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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 September 30, 1999
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Commission file number 0-28008
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SmartServ Online, Inc.
----------------------
(Exact name of small business issuer as specified in its charter)
Delaware 13-3750708
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Metro Center, One Station Place, Stamford, Connecticut 06902
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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 November
22, 1999 was 1,435,336.
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SmartServ Online, Inc.
Form 10-QSB
Index
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets - June 30, 1999 and September 30, 1999 (unaudited)...................................2
Statements of Operations - three months ended September 30, 1999
and 1998 (unaudited)................................................................................4
Statement of Changes in Stockholders' Deficiency - three months
ended September 30, 1999 (unaudited)................................................................5
Statements of Cash Flows - three months ended September 30, 1999 and
1998 (unaudited)....................................................................................6
Notes to Unaudited Financial Statements.............................................................7
Item 2. Management's Discussion and Analysis or Plan of Operation..........................................12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................................................16
Item 2. Changes in Securities and Use of Proceeds..........................................................17
Item 6. Exhibits and Reports on Form 8-K...................................................................17
Signatures.........................................................................................18
1
SmartServ Online, Inc.
Balance Sheets
September 30, June 30,
1999 1999
-------------------- -------------------
(Unaudited)
Assets
Current assets
Cash and cash equivalents $ 1,103,443 $ 2,165,551
Accounts receivable 268,851 348,278
Prepaid expenses 40,665 50,150
-------------------- -------------------
Total current assets 1,412,959 2,563,979
-------------------- -------------------
Property and equipment, net 473,412 498,448
Other assets
Capitalized software development costs,
net of accumulated amortization of $128,953 at
September 30, 1999 and $82,108 at June 30, 1999 880,717 683,337
Security deposits 73,374 74,834
-------------------- -------------------
954,091 758,171
-------------------- -------------------
Total Assets $ 2,840,462 $ 3,820,598
==================== ===================
2
SmartServ Online, Inc.
Balance Sheets
September 30, June 30,
1999 1999
-------------------- -------------------
(Unaudited)
Liabilities and Stockholders' Deficiency
Current liabilities
Accounts payable $ 622,788 $ 780,543
Accrued liabilities 480,786 474,189
Accrued liabilities to warrant holders 717,670 1,311,365
Salaries payable 69,047 93,443
Capital lease obligation - current portion 47,437 70,147
Deferred revenues - current portion 1,656,632 1,656,632
-------------------- -------------------
Total current liabilities 3,594,360 4,386,319
-------------------- -------------------
Deferred revenues - long-term portion 3,727,423 4,141,579
Commitments and Contingencies - Note 6
Stockholders' 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 - 1,199,787 shares at June 30, 1999
and 1,379,787 shares at September 30, 1999 13,798 11,998
Common stock subscribed 1,812,554 1,812,554
Notes receivable from officers (1,812,554) (1,812,554)
Additional paid-in capital 20,928,202 20,679,611
Unearned compensation (3,161,649) (3,452,904)
Accumulated deficit (22,261,672) (21,946,005)
-------------------- -------------------
Total stockholders' deficiency (4,481,321) (4,707,300)
-------------------- -------------------
Total Liabilities and Stockholders' Deficiency $ 2,840,462 $ 3,820,598
==================== ===================
See accompanying notes.
3
SmartServ Online, Inc.
Statements of Operations
(Unaudited)
Three Months
Ended September 30
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1999 1998
------------------- -------------------
Revenues $ 808,292 $ 349,705
------------------- -------------------
Costs and expenses:
Costs of services 232,866 207,084
Product development expenses 46,845 27,046
Selling, general and administrative
expenses 855,265 830,858
------------------- -------------------
Total costs and expenses 1,134,976 1,064,988
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Loss from operations (326,684) (715,283)
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Other income (expense):
Interest income 11,017 2,202
Interest expense and other financing costs -- (141,096)
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11,017 (138,894)
------------------- -------------------
Net loss $ (315,667) $ (854,177)
=================== ===================
Comprehensive loss $ (315,667) $ (854,177)
=================== ===================
Basic and diluted earnings per share $ (0.23) $ (0.92)
=================== ===================
Weighted average shares outstanding 1,368,046 931,093
=================== ===================
See accompanying notes.
4
SmartServ Online, Inc.
