FORM 10-QSB
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
COMMISSION FILE NUMBER 0-28008
SMARTSERV ONLINE, INC.
- --------------------------------------------------------------------------------
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3750708
- --------------------------------------------------------------------------------
(STATE OR OTHER JURISDICTION OF I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
METRO CENTER, ONE STATION PLACE, STAMFORD, CONNECTICUT 06902
- --------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(203) 353-5950
- --------------------------------------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECED ING 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 MAY 14,
1997 WAS 3,695,000.
<PAGE>
SMARTSERV ONLINE, INC.
FORM 10-QSB
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets - June 30, 1996 and March 31, 1997 (unaudited)...... 2
Statements of Operations - three months ended
March 31, 1997 and 1996 and nine months ended
March 31, 1997 and 1996 (unaudited)................................ 3
Statement of Changes in Stockholders' Equity -
nine months ended March 31, 1997 (unaudited)....................... 4
Statements of Cash Flows - three months ended
March 31, 1997 and 1996 and nine months ended
March 31, 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..................................................14
Item 6. Exhibits and Reports on Form 8-K...................................14
Signatures.........................................................15
1
<PAGE>
SMARTSERV ONLINE, INC.
BALANCE SHEETS
MARCH 31, JUNE 30,
1997 1996
----------- -----------
ASSETS (Unaudited)
Current assets
Cash and cash equivalents $ 227,342 $ 3,460,850
Accounts receivable 175,146 57,990
Inventory 30,000 --
Prepaid expenses and other receivables 134,629 68,310
----------- -----------
Total current assets 567,117 3,587,150
----------- -----------
Property and equipment - net 531,070 258,899
----------- -----------
Other assets
Deferred charges 36,000 63,000
Security deposit 81,218 81,218
----------- -----------
117,218 144,218
----------- -----------
Total Assets $ 1,215,405 $ 3,990,267
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 961,212 $ 482,851
Payroll taxes payable 28,100 14,901
Salaries payable 43,137 44,654
Deferred revenues 20,000 --
----------- -----------
Total current liabilities 1,052,449 542,406
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock - $.01 par value
Authorized - 15,000,000 shares
Issued and outstanding - 3,695,000 shares at
June 30, 1996 and March 31, 1997 36,950 36,950
Additional paid-in capital 8,946,592 8,758,299
Accumulated deficit (8,820,586) (5,347,388)
----------- -----------
Total stockholders' equity 162,956 3,447,861
----------- -----------
Total Liabilities and Stockholders' Equity $ 1,215,405 $ 3,990,267
=========== ===========
See accompanying notes.
2
<PAGE>
SMARTSERV ONLINE, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED MARCH 31 ENDED MARCH 31
-------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 170,674 $ -- $ 467,783 $ --
----------- ----------- ----------- -----------
Costs and expenses:
Costs of revenues 738,329 -- 1,758,396 --
Product development expenses -- 370,014 -- 652,737
Selling, general and administrative
expenses 806,797 237,184 2,247,696 645,436
----------- ----------- ----------- -----------
Total costs and expenses 1,545,126 607,198 4,006,092 1,298,173
----------- ----------- ----------- -----------
Loss from operations (1,374,452) (607,198) (3,538,309) (1,298,173)
----------- ----------- ----------- -----------
Other income (expense):
Interest income 8,086 150 73,271 150
Interest expense (2,452) (281,480) (8,160) (499,771)
----------- ----------- ----------- -----------
5,634 (281,330) 65,111 (499,621)
----------- ----------- ----------- -----------
Net loss $(1,368,818) $ (888,528) $(3,473,198) $(1,797,794)
=========== =========== =========== ===========
Net loss per share (Note 2) $ (0.37) $ (0.42) $ (0.94) $ (0.90)
=========== =========== =========== ===========
Weighted average shares outstanding
(Note 2) 3,695,000 2,118,750 3,695,000 1,990,700
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
3
<PAGE>
SMARTSERV ONLINE, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED MARCH 31, 1977
(UNAUDITED)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PAID-IN ACCUMULATED
SHARES PAR VALUE CAPITAL DEFICIT TOTAL
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1996 3,695,000 $ 36,950 $ 8,758,299 $(5,347,388) $ 3,447,861
Change in market value of
employee options -- -- 188,293 -- 188,293
Net loss for the period -- -- -- (3,473,198) (3,473,198)
----------- ----------- ----------- ----------- -----------
Balance at March 31, 1997 3,695,000 $ 36,950 $ 8,946,592 $(8,820,586) $ 162,956
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes.
