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FORM 10-QSB
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
COMMISSION FILE NUMBER 0-28008
SMARTSERV ONLINE, INC.
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(Exact name of small business issuer as specified in its charter)
DELAWARE 13-3750708
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
METRO CENTER, ONE STATION PLACE, STAMFORD, CONNECTICUT 06902
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(Address of principal executive offices) (Zip code)
(203) 353-5950
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [_]
Transitional Small Business Disclosure Format (check one)
YES [_] NO [X]
The number of shares of common stock, $.01 par value, outstanding as of May 15,
1998 was 4,699,531.
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SMARTSERV ONLINE, INC.
FORM 10-QSB
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets - June 30, 1997 and March 31, 1998 (unaudited)........2
Statements of Operations - three months ended March 31, 1998 and
1997 and nine months ended March 31, 1998 and 1997 (unaudited).......3
Statement of Changes in Stockholders' Equity (Deficiency) - nine
months ended March 31, 1998 (unaudited)..............................4
Statements of Cash Flows - three months ended March 31, 1998 and
1997 and nine months ended March 31, 1998 and 1997 (unaudited).......5
Notes to Unaudited Financial Statements..............................6
Item 2. Management's Discussion and Analysis or Plan of Operation...........11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................17
Item 4. Submission of Matters to a Vote of Security Holders.................17
Item 6. Exhibits and Reports on Form 8-K....................................19
Signatures..........................................................20
SMARTSERV ONLINE, INC.
BALANCE SHEETS
MARCH 31, JUNE 30,
1998 1997
------------ ------------
ASSETS (UNAUDITED)
Current assets
Cash and cash equivalents $ 394,088 $ 93,345
Accounts receivable, net of an allowance for losses
of $6,000 at March 31, 1998 and June 30, 1997 178,100 149,782
Prepaid expenses and other receivables 137,988 90,725
------------ ------------
Total current assets 710,176 333,852
Property and equipment - net 652,694 743,714
Other assets 70,437 169,123
------------ ------------
Total Assets $ 1,433,307 $ 1,246,689
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 972,293 $ 829,355
Accrued liabilities 344,588 211,813
Accrued interest -- 16,323
Payroll taxes payable 2,869 20,383
Salaries payable 36,297 46,018
Current portion of capital lease obligation 73,600 86,072
Deferred revenues 24,562 24,914
------------ ------------
Total current liabilities 1,454,209 1,234,878
------------ ------------
Long-term portion of capital lease obligation 99,254 160,139
Notes payable -- 550,000
STOCKHOLDERS' EQUITY (DEFICIENCY)
Common stock - $.01 par value
Authorized - 15,000,000 shares
Issued and outstanding - 3,958,339 shares at
March 31, 1998 and 3,695,000 shares at June 30, 1997 39,583 36,950
Additional paid-in capital 17,801,659 9,046,592
Unearned compensation (4,366,545) --
Accumulated deficit (13,594,853) (9,781,870)
------------ ------------
Total stockholders' equity (deficiency) (120,156) (698,328)
------------ ------------
Total Liabilities and Stockholders' Equity (Deficiency) $ 1,433,307 $ 1,246,689
============ ============
See accompanying notes.
2
SMARTSERV ONLINE, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS NINE MONTHS
ENDED MARCH 31 ENDED MARCH 31
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
Revenues $ 231,309 $ 170,674 $ 613,096 $ 467,783
----------- ----------- ----------- -----------
Costs and expenses:
Costs of revenues 323,579 310,374 1,042,264 837,734
Product development expenses 218,727 427,955 646,432 920,662
Selling, general and administrative
expenses 753,501 806,797 1,913,728 2,247,696
----------- ----------- ----------- -----------
Total costs and expenses 1,295,807 1,545,126 3,602,424 4,006,092
----------- ----------- ----------- -----------
Loss from operations (1,064,498) (1,374,452) (2,989,328) (3,538,309)
----------- ----------- ----------- -----------
Other income (expense):
Interest income 10,883 8,086 33,514 73,271
Interest expense and other
financing costs (182,088) (2,452) (857,169) (8,160)
----------- ----------- ----------- -----------
(171,205) 5,634 (823,655) 65,111
----------- ----------- ----------- -----------
Net loss $(1,235,703) $(1,368,818) $(3,812,983) $(3,473,198)
=========== =========== =========== ===========
Basic and diluted earnings per common
share (Note 2) $ (0.30) $ (0.37) $ (0.95) $ (0.94)
=========== =========== =========== ===========
Weighted average shares outstanding
(Note 2) 4,173,609 3,695,000 4,033,521 3,695,000
=========== =========== =========== ===========
See accompanying notes.
