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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 2004
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Commission file number 0-28008
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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)
2250 Butler Pike, Suite 150, Plymouth Meeting, PA 19462
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(Address of Principal Executive Offices)
(610) 397-0689
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(Issuer's Telephone Number, Including Area Code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
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The number of shares of common stock, $.01 par value, outstanding as of June 30,
2004 was 2,870,230.
Transitional Small Business Disclosure Format (check one):
Yes No X
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SmartServ Online, Inc.
Form 10-QSB
Index
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - June 30, 2004 (unaudited) and
December 31, 2003 ...................................................2
Consolidated Statements of Operations - three months ended
June 30, 2004 and 2003 and six months ended June 30, 2004
and 2003 (unaudited) ................................................4
Consolidated Statement of Changes in Stockholders' Equity
(Deficiency) - six months ended June 30, 2004 (unaudited) ...........5
Consolidated Statements of Cash Flows - three months ended
June 30, 2004 and 2003 and six months ended June 30, 2004
and 2003 (unaudited).................................................6
Notes to Unaudited Consolidated Financial Statements.................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...........................................18
Item 3 Controls and Procedures.............................................25
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds...........................26
Item 6. Exhibits and Reports on Form 8-K....................................27
Signatures.......................................................28-31
1
SmartServ Online, Inc.
Consolidated Balance Sheets
June 30, December 31,
2004 2003
---------- ----------
(Unaudited)
Assets
Current assets
Cash $4,526,790 $ 139,178
Accounts receivable 100,079 103,230
Accrued interest receivable -- 47,004
Prepaid compensation -- 133,127
Prepaid expenses 85,229 86,798
Deferred financing costs -- 322,192
---------- ----------
Total current assets 4,712,098 831,529
---------- ----------
Property and equipment, net 102,762 --
Other assets
Goodwill and intangible assets 1,814,889 --
Security deposits 18,237 5,156
---------- ----------
Total Assets $6,647,986 $ 836,685
========== ==========
See accompanying notes
2
SmartServ Online, Inc.
Consolidated Balance Sheets
June 30, December 31,
2004 2003
------------ ------------
(Unaudited)
Liabilities and Stockholders' Equity (Deficiency)
Current liabilities
Current portion of notes payable $ 32,973 $ --
Accounts payable 1,296,274 1,702,768
Accrued liabilities 967,659 928,393
Accrued salaries 15,565 78,133
Accrued interest payable -- 218,848
------------ ------------
Total current liabilities 2,312,471 2,928,142
------------ ------------
Deferred revenues -- 37,500
Notes payable 33,952 3,340,430
Commitments and Contingencies
Stockholders' Equity (Deficiency)
Convertible Preferred stock - $0.01 par value
Authorized - 1,000,000 shares
Issued and outstanding - 876,491 shares as of June 30,
2004, aggregate liquidation preference of
$13,584,888 and $0 as of December 31, 2003, respectively 1,591,008 --
Common stock - $.01 par value
Authorized - 40,000,000 shares
Issued - 2,904,577; outstanding - 2,870,230 shares at
June 30, 2004 and 2,261,300 shares at December 31, 2003 29,046 22,613
Additional paid-in capital 99,201,111 85,160,306
Notes receivable from former officers (187,525) (255,525)
Unearned compensation (650,893) --
Accumulated deficit (95,613,184) (90,396,781)
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4,369,563 (5,469,387)
Treasury stock, 34,347 shares at cost (68,000) --
------------ ------------
Total stockholders' equity (deficiency) 4,301,563 (5,469,387)
------------ ------------
Total Liabilities and Stockholders' Equity (Deficiency) $ 6,647,986 $ 836,685
============ ============
See accompanying notes.
3
SmartServ Online, Inc.
Consolidated Statements of Operations
(Unaudited)
Three Months Six Months
Ended June 30 Ended June 30
-------------------------- --------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Revenues $ 114,004 $ 238,028 $ 187,715 $ 469,015
----------- ----------- ----------- -----------
Costs and expenses:
Costs of services (674,729) (2,574,543) (981,595) (3,791,374)
Sales and marketing expenses (98,514) (103,496) (142,220) (380,030)
General and administrative expenses (704,185) (1,360,913) (1,365,134 (2,360,093)
Stock-based compensation 893,034 (73,750) (639,107) (101,944)
----------- ----------- ----------- -----------
Total costs and expenses (584,394) (4,112,702) (3,128,056) (6,633,441)
----------- ----------- ----------- -----------
Loss from operations (470,390) (3,874,674) (2,940,341) (6,164,426)
----------- ----------- ----------- -----------
Other income (expense):
Interest income 9,546 4,360 12,767 8,892
Interest expense and other financing costs (154,948) (873,510) (2,092,029) (1,249,396)
Legal settlement -- -- (196,800) --
Gain from extinguishment of debt -- -- -- 305,822
Insurance recovery -- 374,000 -- 374,000
Foreign exchange gains (losses) -- (43) -- 50
----------- ----------- ----------- -----------
(145,402) (495,193) (2,276,062) (560,632)
----------- ----------- ----------- -----------
Net loss $ (615,792) $(4,369,867) $(5,216,403) $(6,725,058)
=========== =========== =========== ===========
Preferred stock dividend accrued (1,102,254) -- (2,016,094) --
----------- ----------- ----------- -----------
Net loss applicable to common shareholders $(1,718,046) $(4,369,867) $(7,232,497) $(6,725,058)
=========== =========== =========== ===========
Basic and diluted loss per share $ (0.60) $ (2.18) $ (2.72) $ (3.40)
=========== =========== =========== ===========
Weighted average shares outstanding - basic and
diluted 2,870,230 2,000,243 2,658,889 1,978,476
=========== =========== =========== ===========
See accompanying notes
4
SmartServ Online, Inc.
Consolidated Statement of Changes in Stockholders' Equity (Deficiency)
Six Months Ended June 30, 2004
(Unaudited)
Common Stock Preferred Stock
Series A Notes Receivable
Preferred from Former Additional
Shares Par Value Shares Stock Officers Paid-in Capital
------ --------- ------ ----- -------- ---------------
Balances at December 31, 2003 2,261,300 $22,613 -- $ -- $(255,525) $85,160,306
Issuance of common stock to acquire 500,002 5,000 -- -- -- 1,635,007
nReach, Inc.
Issuance of common stock related to 83,275 833 -- -- -- 688,319
financing
Issuance of common stock to vendor 60,000 600 -- -- -- 196,200
to satisfy debt
Issuance of warrants as compensation -- -- -- -- -- 447,859
for services
Issuance of warrants related to -- -- -- -- -- 1,849,697
financing
Issuance of warrants to vendor to -- -- -- -- -- 26,299
satisfy debt
Employee stock -- -- -- -- -- 1,290,000
compensation
Amortization of unearned -- -- -- -- -- --
compensation
Treasury stock shares returned in -- -- -- -- 68,000 --
settlement of note receivable from
former officer
Beneficial conversion option on -- -- -- -- -- 9,914,268
convertible Preferred Stock
Series A Preferred Stock -- -- 876,491 1,591,008 -- 9,250
Accretion of dividends on Series A -- -- -- -- -- (1,578,508)
Preferred Stock
Dividends accrued on Preferred Stock -- -- -- -- -- (437,586)
Net loss for the period -- -- -- -- -- --
--------- ------- ------- ---------- --------- -----------
Balances at June 30, 2004 2,904,577 $29,046 876,491 $1,591,008 $(187,525) $99,201,111
========= ======= ======= ========== ========= ===========
Unearned Accumulated
Treasury Stock Compensation Deficit
-------------- ------------ -------
Balances at December 31, 2003 $ -- $ -- $(90,396,781)
Issuance of common stock to acquire -- -- --
nReach, Inc.
Issuance of common stock related to -- -- --
financing
Issuance of common stock to vendor -- -- --
to satisfy debt
Issuance of warrants as compensation -- -- --
for services
Issuance of warrants related to -- -- --
financing
Issuance of warrants to vendor to -- -- --
satisfy debt
Employee stock -- (775,715) --
compensation
Amortization of unearned -- 124,822 --
compensation
Treasury stock shares returned in (68,000) -- --
settlement of note receivable from
former officer
Beneficial conversion option on -- -- --
convertible Preferred Stock
Series A Preferred Stock -- -- --
Accretion of dividends on Series A -- -- --
Preferred Stock
Dividends accrued on Preferred Stock -- -- --
Net loss for the period -- -- (5,216,403)
-------- --------- ------------
Balances at June 30, 2004 $(68,000) $(650,893) $(95,613,184)
======== ========= ============
See accompanying notes.