Statement of Changes in Stockholders' Deficiency
Three Months Ended September 30, 1999
(Unaudited)
Notes
Common Stock Common Receivable Additional
Par Stock from Paid-in Unearned Accumulated
Shares Value Subscribed Officers Capital Compensation Deficit
----------------------- ------------- ------------- ------------- -------------- --------------
Balances at June 30, 1999 1,199,787 $11,998 $1,812,554 $(1,812,554) $20,679,611 $(3,452,904) $(21,946,005)
Issuance of Common Stock in
connection with the
settlement of obligations
to a Prepaid Warrant holder 180,000 1,800 -- -- 266,895 -- --
Amortization of unearned
compensation over the
term of the consulting
agreement -- -- -- -- -- 291,255 --
Change in market value of
employee stock options -- -- -- -- (18,304) -- --
Net loss for the period -- -- -- -- -- -- (315,667)
----------- ----------- ------------- ------------- ------------- -------------- --------------
Balances at September 30,
1999 1,379,787 $13,798 $1,812,554 $(1,812,554) $20,928,202 $(3,161,649) $(22,261,672)
=========== =========== ============= ============= ============= ============== ==============
See accompanying notes.
5
SmartServ Online, Inc.
Statements of Cash Flows
(Unaudited)
Three Months
Ended September 30
-----------------------------------------
1999 1998
------------------- ------------------
Operating Activities
Net loss $ (315,667) $ (854,177)
Adjustments to reconcile net loss to net cash used
for operating activities:
Depreciation and amortization 96,266 47,703
Noncash interest expense and other financing costs -- 128,175
Noncash compensation costs (18,304) --
Noncash consulting costs 291,255 330,421
Amortization of unearned revenues (414,156) (15,534)
Changes in operating assets and liabilities
Accounts receivable 79,427 33,995
Prepaid expenses 9,485 (83,636)
Accounts payable and accrued liabilities (476,158) 161,062
Salaries payable (24,396) 5
Unearned revenues -- 200,000
Security deposit 1,460 --
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Net cash used for operating activities (770,788) (51,986)
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Investing Activities
Purchase of equipment (24,385) (11,638)
Capitalization of software development costs (244,225) (233,005)
------------------- ------------------
Net cash used for investing activities (268,610) (244,643)
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Financing Activities
Repayment of capital lease obligation (22,710) (19,837)
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Net cash used for financing activities (22,710) (19,837)
------------------- ------------------
Decrease in cash and cash equivalents (1,062,108) (316,466)
Cash and cash equivalents - beginning of period 2,165,551 354,225
------------------- ------------------
Cash and cash equivalents - end of period $ 1,103,443 $ 37,759
=================== ==================
See accompanying notes.
6
SmartServ Online, Inc.
Notes to Unaudited Financial Statements
September 30, 1999
1. Organization
SmartServ Online, Inc. (the "Company") commenced operations on August 20, 1993.
The Company offers a range of services designed to facilitate e-commerce by
providing transactional and information services to its alliance partners
("Strategic Marketing Partners"). The Company has developed online financial,
transactional and media applications using a unique "device independent"
delivery solution and makes these services available through its application
software and communication architecture to wireless telephones and personal
digital assistants, personal computers and the Internet. The Company's services
include stock trading, real-time stock quotes, business and financial news,
sports information, private-labeled electronic mail, national weather reports
and other business and entertainment information.
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, 1999 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, 1999. 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, 1999 are not
necessarily indicative of those expected for the year ending June 30, 2000.
The Company has completed development of its core applications software and
communications architecture; however, it has yet to generate revenues in an
amount sufficient to support its operations. 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 Company's financial statements for
the period ended September 30, 1999 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 net
losses of $7,124,126, $5,040,009 and $4,434,482 for the years ended June 30,
1999, 1998 and 1997, respectively, and as of September 30, 1999 had an
accumulated deficit of $22,261,672 and a deficiency of net assets of $4,481,321.
The Company is also a defendant in several legal proceedings (see Note 6) which
could have a material adverse effect on the Company's financial position, cash
flow, and results of operations. 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.
The Company's stockholders approved a one-for-six reverse stock split at a
Special Meeting on October 15, 1998. Such reverse stock split became effective
on October 26, 1998. All applicable financial statement amounts and related
disclosures have been restated to give effect to this transaction.
7
Use of Estimates
----------------
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Revenue Recognition
-------------------
Revenues are recognized as services are provided. Deferred revenues, resulting
from customer prepayments, are recognized as services are provided throughout
the term of the agreement. Deferred revenues resulting from the Company's
agreements with DTN are being amortized over the term of the anticipated future
revenue stream, a period of 42 months.