3
SMARTSERV ONLINE, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
NINE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
ADDITIONAL
COMMON STOCK PAID-IN UNEARNED ACCUMULATED
SHARES PAR VALUE CAPITAL COMPENSATION DEFICIT TOTAL
------------ ------------ ------------ ------------ ------------ ------------
Balance at June 30, 1997 3,695,000 $ 36,950 $ 9,046,592 $ -- $ (9,781,870) $ (698,328)
Issuance of 4,000 Prepaid
Common Stock Purchase
Warrants, net of direct
costs of $545,000 -- -- 3,455,000 -- -- 3,455,000
Conversion of 175 Prepaid
Common Stock Purchase
Warrants into Common Stock
263,339 2,633 (2,633) -- -- --
Issuance of Common Stock
Purchase Warrants to a
financial consultant in
connection with the issuance
of 4,000 Prepaid Common
Stock Purchase Warrants -- -- 4,528,500 (4,528,500) -- --
Issuance of Common Stock
Purchase Warrants in
connection with the
issuance of notes -- -- 654,200 -- -- 654,200
Issuance of Common Stock
Purchase Warrants in
connection with investment
advisory contracts
-- -- 120,000 -- -- 120,000
Amortization of unearned
compensation over the term
of the agreement -- -- -- 161,955 -- 161,955
Net loss for the period -- -- -- -- (3,812,983) (3,812,983)
------------ ------------ ------------ ------------ ------------ ------------
Balance at March 31, 1998 3,958,339 $ 39,583 $ 17,801,659 $ (4,366,545) $(13,594,853) $ (120,156)
============ ============ ============ ============ ============ ============
See accompanying notes.
4
SMARTSERV ONLINE, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS NINE MONTHS
ENDED MARCH 31 ENDED MARCH 31
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
OPERATING ACTIVITIES
Net loss $(1,235,703) $(1,368,818) $(3,812,983) $(3,473,198)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization of property
and equipment 47,984 27,578 141,321 65,904
Non-cash interest expense and other
financing costs 123,100 -- 804,664 --
Changes in market value of employee options -- -- -- 188,293
Amortization of unearned revenues (13,562) -- (18,229) --
Amortization and write-off of deferred charges -- 9,000 63,000 27,000
Amortization of unearned compensation 80,980 -- 161,955 --
Other changes that provided (used) cash
Accounts receivable (50,938) 32,188 (28,318) (117,156)
Inventories -- -- -- (30,000)
Prepaid expenses and other receivables 3,655 (16,135) 16,737 (66,319)
Accounts payable and accrued liabilities 179,434 429,892 286,713 478,361
Accrued interest -- -- (16,323) --
Payroll taxes payable (4,713) 6,611 (28,514) 13,199
Salaries payable (49,587) (11,493) (9,721) (1,517)
Unearned revenues 22,022 -- 37,877 20,000
Security deposit reduction (3,472) -- 10,781 --
----------- ----------- ----------- -----------
Net cash used in operating activities (900,800) (891,177) (2,391,040) (2,895,433)
----------- ----------- ----------- -----------
INVESTING ACTIVITIES
Purchase of equipment (7,425) (119,332) (50,301) (338,075)
----------- ----------- ----------- -----------
Net cash used in investing activities (7,425) (119,332) (50,301) (338,075)
----------- ----------- ----------- -----------
FINANCING ACTIVITIES
Repayment of capital lease obligation (18,546) -- (73,357) --
Proceeds from the issuance of short-term notes -- -- 196,500 --
Proceeds from the issuance of warrants, net -- -- 2,643,941 --
Costs of the issuance of warrants -- -- (25,000) --
Proceeds from officers' loans -- -- 37,500 --
Repayment of officers' loans -- -- (37,500) --
----------- ----------- ----------- -----------
Net cash provided by (used in) financing
activities (18,546) -- 2,742,084 --
----------- ----------- ----------- -----------
Increase (decrease) in cash and cash equivalents (926,771) (1,010,509) 300,743 (3,233,508)
Cash and cash equivalents - beginning of period 1,320,859 1,237,851 93,345 3,460,850
----------- ----------- ----------- -----------
Cash and cash equivalents - end of period $ 394,088 $ 227,342 $ 394,088 $ 227,342
=========== =========== =========== ===========
See accompanying notes.
5
SMARTSERV ONLINE, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
MARCH 31, 1998
1. ORGANIZATION
SmartServ Online, Inc. (the "Company") commenced operations on August 20, 1993.
The Company makes available online information and transactional services to
subscribers through screen-based phones, personal computers, personal digital
assistants, the Internet, interactive voice response systems, alpha-numeric
pagers and other personal communications systems. The Company also offers a
range of services designed to meet the varied needs of clients of Strategic
Marketing Partners, as well as direct subscribers, including: stock quotes,
charting, nationwide business and residential directory services, business and
financial news, sports information, research and analysis reports, online FedEx
package tracking, e-mail, local information, national weather reports and other
business and entertainment information. The Company's software architecture and
capabilities format information for a particular device and present the
information in a user-friendly manner.
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.
On September 30, 1997, the Company completed a private placement ("Placement")
of $4 million of Prepaid Common Stock Purchase Warrants ("Prepaid Warrants") as
more fully disclosed in Note 6. An integral part of this Placement was the
conversion of notes payable and accrued interest thereon, aggregating $836,059,
into such Prepaid Warrants. The net proceeds to the Company of $2,643,941
provided it with working capital to allow it to continue its marketing efforts.
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, 1997 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/A for the
year ended June 30, 1997. 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 March 31, 1998 are
not necessarily indicative of those expected for the year ending June 30, 1998.
The Company has completed development of its information platform and
communications software and exited the developmental stage. 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.
6
RECLASSIFICATIONS
- -----------------
Certain amounts in the 1997 financial statements have been reclassified to
conform to the 1998 presentation.