5
SmartServ Online, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Six Months
Ended June 30 Ended June 30
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2004 2003 2004 2003
----------- ----------- ----------- -----------
Operating Activities
Net loss $ (615,792) $(4,369,867) $(5,216,403) $(6,725,058)
Adjustments to reconcile net loss to net cash
used for operating activities:
Gain from extinguishment of debt -- -- -- (305,822)
Depreciation and amortization -- 1,997,858 -- 2,462,445
Noncash compensation costs 120,862 73,750 761,280 101,944
Noncash consulting services 356,218 -- 447,859 --
Noncash payments to vendors 3,730 -- 223,099 --
Amortization of deferred compensation (893,034) -- 639,107 --
Amortization of deferred revenues -- (165,567) -- (334,261)
Amortization of deferred financing costs -- 745,987 1,231,772 1,093,701
Provision for losses on loans to former officers -- 399,022 -- 399,022
Changes in operating assets and liabilities
Accounts receivable 10,732 74,787 14,213 (9,767)
Accrued interest receivable 3,221 (3,600) 47,004 6,107
Prepaid expenses (61,253) (114,585) 4,512 (22,579)
Prepaid compensation 44,378 -- 133,127 --
Accounts payable and accrued liabilities (490,192) 74,689 (924,749) 706,479
Deferred revenues (33,333) 80,000 (37,500) 218,000
Security deposit -- 9,243 (11,212) 37,959
----------- ----------- ----------- -----------
Net cash used for operating activities (1,554,463) (1,198,283) (2,687,891) (2,371,830)
----------- ----------- ----------- -----------
Investing Activities
Purchase of equipment (73,094) -- (91,193) --
Purchase of nReach, Inc. (12,500) -- (100,000) --
----------- ----------- ----------- -----------
Net cash used for investing activities (85,594) -- (191,193) --
----------- ----------- ----------- -----------
Financing Activities
Proceeds from the issuance of series A convertible
preferred stock and warrants - net 21,750 -- 8,591,275 --
Proceeds from the issuance of notes and warrants -- 1,537,500 -- 2,537,500
Proceeds from the issuance of common stock -- 50,007 -- 385,544
Repayment of notes payable and accrued interest -- -- (1,391,504) (295,000)
Notes payable 66,925 -- 66,925 --
----------- ----------- ----------- -----------
Net cash provided by financing activities 88,675 1,587,507 7,266,696 2,628,044
----------- ----------- ----------- -----------
(Decrease) increase in cash (1,551,382) 389,224 4,387,612 256,214
Cash - beginning of period 6,078,172 21,749 139,178 154,759
----------- ----------- ----------- -----------
Cash - end of period $ 4,526,790 $ 410,973 $ 4,526,790 $ 410,973
=========== =========== =========== ===========
See accompanying notes.
6
SmartServ Online, Inc.
Notes to Unaudited Consolidated Financial Statements
June 30, 2004
1. Nature of Business
SmartServ Online, Inc. (the "Company" or "SmartServ") designs, develops and
distributes software and services that enable the delivery to wireless devices
of various content, with special emphasis on cell phones. The content which the
Company provides includes premium content such as ringtones, images and games,
and dynamic changing content such as horoscopes, lottery results and weather
reports. Historically, the Company has licensed its applications, content and
related services to wireless carriers and enterprises. The Company has revenue
sharing license agreements with wireless carriers such as Verizon Wireless, AT&T
Wireless, Nextel and ALLTEL Wireless, that allow it to deliver its services and
branded content to a wide base of consumer cell phone users. For enterprises,
the Company has in the past offered solutions that deliver financial market
data, proprietary internal documents and other useful information to mobile
workers, although this no longer comprises a core part of the Company's business
or strategy.
To augment our capabilities, we acquired Colorado based nReach, Inc. on February
28, 2004 in exchange for 500,002 shares of our common stock, provided, if the
value of such 500,002 shares immediately prior to June 1, 2004 were less than
$900,000, we would issue up to 299,167 additional shares of our common stock
with respect to such difference in value. That was not the case at June 1, 2004
and no additional shares were issued. We also agreed to an earnout schedule to
pay up to an additional 916,667 shares of our common stock in the event we reach
certain revenue targets within five fiscal quarters following the closing of
this transaction at the rate of one share of our common stock for every dollar
of our revenue in excess of $2,700,000 (the "Earnout Trigger") during such five
fiscal quarters. In addition to the liabilities set forth in the financial
statements of nReach, we assumed (i) ordinary course liabilities since November
30, 2003, (ii) taxes accrued on earnings since December 31, 2002 which were not
yet due and payable as of the closing date, (iii) expenses incurred to
accountants and attorneys in the transaction not to exceed $25,000, and (iv)
short term borrowings up to $75,000 due to an nReach shareholder. nReach is a
wireless content distribution company that offers a broad portfolio of popular
mass-market cell phone content, including ringtones, games, and on-device images
both direct to the consumer and through wireless carriers. This company may
provide us with access to a large number of consumers through its existing
marketing arrangements with large retailers.
The Company has since its inception earned limited revenues and incurred
substantial recurring operating losses, including net losses of $5,216,403 for
the six month period ended June 30, 2004 and $17,537,775 and $8,037,173 for the
years ended December 31, 2003 and December 31, 2002, respectively. Additionally,
the Company had an accumulated deficit of $95,613,184 and $90,396,781 at June
30, 2004 and December 31, 2003, respectively.
The Company began in 2002 and continued during 2003 to reduce its cost structure
through the termination of personnel and the relocation of its headquarters to
Plymouth Meeting, Pennsylvania. Personnel headcount was reduced from 66 in May
2002 to the level of 17 as of June 30, 2004 (including nReach employees). These
efforts have reduced the Company's average monthly operating expenses from
approximately $1,090,000 in July 2002 to approximately $370,000 as of June 2004
(including operating expenses of nReach), excluding noncash stock compensation,
depreciation and amortization. The Company anticipates that its monthly
operating expenses will increase during 2004 due to the working capital
requirements of the business of nReach, as well as related to expansion of
marketing and business development efforts for all of the Company's products and
services and increased corporate overhead.
7
In February 2004, the Company received $10 million in gross proceeds from its
private placement of Units consisting of shares of Series A Convertible
Preferred Stock and warrants to purchase common stock. The Company has used and
expects to use the net proceeds of approximately $8,600,000 from this offering
for repayment of outstanding obligations, completion of strategic acquisitions
and general working capital. In particular, the Company anticipates using a
significant portion of its working capital to settle its accounts payable, which
accounts payable were approximately $1,300,000 and $1,700,000 as of June 30,
2004 and December 31, 2003, respectively.
As a result of the factors identified above, the Company believes it has
sufficient capital for approximately the next 12 months. However, no assurance
can be given that the Company will be able meet its revenue and cash flow
projections, maintain its cost structure as presently configured, or raise
additional capital on satisfactory terms. Should the Company be unable to raise
additional debt or equity financing, it may be forced to seek a merger or cease
operations.
The Company is incorporated in the State of Delaware. The Company commenced
operations in August 1993, and had its initial public offering in March 1996.
The Company completed a one-for-six reverse stock split effective November 25,
2003. Unless otherwise noted, descriptions of shareholdings and convertible
securities reflect such one-for-six reverse stock split.
2. Summary of Significant Accounting Policies
Basis of Presentation
- ---------------------
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States.
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of the Company and
its subsidiaries, all of which are wholly owned. Significant intercompany
accounts and transactions have been eliminated in consolidation.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Revenue Recognition
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The Company recognizes revenue from the use of its products and services in
accordance with American Institute of Certified Public Accountants' ("AICPA")
Statement of Position ("SOP") 97-2, "Software Revenue Recognition", SOP 98-9,
"Modification of SOP 97-2, Software Recognition, With Respect to Certain
Transactions", and the SEC Staff Accounting Bulletin No.104, "Revenue
Recognition". Specifically, there must be (1) evidence of an arrangement, (2)
delivery of the Company's products and services, (3) fixed and determinable fees
and (4) probable collectibility of such fees. Revenues from multi-element
revenue agreements are recognized based on vendor specific objective evidence of
individual components or, if the elements in the arrangement cannot be
separated, as has been the situation to date, recognized as one element ratably
over the term of the agreement.
Subscription Revenue
- --------------------
Subscription revenue consists of fixed and variable charges for the usage of the
Company's products and services provided through its relationships with wireless
telecommunications carriers and a financial services company. Such revenue is
recognized as the services are provided on a monthly basis.
8
Development and Integration Revenue
- -----------------------------------
Development and integration fees are charged for the development of
private-labeled applications for customers that incorporate their proprietary
data into SmartServ's products and services. Such fees are recognized ratably
over the term of the agreement.
Service Revenue
- ---------------
Service revenue is derived from consulting or by providing other professional
services to customers. Revenue from the performance of such services is
recognized when the services are performed. Losses, if any, from professional
services contracts are recognized at the time such losses are identified.
Maintenance and support fees paid in advance are nonrefundable and are
recognized ratably over the term of the agreement, generally 12 months.
Hosting Services
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Hosting service arrangements are based on a flat monthly fee or on the number of
users and may include a one-time setup fee. The one-time setup fee is recognized
over the term of the hosting arrangement, and the hosting services revenue is
recognized monthly as earned on a fixed fee or variable rate basis.
Deferred Revenues
- -----------------
Deferred revenues, resulting from customer prepayments, are recognized as
services are provided throughout the term of the agreement with the respective
customer.
Deferred Financing Costs
- ------------------------
Deferred financing costs represent those costs incurred in connection with the
issuance of the Company's convertible notes. These costs are recorded at the
fair value of the consideration (cash or securities) paid to the finders in such
transactions and are amortized to operations as other financing costs over the
terms of the respective notes.
