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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, 1997
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
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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 PERIODS THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO ______
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE)
YES ______ NO X
THE NUMBER OF SHARES OF COMMON STOCK, $.01 PAR VALUE, OUTSTANDING AS OF
NOVEMBER 18, 1997 WAS 3,695,000.
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SMARTSERV ONLINE, INC.
FORM 10-QSB
INDEX
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets - June 30, 1997 and September 30, 1997 (unaudited)................................... 2
Statements of Operations - three months ended September 30, 1997
and 1996 (unaudited)................................................................................ 3
Statement of Changes in Stockholders' Equity - three months
ended September 30, 1997 (unaudited)................................................................ 4
Statements of Cash Flows - three months ended September 30, 1997 and
1996 (unaudited).................................................................................... 5
Notes to Unaudited Financial Statements............................................................. 6
Item 2. Management's Discussion and Analysis or Plan of Operation........................................... 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................................... 15
Item 6. Exhibits and Reports on Form 8-K.................................................................... 15
Signatures.......................................................................................... 16
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SMARTSERV ONLINE, INC.
BALANCE SHEETS
SEPTEMBER 30, JUNE 30,
1997 1997
------------ ------------
(UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents $ 2,629,421 $ 93,345
Accounts receivable, net of an allowance for losses
of $6,000 at September 30, 1997 and June 30, 1997 180,926 149,782
Prepaid expenses 49,563 90,725
------------ ------------
Total current assets 2,859,910 333,852
Property and equipment, net 709,272 743,714
Other assets 66,965 169,123
------------ ------------
Total Assets $ 3,636,147 $ 1,246,689
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,240,066 $ 829,355
Accrued liabilities 285,579 211,813
Accrued interest -- 16,323
Payroll taxes payable 115,106 20,383
Salaries payable 34,227 46,018
Current portion of capital lease obligation 68,811 86,072
Loan payable to officer 12,500 --
Deferred revenues 35,102 24,914
------------ ------------
Total current liabilities 1,791,391 1,234,878
------------ ------------
Long-term portion of capital lease obligation 140,524 160,139
Notes payable 550,000
STOCKHOLDERS' EQUITY
Common stock - $.01 par value
Authorized - 15,000,000 shares
Issued and outstanding - 3,695,000 shares at June 30, 1997
and September 30, 1997 36,950 36,950
Additional paid-in capital 17,336,692 9,046,592
Unearned compensation (4,370,000) --
Accumulated deficit (11,299,410) (9,781,870)
------------ ------------
Total stockholders' equity 1,704,232 (698,328)
------------ ------------
Total Liabilities and Stockholders' Equity $ 3,636,147 $ 1,246,689
============ ============
See accompanying notes.
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SMARTSERV ONLINE, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS
ENDED SEPTEMBER 30
---------------------------
1997 1996
----------- -----------
Revenues $ 200,193 $ 13,852
----------- -----------
Costs and expenses:
Costs of revenues 377,972 167,185
Product development expenses 205,073 192,766
Selling, general and administrative
expenses 529,463 487,064
----------- -----------
Total costs and expenses 1,112,508 847,015
----------- -----------
Loss from operations (912,315) (833,163)
----------- -----------
Other income (expense):
Interest income 1,087 40,339
Interest expense and other financing costs (606,312) (3,013)
----------- -----------
(605,225) 37,326
----------- -----------
Net loss $(1,517,540) $ (795,837)
=========== ===========
Net loss per share (Note 2) $ (0.41) $ (0.22)
=========== ===========
Weighted average shares outstanding
(Note 2) 3,695,000 3,695,000
=========== ===========
See accompanying notes.
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SMARTSERV ONLINE, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE MONTHS ENDED SEPTEMBER 30, 1997
(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
Issuance of Common Stock
Purchase Warrants to a
financial consultant in
connection with the
issuance of 4,000 Prepaid
Common Stock Purchase
Warrants -- -- 4,370,000 (4,370,000) -- --
Issuance of Common Stock
Purchase Warrants in
connection with the
issuance of notes -- -- 465,100 -- -- 465,100
Net loss for the period -- -- -- -- (1,517,540) (1,517,540)
------------ ------------ ------------ ------------ ------------ ------------
Balance at September 30, 1997 3,695,000 $ 36,950 $ 17,336,692 $ (4,370,000) $(11,299,410) $ 1,704,232
============ ============ ============ ============ ============ ============
See accompanying notes.