BASIC AND DILUTED EARNINGS PER SHARE
- ------------------------------------
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 128, Earnings per Share ("Statement 128").
Statement 128 replaced the previously reported primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive effects of
options, warrants, and convertible securities. Diluted earnings per share is
very similar to the previously reported fully diluted earnings per share. All
earnings per share amounts for all periods have been presented, and where
necessary, restated to conform to the Statement 128 requirements. The
weighted-average shares outstanding are determined as the mean average of the
shares outstanding and assumed to be outstanding during the period.
RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------
In February 1997, the FASB issued Statement No. 129, Disclosure of Information
about Capital Structure. This Statement established standards for disclosing
information about an entity's capital structure. This statement is effective for
fiscal years ending on or after December 15, 1997. The Company plans to adopt
and apply the provisions of this statement for the fiscal year ending June 30,
1998. The resulting effect of the application of this statement is not expected
to have a material impact on the financial statements.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
MARCH 31, JUNE 30,
1998 1997
--------- ---------
Data processing equipment $ 613,444 $ 564,098
Data processing equipment purchased under a capital lease 246,211 246,211
Office furniture and equipment 69,830 69,196
Display equipment 9,635 9,635
Leasehold improvements 36,678 36,357
--------- ---------
975,798 925,497
Accumulated depreciation, including $45,139 and
$8,207 at March 31, 1998 and June 30, 1997, respectively,
for equipment purchased under a capital lease (323,104) (181,783)
--------- ---------
$ 652,694 $ 743,714
========= =========
4. NOTES PAYABLE
On May 29, 1997, the Company entered into a line of credit facility with a
financial institution for a maximum borrowing thereunder of $550,000. Borrowings
under this facility were to be repaid on August 27, 1997, along with interest at
the rate of 24% per annum. On July 21, 1997 and September 16, 1997, the facility
was amended to provide for additional borrowings of up to $222,222. On September
30, 1997, notes payable of $772,222 and accrued interest thereon of $63,837 were
converted into the
7
Company's Prepaid Warrants (`Prepaid Warrants") as more fully described in Note
6.
In conjunction with the origination of the line of credit facility, the Company
issued 250,000 Common Stock Purchase Warrants ("Warrants") to the financial
institution. Similarly, the Company issued 50,500 Warrants for each of the July
and September amendments. As a result of the Company's default on the note in
August, the Company was required to issue 300,500 "default" Warrants to such
institution. At March 31, 1998, these 651,500 Warrants have exercise prices
ranging from $0.75 to $1.375 and expire in September 2002. Pursuant to Statement
of Financial Accounting Standard No. 123, Accounting for Stock Based
Compensation, the Company valued these warrants in accordance with the
Black-Scholes pricing methodology at the time of issuance and recorded such
valuation in the statement of operations as financing costs. Certain of the
Warrants contain variable exercise provisions predicated on the price of the
Company's Common Stock upon the conclusion of certain future events or at the
time of exercise. These Warrants have been revalued at March 31, 1998 in
accordance with the Black-Scholes pricing methodology giving consideration to
facts and circumstances as they existed at that date. The Company has recorded
financing costs associated with these Warrants of $123,100 and $654,200 for the
quarter and nine month period ended March 31, 1998, respectively.
5. LOANS PAYABLE TO OFFICERS
Loans payable to officers of the Company were non-interest bearing and due on
demand. The last of such loans was repaid on October 2, 1997.
6. EQUITY TRANSACTIONS
On September 30, 1997, The Zanett Securities Company ("Zanett"), acting as
placement agent for the Company, completed the private placement ("Placement")
of $4 million of the Company's Prepaid Common Stock Purchase Warrants ("Prepaid
Warrants"). The sale of these Prepaid Warrants was exempt from the registration
requirements of the Securities Act of 1933, as amended, pursuant to Regulation D
thereof. Each Prepaid Warrant entitles the holder to purchase that number of
shares of Common Stock that is equal to $1,000 divided by the applicable
exercise price. Such exercise price is determined initially as 70% of the
average closing bid price of the Common Stock for the 10 trading days ending on
the day prior to exercise of the Prepaid Warrants. Additionally, the exercise
discount shall be increased by 1% for each subsequent 60 day period that the
Prepaid Warrants remain unexercised. The exercise price, however, shall never
exceed $1.40. The Prepaid Warrants became exercisable on December 29, 1997. The
sale of Common Stock issued upon exercise of such Warrants is restricted to
one-third for the first 60, 90 and 120 days subsequent to February 27, 1998, the
date the registration statement became effective. The Prepaid Warrants expire on
September 30, 2000.
Terms of the Placement included the conversion by Zanett of notes payable in the
amount of $772,222 and accrued interest thereon of $63,837 into Prepaid
Warrants. The net proceeds of the Placement of $2,643,941 have been used for
general working capital requirements.
As compensation for its services, Zanett received a placement fee and an
unaccountable expense allowance of 10% ($400,000) and 3% ($120,000),
respectively, of the gross proceeds of the Placement. Additionally, the Company
issued 600,000 Common Stock Purchase Warrants to Zanett that are exercisable at
$1.125 per share of Common Stock. These warrants expire on September 30, 2002.