4
<PAGE>
SMARTSERV ONLINE, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED MARCH 31 ENDED MARCH 31
-------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(1,368,818) $ (888,528) $(3,473,198) $(1,797,794)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 27,578 10,813 65,904 25,817
Changes in market value of
employee options -- -- 188,293 --
Accretion and noncash charges
for interest expense -- 90,126 -- 158,263
Consulting services -- (10,002) -- (10,002)
Amortization of deferred charges 9,000 -- 27,000 --
Other changes that provided (used) cash
Accounts receivable 32,188 34,115 (117,156) (1,972)
Inventories -- 9,844 (30,000) 10,440
Prepaid expenses and other receivables (16,135) (5,301) (66,319) (11,241)
Accounts payable and accrued liabilities 429,892 163,274 478,361 133,099
Accrued interest -- (229,435) -- (106,595)
Payroll taxes payable 6,611 14,108 13,199 (71,585)
Salaries payable (11,493) (11,173) (1,517) (9,942)
Deferred revenues -- -- 20,000 --
----------- ----------- ----------- -----------
Net cash used in operating activities (891,177) (822,159) (2,895,433) (1,681,512)
----------- ----------- ----------- -----------
INVESTING ACTIVITIES
Purchase of equipment (119,332) (84,348) (338,075) (121,973)
----------- ----------- ----------- -----------
Net cash used in investing activities (119,332) (84,348) (338,075) (121,973)
----------- ----------- ----------- -----------
FINANCING ACTIVITIES
Proceeds from the issuance of Bridge notes -- 190,000 -- 1,170,000
Repayment of Bridge notes -- (1,200,000) -- (1,200,000)
Proceeds from the issuance of common stock -- 8,475,000 -- 8,705,000
Proceeds from the issuance of warrants -- 182,510 -- 202,510
Repayment of debt -- (612,500) -- (612,500)
Repayment of notes -- (427,500) -- (452,500)
Due from officers, net -- (79,962) -- (64,309)
Cost of issuing securities -- (1,543,560) -- (1,543,560)
Deferred financing costs -- 137,637 -- (134,916)
----------- ----------- ----------- -----------
Net cash provided by financing activities -- 5,121,625 -- 6,069,725
----------- ----------- ----------- -----------
Increase (decrease) in cash and cash equivalents (1,010,509) 4,215,118 (3,233,508) 4,266,240
Cash and cash equivalents - beginning of period 1,237,851 51,122 3,460,850 --
----------- ----------- ----------- -----------
Cash and cash equivalents - end of period $ 227,342 $ 4,266,240 $ 227,342 $ 4,266,240
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
5
<PAGE>
SMARTSERV ONLINE, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
MARCH 31, 1997
1. ORGANIZATION
SmartServ Online, Inc., formerly Smart Phone Communications (Delaware), Inc.
(the "Company"), commenced operations on August 20, 1993. The Company makes
available online information and transactional services to subscribers through
screen-based telephones, personal computers, the Internet, personal digital
assistants, alpha-numeric pagers, and interactive voice response systems. The
Company also offers a range of services designed to meet the varied needs of
clients of potential strategic partners, as well as potential direct
subscribers, including: stock brokerage support services, business credit
information, investment newsletters, stock research reports, stock quotes,
nationwide business and residential directory services, business and financial
news, sports information, electronic bill payment, research and analysis
reports, trading activity reports by insiders of corporations, online package
tracking, electronic mail, and ordering flowers and gifts. The Company's
software architecture and capabilities format information for a particular
device and present the information in a user friendly manner.