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SMARTSERV ONLINE, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS
ENDED SEPTEMBER 30
---------------------------
1997 1996
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OPERATING ACTIVITIES
Net loss $(1,517,540) $ (795,837)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization of property and equipment 46,073 16,901
Non-cash interest expense and other financing costs 615,564 --
Changes in market value of employee options -- (36,262)
Amortization of unearned revenues (2,290) --
Amortization and write-off of deferred charges 63,000 9,000
Other changes that provided (used) cash --
Accounts receivable (31,144) (1,042)
Accrued interest receivable -- (26,381)
Prepaid expenses 5,162 (32,200)
Accounts payable and accrued liabilities 495,477 (106,279)
Accrued interest (16,323) --
Payroll taxes payable 83,723 2,202
Salaries payable (11,791) (11,803)
Unearned revenues 12,478 --
Security deposit reduction 14,253 --
----------- -----------
Net cash used in operating activities (243,358) (981,701)
----------- -----------
INVESTING ACTIVITIES
Purchase of equipment (11,631) (99,173)
----------- -----------
Net cash used in investing activities (11,631) (99,173)
----------- -----------
FINANCING ACTIVITIES
Repayment of capital lease obligation (36,876) --
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 (25,000) --
----------- -----------
Net cash provided by financing activities 2,791,065 --
----------- -----------
Increase (decrease) in cash and cash equivalents 2,536,076 (1,080,874)
Cash and cash equivalents - beginning of period 93,345 3,460,850
----------- -----------
Cash and cash equivalents - end of period $ 2,629,421 $ 2,379,976
=========== ===========
See accompanying notes.
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SMARTSERV ONLINE, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
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 potential
Strategic Marketing Partners, as well as potential direct subscribers,
including: business credit information, investment newsletters, stock research
reports, stock quotes, nationwide business and residential directory services,
business and financial news, sports information, research and analysis reports,
trading activity reports by insiders of corporations, online FedEx package
tracking, electronic mail, 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 will
provide it with working capital and 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 three months ended September 30, 1997
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; however, it has yet
to generate significant revenues. The Company has incurred recurring operating
losses and its operations have not produced a positive cash flow.
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Additionally, there is no assurance that the Company will generate future
revenues or cash flow from operations.
RECLASSIFICATIONS
Certain amounts in the 1996 financial statements have been reclassified to
conform to the 1997 presentation.
LOSS PER SHARE
Net loss per share is computed based on the weighted average number of common
shares and common equivalents outstanding during the period using the treasury
stock method. Shares from the assumed exercise of options and warrants granted
by the Company have been included in the computations of loss per share for all
periods, unless their inclusion would be antidilutive.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement 128, Earnings Per Share. Statement 128 establishes standards for
computing and presenting earnings per share. This Statement simplifies the
standards for computing earnings per share previously required by APB Opinion
No. 15, and makes them comparable to international EPS standards. Also 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. Both of these statements are
effective for fiscal years ending on or after December 15, 1997. The Company
plans to adopt and apply the provisions of these statements for the fiscal year
ending June 30, 1998. The resulting effect of the application of these
statements is not expected to have a material impact on the financial
statements.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
SEPTEMBER 30, JUNE 30,
1997 1997
--------- ---------
Data processing equipment $ 575,408 $ 564,098
Data processing equipment purchase under a capital lease 246,211 246,211
Office furniture and equipment 69,196 69,196
Display equipment 9,635 9,635
Leasehold improvements 36,678 36,357
--------- ---------
937,128 925,497
Accumulated depreciation, including $20,517 and $8,207 at September 30, 1997
and June 30, 1997, respectively, for equipment purchased
under a capital lease (227,856) (181,783)
--------- ---------
$ 709,272 $ 743,714
========= =========
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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 Company's 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 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.