Also in conjunction with the Placement, the Company entered into an agreement
with a financial consultant who is an affiliate of Zanett Lombardier, Ltd, an
investor in the Prepaid Warrants. During the five-year term of the agreement
such consultant will provide the Company with advisory services
8
relating to financial and strategic ventures and alliances, investment banking
and general financial advisory services, and advice and assistance with the
Company's market development activities. As compensation for these services, the
Company authorized the issuance of 3,555,555 Common Stock Purchase Warrants
("Consulting Warrants") to this consultant that are exercisable at $1.125 per
share of Common Stock. The issuance of 3,055,555 of such Consulting Warrants was
contingent upon the approval of the Company's shareholders which was received on
April 24, 1998. At September 30, 1997, the Company valued these warrants using
the Black-Scholes pricing methodology at approximately $4,400,000. However,
since the issuance of 3,055,555 of such Consulting Warrants was uncertain until
April 24, 1998, the Company has revalued these Consulting Warrants in accordance
with Statement of Financial Accounting Standard No. 123, Accounting for
Stock-Based Compensation, and the Black-Scholes pricing methodology at March 31,
1998, giving consideration to the facts and circumstances as they existed at
that date. Accordingly, unearned compensation has been adjusted to $4,528,500 at
March 31, 1998. Such amount has been recorded in stockholders' equity as
unearned compensation and will be amortized to income over the five-year term of
the agreement. These warrants expire on September 30, 2002. The Company has
recorded consulting expense of $80,975 and $161,955 for the quarter and nine
month period ended March 31, 1998, respectively.
7. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
THREE MONTHS ENDED MARCH 31 NINE MONTHS ENDED DECEMBER 31
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
Numerator:
Net loss $(1,235,703) $(1,368,818) $(3,812,983) $(3,473,198)
=========== =========== =========== ===========
Denominator:
Weighted-average shares 4,173,609 3,695,000 4,033,521 3,695,000
=========== =========== =========== ===========
Basic and diluted earnings per
common share $ (0.30) $ (0.37) $ (0.95) $ (0.94)
=========== =========== =========== ===========
At March 31, 1998 there were, exclusive of the Common Stock Purchase Warrants
issued in connection with the issuance of notes payable (Note 4) and the Prepaid
Warrants (Note 6), 2,687,500 Common Stock Purchase Warrants outstanding. Such
warrants have exercise prices ranging from $0.625 to $12.00 per share and expire
from March 2001 through March 2003. None of these warrant issuances have been
included in the computation of diluted loss per share because their inclusion
would be antidilutive. Additionally, the Company has established an employee
stock option plan for the benefit of directors, employees and consultants to the
Company. These options are intended to qualify as incentive stock options within
the meaning of Section 422 of the Internal Revenue Code, as amended, or as
nonqualified stock options. The options are partially exercisable after one year
from date of grant and no options may be granted after April 15, 2006. At the
Annual Meeting on April 24, 1998, the shareholders approved an amendment to the
Plan authorizing the issuance of up to 1,500,000 options to employees and
non-employee directors. At March 31, 1998, there are options outstanding for the
purchase of 1,070,475 shares of the Company's Common Stock.
9
SUBSEQUENT EVENTS
Subsequent to March 31, 1998, investors in the Company's Prepaid Warrants
converted 1,037.5 of such warrants into 741,192 shares of Common Stock at an
exercise price of $1.40 per share.
At the Annual Meeting on April 24, 1998, the shareholders approved the amendment
of the Company's Certificate of Incorporation to increase the number of
authorized shares of the Company's Common Stock, par value $0.01 per share, from
15,000,000 to 40,000,000 shares. Additionally, the shareholders approved the
amendment of the Company's Certificate of Incorporation to create a class of
1,000,000 shares of Preferred Stock, par value $0.01 per share.
10
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, the
Internet, interactive voice response systems, alpha-numeric paging devices and
other personal communications systems to clients of Strategic Marketing
Partners, as well as to prospective direct subscribers. The Company has exited
from the development stage with the completion of its software architecture and
product offering and has commenced the implementation of its marketing
strategies.
The Company's business plan focuses on the strategy of marketing its services in
partnership with those companies that have an economic incentive to provide the
Company's information platform to their customers. Through the use of this
model, the consumer is a customer of both SmartServ and its Strategic Marketing
Partner. The Company also believes that the sale of its information platform
through the cooperative efforts of partners with more recognizable brand names
than its own is important to its success.
The Company is developing strategic marketing relationships with key partners
that provide access to large numbers of potential subscribers for its monthly
services. Toward that end, on May 1, 1998, the Company consummated an agreement
with Data Transmission Network Corp. ("DTN") whereby DTN obtained the exclusive
right to market the Company's three financial services information products to
the finance and investment communities. These products include: SmartServ Pro, a
real-time, tick-by-tick stock quote service; and TradeNet and BrokerNet,
real-time trading and account information products for the stock brokerage
industry. Additionally, DTN has acquired SmartServ's Internet based retail
customers.
DTN is an innovative information and communications provider for the
agricultural, automotive, energy, farm implement, financial, mortgage, golf turf
management, construction, aviation, emergency management and weather related
industries. DTN provides commodities and financial information to farmers and
others via satellite transmission and leased telecommunications lines. The
SmartServ/DTN partnership provides DTN with quality financial products
engineered for low cost delivery through the Internet while allowing SmartServ
the opportunity to reduce its costs and substantially increase revenues. DTN has
a sales force of more than 200 sales personnel which when coupled with DTN's
subscriber base and marketing and advertising capabilities represents a
significant opportunity for the Company. Effective May 1, 1998, with the
licensing to DTN of the SmartServ Pro product, the Company has exited the retail
market for a more cost effective business-to-business arrangement. Thus the
significant marketing, advertising and infrastructure costs associated with a
direct marketing program will be borne by DTN.