Basic and Diluted Earnings per Share
------------------------------------
In 1997, the Financial Accounting Standards Board 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.
Comprehensive Income
--------------------
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Comprehensive Income" ("Statement 130")
which requires companies to report a new, additional measure of income on the
income statement in a full set of general purpose financial statements.
Comprehensive Income includes foreign currency translation gains and losses and
unrealized gains and losses on equity securities that have been previously
excluded from income and reflected instead in equity. There were no components
of comprehensive income excluded from income and reflected in equity for the
three month periods ended September 30, 1999 and 1998.
Capitalized Software Development Costs
--------------------------------------
In connection with certain contracts entered into between the Company and its
Strategic Marketing Partners, the Company has capitalized software development
costs related to certain product enhancements in accordance with Statement of
Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed", effective July 1, 1998.
8
3. Property and Equipment
Property and equipment consist of the following:
September 30, June 30,
1999 1999
-------------------- -----------------
Data processing equipment $ 724,595 $ 700,210
Data processing equipment purchased under a capital lease 246,211 246,211
Office furniture and equipment 71,423 71,423
Display equipment 9,635 9,635
Leasehold improvements 36,678 36,678
-------------------- -----------------
1,088,542 1,064,157
Accumulated depreciation, including $119,002 and $106,691 at September 30,
1999 and June 30, 1999, respectively, for equipment purchased
under a capital lease (615,130) (565,709)
==================== =================
$ 473,412 $ 498,448
==================== =================
4. Equity Transactions
On July 1, 1999, the Company entered into an agreement with a holder of $325,000
of the Company's Prepaid Common Stock Purchase Warrants ("Prepaid Warrants"), to
settle the Company's obligation to such holder pursuant to the default
provisions of the Prepaid Warrants. Accordingly, the Company paid $325,000 to
redeem the Prepaid Warrants and issued 180,000 shares of Common Stock in full
settlement of all obligations to the holder. The Company has agreed to file a
registration statement with the Securities and Exchange Commission covering such
shares. Settlement costs of $268,695 were recorded during the year ended June
30, 1999.
5. Earnings per Share
The following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended September 30
-----------------------------------------
1999 1998
----------------- -----------------
Numerator:
Net loss $ (315,667) $ (854,177)
================= =================
Denominator:
Weighted average shares 1,368,046 931,093
================= =================
Basic and diluted earnings per common share $ (0.23) $ (0.92)
================= =================
At September 30, 1999 there were, exclusive of the Prepaid Warrants, 3,195,000
Common Stock Purchase Warrants outstanding. Such warrants have exercise prices
ranging from $.60 to $72.00 per share and expire from March 2001 through January
2004. Based on the closing price ($.75) of the Company's Common Stock at
September 30, 1999, there were, exclusive of the Prepaid Warrants, currently
exercisable in-the-money warrants outstanding for the purchase of 507,700 shares
of Common Stock. Additionally, the Company has established an employee stock
option plan for the benefit of
9
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 September 30, 1999, there are options
outstanding for the purchase of 285,901 shares of the Company's Common Stock.
None of the warrants or options have been included in the computation of diluted
loss per share because their inclusion would be antidilutive.
6. Commitments and Contingencies
By letter dated April 10, 1998, Michael Fishman, then 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 and four other
defendants in the United States District Court for the District of Connecticut.
The complaint asserted claims under Sections 10(b) and 18 of the Securities
Exchange Act of 1934, as well as several state law claims, including breach of
contract, fraud and misrepresentation. Mr. Fishman alleged that the Company (1)
failed to pay him the benefits and compensation to which he was entitled and (2)
made material misrepresentations in its filings with the Securities and Exchange
Commission. On December 11, 1998, the Court granted the Company's motion to
dismiss Mr. Fishman's action without prejudice to the plaintiff to seek leave to
file an amended complaint within 30 days. On May 12, 1999, the Court denied the
plaintiff's subsequent motion for leave to file a substituted complaint on the
basis that the federal securities law claim, the only federal claim alleged by
the plaintiff, was still deficient. Accordingly, the federal securities claim
was dismissed with prejudice. On or about June 4, 1999, Mr. Fishman commenced an
action against the same defendants and added as a seventh defendant, the
Company's former President, Steven Francesco, in the Connecticut Superior Court
for the Judicial District of Stamford/Norwalk at Stamford alleging breach of
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. Plaintiff has
responded to the counterclaims and discovery is proceeding. Although the Company
is vigorously defending this action, there can be no assurance that it will be
successful.