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. The balance sheet
at June 30, 1996 has been derived from the audited financial statements at that
date, but does not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. The
financial statements should be read in conjunction with the Company's Annual
Report on Form 10-KSB for the year ended June 30, 1996. In the opinion of the
Company, all adjustments (consisting of normal recurring accruals) necessary for
a fair presentation have been made. Results of operations for the nine months
ended March 31, 1997 are not necessarily indicative of those expected for the
year ending June 30, 1997.
The Company has completed development of its information platform and
communications software and has exited the developmental stage. However, the
Company has incurred recurring operating losses and its operations have not
produced a positive cash flow. Additionally, there is no assurance that the
Company will generate future revenues or cash flow from operations.
The Company estimates that it has sufficient cash resources through May 1997;
however, the Company has accepted a Term Sheet from Coleman & Company
Securities, Inc. with respect to a private placement of up to $3,000,000 in
Rights. Such Rights are convertible into Common Stock and Warrants of the
Company commencing six months from date of issuance. There can be no assurance;
however, that this transaction will be consummated.
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
6
<PAGE>
Basis of Presentation (continued)
- ---------------------------------
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.
Management believes that the Company's primary source of revenues will be
derived from consumers who purchase the services through its Strategic Partners.
The Company has also commenced development of a direct subscriber base. At March
31, 1997, the Company had a subscriber base of approximately 2,000 users which
is projected to grow to approximately 42,000 users by June 30, 1998; however,
there can be no assurance that the Company's product offering will continue to
be accepted in the marketplace.
Stock Based Compensation
- ------------------------
The Company grants stock options for the purchase of a fixed number of shares to
employees with an exercise price equal to the fair value of the shares at the
date of grant. The Company accounts for these stock option grants in accordance
with APB Opinion No. 25, "Accounting for Stock Issued to Employees" and,
accordingly, where terms are fixed and determinable, recognizes no compensation
expense.
Earnings (Loss) per Share
- -------------------------
On March 21, 1996, the Company completed an Initial Public Offering of 1,695,000
shares of $.01 par value common stock at $5.00 per share and 1,725,000 common
stock purchase warrants at $.10 per warrant. The Company received $7,058,648
from the Offering, net of the costs of issuing these securities of $1,588,852.
In connection with the Initial Public Offering, the Board of Directors voted to
increase the aggregate number of shares that the Company is authorized to issue
to 15,000,000.
Net loss per share is computed based on the weighted average number of common
shares and common equivalents outstanding during the period using the treasury
stock method. Shares from the assumed exercise of options and warrants granted
by the Company have been included in the computations of loss per share for all
periods, unless their inclusion would be antidilutive. However, for purposes of
computing net loss per share, options and warrants granted by the Company during
the 12 months preceding the Initial Public Offering date have been included in
the calculation of common and common equivalent shares outstanding as if they
were outstanding for all periods prior to the Initial Public Offering, using the
treasury stock method and the Initial Public Offering price of $5.00 per share.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share, which is required to be adopted on December 31, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options would be excluded. The impact of Statement 128 on primary earnings
per share is not expected to be material.
7
<PAGE>
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
MARCH 31, JUNE 30,
1997 1996
--------- ---------
Data processing equipment $ 553,547 $ 280,814
Office furniture and equipment 68,896 37,051
Display equipment 9,635 9,635
Leasehold improvements 33,497 --
--------- ---------
665,575 327,500
Accumulated depreciation (134,505) (68,601)
--------- ---------
$ 531,070 $ 258,899
========= =========
4. COMMITMENTS
On August 21, 1995, the Company accepted a proposal from Strategica, Inc., a
financial intermediary, for the arrangement of a $2,500,000 secured revolving
credit facility ("Proposal"). As compensation therefor, the Company issued
116,550 shares of common stock to Strategica. Additionally, the Proposal
contemplated that the Company would enter into a consulting agreement, whereby
Strategica would provide consulting services with regard to operational,
management and strategic issues. As consideration for these ongoing services,
the Company would pay $72,000 per annum over the four year term of the
agreement. The Company subsequently received a commitment letter which differed
significantly from the original Proposal, which management believed to be
unacceptable. Negotiations between management and Strategica to resolve this
matter in a mutually satisfactory manner have been unsuccessful. See Part II,
Item 1 for a discussion of the Company's lawsuit against Strategica.