Other potential partners include regional telephone operating companies, long
distance carriers, telephone equipment manufacturers and companies that
distribute screen telephone equipment, market local screen telephone services or
otherwise benefit from the increased acceptance of these devices. Screen phones
were developed to facilitate the use of caller ID, call waiting and other
services offered at a premium by the telephone companies. 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 as a value-added benefit. In September 1997, the Company
signed a three year contract with Sprint/United Management Company ("Sprint")
for the delivery of the Company's information services into additional markets
beyond the initial trial city--Las Vegas. In December 1997, Sprint commenced the
deployment of the Company's services in three Florida markets. The Company
anticipates that this will result in the deployment of the Company's information
services in
11
New York, North Carolina, Chicago, Los Angeles and other designated markets as
part of a national campaign.
The Company has also signed an agreement with CIDCO Incorporated, a leading
marketer of screen-based phones and other Caller ID devices, whereby CIDCO will
offer the Company's suite of online financial and entertainment information to
buyers of the CIDCO CST 2100 screen phone. These services are to be marketed as
"CIDCO Personal Information Services". CIDCO's clients include Southwestern Bell
and Bell Atlantic.
Management continues to believe that substantially all of the Company's revenues
will be derived from customers that purchase the Company's services through
Strategic Marketing Partners with mass distribution capabilities. The Company
anticipates that Strategic Marketing Partners will brand the Company's "bundled"
information services with their own private label, promote the packaged offering
and then distribute the Company's information package on screen-based phones,
PCs, PDAs, the Internet, interactive voice response systems, alpha-numeric
pagers and other PCS devices to their customers. The Company has the ability to
customize the information package to be offered to each Strategic Marketing
Partner, and in turn to their customers.
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 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.
Notwithstanding the execution of contracts with both DTN and Sprint and the
continual discussions with potential Strategic Marketing Partners about
potential marketing relationships, there can be no assurance that the Company's
products and services will continue to be accepted in the marketplace by the
ultimate consumers.
Management anticipates that staffing requirements associated with the
implementation of its plan of operation will result in the addition of a minimum
of three to six personnel during the period ending September 30, 1998. Such
personnel will be added to assist with the programming requirements of Strategic
Marketing Partners' product offerings and for customer support.
RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 1998 VS. QUARTER ENDED MARCH 31, 1997
During the quarter ended March 31, 1998, total revenues amounted to $231,309,
consisting primarily of subscription fees for the SmartServ Online "Pro"
real-time stock quote service ($136,600) and sales generated from the Company's
relationships with Sprint ($22,500) and Schroder ($72,000). The Company
commenced the implementation of its marketing plan with a national advertising
campaign in September 1996. Total revenues during the quarter ended March 1997
were $170,674, consisting primarily of subscription fees from the sale of the
Company's information services of $75,800 and fees for the enhancement,
implementation, and marketing of services associated with the Company's
arrangement with Schroder of $94,800.
12
During the quarter ended March 31, 1998, the Company incurred costs of revenues
of $323,579. Such costs consisted primarily of information and communication
costs ($161,400), personnel costs ($83,700), and computer hardware leases,
depreciation and maintenance ($77,300). During the quarter ended March 31, 1997,
the costs of revenues were $310,374. Such costs consisted primarily of
information and communication costs ($142,500), personnel costs ($111,500), and
computer hardware leases, depreciation and maintenance ($45,100).
Product development expenses were $218,727 vs. $427,955 for the quarter ended
March 31, 1997. Such costs consisted primarily of personnel costs ($125,500) and
computer systems consultants ($93,200). During the quarter ended March 31, 1997,
such product development expenses consisted primarily of personnel costs
($166,700) and systems consultants ($259,500).
During the quarter ended March 31, 1998, the Company incurred selling, general
and administrative expenses of $753,501 vs. $806,797 for the quarter ended March
31, 1997. Such costs were incurred primarily for personnel costs ($252,000),
facilities ($49,000), marketing and advertising costs ($33,000) and professional
fees ($310,000). Included in professional fees is an $80,980 non-cash charge for
the amortization of unearned compensation associated with the issuance of Common
Stock Purchase Warrants to a financial consultant. During the quarter ended
March 31, 1997, selling, general and administrative expenses were incurred
primarily for advertising and marketing ($187,000), personnel costs ($274,000)
and professional fees ($229,200).
Interest income for the quarter ended March 31, 1998 amounted to $10,883 vs.
$8,086 for the quarter ended March 31, 1997. During the quarter ended March 31,
1998 such amounts were earned from the Company's investments in highly rated
bank certificates of deposit while during the quarter ended March 31, 1997 such
amounts were earned primarily from the Company's investments in highly liquid
commercial paper. During the quarter ended March 31, 1998 interest and financing
costs included a non-cash charge of $123,100 for the revaluation of certain
Common Stock Purchase Warrants issued in connection with the Company's May 1997
line of credit facility.