By memorandum dated April 10, 1998, Jonathan Paschkes, then Vice President of
Marketing for the Company, resigned his position. On or about November 17, 1998,
Mr. Paschkes filed a complaint against the Company and Sebastian E. Cassetta in
the United States District Court, District of Connecticut. In the complaint, Mr.
Paschkes alleges (i) fraudulent inducement to him to accept his position with
the Company; (ii) breach of various terms of the Company's employment contract
with him; and (iii) failure by the Company to pay him wages and bonuses and
issue options to him pursuant to the terms of his employment contract. On or
about February 18, 1999, Mr. Paschkes filed an amended complaint. The Company
answered the amended complaint and asserted counterclaims against Mr. Paschkes
for fraudulent inducement, breach of contract, conversion and statutory theft.
On October 5, 1999, an agreement in principle was reached between the Company
and Mr. Paschkes in full settlement of these claims. The Company has executed a
settlement agreement with Mr. Paschkes and anticipates filing a Stipulation of
Dismissal with prejudice before November 30, 1999. The Company recorded a charge
for the settlement of such claims in the results of operations for the year
ended June 30, 1999.
On or about May 11, 1998, Ronald G. Weiner filed a complaint against the Company
and Mr. Francesco in the Supreme Court of the State of New York, County of New
York. The complaint alleges, among other things, that in May 1993, by letter
from Mr. Francesco, Mr. Weiner was offered a 10% equity stake in Smart Phone
Services, Inc. ("SPS"), a Subchapter S company of which Mr. Francesco allegedly
was the President and sole shareholder, in exchange for his active involvement
in, among other things, raising capital and managing the financial aspects of
SPS. The complaint alleges that, in November 1993, Mr. Francesco sent a letter
to Mr. Weiner in which he (i) represented that SPS had failed to attract a
single
10
investor and (ii) withdrew his offer to Mr. Weiner of a 10% equity position in
SPS. The complaint further alleges that, in conversations with Mr. Weiner
beginning in November 1993, Mr. Francesco represented that he was ceasing all
efforts to capitalize SPS. The complaint alleges, among other things, that Mr.
Francesco and SPS breached their agreement with Mr. Weiner by withdrawing their
offer to him of a 10% equity stake in SPS, and that, at the time Mr. Francesco
represented that he was ceasing efforts to capitalize SPS, he had actually
formed the Company and was actively seeking investors for it. The complaint
further alleges that the Company is a successor entity to SPS and that,
therefore, the Company is liable for SPS' and Mr. Francesco's alleged conduct in
derogation of their alleged agreement with Mr. Weiner. The complaint seeks,
among other things, (i) a declaratory judgment declaring Mr. Weiner a 10% equity
shareholder of the Company, (ii) a constructive trust in Mr. Weiner's favor for
10% of the Company's equity shares and (iii) restitution against Mr. Francesco
and the Company for unjust enrichment. On his unjust enrichment claim, Mr.
Weiner seeks unspecified damages that he alleges to be at least $250,000. In its
answer to the complaint, the Company has denied the material allegations of the
complaint and asserted affirmative defenses. No discovery in this action has yet
been taken. Although the Company is vigorously defending this action, there can
be no assurance that it will be successful.
7. Subsequent Events
On October 13, 1999, the Board of Directors authorized the establishment of the
Company's 1999 Employee Stock Option Plan ("1999 Plan"). The 1999 Plan provides
for the issuance of options to employees and directors for the purchase of a
maximum of 400,000 shares of Common Stock of the Company at not less than the
fair value of the Common Stock on the date of grant. The Board authorized the
issuance of 300,000 of such options to employees at the fair value of the Common
Stock on that date.
Also on October 13, 1999, the Board of Directors authorized the Company to enter
into a restricted stock agreement with Robert Pearl, Director of Business
Development, pursuant to which Mr. Pearl will be awarded 1% of the fully diluted
shares of Common Stock of the Company as of that date at the purchase price of
$.75 per share. Additionally, the Board of Directors agreed to reprice the
restricted shares granted to Messrs. Cassetta and Rossi to $.75 per share, the
fair value of the shares at that date.
In November 1999, $87,803 of the Company's Prepaid Warrants were converted into
an aggregate of 30,525 shares of Common Stock.