Earnings Per Share
- ------------------
Basic earnings per share is computed on the weighted average number of common
shares outstanding; however, it does not include the unvested portion of
restricted shares in accordance with Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share". Diluted earnings per share reflects the
increase in the weighted average common shares outstanding that would result
from the assumed exercise of outstanding stock options calculated using the
treasury stock method when dilutive.
Fair Value of Financial Instruments
- -----------------------------------
The carrying amounts of our financial instruments approximate fair value due to
their terms and maturities.
Supplemental Cash Flow Information
- ----------------------------------
The Company considers all highly liquid investments with a maturity date of
three months or less when purchased to be cash equivalents.
In connection with engaging a vendor to provide investor relation services, in
May 2004 we entered into an agreement to grant a warrant to purchase 50,000
shares of common stock at $2.15 per share. The warrant expires in May of 2006.
This warrant is valued at $107,657 and is considered a non-cash transaction for
the purposes of the Statement of Cash Flows.
9
In connection with Alpine Capital's claim for a finder's fee in connection with
the April 2003 amendment related to bridge financing, Alpine received a warrant
in July to purchase 40,000 shares of common stock at $1.50 per share expiring
July 8, 2009. This warrant is valued at $72,128 and is considered a non-cash
transaction for the purposes of the Statement of Cash Flows.
In connection with payment to a vendor to provide recruiting services in June
2004 we entered into an agreement to grant a warrant to purchase 5,000 shares of
common stock at $3.10 per share. The warrant expires in May of 2006. This
warrant is valued at $7,377 and is considered a non-cash transaction for the
purposes of the Statement of Cash Flows.
In connection consulting services to be provided by Shai Stern, M. Ezzat Jalled
and E. Alan Scheik III, we entered into consulting agreements dated June 2004
for warrants to purchase 25,000, 100,000 and 10,000 shares of common stock at
$1.50, $1.50 and $2.50 per share, respectively and expiring in May 2006. These
warrants are valued at $45,080, $180,321 and $15,782, respectively and are
considered non-cash transactions for the purposes of the Statement of Cash
Flows.
In connection with settling a debt with a law firm, in April 2004 we granted a
warrant to purchase 1,820 shares of common stock at $3.15 per share. The warrant
expires in April of 2006. This warrant is valued at $3,730 and is considered a
non-cash transaction for the purposes of the Statement of Cash Flows.
During the quarter ended June 30, 2004, the Company issued 83,275 shares of
common stock amounting to $275,006 to Spencer Trask and Richard Berland as
finders fees for the recent financings. The issuance of shares of common stock
is considered a non-cash transaction for the purposes of the Statement of Cash
Flows.
During the quarter ended March 31, 2004, the Company issued 60,000 shares of
common stock amounting to $196,800 and a cash payment of $45,000 to a vendor in
settlement of the Company's obligation to that vendor. The issuance of shares of
common stock is considered a non-cash transaction for the purposes of the
Statement of Cash Flows.
During the quarter ended March 31, 2004, the Company issued 500,002 shares of
common stock amounting to $1,640,007 for the acquisition of the issued and
outstanding common stock of nReach, Inc. The issuance of shares of common stock
is considered a non-cash transaction for the purposes of the Statement of Cash
Flows.
During the quarter ended March 31, 2004, the Company converted notes payable and
accrued interest amounting to $3,122,302 into Series A convertible preferred
stock and warrants. This conversion is considered a non-cash transaction for the
purposes of the Statement of Cash Flows.
Interest, debt origination and other financing costs paid during the three month
periods ended June 30, 2004 and 2003 were $1,536 and $100 and for the six months
periods ended June 30, 2004 and 2003 were $1,536 and $70,100, respectively.
Concentration of Credit Risk
- ----------------------------
Financial instruments that potentially subject SmartServ to concentrations of
credit risk consist solely of accounts receivable. At June 30, 2004 and December
31, 2003, accounts receivable consist principally of amounts due from major
telecommunications carriers, as well as a financial services company. The
Company performs periodic credit evaluations of its customers and, if
applicable, provides for credit losses in the financial statements. As of June
30, 2004 and December 31, 2003 the Company did not have a reserve for doubtful
accounts.
Property and Equipment
- ----------------------
Property and equipment are stated at cost, net of accumulated depreciation.
Equipment purchased under a capital lease is recorded at the present value of
the future minimum lease payments at the date of acquisition. Depreciation is
computed using the straight-line method over estimated useful lives of three to
ten years.
10
On an ongoing basis, SmartServ reviews the future recoverability of its property
and equipment for impairment whenever events or changes in circumstances
indicate that the carrying amounts may not be recoverable. When such events or
changes in circumstances do occur, an impairment loss is recognized if the
undiscounted future cash flows expected to be generated by the asset are less
than its carrying value. As a result of less than anticipated demand for the
Company's products and services, as well as its inability to leverage certain
relationships during the quarter ended June 30, 2003, the Company recorded an
impairment loss of $843,768 in such quarter to reduce the recorded value of its
assets to their estimated net realizable value.
Advertising Costs
- -----------------
Advertising costs are expensed as incurred and were approximately $-0- and
$6,000 during the six month periods ended June 30, 2004 and 2003, respectively.
Stock Based Compensation
Employee Stock Option Plans
- ---------------------------
The Company maintains several stock option plans for employees and directors
that provide for the granting of stock options for a fixed number of common
shares with an exercise price equal to the fair value of the shares at the date
of grant. The Company accounts for such grants in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB No. 25"). Accordingly, compensation expense is recognized to the extent
that the fair value of the stock exceeds the exercise price of the option at the
measurement date. Certain options, which have been repriced, are subject to the
variable plan requirements of APB No. 25, which requires the Company to record
compensation expense for changes in the fair value of its common stock.
Non-Employee Compensation
- -------------------------
The Company has issued warrants to purchase common stock to non-employee
consultants as compensation for services rendered or to be rendered to the
Company. The warrants are recorded in accordance with the provisions of SFAS No.
123, Accounting for Stock-Based Compensation, and are valued in accordance with
the Black-Scholes pricing methodology.
The Company adopted the disclosure provisions of SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure, which amends SFAS No. 123.
SFAS No. 148 provides alternative methods of transition for a voluntary change
to the fair value based method of accounting for stock-based employee
compensation, which was originally provided under SFAS No. 123. SFAS No. 148
also improves the timeliness of disclosures by requiring the information to be
included in interim as well as annual financial statements. The adoption of
these disclosure provisions had no impact on the Company's 2003 or first and
second quarter of 2004 consolidated results of operations, financial position or
cash flows.
SFAS No. 123 requires companies to recognize compensation expense based on the
respective fair values of the options at the date of grant. Companies that
choose not to adopt such rules will continue to apply the existing accounting
rules contained in APB No. 25, but are required to disclose the pro forma
effects on net income (loss) and earnings (loss) per share, as if the fair value
based method of accounting had been applied.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. As such, the pro forma
net earnings (loss) and earnings (loss) per share are not indicative of future
years.
11
SmartServ's pro forma information is as follows:
Three Months Six Months
Ended June 30 Ended June 30
-------------------------- --------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net loss as reported $ (615,792) $(4,369,867) $(5,216,403) $(6,725,058)
Employee stock-based
compcompensation included in
net loss (893,034) -- 639,107 1,323
Employee stock-based
compcompensation pursuant to
SFAS 123/SFAS 148 (445,531) (670,659) (610,316) (1,588,153)
----------- ----------- ----------- -----------
Pro forma net loss $(1,954,357) $(5,040,526) $(5,187,612) $(8,311,888)
=========== =========== =========== ===========
Basic and diluted loss per share $ (0.60) $ (2.18) $ (2.72) $ (3.40)
=========== =========== =========== ===========
Pro forma basic and diluted
loss per share $ (0.68) $ (2.52) $ (1.95) $ (4.20)
=========== =========== =========== ===========
Foreign Currency Translation
- ----------------------------
The financial statements of the Company's foreign subsidiaries, whose functional
currencies are other than the U.S. dollar, have been translated into U.S.
dollars in accordance with SFAS No. 52, Foreign Currency Translation. All
balance sheet accounts have been translated using the exchange rates in effect
at the balance sheet date. Income statement amounts have been translated using
the average rate for the year. Gains and losses resulting from the changes in
exchange rates from year to year have been reported in accumulated other
comprehensive income.
12
3. Property and Equipment
Property and equipment consist of the following:
June 30, December 31,
2004 2003
----------- -----------
Data processing equipment $ 4,594,526 $ 4,594,526
Office furniture and equipment 427,142 397,474
Display equipment 144,429 71,335
Leasehold improvements 69,852 69,852
----------- -----------
5,235,949 5,133,187
Impairment of capital assets (843,768) (843,768)
Accumulated depreciation (4,289,419) (4,289,419)
----------- -----------
$ 102,762 $ --
=========== ===========
4. Note Receivable From Former Officers
In December 2000, the Company's Board of Directors authorized the issuance of a
line of credit to Sebastian Cassetta, SmartServ's former Chief Executive
Officer, for an amount not to exceed $500,000. Such amount bears interest at the
prime rate and matured on March 20, 2004. Pursuant to the terms of the note,
interest for the period January 2, 2001 to June 30, 2002 has been accrued and is
payable at maturity. Commencing July 1, 2002 until maturity, interest shall be
payable semi-annually in arrears on January 1st and July 1st. In October 2003
the Company agreed to forgive this loan over a three-year period pursuant to Mr.