NINE MONTHS ENDED MARCH 31, 1998 VS. NINE MONTHS ENDED MARCH 31, 1997
During the nine months ended March 31, 1998, the Company recorded revenues of
$613,096, consisting primarily of $407,000 from the sale of subscriptions to its
information services, $127,000 from enhancement, implementation, and marketing
services associated with its arrangement with Schroder, and $76,000 from the
Company's relationship with Sprint. During the nine months ended March 31, 1997,
the Company recorded revenues of $228,035 from the sale of its information
services and the related screen-based telephones. Additionally, the Company
recorded revenues of $239,748 related to the enhancement, implementation and
marketing of services associated with its arrangement with Schroder.
During the nine months ended March 31, 1998, the Company incurred costs of
revenues of $1,042,264. Such costs consisted primarily of information and
communication costs ($484,600), personnel costs ($267,500), and computer
hardware leases, depreciation and maintenance ($259,800). During the nine months
ended March 31, 1997, the costs of revenues were $837,734. Such costs consisted
primarily of information and communication costs ($199,100), personnel costs
($340,100), and computer hardware leases, depreciation and maintenance
($121,600), and purchases of screen-based phones for resale ($95,500). Included
in personnel costs in 1997 is a non-cash charge of $29,200 for the change in the
market value of employee stock options.
Product development expenses were $646,432 during the nine months ended March
31, 1998 vs. $920,662 for the nine months ended March 31, 1997. Such costs
consisted primarily of personnel costs ($400,500) and computer systems
consultants ($226,000). During the nine months ended March 31,
13
1997, such product development expenses consisted primarily of personnel costs
($509,100) and systems consultants ($395,900). Included in personnel costs in
1997 is a non-cash charge of $43,800 for the change in the market value of
employee stock options.
During the nine months ended March 31, 1998, the Company incurred selling,
general and administrative expenses of $1,913,728, primarily for personnel costs
($730,100), facilities ($147,800), marketing and advertising costs ($120,200),
and professional fees ($646,300). Included in professional fees is a non-cash
charge of $63,000 for the write-off of prepaid consulting fees incurred in
connection with the Company's Initial Public Offering of Securities and a
$161,955 non-cash charge for the amortization of unearned compensation
associated with the issuance of Common Stock Purchase Warrants to a financial
consultant. Selling, general and administrative expenses for the nine months
ended March 31, 1997 were $2,247,696. Such costs consisted primarily of
personnel costs ($765,300), facilities ($123,700), marketing and advertising
costs ($580,100), and professional fees ($486,600). Included in personnel costs
for 1997 was a non-cash charge of approximately $115,000 related to the change
in value of employee stock options.
Interest income for the nine months ended March 31, 1998 amounted to $33,514 vs.
$73,271 for the nine months ended March 31, 1997. During the nine months ended
March 31, 1998, such amounts were earned from the Company's investments in
highly rated bank certificates of deposit while during the nine months ended
March 31, 1997, such amounts were earned primarily from the Company's
investments in highly liquid commercial paper. Interest and financing costs for
the nine months ended March 31, 1998 were $857,169. Such amounts were incurred
primarily in connection with the issuance of short-term notes payable and
associated Common Stock Purchase Warrants. The Common Stock Purchase Warrants
have been recorded in the financial statements in accordance with the
Black-Scholes pricing methodology as prescribed by Statement of Financial
Accounting Standard, No. 123, Accounting for Stock-Based Compensation. Interest
costs for the nine months ended March 31, 1997 were incurred in connection with
an insurance financing agreement and amounted to $8,160.
CAPITAL RESOURCES AND LIQUIDITY
Since inception of the Company on August 20, 1993 through March 21, 1996, the
date of the IPO, the Company had funded its operations through a combination of
private debt and equity financings totaling $2,900,000 and $300,000,
respectively.
The IPO of 1,695,000 common shares and 1,725,000 common stock purchase warrants
on March 21, 1996 provided the Company with gross proceeds of $8,647,500. Direct
costs associated with the IPO were approximately $1,589,000.
During the first half of the year ended June 30, 1997, the Company's operations
were funded through the proceeds of the March 1996 IPO and revenues generated
from the Company's marketing and advertising programs. Commencing with the
second half of 1997, the Company experienced both equity and working capital
constraints resulting from the information delivery system's inability to
support and retain the volume of users generated by the Company's marketing and
advertising programs. In May 1997, the Company arranged a line of credit
facility with a financial institution. Such line of credit was originated for a
maximum borrowing amount of $550,000. In July and September 1997, the facility
was amended to allow for additional borrowings of up to $222,222. In conjunction
with the origination of the line of credit facility, the Company issued 250,000
Common Stock Purchase Warrants ("Warrants") to the financial institution.
Similarly, the Company issued 50,500 Warrants for each of the July and September
amendments. As a result of the Company's default on the note in August, the
Company was required to issue 300,500 "default" Warrants to such institution. At
March 31, 1998, these 651,500 Warrants have exercise prices ranging from $0.75
to $1.375 and expire in September 2002. Pursuant to
14
Statement of Financial Accounting Standard No. 123, Accounting for Stock-Based
Compensation, the Company valued these warrants in accordance with the
Black-Scholes pricing methodology at the time of issuance and recorded such
valuation in the statement of operations as financing costs. At March 31, 1998,
certain of the Warrants contain variable exercise provisions predicated on the
price of the Company's Common Stock upon the conclusion of certain events or at
the time of exercise. The Warrants have been revalued at March 31, 1998 in
accordance with the Black-Scholes pricing methodology giving consideration to
facts and circumstances as they existed at that date.
