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FORM 10-QSB
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1996
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 PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIODS THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [_]
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE)
YES [_] NO [X]
THE NUMBER OF SHARES OF COMMON STOCK, $.01 PAR VALUE, OUTSTANDING AS OF FEBRUARY
10, 1996 WAS 3,695,000.
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<PAGE>
SMARTSERV ONLINE, INC.
FORM 10-QSB
INDEX
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets - June 30, 1996 and December 31, 1996
(unaudited).........................................................2
Statements of Operations - three months ended December 31,
1996 and 1995 and six months ended December 31, 1996 and
1995 (unaudited)....................................................3
Statement of Changes in Stockholders' Equity - six months
ended December 31, 1996 (unaudited).................................4
Statements of Cash Flows - three months ended December 31,
1996 and 1995 and six months ended December 31, 1996
and 1995 (unaudited)................................................5
Notes to Unaudited Financial Statements.............................6
Item 2. Management's Discussion and Analysis or Plan of Operation...........9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................13
Item 6. Exhibits and Reports on Form 8-K...................................13
Signatures.........................................................14
1
<PAGE>
SMARTSERV ONLINE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1996
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 1,237,851 $ 3,460,850
Accounts receivable 170,392 57,990
Inventory 30,000 --
Prepaid expenses and other receivables 155,436 68,310
----------- -----------
Total current assets 1,593,679 3,587,150
----------- -----------
Property and equipment 439,316 258,899
----------- -----------
Other assets
Deferred charges 45,000 63,000
Security deposit 81,218 81,218
----------- -----------
126,218 144,218
----------- -----------
Total Assets $ 2,159,213 $ 3,990,267
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 531,320 $ 482,851
Payroll taxes payable 21,489 14,901
Salaries payable 54,630 44,654
Deferred revenues 20,000 --
----------- -----------
Total current liabilities 627,439 542,406
----------- -----------
STOCKHOLDERS' EQUITY
Common stock - $.01 par value
Authorized - 15,000,000 shares
Issued and outstanding - 3,695,000 shares at June 30, 1996
and December 31, 1996 36,950 36,950
Additional paid-in capital 8,946,592 8,758,299
Accumulated deficit (7,451,768) (5,347,388)
----------- -----------
Total stockholders' equity 1,531,774 3,447,861
----------- -----------
Total Liabilities and Stockholders' Equity $ 2,159,213 $ 3,990,267
=========== ===========
</TABLE>
See accompanying notes.
2
<PAGE>
SMARTSERV ONLINE, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED DECEMBER 31 ENDED DECEMBER 31
-------------------------- --------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 283,257 $ -- $ 297,109 --
----------- ----------- ----------- -----------
Costs and expenses:
Costs of revenues 660,116 -- 1,020,067 --
Product development expenses -- 110,176 -- 282,723
Selling, general and administrative
expenses 953,835 239,595 1,440,899 408,252
----------- ----------- ----------- -----------
Total costs and expenses 1,613,951 349,771 2,460,966 690,975
----------- ----------- ----------- -----------
Loss from operations (1,330,694) (349,771) (2,163,857) (690,975)
----------- ----------- ----------- -----------
Other income (expense):
Interest income 24,846 -- 65,185 --
Interest expense (2,695) (166,356) (5,708) (218,291)
----------- ----------- ----------- -----------
22,151 (166,356) 59,477 (218,291)
----------- ----------- ----------- -----------
Net loss $(1,308,543) $ (516,127) $(2,104,380) $ (909,266)
=========== =========== =========== ===========
Net loss per share (Note 2) $ (0.35) $ (0.28) $ (0.57) $ (0.49)
=========== =========== =========== ===========
Weighted average shares outstanding
(Note 2) 3,695,000 1,840,000 3,695,000 1,840,000
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
3
<PAGE>
SMARTSERV ONLINE, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED DECEMBER 31, 1996
(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 -- -- -- (2,104,380) (2,104,380)
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1996 3,695,000 $ 36,950 $ 8,946,592 $(7,451,768) $ 1,531,774
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes.