In November 1999, Zanett Lombardier, Ltd converted certain warrants held by it
into an aggregate of 25,042 shares of Common Stock.
11
Item 2. Management's Discussion and Analysis or Plan of Operation
------
Plan of Operation
The Company delivers Internet-based content and trade order routing solutions,
as well as "Web-to-Wireless" applications that drive transactions to its
strategic alliances ("Strategic Marketing Partners") and their customers. The
Company has developed online financial, transactional and media applications
using a unique "device-independent" delivery solution.
The Company's plan of operation includes programs for the sale of the Company's
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 the Company to
maximize its market reach at minimal operating costs. The flexibility of the
Company'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 of distribution of financial
information and transaction services via wireless telephones and PDAs, the
Company is developing strategic marketing relationships with the wireless
equipment manufacturers, carriers and other value-added service providers and
potential corporate partners. The Company continuously seeks to increase product
performance and widen its distribution by building and maintaining this network
of Strategic Marketing Partners. Combining the Company's application development
and data platform with the core competencies of its Strategic Marketing
Partners, the Company 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 the Company's
information products and as a source of revenues from "fee based" transactions
such as routing stock order entries.
Management believes that most of the Company's revenues will ultimately be
derived from consumers who purchase the Company's services through Strategic
Marketing Partners. The Company anticipates that Strategic Marketing Partners
will brand the Company's "bundled" information services with their own private
label and promote and distribute the Company's packaged offering to their
clients. The Company has the ability to customize the information package to be
offered to each Strategic Marketing Partner, by device. With the licensing of
four of the Company's Internet products by DTN, the Company has discontinued
efforts to develop a direct subscriber base.
Management anticipates that staffing requirements associated with the
implementation of its plan of operation will result in the addition of a minimum
of six to ten people during the period ending June 30, 2000. Such personnel will
be added to assist with the programming requirements of Strategic Marketing
Partners' product offerings, for customer support and sales and marketing.
Results of Operations
Quarter Ended September 30, 1999 vs. Quarter Ended September 30, 1998
During the quarters ended September 30, 1999 and 1998, the Company's revenues
were $808,292 and $349,705, respectively. Substantially all of such revenues
were obtained from the Company's licensing agreement with Data Transmission
Network Corporation ("DTN"). At September 30, 1999 and 1998, the Company
recorded deferred revenues of $5,384,055 and $960,515, respectively. Such
amounts resulted from the Company's relationship with DTN and will be amortized
to revenues over the term of the anticipated revenue stream.
12
During the quarter ended September 30, 1999, the Company incurred costs of
services of $232,866. Such costs consisted primarily of information and
communication costs ($48,400), personnel costs ($55,800) and computer hardware
lease, depreciation and maintenance costs ($84,600). During the quarter ended
September 30, 1998, the Company incurred costs of services of $207,084. Such
costs consisted primarily of information and communication costs ($95,700),
personnel costs ($29,100), and computer hardware lease, depreciation and
maintenance costs ($80,800). Product development costs were $46,845 and $27,046
for the quarters ended September 30, 1999 and 1998, respectively. Such costs
consisted primarily of the amortization of capitalized software development
costs related to certain product enhancements in accordance with Statement of
Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed" ("Statement 86"). During the
quarters ended September 30, 1999 and 1998, the Company capitalized $244,225 and
$233,005, respectively, of development costs in accordance with Statement 86.
During the quarter ended September 30, 1999, the Company incurred selling,
general and administrative expenses of $855,265 vs. $830,858 for the quarter
ended September 30, 1998. Such costs were incurred primarily for personnel costs
($221,000), marketing and advertising costs ($76,400), professional fees
($468,800), facilities ($50,000) and telecommunications costs ($17,000).
Included in professional fees are noncash charges of $291,300 resulting from the
amortization of costs ascribed to common stock purchase warrants previously
issued to financial consultants. Such common stock purchase warrants were
recorded in accordance with the Black-Scholes pricing methodology. Selling,
general and administrative expenses for the quarter ended September 30, 1998
were incurred primarily for personnel costs ($185,000), marketing and
advertising costs ($61,800), professional fees ($488,400), facilities ($49,000)
and telecommunications costs ($14,700). Included in professional fees are
non-cash charges of $330,400 resulting from the amortization of costs ascribed
to common stock purchase warrants previously issued to financial consultants.
In accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" the Company must recognize the compensatory nature of
173,239 options issued to employees pursuant to the Company's employee stock
option plan, as well as 892,319 shares issued or to be issued to Messrs.
Cassetta, Rossi and Pearl. Accordingly, the Company will be required to record a
noncash charge to earnings based on the difference between the market price of
the Company's Common Stock at December 31,1999 and the exercise price of the
option or purchase price of the restricted stock.
As a result of the volatility of the Company's Common Stock, the magnitude of
such a noncash charge is unknown. However, based on a closing price ($15.875) of
the Company's Common Stock at November 22, 1999, the Company would be required
to record a noncash charge to earnings of approximately $14,500,000. Such
charge will have no impact on the Company's statement of condition at December
31, 1999 or cash flows for the period then ended.
Interest income for the quarter ended September 30, 1999 and 1998 amounted to
$11,017 and $2,202, respectively. Such amounts were earned primarily from the
Company's investments in short-tern commercial paper and cash balances. Interest
and financing costs for the quarters ended September 30, 1999 and 1998 were $0
and $141,096, respectively. During the quarter ended September 30, 1998, such
costs were primarily attributable to the issuance of 50,000 shares of Common
Stock to Zanett Lombardier, Ltd ("ZLL") and Bruno Guazzoni, holders of
$1,669,000 of Prepaid Warrants, in consideration of such holders agreeing to
restrictions on the exercise of the Prepaid Warrants and the resale of the
shares of Common Stock issuable upon such exercise. The issuance of such shares
was recorded in the financial statements at fair market value.
Capital Resources and Liquidity
Since inception of the Company on August 20, 1993 through March 21, 1996, the
date of the initial public offering of securities ("IPO"), the Company had
funded its operations through a combination of private debt and equity
financings totaling $4,160,000 and $12,877,500, respectively.
In May 1997, the Company arranged a line of credit facility with ZLL. 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 56,627 common stock purchase warrants to ZLL.
Similarly, the Company issued 11,438 warrants for each of the July and September
amendments. As a result of the Company's default on the note in August 1997, the
Company was required to issue 50,083 "default" warrants to ZLL. These warrants
are currently exercisable at prices ranging from $.64 to $6.07 and expire in
September 2002.
13
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, Zanett Securities Corporation, 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
Prepaid Warrants expire on September 30, 2000. As part of the Placement, ZLL
converted a note 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 Warrants. The net proceeds of the Placement of $2,643,941
were used for general working capital requirements.
On April 23, 1998, the Company entered into a Software License and Service
Agreement with DTN, whereby the Company licensed to DTN the rights to market
three of the Company's Internet products. The Company received $850,000 upon
execution of the contract and received minimum monthly payments of $100,000
through April 1999.
On June 24, 1999, the Company and DTN entered into a License Agreement that
amended the Software License and Service Agreement dated April 23, 1998. In
consideration of the receipt of $5.175 million, the Company granted DTN an
exclusive perpetual worldwide license to the Company's Internet-based (i)
real-time stock quote product, (ii) an online trading vehicle for customers of
small and medium sized brokerage companies, (iii) an administrative reporting
package for brokers of small and medium sized brokerage companies, and (iv) an
order entry/routing system. Additionally, the Company received $324,000 in
exchange for an agreement to issue warrants to purchase 300,000 shares of the
Company's Common Stock at an exercise price of $8.60 per share. The Company has
agreed to continue to operate these products and provide maintenance and
enhancement services in exchange for a percentage of the revenues earned by DTN
therefrom. The cost of the Company's commitment to provide such maintenance and
enhancement services is limited to a maximum of 20% of the revenues earned by
the Company. None of the Company's wireless products were included in this
transaction. Although the Company believes that DTN has the experience and the
financial ability to distribute the Company's services to thousands of potential
customers, there can be no assurance that the products and services will be
accepted by the ultimate consumer on a widespread basis.
On August 11, 1998, the Company entered into a letter of intent, as amended on
November 24, 1998, with Spencer Trask Securities, Inc. ("Spencer Trask") which
provided for the retention of Spencer Trask to act as exclusive placement agent
in connection with a private placement by the Company of a minimum of $5,000,000
and a maximum of $10,000,000 of securities of the Company.
In anticipation of completing the private placement, the Company completed an
interim financing of $550,000 of securities of the Company. The Company sold
five and one-half (5.5) units, each consisting of a secured convertible 8% note
in the principal amount of $100,000 and warrants to purchase Common Stock of the
Company. The notes and the warrants are convertible and exercisable,
respectively, at $.60 per share of Common Stock. Such notes were repaid in June
1999.