Cassetta's Separation Agreement.
Additionally, during the quarter ended June 30, 2003, the Company recorded a
valuation allowance of $270,000 in connection with the potential
uncollectibility of a loan made to Mr. Cassetta for the purchase of SmartServ
restricted stock. Such reserve is classified as a reduction of stockholders'
equity. While this loan had original maturity date of December 2003, Mr.
Cassetta's ability to repay this loan and interest thereon is highly contingent
on the market value of his investment in the Company. In his separation
agreement in October 2003, the Company extended the maturity date of the
restricted stock note until September 2004.
The Company's former Chief Technology Officer, Mario Rossi, was the obligor on a
promissory note made in favor of the Company with respect to the purchase of
34,347 shares of Company common stock, which were pledged as collateral for the
note. In January 2004, as part of his separation agreement, all shares of stock
were assigned and transferred to the Company and the outstanding debt of $68,000
was cancelled.
5. Notes Payable
In February 2003, the Company issued a convertible note to Global Capital
Funding Group, LP ("Global") in consideration for the receipt of $1 million. The
note bore interest at the rate of 10% per annum, and was secured by the
Company's assets, exclusive of its internally developed software products. The
note matured on February 14, 2004, contained certain antidilution provisions,
and was convertible into shares of SmartServ common stock at $6.60 per share. As
additional consideration, the Company issued Global a warrant for the purchase
of 33,333 shares of its common stock at an exercise price of $9.66 per share.
The warrant issued to Global contains certain antidilution provisions and
expires on February 14, 2006. The note and the warrant have been recorded in
accordance with APB No. 14, "Accounting for Convertible Debt and Debt Issued
with Stock Purchase Warrants". The warrant has been valued in accordance with
the Black-Scholes pricing
13
methodology and is netted against the outstanding obligation in the financial
statements. Such amount is being amortized into operations as interest expense
and other financing costs over the life of the obligation. Alpine Capital
Partners, Inc. ("Alpine") received a finder's fee of $70,000, representing 7% of
the aggregate purchase price of the convertible note and a warrant to purchase
15,167 shares of common stock exercisable at $9.66 per share in connection with
this transaction. These warrants have been valued in accordance with SFAS No.
123 and the Black-Scholes pricing methodology and recorded in the financial
statements as deferred compensation costs. This amount is being amortized into
operations on a straight-line basis over the life of the obligation. Also in
connection with the 10% convertible notes, the Company has recorded a non-cash
charge for other financing costs of $304,772 representing a portion of the
intrinsic value of the beneficial conversion feature of the notes. Emerging
Issues Task Force ("EITF") Issue No. 98-5, "Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios" ("Issue No. 98-5") as more fully described in EITF Issue No.
00-27, "Application of Issue No. 98-5 to Certain Convertible Instruments",
defines the beneficial conversion feature as the non-detachable conversion
feature that is "in-the-money" at the date of issuance. Issue No. 98-5 requires
the recognition of the intrinsic value of the conversion feature as the
difference between the conversion price and the fair value of the common stock
into which the notes are convertible. During the quarter ending June 30, 2003,
the Company recorded a non-cash charge of $101,600 representing the amortization
of the remainder of such beneficial conversion feature. In April 2003, the
Company borrowed an additional $250,000 from Global and amended the convertible
note to include such amount. As additional consideration, the Company issued
Global a warrant for the purchase of 3,333 shares of its common stock at an
exercise price of $7.20 per share. In settlement of Alpine's claim for a
finder's fee in connection with the April 2003 amendment, during July 2004
Alpine received a warrant to purchase 40,000 shares of common stock at $1.50 per
share expiring July 8, 2009. In November 2003, as an inducement to obtain
Global's consent to the sale of Units in the November 2003 transaction and the
2004 private placement, the Company issued Global a warrant to purchase 16,667
shares of common stock at an exercise price of $2.40 per share. On February 13,
2004, SmartServ paid in full the principal and accrued interest due under the
Global note, which was $1,391,504.
Between May and November 2003 the Company sold Units consisting of convertible
debentures and warrants to purchase common stock for $3 million in aggregate
proceeds. During February 2004, SmartServ completed a private placement of
Units, which Units consisted of Series A Convertible Preferred Stock, $.01 par
value ("Series A") and warrants to purchase common stock for $10 million in
aggregate gross proceeds. Pursuant to their terms, the principal and accrued
interest on SmartServ's convertible debentures issued in the May through
November 2003 transactions, which was approximately $3,122,302, were
automatically converted into these Units. Each Unit consisted of one share of
Series A initially convertible into ten shares of common stock and one warrant
for the purchase of ten shares of common stock. The purchase price per Unit was
$15.00. The Series A is described in more detail below under note 6 to the
financial statements.
As of December 31, 2003 the amount of the Company's debt obligations were
$4,250,010 and the unamortized discount amounted to $909,580.
As of March 31, 2004 the amount of the Company's debt obligations were paid in
full or converted to Series A as described above.
During the quarter ended June 30, 2004, the Company entered into a note payable
to finance kiosk equipment in the amount of $70,000. The note bears interest at
a rate of five percent per annum and has a two year term.
14
6. Equity Transactions
In February 2004, the Company completed the closing of a $10 million private
offering of investment Units consisting of shares of Series A and warrants to
purchase common stock ("2004 Private Placement"). The private offering consisted
of investment Units at the price of $15 per Unit. Each Unit consists of (i) one
share of Series A, each of which is initially convertible into 10 shares of
common stock, and (ii) one warrant for the purchase of 10 shares of common
stock. The Series A receives dividends at the rate of 8% per year payable
quarterly in cash or, in our sole discretion, in registered shares of our common
stock. The Series A is entitled to a liquidation preference equal to the
purchase price per Unit plus accrued and unpaid dividends. The Series A is not
redeemable. The warrants have an exercise price of $2.82 per share and expire in
February 2007. The Company is obligated to register the common stock upon
conversion of the Series A and exercise of the warrants. Holders of the Series A
have an optional right to convert to fully paid and non-assessable shares of
common stock on a one-for-ten basis (subject to adjustment) at any time prior to
the third anniversary date of the final closing date of February 27, 2004 (the
"Mandatory Conversion Date"). The Series A will be automatically converted into
common stock on a one-for-ten basis (subject to adjustment) upon the earliest of
(i) the Mandatory Conversion Date; or (ii) if, after two years from the date of
the final closing date of February 27, 2004, the common stock has a closing sale
price of $4.00 or more for twenty (20) consecutive trading days. The Company
also completed the closing of an additional $25,000 private offering of these
Units to an accredited investor in March 2004, which Units have the same terms
as described above other than the expiration date which will be March 2007. The
Company has used and expects to use the net proceeds of approximately $8,600,000
from this offering for repayment of outstanding obligations (including
$1,391,500 that was used to repay Global), completion of strategic acquisitions
and general working capital.
Pursuant to their terms, the principal and accrued interest on SmartServ's
convertible debentures issued in the May through November 2003 transactions,
which was approximately $3,122,302, were also automatically converted into the
Units issued in the 2004 Private Placement.
Spencer Trask Ventures, Inc. ("Spencer Trask") received warrants to purchase
1,336,666 shares of common stock at $1.50 per share and warrants to purchase
1,336,666 shares of common stock at $2.82 per share as partial compensation for
being the placement agent for the 2004 Private Placement.
SmartServ acquired all of the stock of nReach, Inc. on February 28, 2004 in
exchange for 500,002 shares of its common stock; provided, if the value of such
500,002 shares immediately prior to June 1, 2004 is less than $900,000,
SmartServ will issue up to 299,167 additional shares of its common stock with
respect to such difference in value. The value of such 500,002 shares was in
excess of $900,000 immediately prior to June 1, 2004 and, therefore, SmartServ
will not issue any additional shares of its common stock. The nReach
shareholders may also earn up to 916,667 shares of our common stock in the event
SmartServ reaches certain revenue targets within five fiscal quarters following
the closing of this transaction at the rate of one share of common stock for
every one dollar of SmartServ revenue in excess of $2,700,000 (the "Earnout
Trigger") during such five fiscal quarters.
Pursuant to a Restricted Stock Agreement dated December 28, 1998, the Company
received a promissory note in the original principal amount of $457,497 from
Sebastian E. Cassetta, its former Chairman and Chief Executive Officer, for his
purchase of restricted shares of common stock. As of June 30, 2004, the balance
due of such loan is $187,525, after recording of a valuation allowance in
connection with the potential uncollectibility of such loan from Mr. Cassetta
During the quarter ended March 31, 2004, the Company issued 60,000 shares of
common stock and a cash payment of $45,000 to a vendor in settlement of the
Company's obligation to that vendor
During the quarter ended June 30, 2004, the Company issued 83,275 shares of
common stock amounting to $275,006 to Spencer Trask and Richard Berland as
finders fees for the recent financings.