In May 1997, the Company entered into a three year noncancelable capital lease
for certain computer equipment used to provide information services. The cost of
this equipment ($246,211) is being financed through the manufacturer's finance
division.
On September 30, 1997, The Zanett Securities Company ("Zanett"), acting as
placement agent for the Company, completed a private placement ("Placement") of
$4 million of the Company's Prepaid Common Stock Purchase Warrants ("Prepaid
Warrants"). The sale of these Prepaid Warrants was exempt from the registration
requirements of the Securities Act of 1933, as amended, pursuant to Regulation
D. Each Prepaid Warrant entitles the holder to purchase that number of shares of
Common Stock that is equal to $1,000 divided by the applicable exercise price.
Such exercise price is determined initially as 70% of the average closing bid
price of the Common Stock for the 10 trading days ending on the day prior to
exercise of the Prepaid Warrants. Additionally, the exercise discount shall by
increased by 1% for each subsequent 60 day period that the Prepaid Warrants
remain unexercised. The exercise price, however, shall never exceed $1.40. The
Prepaid Warrants became exercisable on December 29, 1997. The sale of Common
Stock issued upon exercise of the Prepaid Warrants is restricted to one-third
for the first 60, 90 and 120 days subsequent to February 27, 1998, the date the
registration statement became effective. The Prepaid Warrants expire on
September 30, 2000.
As compensation for the successful completion of the Placement, Zanett received
a placement fee and an unaccountable expense allowance of 10% and 3%,
respectively, of the gross proceeds of the Placement. Additionally, the Company
issued 600,000 Common Stock Purchase Warrants to Zanett that are exercisable at
$1.125 per share of Common Stock.
Also in conjunction with the Placement, the Company entered into an agreement
with a financial consultant who is an affiliate of Zanett Lombardier, Ltd, an
investor in the Prepaid Warrants. During the five-year term of the agreement
this consultant will provide the Company with advisory services relating to
financial and strategic ventures and alliances, investment banking and general
financial advisory services, and advice and assistance with the Company's market
development activities. As compensation for these services, the Company
authorized the issuance of 3,555,555 Common Stock Purchase Warrants ("Consulting
Warrants") to this consultant that are exercisable at $1.125 per share of Common
Stock. Of such amount, the issuance of 3,055,555 Consulting Warrants was
contingent upon the approval of the Company's shareholders which was received on
April 24, 1998. At September 30, 1997, the Company valued these warrants using
the Black-Scholes pricing methodology at approximately $4,400,000. However,
since the issuance of 3,055,555 of such Consulting Warrants was uncertain until
April 24, 1998, the Company has revalued these Consulting Warrants in accordance
with the Black-Scholes pricing methodology at March 31, 1998, giving
consideration to the facts and circumstances as they existed at that date.
Accordingly, unearned compensation has been adjusted to $4,528,500 at March 31,
1998. Such amount has been recorded in stockholders' equity as unearned
compensation and will be amortized to income over the five-year term of the
agreement. These warrants expire on September 30, 2002.
As part of the Placement, Zanett converted notes payable of $772,222, issued
pursuant to a Line of Credit Agreement dated May 29, 1997, as amended, and
accrued interest thereon of $63,837 into Prepaid
15
Warrants. The net proceeds of the Placement of $2,643,941 have been used for
general working capital requirements.
The licensing agreement with DTN provides that the Company will receive a
minimum of $2 million during the twelve month period ended April 30, 1999, and
up to 40% of revenues generated from the subscriber base after the attainment of
a 1,000 customer threshold. Additionally, DTN will assume the Company's
telecommunications and information costs, as well as the system's hardware costs
associated with expansion of the subscriber base. This will result in a
significant reduction in the Company's infrastructure and overhead costs.
The Company has also entered into a three year contract with Sprint and is
currently negotiating an agreement, in partnership with Sprint, with a major
stock brokerage firm. Additionally, the Company is in negotiations with several
major telecommunications companies. Management continues to believe that upon
the successful implementation of its marketing plan, sufficient revenues will be
generated to meet operating requirements. Management also believes that the
successful execution of its proposed plan of operations will generate sufficient
cash flow from operations to enable the Company to offer its services on an
economically sound basis; however, no assurance can be given that such goals
will be obtained or that any expected revenues or cash flows will be
forthcoming, except for those previously described in connection with the DTN
licensing agreement.
The Company has been notified by Nasdaq that it is not in compliance with the
net tangible assets requirement as set forth in NASD Marketplace Rule
4310(c)(2). Such rule requires the maintenance of a minimum of $2 million of net
tangible assets for continued listing on The Nasdaq Small Cap Market. If the
Company were to be delisted from The Nasdaq Small Cap Market the Company would
be subject to financial penalties resulting from its default pursuant to Article
V of the Prepaid Warrants. Additionally, such event would allow Zanett Capital,
Inc. the right to name a majority of the directors of the Company.
The Company is currently seeking additional sources of capital through a private
placement; however, there can be no assurance that additional financing will be
available on acceptable terms or at all.