On December 3, 1996, the Company entered into an agreement with a financial
institution for the acquisition and financing of approximately $230,000 of
additional computer equipment. The equipment is being acquired to enhance the
Company's ability to provide its information service to a growing user base and
to meet continued demand for these services.
5. EMPLOYEE STOCK OPTION PLAN
In April 1996, the Board of Directors approved the establishment of an Employee
Stock Option Plan ("Plan") authorizing stock option grants to directors, key
employees and consultants of the Company. The exercise of options granted under
the Plan was contingent upon the approval of the Plan by the Company's
stockholders, which was obtained at the Annual Meeting of Stockholders on
November 4, 1996. The options are intended to qualify as incentive stock options
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended, or as nonqualified stock options. The Plan provides for the exercise of
such options at not less than the fair value of the stock on the date of grant.
The options are generally exercisable after one year from date of grant and no
options may be granted after April 15, 2006. Pursuant to the terms of the Plan,
each nonemployee director of the Company received an initial grant to purchase
5,000 shares of common stock and will receive an additional option to purchase
5,000 shares of common stock immediately following each annual meeting at which
directors are elected. On December 6, 1996, the Company's Board of Directors
approved the increase in the number of shares eligible for issuance under the
Plan to 650,000. Such 250,000 share increase is subject to the approval of the
Company's stockholders. The Plan is administered by a committee designated by
8
<PAGE>
5. Employee Stock Option Plan (continued)
the Board of Directors of the Company.
Activity in the Company's stock option plan is as follows:
OPTIONS EXERCISE PRICE
------- --------------
Granted 311,550 $6.44 - $7.08
Exercised 0 0 - 0
Canceled 0 0 - 0
-------- -------------
Balance at June 30, 1996 311,550 6.44 - 7.08
Granted 424,975 5.06 - 6.25
Exercised 0 0 - 0
Canceled (318,725) 5.06 - 7.08
-------- -------------
Balance at March 31, 1997 417,800 $5.06 - $7.08
========= =============
At March 31, 1997, there were 232,200 shares available for grant of options
under the Plan.
In the financial statements for the nine months ended March 31, 1997, the
Company recorded a non-cash charge of $188,293, reflecting the compensatory
nature of the option grants in accordance with APB Opinion No. 25, "Accounting
for Stock Issued to Employees."
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
PLAN OF OPERATION
The Company provides online information and transactional services through
personal computers (PCs), screen-based telephones, the Internet, personal
digital assistants (PDAs), alpha-numeric pagers, and interactive voice response
systems to clients of potential Strategic Partners, as well as to prospective
direct subscribers. The Company has emerged from the development stage with the
completion of the SmartServ information platform and communications software and
the ability of its product offering to meet the needs of subscribers.
On March 21, 1996, the Company completed an Initial Public Offering of 1,695,000
shares of common stock and 1,725,000 common stock purchase warrants which
provided the Company with approximately $7,059,000, net of the costs of issuance
of approximately $1,589,000. The proceeds from this Offering have allowed the
Company to commence the implementation of its marketing plan.
The Company's plan of operation includes programs for marketing simultaneously
at two separate levels. At the first level, the Company is developing strategic
relationships with key partners that provide access to large numbers of
potential subscribers for its monthly services. These partners include regional
telephone operating companies, long distance carriers, telephone equipment
manufacturers and others who distribute screen telephone equipment, market local
screen telephone services or otherwise benefit from the increased acceptance of
these devices. To these partners, the Company's services are perceived as a
means of increasing interest in and sales of screen telephones, and there is
thus a strong incentive to promote the Company's services.