Obligations to Maintain Effective Registration Statements:
- ----------------------------------------------------------
15
Vertical Ventures Investments, LLC holds a warrant to purchase up to 22,476
shares of common stock that is subject to registration rights. The Registration
Statement covering the shares underlying this warrant is no longer effective.
The Company had until May 14, 2003 to cause the Registration Statement to again
become effective. The Company failed to do so by May 14, 2003, so it is required
to pay a fee of $8,250 for the first month of the deficiency and a fee of
$16,500 for each month thereafter until the shares underlying the warrant are
registered.
Accredited investors in the Company's September 2002 Equity Placement hold up to
an aggregate of 616,991 shares of common stock, and warrants to purchase up to
an aggregate of 249,954 shares of common stock, all subject to registration
rights requiring the Company to use its commercially reasonable best efforts to
maintain the effectiveness of the Registration Statement covering the shares of
common stock and the shares underlying the warrants. The Registration Statement
covering these securities is no longer effective.
Obligation to File a Registration Statement:
- --------------------------------------------
Global Capital Funding Group, L.P. holds warrants to purchase up to 257,333
shares of common stock, and a convertible note convertible into 189,394 shares
of common stock (which was paid off in February, 2004). The Company was required
to file a Registration Statement covering all such shares on April 14, 2003 and
by agreement with Global is required to include such shares in a Registration
Statement. The Company negotiated a cure of the penalty fee, equal to $25,000
for each month that this deficiency remained uncured, by paying off the
convertible note in February 2004. The Company filed a Form SB-2 Registration
Statement on May 13, 2004 that covered the common stock underlying the Global
warrants which Registration Statement was not yet been declared effective by the
SEC.
7. Stock-based Compensation
In connection with the grant of certain stock options, warrants and other
compensation arrangements, the Company has recorded charges and credits to
earnings that are noncash in nature. Certain of these stock option grants are
subject to the variable plan requirements of APB No. 25 that require the Company
to record compensation expense for changes in the fair value of its common
stock.
In connection with entering into an Employment Agreement with the Company on
March 12, 2004, the Company granted to Robert Pons, the Company's President and
Chief Executive Officer, an option to purchase 1,300,000 shares of common stock,
which option has an exercise price of $1.50 per share and a term of 10 years.
The option provides for 557,141 shares to vest immediately and the remaining
742,859 shares to vest in equal amounts as of the last day of each calendar
quarter commencing March 31, 2004. The option will vest immediately upon a
Change of Control (as defined in his option agreement) or in the event Mr. Pons
is terminated Other Than for Cause or he terminates employment for Good Reason
(as each is defined under the Employment Agreement).
In connection with entering into an Employment Agreement with the Company on
March 12, 2004, the Company granted to Tim Wenhold, the Company's Executive Vice
President and Chief Operating Officer, an option to purchase 700,000 shares of
common stock, which option has an exercise price of $1.50 per share and a term
of 10 years. The option provides for 300,000 shares to vest immediately and the
remaining 400,000 shares to vest in equal amounts as of the last day of each
calendar quarter commencing March 31, 2004. The option will vest immediately
upon a Change of Control (as defined in his option agreement) or in the event
Mr. Wenhold is terminated Other Than for Cause or he terminates employment for
Good Reason (as each is defined under the Employment Agreement)
In April 2004, the Company granted to Len von Vital, Matthew Stecker and Daniel
Wainfan, the Company's Chief Financial Officer, Chief Technology Officer and
Vice President of Marketing, respectively, each an option to purchase 300,000,
150,000 and 100,000 shares of common stock, respectively, which options have an
exercise prices of $3.75, $1.50 and $3.25 respectively, per share and a term of
10 years. The options vest in equal amounts as of the last day of each calendar
quarter commencing June 30, 2004. The options will vest immediately upon a
Change of Control (as defined in their option agreements).
16
Stock-based compensation for the three months and six months ended June 30, 2004
was for the impact of options granted at less than fair market value on the
measurement date and for the three months and six months ended June 30, 2003
consisted primarily of the impact of changes in the market value of the
Company's common stock on the value of options to purchase common stock issued
to employees and the amortization of deferred costs associated with the prior
issuance of warrants to purchase common stock to various consultants.
The following table illustrates the amount of stock-based compensation charges
that would have been recorded in the categories of the statement of operations
had stock-based compensation not been separately stated therein:
Three Months Six Months
Ended June 30 Ended June 30
---------------------- ----------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Costs of services $ 305,250 $ -- $(231,001) $ 396
General and administrative expenses 587,784 (73,750) (408,106) (102,340)
--------- --------- --------- ---------
$ 893,034 $ (73,750) $(639,107) $(101,944)
========= ========= ========= =========
8. Earnings Per Share
The following table sets forth the computation of basic and diluted loss per
share:
Three Months Six Months
Ended June 30 Ended June 30
-------------------------------- ------------------------------
2004 2003 2004 2003
--------------- ------------- --------------- -----------
Numerator:
Net loss $ (1,718,046) $ (4,369,867) $ (7,232,497) $(6,725,058)
=============== ============= =============== ===========
Denominator:
Weighted average shares - basic and diluted 2,870,230 2,000,243 2,658,889 1,978,476
=============== ============= =============== ===========
Basic and diluted loss per common share $ (0.60) $ (2.18) $ (2.72) $ (3.40)
=============== ============= =============== ===========
Outstanding stock options and warrants to purchase an aggregate of 19,071,531
and 2,194,933 shares of common stock at June 30, 2004 and 2003, respectively,
were not included in the computations of diluted earnings per share because the
Company reported losses for the periods and, therefore their inclusion would be
antidilutive.
9. Commitments and Contingencies
On or about March 22, 2004, Jenkens & Gilchrist Parker Chapin, LLP, SmartServ's
former legal counsel, filed a complaint against SmantServ in the Supreme Court
of the State of New York, County of New York. The complaint seeks payment of
unpaid invoices for legal services in the amount of $599,244. While the Company
intends to vigorously defend such lawsuit, an unfavorable outcome could have a
material adverse effect on the Company's financial condition, results of
operation and cash flows.
17
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This discussion and analysis of our financial condition and results of
operations contain certain "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Actual results could
differ materially from those anticipated in these forward-looking statements for
many reasons, including the factors described in "Certain Factors That May
Affect Future Results" and elsewhere in this report.
We design, develop and distribute software and services that enable the delivery
to wireless devices of various content, with special emphasis on cell phones.
The content that we provide includes premium content such as ringtones, images
and games, and dynamic changing content such as horoscopes, lottery results and
weather reports. Historically, we have licensed our applications, content and
related services to wireless carriers and enterprises. We have revenue sharing
license agreements with wireless carriers such as Verizon Wireless, AT&T
Wireless, Nextel and ALLTEL Wireless, that allow us to deliver our services and
branded content to a wide base of consumer cell phone users. For enterprises, we
have in the past offered solutions that deliver financial market data,
proprietary internal documents and other useful information to mobile workers,
although this no longer comprises a core part of our business or strategy.
We have since our inception earned limited revenues and incurred substantial
recurring operating losses, including net losses of $5,216,403 for the six month
period ended June 30, 2004, and $17,537,775 and $8,037,173 for the years ended
December 31, 2003 and 2002, respectively. Additionally, we had an accumulated
deficit of $95,613,184 and $90,396,781 at June 30, 2004 and December 31, 2003,
respectively.
In February 2004, we completed the closing of a $10 million private offering of
investment Units consisting of shares of Series A Convertible Preferred Stock
and warrants to purchase common stock ("2004 Private Placement"). We also
completed the closing of an additional $25,000 private offering of these Units
to an accredited investor in March 2004. We have used and expect to use the net
proceeds of approximately $8,600,000 from this offering for repayment of
outstanding obligations (including $1,391,500 that was used to repay Global
Capital Funding Group, LP), completion of strategic acquisitions and general
working capital. We believe we have sufficient working capital for the next
twelve months. It is likely we may require additional funds in the long term
depending upon the growth of our revenues, our business strategy, the costs of
any acquisitions and other factors.
We believe that the evolution of the cellular industry is at an important
turning point, where both consumers and businesses are expecting more
functionality and features from both their cell phones and their cellular
carriers. This expectation is being driven by a number of industry trends
including highly competitive pricing packages, newer and more functional cell
phones and mobile devices, and the customers' ability to take their cell phone
number with them to a new carrier that offers them more value than the
incumbent. Competition in this environment appears to be moving from
differentiation based on network coverage or minute rates to one based on
enhanced features and services. We believe that as carriers' network coverage,
quality of service, and pricing plans become more-or-less equal, cell phone
customers will choose a carrier based principally on the suite of premium
content and applications that are included with its service. This environment
will provide an opportunity for us to exploit our current and planned content
assets and delivery capabilities, developed over the past nine years.