These 651,500 warrants were issued at exercise prices ranging from $1.125 to
$2.825 and expire in September 2002. The exercise price of these warrants was
adjusted in September 1997 to a maximum of $1.40. They have been valued in
accordance with the Black-Scholes pricing methodology and recorded in the
statement of operations as financing costs.
5. LOAN PAYABLE TO OFFICER
The loan payable to an officer of the Company is non-interest bearing and due on
demand. Such loan 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 Exchange Act 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 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 may be exercised on the earlier of the date upon which a
registration statement is declared effective by the SEC or 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 the registration
statement becoming effective. The Prepaid Warrants expire on September 30, 2002.
Terms of the Placement, included the conversion by Zanett, of a note 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 will be 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.
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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 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 issued
3,555,555 Common Stock Purchase Warrants to this consultant that are exercisable
at $1.125 per share of Common Stock. The Company has valued these warrants using
the Black-Scholes pricing methodology at approximately $4,400,000. 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.
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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 potential 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's plan of operation includes programs for marketing simultaneously
at two distinct levels. At the first level, the Company is developing strategic
marketing relationships with key partners that provide access to large numbers
of potential subscribers for its monthly services. These partners include
regional telephone operating companies, long distance carriers, telephone
equipment manufacturers and others who distribute screen telephone equipment,
market local screen telephone services or otherwise benefit from the increased
acceptance of these devices. 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 3 year contract with
Sprint/United Management Company for the delivery of the Company's information
services into additional markets beyond the initial trial city--Las Vegas. The
Company anticipates that this will result in the deployment of the Company's
information services in Florida, New York, North Carolina, Chicago, Los Angeles
and other designated markets as part of a national campaign.
The Company is also working with businesses, such as brokerage firms, that need
to disseminate proprietary information more effectively to their existing client
base. The Company's information platform and communications architecture allows
the bundling of its partners' proprietary information with its own value-added
information, and makes this package available to subscribers 24 hours per day,
365 days per year. The Company is currently working with Schroder & Company in
an effort to provide proprietary account information to the customers of its
correspondent relationships. As a direct result of this relationship, the
Company is providing its stock quote product and online trading services to the
customers of a correspondent relationship. Additionally, the Company has an
agreement with another correspondent firm to make the Company's "BrokerNet"
program available to its 400 independent stockbrokers.
At the second level, the Company has initiated a direct marketing program for
its SmartServ "Pro" stock quote services. The response to advertisements in
Investors' Business Daily and television commercials run on cable station CNBC
have demonstrated that a strong and active market exists for this information.
Management believes that most of the Company's revenues will ultimately be
derived from end users who 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
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"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 clients. The
Company has the ability to customize the information package to be offered to
each Strategic Marketing Partner, and in turn to their end users.
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 a contract with Sprint/United Management
Company 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 3 to 6 personnel during the period ending December 31, 1997. Such personnel
will be added to assist with the programming requirements of Strategic Marketing
Partners' product offerings and for customer support.
RESULTS OF OPERATIONS
During the fiscal year ended June 30, 1997, the Company commenced the
implementation of its marketing strategies. At September 30, 1997, the Company
has approximately 3,400 customers. Of such number, 2,200 have been generated
through the Company's relationship with Sprint, 1,100 result from the SmartServ
"Pro" advertising and marketing program aimed at the PC based real-time stock
quote user, and 100 are related to the Company's arrangement with Schroder &
Co., Inc.
QUARTER ENDED SEPTEMBER 30, 1997 VS. QUARTER ENDED SEPTEMBER 30, 1996
The Company commenced the implementation of its marketing plan during the
quarter ended September 30, 1996 and recorded revenues of 13,852 from the sale
of its information services. During the quarter ended September 30, 1997, sales
of the company's information services increased to $162,693, primarily from the
SmartServ Online "Pro" real-time stock quote service. Additionally, the Company
recorded revenues of $37,500 related to enhancement, implementation, and
marketing of services associated with its arrangement with Schroder & Co., Inc.
During the quarter ended September 30, 1997, the Company incurred costs of
services of $377,972. Such costs consisted primarily of information and
communication costs ($190,500), personnel costs ($91,500), and computer hardware
leases, depreciation and maintenance ($79,700). During the quarter ended
September 30, 1996, the cost of services was $167,185. Such costs consisted
primarily of information and communication costs ($37,200), personnel costs
($81,900), and computer hardware leases, depreciation and maintenance ($38,400).