The Company is working with businesses which desire to provide new services,
such as those provided by the Company, to an existing base of clients. Examples
include brokerage firms, such as Schroder Wertheim & Co. and Herzog, Heine,
Geduld, Inc., and other disseminators of financial information, whose clients
can benefit from the efficiency, convenience and timeliness of the services
provided by the Company. The Company will co-brand with its Strategic Partners
or offer its services under its Strategic Partners' name. By providing this
branding flexibility, the Company has been able to expand the number of
businesses interested in forming relationships with it, and has the ability to
market its services under far more recognizable brand names than its own.
At the second level, the Company is working with Strategic Partners to assure
awareness of the Company's services by consumers. Programs under development
with existing Strategic Partners, such as Northern Telecom and CIDCO
Incorporated, include direct marketing, package inserts, and in-store
promotions.
Management believes that most of the Company's revenues will ultimately be
derived from end users who purchase the Company's services through Strategic
Partners with such mass distribution capabilities. The Company anticipates that
Strategic Partners will brand the Company's information services, acquired from
the Company's "information platform", with their own private label, promote the
packaged offering and then distribute the Company's information package on
screen-based phones, PCs, PDAs, and interactive voice response systems to their
clients for use. The Company has the ability to customize the information
package to be offered to each Strategic Partner, and in turn to their end users.
The Company is also in the initial stages of developing a direct subscriber
base. It is anticipated that the monthly base charge will vary, between $7.00
and $49.95 per month, depending upon the product offering and specific market
segment.
10
<PAGE>
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 through the period ending December 31, 1997. Such personnel
will be added to assist with the programming requirements of Strategic Partners'
product offerings and for customer support.
RESULTS OF OPERATIONS
During the year ended June 30, 1996, the Company was in the process of
completing its information platform and communications software and,
accordingly, did not generate any significant revenues from operations. In
September 1996, the Company commenced a national advertising campaign in an
effort to increase the number of direct subscribers to the SmartServ information
platform, and to stimulate awareness of the Company's name in the marketplace.
At March 31, 1997, the Company had approximately 2,000 users online.
THREE MONTHS ENDED MARCH 31, 1997 VS. THREE MONTHS ENDED MARCH 31, 1996
Total revenues during the three months ended March 1997 were $170,674 compared
to $0 during the three months ended March 1996. Revenues from the sale of the
Company's information services were $75,859, while revenues for the design,
development and implementation services associated with the Company's
arrangement with Schroder Wertheim were $94,815. During the comparable 1996
period, the Company received design and development fees of $14,000 that were
offset against product development expenses because the Company was considered
a development stage enterprise.
The net loss increased to $1,368,818 compared to $888,528 in 1996 as a result of
the Company's efforts to build an infrastructure capable of supporting its
operations and the marketing and advertising of its information product
offering, as well as the cash constraints experienced by the Company during the
1996 period.
With the Company's departure from the development stage, it incurred costs of
revenues of $738,329, consisting primarily of personnel costs, systems
consultants, and information and communication costs. During the period, systems
consulting fees of approximately $265,000 were incurred to assist the Company
with an upgrade of the Company's information and communication software
architecture. During the corresponding period of the prior year, the Company
incurred product development expenses of $370,014, consisting primarily of
personnel costs. Such costs were incurred in connection with the development of
the Company's information platform and communications delivery system.
Selling, general and administrative costs increased to $806,797 in 1997 from
$237,184 in 1996 as a result of the increase in sales and customer support
personnel, rent for additional office space, professional fees, and marketing
and advertising expenditures. Such marketing and advertising costs incurred
during the three months ended March 1997 were approximately $187,000, while
legal fees associated with the Company's action against Strategica were
approximately $90,000.
Interest income for the three months ended March 31, 1997 amounted to $8,086.
Such amounts were earned primarily from the Company's investments in highly
liquid commercial paper. Interest expense for the three months ended March 31,
1997 was incurred in connection with an insurance financing arrangement and
amounted to $2,452. Interest expense for the three months ended March 31, 1996
was $281,480. Such costs were incurred in connection with the senior and
subordinated notes outstanding during the period, as well as the issuance of
$1,200,000 of Bridge financing prior to the Company's Initial Public Offering of
securities.