On July 1, 1999, the Company entered into an agreement with Arnhold & S.
Bleichroeder, Inc. ("ASB") to settle the Company's obligation to ASB pursuant to
the default provisions of the Prepaid Warrants. Accordingly, the Company paid
ASB $325,000 to redeem the Prepaid Warrants and issued 180,000 shares of Common
Stock in full settlement of all obligations to ASB. The Company has agreed to
file a registration statement with the Securities and Exchange Commission
covering such shares.
The Company's financial statements for the period ended September 30, 1999 have
been prepared on a
14
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 net losses of $7,124,126, $5,040,009, and $4,434,482 for the
years ended June 30, 1999, 1998 and 1997, respectively, and as of September 30,
1999 had an accumulated deficit of $22,261,672 and a deficiency of net assets of
$4,481,321. The Company is also a defendant in several legal proceedings that
could have a material adverse effect on the Company's financial position, cash
flows, and results of operations. 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.
The Company's management believes 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. 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
----------------------------------------------
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.
15
PART 2. OTHER INFORMATION
SmartServ Online, Inc.
Item 1. Legal Proceedings
By letter dated April 10, 1998, Michael Fishman, then 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 and four other
defendants in the United States District Court for the District of Connecticut.
The complaint asserted claims under Sections 10(b) and 18 of the Securities
Exchange Act of 1934, as well as several state law claims, including breach of
contract, fraud and misrepresentation. Mr. Fishman alleged that the Company (1)
failed to pay him the benefits and compensation to which he was entitled and (2)
made material misrepresentations in its filings with the Securities and Exchange
Commission. On December 11, 1998, the Court granted the Company's motion to
dismiss Mr. Fishman's action without prejudice to the plaintiff to seek leave to
file an amended complaint within 30 days. On May 12, 1999, the Court denied the
plaintiff's subsequent motion for leave to file a substituted complaint on the
basis that the federal securities law claim, the only federal claim alleged by
the plaintiff, was still deficient. Accordingly, the federal securities claim
was dismissed with prejudice. On or about June 4, 1999, Mr. Fishman commenced an
action against the same defendants and added as a seventh defendant, the
Company's former President, Steven Francesco, in the Connecticut Superior Court
for the Judicial District of Stamford/Norwalk at Stamford alleging breach of
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. Plaintiff has
responded to the counterclaims and discovery is proceeding. Although the Company
is vigorously defending this action, there can be no assurance that it will be
successful.
By memorandum dated April 10, 1998, Jonathan Paschkes, then Vice President of
Marketing for the Company, resigned his position. On or about November 17, 1998,
Mr. Paschkes filed a complaint against the Company and Sebastian E. Cassetta in
the United States District Court, District of Connecticut. In the complaint, Mr.
Paschkes alleges (i) fraudulent inducement to him to accept his position with
the Company; (ii) breach of various terms of the Company's employment contract
with him; and (iii) failure by the Company to pay him wages and bonuses and
issue options to him pursuant to the terms of his employment contract. On or
about February 18, 1999, Mr. Paschkes filed an amended complaint. The Company
answered the amended complaint and asserted counterclaims against Mr. Paschkes
for fraudulent inducement, breach of contract, conversion and statutory theft.
On October 5, 1999, an agreement in principle was reached between the Company
and Mr. Paschkes in full settlement of these claims. The Company has executed a
settlement agreement with Mr. Paschkes and anticipates filing a Stipulation of
Dismissal with prejudice before November 30, 1999.