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.
16
PART II. OTHER INFORMATION
SMARTSERV ONLINE, INC.
ITEM 1. LEGAL PROCEEDINGS
On or about December 15, 1997, Steven T. Francesco, then President and Chief
Operating Officer of the Company, filed a complaint against the Company,
Sebastian E. Cassetta (its Chairman of the Board and Chief Executive Officer),
Bruno Guazzoni, Claudio Guazzoni, Zanett Securities, Inc. and Zanett Capital,
Inc. in the Supreme Court of the State of New York, County of New York. In the
amended complaint, which was served on or about December 29, 1997, Mr. Francesco
alleged, among other things, that the Company breached the terms of its
employment agreement with him. The amended complaint seeks damages against the
Company in an unspecified amount and injunctive relief. On February 6, 1998 the
Board of Directors terminated Mr. Francesco's employment with the Company as its
President and Chief Operating Officer. The Company has moved the Court to
dismiss certain of the claims against it. That motion is currently pending. No
disclosure in this action has yet been noticed or taken. The Company will
vigorously defend this action.
By letter dated April 10, 1998, Michael Fishman, then a Vice President of Sales
for the Company, resigned his position. On or about April 24, 1998, Mr. Fishman
filed a complaint against the Company, Sebastian E. Cassetta, Claudio Guazzoni,
Zanett Securities Co., Zanett Capital Corp. and Zanett Lombardier Ltd. in the
United States District Court for the District of Connecticut. In the complaint,
Mr. Fishman alleges, among other things, that the Company constructively
discharged him by breaching of the terms of its employment agreement with him.
The complaint seeks to assert claims for (i) fraud under the federal securities
laws, (ii) breach of various terms of the Company's employment agreement with
Mr. Fishman, (iii) breach of the implied duty of good faith and fair dealing,
(iv) fraudulent misrepresentation, (v) negligent misrepresentation, (vi)
intentional misrepresentation, (vii) failure to pay wages and (viii) promissory
estoppel. The complaint seeks damages against the Company in an unspecified
amount. The Company has not yet answered or moved against the complaint and the
time for it to do so has not yet expired. No discovery in this action has yet
been noticed or taken. The Company will vigorously defend this action.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Date of Annual Meeting of Stockholders - April 24, 1998
(b) Directors Elected at Annual Meeting
Mario F. Rossi
Robert H. Steele
Continuing Directors
Sebastian E. Cassetta
Steven T. Francesco
L. Scott Perry
Claudio Guazzoni
Catherine Cassel Talmadge
17
(c) Election of Mario F. Rossi as Director
SHAREHOLDER VOTES
-----------------
For: 3,014,734
Withheld: 860,395
Election of Robert H. Steele as Director
SHAREHOLDER VOTES
-----------------
For: 3,014,734
Withheld: 860,395
Amendment of the Company's 1996 Stock Option Plan to increase the
number of shares available for grant from 400,000 to 1,500,000
shares, eliminate mandatory grants of options to non-employee
directors and grant the compensation committee discretionary
authority to grant options to both employee and non-employee
directors.
SHAREHOLDER VOTES
-----------------
For: 1,129,954
Against: 1,023,501
Abstentions: 4,150
Broker non-votes: 1,717,524
Amendment of the Company's Certificate of Incorporation to increase
the number of authorized shares of the Company's Common Stock, par
value $0.01 per share, from 15,000,000 shares to 40,000,000 shares.
SHAREHOLDER VOTES
-----------------
For: 3,684,328
Against: 184,096
Abstentions: 6,705
Broker non-votes: --
Amendment of the Company's Certificate of Incorporation to create a
class of 1,000,000 shares of Preferred Stock, par value $0.01 per
share.
SHAREHOLDER VOTES
-----------------
For: 1,129,699
Against: 1,021,001
Abstentions: 6,905
Broker non-votes: 1,717,524
Approval of the issuance of Consultant Warrants to purchase 3,055,555
shares of the Company's Common Stock to Mr. Bruno Guazzoni, a
consultant to the Company.
SHAREHOLDER VOTES
-----------------
For: 1,750,854
Against: 402,146
Abstentions: 4,605
Broker non-votes: 1,717,524
18
Ratification of the appointment of Ernst & Young LLP as the Company's
independent auditors for the fiscal year ending June 30, 1998.
SHAREHOLDER VOTES
-----------------
For: 3,858,329
Against: 11,850
Abstentions: 4,950
Broker non-votes: --
ITEM 6. EXHIBITS AND REPORTS ON FORM 8 - K
(a) The following exhibits are included herein:
Exhibit 10.26 Asset Purchase Agreement between SmartServ Online,
Inc. and Data Transmission Network Corporation,
dated April 23, 1998
Exhibit 27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
During the quarter ended March 31, 1998 the Company filed a Current
Report on Form 8-K, dated February 11, 1998, reporting Item 5. Such
report did not contain any financial information.
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)
Date: MAY 19, 1998 By: /S/ SEBASTIAN E. CASSETTA
------------ --------------------------
Sebastian E. Cassetta
Chairman of the Board, Chief
Executive Officer
Date: MAY 19, 1998 /S/ THOMAS W. HALLER
------------ --------------------------
Thomas W. Haller
Chief Financial Officer, Treasurer