To augment our capabilities, we acquired the issued and outstanding common stock
of the Colorado based nReach, Inc. on February 28, 2004 in exchange for 500,002
shares of our common stock. We also agreed to an earnout schedule to pay up to
an additional 916,667 shares of our common stock in the event we reach certain
revenue targets within five fiscal quarters following the closing of this
transaction at the rate of one share of our common stock for every dollar of our
revenue in excess of $2,700,000 (the "Earnout Trigger") during such five fiscal
quarters. nReach, Inc., is a wireless content distribution company that offers a
broad portfolio of popular mass-market cell phone content, including ringtones,
games and on-device images. This company may provide us with access to a large
number of consumers through its existing marketing arrangements with large
retailers.
18
We are building, through acquisition and through internal development, a wide
array of content that will continue to be offered through traditional
carrier-based distribution channels as well as through bundled offerings with
pre-paid voice minutes. The content offered or to be offered through the
SmartServ platforms consists of:
o Premium content, such as ring tones, images and games, that are
periodically delivered and reside on the mobile device; and
o Dynamic mobile applications, where the information or data content is
frequently changing and therefore frequently delivered to the mobile
device.
While we expect to retain and grow our revenues derived through existing
channels, we believe that there is a substantial opportunity to grow additional
revenue through the bundling of our existing and planned future premium content
with voice services in ways targeted to specific segments of the consumer
market. Providing a set of products that bundle cell phone airtime with premium
content, such as ringtones, images and games, delivered through our current
technology infrastructure is how we plan to enter the emerging market for
reselling wireless airtime.
Our immediate focus will be on finding channels to market to specific segments
of consumers within the pre-paid wireless marketplace. The rapidly expanding
pre-paid market parallels the track taken a decade ago for pre-paid long
distance, but has an expanded reach since pre-paid wireless users can completely
avoid the monthly costs for a traditional home landline telephone.
While we believe that our new marketing strategies, as well as our carrier and
enterprise relationships are important to our success, no assurance can be given
that we will be able to implement our new marketing strategies or that our
carrier and enterprise relationships will be successful in their marketing
efforts or that our products and services will be well received in the
marketplace. We also expect to perform certain development projects during 2004
to enhance our product offerings, including development of mobile lifestyle BREW
and J2ME applications.
On November 24, 2003, we announced that our new trading symbol on the OTC
Bulletin Board would be SSRV effective at market opening on November 25, 2003.
NASD assigned this new trading symbol in conjunction with our one-for-six
reverse stock split, which also took effect on November 25, 2003. Under the
reverse stock split, our outstanding shares of common stock prior to the reverse
split were exchanged for new shares of common stock at a ratio of one new share
for every six pre-split shares. All of our convertible securities, such as
convertible debentures, stock options and warrants, were also subject to the
reverse split. Our convertible securities are convertible or exercisable, as the
case may be, at six times the price for one-sixth the number of shares into
which such security was previously convertible or exercisable. All share amounts
of common stock and convertible securities reported in this Form 10-QSB are
adjusted for the split.
As of June 30, 2004, SmartServ employed 17 people, all of whom were employed in
the United States. All were full-time employees.
19
Results of Operations
Quarter ended June 30, 2004 versus Quarter ended June 30, 2003
During the quarter ended June 30, 2004, we recorded revenues of $114,004,
substantially all of which were earned through our licensing agreement with
QUALCOMM. During the quarter ended June 30, 2003, we recorded revenues of
$238,028. Of such 2003 revenues, $46,000 were earned through our licensing
agreement with wireless telecommunications carriers, $79,800 were earned through
our licensing agreement with Salomon Smith Barney and $108,000 were earned under
a one-time purchase order from Wireless Retail, Inc. During the quarters ended
June 30, 2004 and 2003, we recognized $33,333 and $53,400, respectively, from
the amortization of deferred revenues.
During the quarter ended June 30, 2004, we incurred costs of services of
$674,729, a decrease of 74% over the $2,574,543 incurred during the quarter
ended June 30, 2003. Such costs decreased primarily due to reductions in US
personnel, the reduction of computer depreciation and maintenance and the
reduction of consulting costs incurred in connection with the development of our
systems' architecture and application platform. Components of the costs of
service category consist primarily of information and communication costs
($157,969), personnel costs ($334,570), consulting expenses ($131,936),
facilities ($4,268) and travel costs ($14,474). Costs associated with the
operations of nReach, that are included in the categories listed above, were
$339,090 for the quarter ended June 30, 2004. During the quarter ended June 30,
2003, we incurred costs of services of $2,574,543. Components of the costs of
service category consist primarily of information and communication costs
($119,900), personnel costs ($445,800), computer hardware leases, depreciation
and maintenance costs ($270,200), facilities ($62,800) and amortization expenses
relating to capitalized software development costs ($91,900).
During the quarter ended June 30, 2004, we incurred sales and marketing expenses
of $98,514, a decrease of 5% over the quarter ended June 30, 2003. Such costs
decreased primarily due to US personnel reductions. Components of the sales and
marketing category consist primarily of personnel costs ($44,528), consulting
costs ($5,793) trade show costs ($14,033) and public relations costs ($34,160).
During the quarter ended June 30, 2003, we incurred sales and marketing expenses
of $103,496. Components of the sales and marketing category consist primarily of
personnel costs ($96,400).
During the quarter ended June 30, 2004, we incurred general and administrative
expenses of $704,185, a decrease of 48% over the quarter ended June 30, 2003.
Such expenses decreased primarily due to personnel reductions, reductions in
professional fees and reductions in facilities costs related to the relocation
of our headquarters from Stamford, Connecticut to Plymouth Meeting,
Pennsylvania. Components of the general and administrative category consist
primarily of personnel costs ($182,316), consulting costs ($388,674),
professional fees ($268,987), facilities ($19,197) and insurance ($23,983).
These costs were partially offset by discounts negotiated with vendors to settle
outstanding accounts payable amounting to $285,682. During the quarter ended
June 30, 2003, we incurred general and administrative expenses of $1,360,913.
Components of the general and administrative category consist primarily of
personnel costs ($353,000), professional fees ($302,200), facilities (122,800),
insurance ($33,000) and computer hardware leases, depreciation and maintenance
costs ($35,900).
During the quarter ended June 30 2004, the net noncash credit for stock-based
compensation amounted to $893,034, compared to a net noncash charge of $73,750
during the quarter ended June 30, 2003. Such noncash costs decreased due to the
vesting of employee stock options to management at a price that was less than
the fair market value of our common stock on the grant date. Such noncash
amounts are primarily related to the valuation of stock-based compensation in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB No. 25"). Certain employee stock options are
subject to the variable plan requirements of APB No. 25, as they were repriced,
and therefore, compensation expense is recognized for changes in the fair value
of our common stock. Noncash charges for consulting services for the quarters
ended June 30, 2004 and 2003 were $356,218 and $-0-, respectively, resulting
primarily from the issuance of warrants to purchase common stock to financial,
marketing and investor relations consultants. During the quarter ended June 30,
2003, noncash charges for consulting services were $73,350, resulting primarily
from the amortization of deferred costs associated with the prior issuance of
warrants to purchase common stock to various financial, marketing and technical
20
consultants. The value of substantially all of such common stock purchase
warrants has been recorded in accordance with the Black-Scholes pricing
methodology.
Interest income for the quarters ended June 30, 2004 and 2003 amounted to $9,546
and $4,360 respectively. Such amounts were earned primarily from our investments
in money fund accounts. During the quarters ended June 30, 2004 and 2003,
interest and other financing costs were $154,948 and $873,510 respectively.
During the quarters ended June 30, 2004 and 2003, interest and other financing
costs were incurred in connection with the completion, in February 2004, of a
$10 million private offering of investment Units in the 2004 Private Placement
and other financing costs were incurred in connection with the convertible notes
issued in May and June 2003.
During the quarter ended June 30, 2003, the Company recorded an insurance
recovery of $374,000 for legal costs incurred in connection with a favorable
trial decision in the matter of Michael Fishman v. SmartServ Online, Inc. et al.
Basic and diluted loss per share was $0.60 for the quarter ended June 30, 2004
compared to $2.18 loss per share for the quarter ended June 30, 2003. The loss
per share for the quarter ended June 30, 2004 includes an accrued preferred
stock dividend of $1,102,254. The weighted average shares outstanding increased
to 2,870,230 at June 30, 2004 from 2,000,243 at June 30, 2003.
Six Months ended June 30, 2004 versus Six Months ended June 30, 2003
During the six months ended June 30, 2004 and 2003, we recorded revenues of
$187,715 and $469,015 respectively. Of such 2004 revenues, substantially all
were earned through our licensing agreement with QUALCOMM Of such 2003 revenues,
$65,300 were earned through our licensing agreement with wireless
telecommunications carriers, $288,500 were earned through our licensing
agreement with Salomon Smith Barney and $108,000 were earned through our
licensing agreement with Wireless Retail, Inc. During the quarters ended June
30, 2004 and 2003, we recognized $33,333 and $222,100, respectively, from the
amortization of deferred revenues.