4
<PAGE>
SMARTSERV ONLINE, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED DECEMBER 31 ENDED DECEMBER 31
-------------------------- --------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(1,308,543) $ (516,127) $(2,104,380) $ (909,266)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 21,425 12,383 38,326 15,004
Changes in market value of
employee options 224,555 -- 188,293 --
Accretion and noncash charges
for interest expense -- 68,137 -- 68,137
Amortization of deferred charges 9,000 -- 18,000 --
Other changes that provided (used) cash
Accounts receivable (111,360) (36,087) (112,402) (36,087)
Inventories (30,000) 2,572 (30,000) 596
Prepaid expenses and other receivables (28,545) (9,368) (87,126) (5,940)
Accounts payable and accrued liabilities 154,748 (127,416) 48,469 (30,175)
Accrued interest -- 70,905 -- 122,840
Payroll taxes payable 4,386 (113,384) 6,588 (85,693)
Salaries payable 21,779 16,385 9,976 1,231
Deferred revenues 20,000 -- 20,000 --
----------- ----------- ----------- -----------
Net cash used in operating activities (1,022,555) (632,000) (2,004,256) (859,353)
----------- ----------- ----------- -----------
INVESTING ACTIVITIES
Purchase of equipment (119,570) (19,602) (218,743) (32,476)
Software development costs -- (2,073) -- (5,149)
----------- ----------- ----------- -----------
Net cash used in investing activities (119,570) (21,675) (218,743) (37,625)
----------- ----------- ----------- -----------
FINANCING ACTIVITIES
Due from officers, net -- 2,350 -- 15,653
Proceeds from the issuance of notes -- 980,000 -- 980,000
Proceeds from the issuance of warrants -- 20,000 -- 20,000
Repayment of notes -- (25,000) -- (25,000)
Common stock subscribed -- -- -- 230,000
Deferred financing costs -- (272,553) -- (272,553)
----------- ----------- ----------- -----------
Net cash provided by financing activities -- 704,797 -- 948,100
----------- ----------- ----------- -----------
Increase (decrease) in cash and cash equivalents (1,142,125) 51,122 (2,222,999) 51,122
Cash and cash equivalents - beginning of period 2,379,976 -- 3,460,850 --
----------- ----------- ----------- -----------
Cash and cash equivalents - end of period $ 1,237,851 $ 51,122 $ 1,237,851 $ 51,122
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
5
<PAGE>
SMARTSERV ONLINE, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 1996
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, 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 six months
ended December 31, 1996 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 market for online information and transactional services is highly
competitive and subject to rapid innovation and technological change, shifting
consumer preferences and frequent new service introductions. The Company
believes that potential new competitors, including large multimedia and
information systems companies, are increasing their focus on transaction
processing. Increased competition in the market for the Company's services could
materially and adversely affect the Company's results of operations through
price reductions and loss of potential market share. The Company's ability to
compete in the future depends on its ability to maintain the technological and
performance advantages of its current distribution platform and to introduce new
applications that achieve market acceptance.
6
<PAGE>
BASIS OF PRESENTATION (CONTINUED)
- ----------------------------------
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
December 31, 1996, the Company had a subscriber base of approximately 1,500
users which is projected to grow to approximately 14,000 users by June 30, 1997;
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.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
DECEMBER 31, JUNE 30,
1996 1996
------------ ------------
Data processing equipment $ 442,587 $ 280,814
Office furniture and equipment 68,854 37,051
Display equipment 9,635 9,635
Leasehold improvements 25,167 --
------------ ------------
546,243 327,500
Accumulated depreciation (106,927) (68,601)
============ ============
$ 439,316 $ 258,899
============ ============
7
<PAGE>
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 complaint 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
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 (313,275) 5.06 - 7.08
-------- ------------------
Balance at December 31, 1996 423,250 $ 5.06 - $ 7.08
-------- ------------------
At December 31, 1996, there were 226,750 shares available for grant under the
Plan.
In the financial statements for the six month and three month periods ended
December 31, 1996, the Company recorded non-cash charges of $188,293 and
$224,555, respectively, reflecting the compensatory nature of the option grants
in accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees."
8
<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, 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 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 also 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 Bear Stearns & Co., Inc. and Schroder
Wertheim & Co., 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.
9
<PAGE>
Management anticipates that staffing requirements associated with the
implementation of its plan of operation will result in the addition of a minimum
of 6 to 8 personnel through the fiscal year ending June 30, 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 December 31, 1996, the Company had approximately 1,500 users online.
THREE MONTHS ENDED DECEMBER 31, 1996 VS. THREE MONTHS ENDED DECEMBER 31, 1995
Total revenues during the three months ended December 1996 were $283,257
compared to $0 during the three months ended December 1995. Revenues from the
sale of the Company's information services were $40,834, while revenues from the
sale of related telephone equipment for the delivery of these services to
customers were $97,489. Design, development and implementation services revenues
associated with the Company's arrangement with Schroder Wertheim were $144,934.
During the comparable 1995 quarter, the Company received design and development
fees of $48,000 which were offset against product development expenses because
the Company was considered a development stage enterprise.
The net loss increased to $1,308,543 compared to $516,127 in 1995 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
1995 period.
With the Company's recent departure from the development stage, it incurred
costs of revenues of $660,116, consisting primarily of salaries, systems
consultants, and information and communication costs. Included therein, however,
was a non-cash charge of $89,000 for the change in the market value of employee
stock options. During the corresponding period of the prior year, the Company
incurred product development expenses of $110,176, consisting primarily of
salaries. 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 $953,853 in 1996 from
$239,595 in 1995 as a result of the increase in sales and customer support
personnel, rent for additional office space, and marketing and advertising
expenditures. Such marketing and advertising costs incurred during the three
months ended December 1996 were approximately $350,000. Additionally, a non-cash
charge of $135,000 for the change in market value of employee stock options was
included in selling, general and administrative expenses for the three months
ended December 1996.