Product development costs were $205,073 vs. $192,766 for the quarter ended
September 30, 1996. Such costs consisted primarily of personnel costs ($144,400)
and computer system consultants ($54,900). During the quarter ended September
30, 1996, such product
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development expenses consisted primarily of personnel costs ($122,300) and
systems consultants ($61,700).
During the quarter ended September 30, 1997, the Company incurred selling,
general and administrative expenses of $529,463 vs. $487,064 for the quarter
ended September 30, 1996. Such costs were incurred primarily for personnel costs
($212,000), facilities ($48,700), marketing and advertising costs ($37,200),
professional fees ($113,300), and telecommunications costs ($22,000). 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. During the quarter ended September 30, 1996, the Company
commenced an effort to build an infrastructure capable of supporting its
operations and the marketing and advertising of its information product
offering. Such costs were incurred primarily for advertising and marketing
($56,900), personnel costs ($113,900), professional fees ($130,100) and
telecommunications costs ($19,800). The necessary funds to support these efforts
were provided by the Company's Initial Public Offering ("IPO") in March 1996 and
revenues from information sales and services.
Interest income for the quarter ended September 30, 1997 amounted to $1,087 vs.
$40,339 for the quarter ended September 30, 1996. During the quarter ended
September 30, 1996 such amounts were earned primarily from the Company's
investments in highly liquid commercial paper. Interest and financing costs for
the year ended September 30, 1997 were $606,312. 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. Interest costs for the quarter ended
September 30, 1996 were incurred in connection with an insurance financing
agreement and amounted to $3,013.
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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 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. These 651,500
warrants were issued at exercise prices ranging from $1.125 to $2.825 and expire
in September 2002. The exercise price of these warrants was adjusted in
September 1997 to a maximum of $1.40.
In May 1997, the Company entered into a 3 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 may be exercised on the earlier of the date upon which a
registration statement is declared effective by the SEC or 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 the
registration statement becoming 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
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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 issued 3,555,555 Common Stock Purchase Warrants to this financial
consultant that are exercisable at $1.125 per share of Common Stock. The Company
has valued these warrants using the Black-Scholes pricing methodology at
approximately $4,400,000. 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.
As part of the Placement, Zanett 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 will be used for general working capital
requirements.
The Company has entered into a 3 year contract with Sprint/United Management
Corp. and is currently negotiating agreements with several major stock brokerage
firms. 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;
however, no assurance can be given that such goals will be obtained or that any
expected revenues or cash flows will be forthcoming.
Management estimates that, without a significant increase in revenues, net
proceeds from the Placement will be sufficient to support the Company's
operations through April 1998. The Company intends to seek additional sources of
capital and liquidity through collaborative agreements, through the redemption
of the outstanding common stock purchase warrants or through public or private
financing; however, there can be no assurance that additional financing will be
available on acceptable terms or at all.
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.
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PART 2. OTHER INFORMATION
SMARTSERV ONLINE, INC.
ITEM 1. LEGAL PROCEEDINGS
There are no pending material legal proceedings to which the Company or any of
its properties is a defendant.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8 - K
(a) The following exhibits are included herein:
Exhibit 11 - Statement re: computation of earnings per share
Exhibit 27 - Financial Data Schedule
(b) REPORTS OF FORM 8-K
Since the end of the fiscal year ended June 30, 1997, the Company
filed a Current Report on Form 8-K dated September 30, 1997 and a
Form 8-K/A reporting Item 5 and containing a pro forma balance sheet
as at August 31, 1997.
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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 18, 1997 /S/ SEBASTIAN E. CASSETTA
----------------- --------------------------
Sebastian E. Cassetta
Chairman of the Board, Chief
Executive Officer
Date: November 18, 1997 /S/ THOMAS W. HALLER
----------------- ---------------------
Thomas W. Haller
Chief Financial Officer,
Treasurer
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EXHIBIT INDEX
Exhibit 11 - Statement re: computation of earnings per share
Exhibit 27 - Financial Data Schedule