11
<PAGE>
NINE MONTHS ENDED MARCH 31, 1997 VS. NINE MONTHS ENDED MARCH 31, 1996
During the nine months ended March 31, 1997, the Company commenced the
implementation of its marketing plan and recorded revenues of $228,035 from the
sale of its information services and related screen-based telephones.
Additionally, the Company recorded revenues of $239,748 related to design,
development and implementation services associated with its arrangement with
Schroder Wertheim & Co. During the comparable 1996 period, the Company received
design and development fees of $62,000 which were offset against product
development expenses because the Company was considered a development stage
enterprise.
Also during the nine months ended March 31, 1997, the Company incurred selling,
general and administrative expenses of $2,247,696, primarily for personnel
costs, facilities, marketing costs and professional fees. Selling, general and
administrative costs increased by $1,602,260 over the corresponding period of
the prior year as a result of the Company's efforts to build an infrastructure
capable of supporting its operations and the marketing and advertising of its
information product offering. Advertising and marketing costs amounted to
approximately $540,000, while personnel costs included a non-cash charge of
approximately $115,000 related to the change in value of employee stock options.
The necessary funds to support these efforts were provided by the Company's
Initial Public Offering in March 1996.
With the Company's recent departure from the development stage, it incurred
costs of revenues of $1,758,396, consisting primarily of personnel costs
($816,900), systems consultants ($395,900), information and communication costs
($244,000), and screenphone purchases ($95,300). Included in personnel costs is
a non-cash charge of approximately $73,000 for the change in market value of
employee stock options. During the corresponding period of the prior year, the
Company incurred product development expenses of $652,737 consisting primarily
of personnel costs.
Interest income for the nine months ended March 31, 1997 amounted to $73,271.
Such amounts were earned primarily from the Company's investments in highly
liquid commercial paper. Interest expense for the nine months ended March 31,
1997 was incurred in connection with an insurance financing arrangement and
amounted to $8,160. Interest expense for the nine months ended March 31, 1996
was incurred in connection with the senior and subordinated notes, as well as
the bridge financing outstanding during the period and amounted to $499,771.
LIQUIDITY AND CAPITAL RESOURCES
The Company has commenced its marketing efforts and generated revenues of
approximately $468,000 during the nine months ended March 31, 1997. Revenues
from the Company's sales and marketing efforts are not expected to be sufficient
to support operations until the quarter ending December 1997.
The Company estimates that it has sufficient cash resources through May 1997. To
ensure the adequacy of future capital resources, the Company has accepted a Term
Sheet from Coleman & Company Securities, Inc. with respect to a private
placement of up to $3,000,000 in Rights. Such Rights are convertible into Common
Stock and Warrants of the Company commencing six months from date of issuance.
There can be no assurance; however, that this transaction will be consummated.
The Company anticipates that these funds will be used for additional programming
personnel necessary to integrate the Company's software with the information
systems of its Strategic Partners, for marketing support personnel necessary to
fulfill subscriber needs and inquiries, and for the expansion of the Company's
sales and marketing efforts. It is also anticipated that hardware and software
purchases of approximately $50,000 will be required through the remainder of the
year ending June 30, 1997. The Company expects to augment its capital formation
through the realization of revenues from the sale of its information and
12
<PAGE>
transactional services; however, there can be no assurance that the Company's
product offering will continue to be accepted in the marketplace.
The Company may, in the future, have access to additional funding because as
part of the Initial Public Offering, the Company issued 1,725,000 common stock
purchase warrants entitling the holders thereof to purchase one share of common
stock at an exercise price of $4.00 per share, subject to certain adjustments,
at any time commencing on March 21, 1997 through March 20, 2001. The warrants
are subject to redemption by the Company at $.10 per warrant commencing March
21, 1997, on thirty days written notice, provided the average closing bid
quotation for the common stock as reported on The NASDAQ Stock Market or other
national securities exchange, if traded thereon, has been at least $7.50 for a
period of 20 consecutive days ending on the third day prior to the date on which
the Company gives notice of redemption. Exercise of these warrants by the
holders could provide additional capital of approximately $6,600,000; however,
such exercise can not be assured.