Interest income for the three months ended December 31, 1996 amounted to
$24,846. Such amounts were earned primarily from the Company's investments in
highly liquid commercial paper. Interest expense for the three months ended
December 31, 1996 was incurred in connection with an insurance financing
arrangement and amounted to $2,695. Interest expense for the three months ended
December 31, 1995, incurred in connection with the senior and subordinated notes
outstanding during the period, was $166,356.
10
<PAGE>
SIX MONTHS ENDED DECEMBER 31, 1996 VS. SIX MONTHS ENDED DECEMBER 31, 1995
During the six months ended December 1996, the Company commenced the
implementation of its marketing plan and recorded revenues of $152,175 from the
sale of its information services and the related screen-based telephones.
Additionally, the Company recorded revenues of $144,934 related to design,
development and implementation services associated with its arrangement with
Schroder Wertheim.
Also during the six months ended December 31, 1996, the Company incurred
selling, general and administrative expenses of $1,440,899, primarily for
salaries, facilities, marketing costs and professional fees. Selling, general
and administrative costs increased by $1,032,647 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 $400,000, while salary 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 of securities in March 1996.
With the Company's recent departure from the development stage, it incurred
costs of revenues of $1,020,067, consisting primarily of salaries, systems'
consultants, and information and communication costs. Of this amount,
approximately 73,000 represents a non-cash charge 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 $282,723 consisting
primarily of salaries.
Interest income for the six months ended December 31, 1996 amounted to $65,185.
Such amounts were earned primarily from the Company's investments in highly
liquid commercial paper. Interest expense for the six months ended December 31,
1996 was incurred in connection with an insurance financing arrangement and
amounted to $5,708. Interest expense for the six months ended December 31, 1995,
incurred in connection with the senior and subordinated notes outstanding during
the period, was $218,291.
11
<PAGE>
CAPITAL RESOURCES AND LIQUIDITY
The Company has commenced its marketing efforts and generated revenues of
approximately $280,000 during the quarter ended December 31, 1996. Revenues from
the Company's sales and marketing efforts are not expected to be sufficient to
support operations until the quarter ending September 1997.
The Company estimates that it has cash resources and access to sufficient
liquidity to allow it to fund its operations through September 1997. In
connection therewith, the Company has received a Term Sheet from Rickel &
Associates, the Company's Investment Advisor, with respect to a private
placement of up to $2,000,000 in convertible debentures. Such debentures bear
interest at 10% per annum and mature three years from the 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 $100,000 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 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 also 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 or
redemption by the Company could provide additional capital of approximately
$6,600,000; however, such exercise or redemption 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.
12
<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 December 31, 1996.
13
<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: FEBRUARY 13, 1997 /S/ SEBASTIAN E. CASSETTA
------------------ --------------------------
Sebastian E. Cassetta
Chairman of the Board, Chief
Executive Officer
Date: FEBRUARY 13, 1997 /S/ THOMAS W. HALLER
------------------ ---------------------
Thomas W. Haller
Chief Financial Officer, Treasurer
14
EXHIBIT 11 - STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31 SIX MONTHS ENDED DECEMBER 31
------------------------------ ------------------------------
1996 1995 1996 1995
--------------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
PRIMARY:
Average shares outstanding 3,695,000 1,775,000 3,695,000 1,775,000
Net effect of stock and warrant issuances
with exercise prices below the initial
public offering price based on the
treasury stock method -- 65,000 65,000
--------------- ----------- ------------- -------------
Total 3,695,000 1,840,000 3,695,000 1,840,000
=============== =========== ============= =============
Net loss $ (1,308,543) $ (516,127) $ (2,104,380) $ (909,266)
=============== =========== ============= =============
Per share amount $ (0.35) $ (0.28) $ (0.57) $ (0.49)
=============== =========== ============= =============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1996 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> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,237,851
<SECURITIES> 0
<RECEIVABLES> 170,392
<ALLOWANCES> 0
<INVENTORY> 185,436
<CURRENT-ASSETS> 1,593,679
<PP&E> 546,243
<DEPRECIATION> 106,927
<TOTAL-ASSETS> 2,159,213
<CURRENT-LIABILITIES> 627,439
<BONDS> 0
0
0
<COMMON> 36,950
<OTHER-SE> 1,494,824
<TOTAL-LIABILITY-AND-EQUITY> 2,159,213
<SALES> 297,109
<TOTAL-REVENUES> 362,294
<CGS> 1,020,067
<TOTAL-COSTS> 1,020,067
<OTHER-EXPENSES> 1,440,899
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,708
<INCOME-PRETAX> (2,104,380)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,104,380)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,104,380)
<EPS-PRIMARY> (0.57)
<EPS-DILUTED> (0.57)
</TABLE>