On or about May 11, 1998, Ronald G. Weiner filed a complaint against the Company
and Mr. Francesco in the Supreme Court of the State of New York, County of New
York. The complaint alleges, among other things, that in May 1993, by letter
from Mr. Francesco, Mr. Weiner was offered a 10% equity stake in Smart Phone
Services, Inc. ("SPS"), a Subchapter S company of which Mr. Francesco allegedly
was the President and sole shareholder, in exchange for his active involvement
in, among other things, raising capital and managing the financial aspects of
SPS. The complaint alleges that, in November 1993, Mr. Francesco sent a letter
to Mr. Weiner in which he (i) represented that SPS had failed to attract a
single investor and (ii) withdrew his offer to Mr. Weiner of a 10% equity
position in SPS. The complaint
16
further alleges that, in conversations with Mr. Weiner beginning in November
1993, Mr. Francesco represented that he was ceasing all efforts to capitalize
SPS. The complaint alleges, among other things, that Mr. Francesco and SPS
breached their agreement with Mr. Weiner by withdrawing their offer to him of a
10% equity stake in SPS, and that, at the time Mr. Francesco represented that he
was ceasing efforts to capitalize SPS, he had actually formed the Company and
was actively seeking investors for it. The complaint further alleges that the
Company is a successor entity to SPS and that, therefore, the Company is liable
for SPS' and Mr. Francesco's alleged conduct in derogation of their alleged
agreement with Mr. Weiner. The complaint seeks, among other things, (i) a
declaratory judgment declaring Mr. Weiner a 10% equity shareholder of the
Company, (ii) a constructive trust in Mr. Weiner's favor for 10% of the
Company's equity shares and (iii) restitution against Mr. Francesco and the
Company for unjust enrichment. On his unjust enrichment claim, Mr. Weiner seeks
unspecified damages that he alleges to be at least $250,000. In its answer to
the complaint, the Company has denied the material allegations of the complaint
and asserted affirmative defenses. No discovery in this action has yet been
taken. Although the Company is vigorously defending this action there can be no
assurance that it will be successful.
Item 2. Changes in Securities and Use of Proceeds
On July 1, 1999, the Company entered into an agreement with Arnhold & S.
Bleichroeder, Inc. ("ASB"), a holder of $325,000 of the Company's Prepaid
Warrants, to settle the Company's obligation to ASB pursuant to the default
provisions of the Prepaid Warrants. Accordingly, the Company paid $325,000 to
redeem the Prepaid Warrants and issued 180,000 shares of Common Stock in full
settlement of all obligations to the ASB. No commissions were paid in connection
with such transaction. These shares were issued in reliance upon the exemption
from registration provided by Section 4 (2) of the Securities Act of 1933, as
amended (the "Securities Act").
In November 1999, $87,803 of Prepaid Warrants were converted into an aggregate
of 30,525 shares of Common Stock of the Company. No sales commissions were paid
in connection with such conversions. The shares were issued in reliance upon the
exemption from registration provided by Section 3 (a) (9) of the Securities Act.
In November 1999, Zanett Lombardier, Ltd converted certain warrants held by it
into an aggregate of 25,042 shares of Common Stock. These shares were issued in
reliance upon the exemption from registration provided by Section 4 (2) of the
Securities Act.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibit is included herein:
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three
months ended September 30, 1999.
17
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 23, 1999 /S/ SEBASTIAN E. CASSETTA
----------------- --------------------------------------
Sebastian E. Cassetta
Chairman of the Board, Chief Executiv
Officer
Date: November 23, 1999 /S/ THOMAS W. HALLER
----------------- --------------------------------------
Thomas W. Haller
Chief Financial Officer, Treasurer
Exhibit 27 - Financial Data Schedule
Item 601(c) of Regulation S-B
This Schedule contains summary financial information extracted from the
September 30, 1999 financial statments of SmartServ Online, Inc. and is
qualified in its entirety by reference to such financial statements.
September 30, 1999
Cash and cash items $ 1,103,443
Marketable securities --
Notes and accounts receivable -trade:
Billed 268,851
Unbilled --
Allowances for doubtful accounts --
Prepaid expenses 40,665
Total current assets 1,412,959
Property and equipment 1,088,542
Accumulated depreciation 615,130
Total assets 2,840,462
Total current liabilities 3,594,360
Bonds, mortgages and similar debt --
Common Stock 13,798
Preferred Stock - mandatory redemption --
Preferred Stock - no mandatory redemption --
Other stockholders' equity (deficit) (4,495,119)
Total liabilities and stockholders' equity (deficiency) (4,481,321)
Net sales of information services 808,292
Total revenues 808,292
Cost of services 279,711
Total costs and expenses of sales 279,711
Other costs and expenses 855,265
Provision for doubtful accounts and notes --
Interest and amortization of debt discount --
Income/(loss) before taxes (315,667)
Income tax expense --
Income/(loss) from continuing operations (315,667)
Discontinued operations --
Extraordinary items --
Cumulative effect of changes in accounting principles --
Net income or (loss) $ (315,667)
Earnings/(loss) per share - basic $ (0.23)
Earnings/(loss) per share - diluted $ (0.23)