The Company intends to seek additional sources of capital and liquidity for
expansion through collaborative agreements 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.
13
<PAGE>
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, except as set forth below.
In August 1996, the Company commenced an action in the Supreme Court of the
State of New York, New York County, against Strategica Inc. and its affiliated
entities ("Strategica"). The complaint arose out of the proposal made by
Strategica and accepted in August 1995 by the Company (the "Proposal") whereby
Strategica agreed to act as the Company's agent for the arrangement of a secured
revolving credit facility in the amount of $2,500,000. Additionally, the
Proposal contemplated that the Company would retain Strategica as a financial
consultant to the Company. The Proposal was subject to the delivery and
execution of definitive documentation. In January 1996, Strategica forwarded to
the Company a proposed commitment letter which was unacceptable to the Company.
The complaint alleges breach of the Proposal, breach of the implied covenants of
good faith and fair dealing, and fraud. The complaint seeks damages of not less
than $2,500,000, punitive damages and the rescission of the Proposal and of the
issuance by the Company of 116,550 shares of its Common Stock to Strategica
thereunder. Strategica asserted a counterclaim against the Company for breach of
contract and seeks damages of not less than $350,000. Discovery proceedings are
currently in process.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8 - K
(a) The following exhibits are included herein:
Exhibit 11 - Statement re: computation of
earnings per share
Exhibit 27 - Financial Data Schedule
(b) The Company did not file any reports on Form 8-K during
the three months ended March 31, 1997.
14
<PAGE>
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: May 14, 1997 /S/ Sebastian E. Cassetta
------------ ---------------------------------
Sebastian E. Cassetta
Chairman of the Board, Chief Executive
Officer
Date: May 14, 1997 /S/ Thomas W. Haller
------------ ---------------------------------
Thomas W. Haller
Chief Financial Officer, Treasurer
15
Exhibit 11 - Statement Regarding Computation of Earnings Per Share
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31 NINE MONTHS ENDED MARCH 31
-------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
PRIMARY:
Average shares outstanding 3,695,000 1,967,100 3,695,000 1,839,050
Net effect of stock and
warrant issuances with exercise
prices below the initial
public offering price based
on the treasury stock method -- 151,650 -- 151,650
----------- ----------- ----------- -----------
Total 3,695,000 2,118,750 3,695,000 1,990,700
=========== =========== =========== ===========
Net loss $(1,368,818) $ (888,528) $(3,473,198) $(1,797,794)
=========== =========== =========== ===========
Per share amount $ (0.37) (0.42) $ (0.94) $ (0.90)
=========== =========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH
31, 1997 FINANCIAL STATEMENTS OF SMARTSERV ONLINE, INC. AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001005698
<NAME> SMARTSERV ONLINE, INC.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 227,342
<SECURITIES> 0
<RECEIVABLES> 175,146
<ALLOWANCES> 0
<INVENTORY> 164,629
<CURRENT-ASSETS> 567,117
<PP&E> 665,575
<DEPRECIATION> 134,505
<TOTAL-ASSETS> 1,215,405
<CURRENT-LIABILITIES> 1,052,449
<BONDS> 0
0
0
<COMMON> 36,950
<OTHER-SE> 126,006
<TOTAL-LIABILITY-AND-EQUITY> 1,215,405
<SALES> 467,783
<TOTAL-REVENUES> 541,054
<CGS> 1,758,396
<TOTAL-COSTS> 1,758,396
<OTHER-EXPENSES> 2,247,696
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,160
<INCOME-PRETAX> (3,473,198)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,473,198)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,473,198)
<EPS-PRIMARY> (0.94)
<EPS-DILUTED> (0.94)
</TABLE>