During the six months ended June 30, 2004, we incurred costs of services of
$981,595, a decrease of 74% over the six months ended June 30, 2003. Such costs
decreased primarily due to reductions in US personnel, the reduction of computer
depreciation and maintenance and the reduction of consulting costs incurred in
connection with the development of our systems' architecture and application
platform. Components of the costs of service category consist primarily of costs
associated with information and communication costs ($249,820), personnel costs
($482,392), consulting expenses ($184,998) and facilities ($10,603). Costs
associated with the operations of nReach, that are included in the categories
listed above, were $461,257 for the four months since the acquisition within the
six months ended June 30, 2004. During the six months ended June 30, 2003, we
incurred costs of services of $3,791,374. Such costs include a charge ($129,000)
in connection with the potential uncollectibility of a loan to a former officer
and an impairment loss ($1,440,600) recorded to adjust the value of the
Company's property and equipment and capitalized software costs to net
realizable value, offset by personnel reductions and the reduction of computer
hardware leases, depreciation and maintenance costs. Other components of the
costs of service category during the six months ended June 30, 2003 consist
primarily of information and communication costs ($268,900), personnel costs
($1,022,300), computer hardware leases, depreciation and maintenance costs
($593,300), facilities ($124,800) and amortization expenses relating to
capitalized software development costs ($183,800).
During the six months ended June 30, 2004, we incurred sales and marketing
expenses of $142,220, a decrease of 63% over the six months ended June 30, 2003.
Such costs decreased primarily due to US personnel reductions, reductions in
travel and reductions in advertising and trade shows. Components of the sales
and marketing category consist primarily of personnel costs ($69,960),
consulting costs ($15,556) and public relations costs ($34,160). During the six
months ended June 30, 2003, we incurred sales and marketing expenses of
$380,030. Components of the costs of the sales and marketing category consist
primarily for personnel costs ($301,600), advertising and trade shows ($9,200),
consulting fees ($17,800) and travel and lodging ($33,300).
21
During the six months ended June 30, 2004, we incurred general and
administrative expenses of $1,365,134, a decrease of 42% over the six months
ended June 30, 2003. Such expenses decreased primarily due to personnel
reductions, reductions in professional fees and reductions in facilities costs
related to the relocation of our headquarters from Stamford, Connecticut to
Plymouth Meeting, Pennsylvania. Components of the general and administrative
category consist primarily of personnel costs ($267,057), consulting fees
($753,903), professional fees ($418,186), facilities ($38,508) and insurance
($53,671). During the six months ended June 30, 2003, we incurred general and
administrative expenses of $2,360,093. Such costs include a charge ($270,000) in
connection with the potential uncollectibility of a loan to a former officer and
an impairment loss ($108,000) recorded to adjust the value of the Company's
property and equipment to net realizable value, offset by personnel reductions
and the reduction of insurance costs. Other components of the costs of the
general and administrative category during the six months ended June 30, 2003
consist primarily for personnel costs ($672,200), professional fees ($613,300),
facilities ($244,200), insurance ($129,000), computer hardware leases,
depreciation and maintenance costs ($76,200), and communications costs
($25,900).
During the six months ended June 30, 2004, the net noncash charge for
stock-based compensation amounted to $639,107 compared to a net noncash charge
of $101,944 during the six months ended June 30, 2003. Such noncash costs
increased due to the issuance and vesting of employee stock options to
management at a price that was less than the fair market value of our common
stock on the grant date. Such noncash amounts are primarily related to the
valuation of stock-based compensation in accordance with Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25").
Certain employee stock options are subject to the variable plan requirements of
APB No. 25, as they were repriced, and therefore, compensation expense is
recognized for changes in the fair value of our common stock. Noncash charges
for consulting services for the six months ended June 30, 2004 and 2003 were
$447,859 and $103,000, respectively, resulting primarily from the issuance of
warrants to purchase common stock to financial, marketing and investor relations
consultants, from the issuance of warrants to the Company's former legal counsel
as part of his separation agreement and from the amortization of deferred costs
associated with the prior issuance of warrants to purchase common stock to
financial, legal, marketing and technical consultants. The value of
substantially all of such common stock purchase warrants has been recorded in
accordance with the Black-Scholes pricing methodology.
Interest income for the six months ended June 30, 2004 and 2003 amounted to
$12,767 and $8,892, respectively. Such amounts were earned primarily from our
investments in money fund accounts. During the six months ended June 30, 2004
and 2003, interest and other financing costs were $2,092,029 and $1,249,396,
respectively. During the six months ended June 30, 2004 and 2003, interest and
other financing costs were incurred in connection with the completion, in
February 2004, of a $10 million private offering of investment Units in the 2004
Private Placement and in connection with the convertible notes issued in
February, May and June 2003 and the $20 million line of credit facility with
Hewlett Packard.
During the six months ended June 30, 2003, the Company recorded a gain of
$305,822 resulting from the partial repayment, in full settlement, of the
amended promissory note issued to Hewlett-Packard Company. Also during the six
months ended June 30, 2003, the Company recorded an insurance recovery of
$374,000 for legal costs incurred in connection with a favorable trial decision
in the matter of Michael Fishman v. SmartServ Online, Inc., et al.
Basic and diluted loss per share was $2.72 for the six months ended June 30,
2004 compared to $3.40 loss per share for the six months ended June 30, 2003.
The weighted average shares outstanding increased to 2,658,889 at June 30, 2004
from 1,978,476 at June 30, 2003.
22
Capital Resources and Liquidity
At June 30, 2004 and December 31, 2003, the Company had cash of $4,526,790 and
$139,178, respectively. Net cash used in operations was $2,687,891 for the six
months ended June 30, 2004 compared to $2,371,830 during the six months ended
June 30, 2003. The primary reason for this increase was the Company's reduction
of its accounts payables through negotiated settlements with vendors.
In March 2004, we completed the acquisition of all of the outstanding stock of
nReach, Inc., based in Lakewood, Colorado, in exchange for 500,002 shares of our
common stock, the assumption and payment of $100,000 of certain obligations of
nReach's stockholders and an earn out schedule that may require our payment of
up to an additional 916,667 shares of common stock based on certain revenue
targets.
In February 2004, we completed the closing of a $10 million private offering of
investment Units consisting of shares of Series A Convertible Preferred Stock
and warrants to purchase common stock ("2004 Private Placement"). The private
offering consisted of investment Units at the price of $15 per Unit. Each Unit
consists of (i) one share of Series A convertible preferred stock, $.01 par
value, each of which is initially convertible into 10 shares of common stock,
and (ii) one warrant for the purchase of 10 shares of common stock. The Series A
receives dividends at the rate of 8% per year payable quarterly in cash or, in
our sole discretion, in registered shares of our common stock. The warrants have
an exercise price of $2.82 per share and expire in February 2007. We also
completed the closing of an additional $25,000 private offering of these Units
to an accredited investor in March 2004, which Units have the same terms as
described above other than the expiration date which will be March 2007. The
Series A is entitled to a liquidation preference equal to the purchase price per
Unit plus accrued and unpaid dividends. The Series A is not redeemable. Spencer
Trask, the placement agent for the 2004 Private Placement, received compensation
consisting of (i) a cash fee of $1,002,500, or 10% of the aggregate purchase
price of all of the Units acquired for cash, (ii) a non-accountable expense
allowance of $300,750, or 3% of the aggregate proceeds of all Units sold for
cash in the transaction, and (iii) warrants to purchase a number of shares of
common stock equal to 20% of the shares of common stock underlying the
securities in the Units sold for cash, constituting in the aggregate warrants to
purchase 1,336,666 shares of common stock at $1.50 per share and warrants to
purchase 1,336,666 shares of common stock at $2.82 per share. These warrants
were issued in reliance upon the exemption from registration provided by Section
4(2) of the Securities Act. We have used and expect to use the net proceeds of
approximately $8,600,000 from this offering for repayment of outstanding
obligations (including $1,391,500 that was used to repay Global Capital Funding
Group, LP), completion of strategic acquisitions and general working capital. We
also anticipated using a significant portion of our working capital to settle
our accounts payable, which accounts payable were approximately $1,300,000 and
$1,700,000 as of June 30, 2004 and December 31, 2003, respectively.
In February 2004, the convertible notes issued in our May, June, September and
November 2003 bridge financings were automatically converted into the Units
issued in connection with the 2004 Private Placement. The conversion took place
at the rate of $15 per Unit. This resulted in the conversion of the aggregate
outstanding amount of debt owing from these convertible notes ($3,122,302 -
representing principal and accrued interest) into 208,147 Units from the 2004
Private Placement, which in the aggregate consists of 208,147 shares of Series A
Convertible Preferred Stock and warrants to purchase 2,081,470 shares of common
stock at an exercise price $2.82 per share. These warrants expire in February
2007.
While the warrants to purchase common stock issued during the year ended
December 31, 2003 and six months ended June 30, 2004 represent an additional
source of capital, they expire between May 2006 and March 2009 and are not
callable by us. Therefore, they cannot be relied upon by us as a definite source
of capital. The warrant holders may choose to exercise their warrants if the
market price of our common stock exceeds the exercise price of the warrant.
During the year ended December 31, 2002, we recorded a valuation allowance of
$664,640 in connection with the potential uncollectibility of outstanding loans
made to Mr. Sebastian Cassetta, our then Chairman and Chief
23
Executive Officer, which included a loan used by him to purchase our restricted
stock and loans in the aggregate original principal amount of $500,000.
Additionally, during the quarter ended June 30, 2003, we recorded a valuation
allowance of $270,000 in connection with the potential uncollectibility of the
loan made to Mr. Cassetta for the purchase of our restricted stock. Mr.
Cassetta's ability to repay these loans and interest thereon is highly
contingent on the market value of his investment in our common stock. In his
separation agreement in October 2003, we extended the maturity date of the loan
for the restricted stock until September 2004 and forgave over a three-year term
the loans in the aggregate original principal amount of $500,000, plus the
accrued interest thereon.
Our failure to timely file or keep registration statements effective has
affected the registration rights held by certain of our stockholders and warrant
holders. As of June 30, 2004, we recorded an aggregate of $202,125 for penalties
in connection with the aforementioned registration requirements. Such amounts
are included in accrued expenses on our balance sheet. We filed a Form SB-2
Registration Statement on May 13, 2004. It has not yet been declared effective
by the Securities and Exchange Commission ("SEC").
The economic downturn in general, and its impact on the telecommunications
industry in particular, caused telecommunications service providers to reduce
capital spending, personnel and debt, as well as new service introductions. This
had resulted in delays in the build-out of high-speed carrier data networks and
availability of data-enabled wireless devices, causing the market for our
financial data, lifestyle and transaction services to be lackluster. In
addition, many financial services firms curtailed new product development to
focus on data security and recovery. Consequently, the potential demand for our
products and services has been significantly delayed. Such delays have had a
very detrimental effect on our operations and have resulted in our inability to
implement our business plan and related marketing strategies. Consequently, in
2002 we commenced an effort to realign our infrastructure and related overhead
to correlate with reductions in projected revenue. As part of this effort, we
closed our UK and Hong Kong sales offices and downsized our domestic operations
through staff reductions to a level sufficient to support our projected
operations. In both March and May 2003, we reduced our cost structure through
the termination of additional personnel. Personnel headcount has been reduced
from 66 in May 2002 to the current level of 17 as of June 30, 2004 (including
the nReach acquisition completed in March 2004). These efforts have reduced our
average monthly operating expenses from approximately $1,090,000 in July 2002 to
approximately $370,000 as of June 2004 (including operating expenses of nReach),
excluding non-cash stock compensation, depreciation and amortization. The
Company anticipates that its monthly operating expenses will increase during
2004 due to the working capital requirements of the business of nReach, as well
as related to expansion of marketing and business development efforts for all of
the Company's products and services and increased corporate overhead.
We believe we have sufficient working capital for the next twelve months. It is
likely we may require additional funds in the long term depending upon the
growth of our revenues, our business strategy, the costs of any acquisitions and
other factors. Should the Company be unable to raise additional debt or equity
financing, it may be forced to seek a merger or cease operations.
Certain Factors That May Affect Future Results
- ----------------------------------------------
Forward-looking statements in this document and those made from time-to-time by
our employees are made under the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements
involve certain known and unknown risks, uncertainties and other factors which
may cause our actual results, performance or achievements to be materially
different from any future results, performance or achievements expressed or
implied by these forward-looking statements. Certain factors that could cause or
contribute to such differences include, and are not limited to: We may not have
sufficient working capital in the long term; We have never been profitable and
if we do not achieve profitability we may not be able to continue our business;
We have significant accounts payable obligations; We may not be able to complete
or successfully integrate acquisitions that we seek to pursue, or achieve the
desired results of such acquisitions; Only one of our
24
four major customers from 2003 will continue to generate revenues for us in
2004; We plan to pursue new streams of revenue from the resale of prepaid
wireless airtime bundled with wireless data content, and revenues from such
business may not materialize; We have a new CEO and executive management team;
The market for our business is in the development stage and may not achieve the
growth we expect; Spencer Trask may be able to affect and exercise some manner
of control over us; The market price of our common stock may decrease because we
have issued, and will likely continue to issue, a substantial number of
securities convertible or exercisable into our common stock; and other risks
described in this Quarterly Report on Form 10-QSB, our Annual Report on Form
10-KSB/A for the year ended December 31, 2003 (including the risks described
under "Risk Factors") and our other filings with the Securities and Exchange
Commission. You can identify forward-looking statements by the fact that they do
not relate strictly to historical or current facts. The words "believe,"
"expect," "anticipate," "intend" and "plan" and similar expressions are often
used to identify forward-looking statements. We caution you not to place undue
reliance on these forward-looking statements. We undertake no obligation to
update or revise any forward-looking statements or to publicly announce the
result of any revisions to any of the forward-looking statements in this
document to reflect future events or developments.
Item 3. Controls and Procedures
We maintain a system of disclosure controls and procedures that is designed to
provide reasonable assurance that information that is required to be disclosed
by us in the reports that we file or submit under the Securities and Exchange
Act of 1934, as amended, is accumulated and communicated to management in a
timely manner. Our Chief Executive Officer and Chief Financial Officer have
evaluated this system of disclosure controls and procedures as of the end of the
period covered by this quarterly report, and each believes that the system is
operating effectively to ensure appropriate disclosure at a reasonable level of
assurance. There have been no changes during the second fiscal quarter in our
internal control over financial reporting, to the extent that elements of
internal control over financial reporting is subsumed within disclosure controls
and procedures, that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
25
PART II. OTHER INFORMATION
SmartServ Online, Inc.
Item 2. Changes in Securities and Use of Proceeds
At the time of issuance, each investor or recipient of unregistered securities
was either an accredited investor or a sophisticated investor. Each investor had
access to SmartServ's most recent Form 10-KSB/A, all quarterly and periodic
reports filed subsequent to such Form 10-KSB/A and the Company's most recent
proxy materials.
In connection with settling a debt with a law firm, in April 2004 we granted a
warrant to purchase 1,820 shares of common stock at $3.15 per share. The warrant
expires in April of 2006. This warrant was issued in reliance upon the exemption
from registration provided by Section 4(2) of the Securities Act of 1933, as
amended.
In connection with engaging a vendor to provide investor relation services, in
May 2004 we entered into an agreement to grant a warrant to purchase 50,000
shares of common stock at $2.15 per share. The warrant expires in May of 2006.
This warrant was issued in reliance upon the exemption from registration
provided by Section 4(2) of the Securities Act of 1933, as amended.
In connection with Alpine Capital's claim for a finder's fee in connection with
the April 2003 amendment related to bridge financing, Alpine received a warrant
in July to purchase 40,000 shares of common stock at $1.50 per share expiring
July 8, 2009. This warrant was issued in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as amended.
In connection with payment to a vendor to provide recruiting services in June
2004 we entered into an agreement to grant a warrant to purchase 5,000 shares of
common stock at $3.10 per share. The warrant expires in May of 2006. This
warrant was issued in reliance upon the exemption from registration provided by
Section 4(2) of the Securities Act of 1933, as amended.
In connection consulting services to be provided by Shai Stern, M. Ezzat Jalled
and E. Alan Scheik III we entered into consulting agreements dated June 2004 for
warrants to purchase 25,000, 100,000 and 10,000 shares of common stock at $1.50,
$1.50 and $2.50 per share , respectively and expiring in May 2006. This warrant
was issued in reliance upon the exemption from registration provided by Section
4(2) of the Securities Act of 1933, as amended.
26
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 Option Agreement dated as of April 9, 2004 between SmartServ and Len von
Vital+
10.2 Option Agreement dated as of April 15, 2004 between SmartServ and Matthew
Stecker+
10.3 Option Agreement dated as of April 26, 2004 between SmartServ and Daniel
Wainfan+
10.4 Non-Employee Director Compensation Plan+
10.5 Consulting Agreement dated as of June 1, 2004 between SmartServ and M.
Ezzat Jalled/1/
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002+
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002+
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002+
+ Filed herewith.
1 Filed as an Exhibit to Amendment No. 1 to our Registration Statement on
Form SB-2 (Registration Statement No. 333-115462) on July 27, 2004
(b) Reports on Form 8-K
On April 16, 2004, the Company filed a Form 8-K under Items 5 and 12 of such
Form. The information related to the Company's press release issued on April 14,
2004 regarding the financial results for the quarter and year ended December 31,
2003 and the expiration of the stock purchase agreement with Mobile Airwaves,
Inc.
On May 4, 2004, the Company filed a Form 8-K/A, Amendment No. 1 under Item 2 of
such Form. The information related to the acquisition on February 28 2004 of all
of the stock of nReach, Inc. which was previously reported on a Form 8-K filed
by the Company on March 4, 2004, and the assumption of certain of nReach's
obligations by the Company and the obligation of the Company to issue additional
shares of the Company's common stock under certain circumstances.
On May 20, 2004, the Company filed a Form 8-K under 12 of such Form. The
information related to the Company's press release issued on May 20, 2004
regarding its unaudited financial results for the first quarter ended March 31,
2004.
27
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: August 16, 2004 /s/ Robert M. Pons
--------------- ----------------------------------------
Robert M. Pons
Chief Executive Officer
Date: August 16, 2004 /s/ Len von Vital
--------------- ----------------------------------------
Len von Vital
Chief Financial Officer
28