================================================================================
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, 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 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
20, 1998 WAS 3,958,339.
================================================================================
<PAGE>
SMARTSERV ONLINE, INC.
FORM 10-QSB
INDEX
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets - June 30, 1997 and December 31, 1997 (unaudited)......2
Statements of Operations - three months ended December 31, 1997 and
1996 and six months ended December 31, 1997 and 1996 (unaudited)......3
Statement of Changes in Stockholders' Equity - six months
ended December 31, 1997 (unaudited)...................................4
Statements of Cash Flows - three months ended December 31, 1997 and
1996 and six months ended December 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....................................................16
Item 6. Exhibits and Reports on Form 8-K.....................................16
Signatures...........................................................17
<PAGE>
SMARTSERV ONLINE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1997
------------ ------------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 1,320,859 $ 93,345
Accounts receivable, net of an allowance for losses
of $6,000 at December 31, 1997 and June 30, 1997 127,162 149,782
Prepaid expenses and other receivables 41,643 90,725
------------ ------------
Total current assets 1,489,664 333,852
Property and equipment - net 693,253 743,714
Other assets 66,965 169,123
------------ ------------
Total Assets $ 2,249,882 $ 1,246,689
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 922,222 $ 829,355
Accrued liabilities 215,225 211,813
Accrued interest -- 16,323
Payroll taxes payable 7,582 20,383
Salaries payable 85,884 46,018
Current portion of capital lease obligation 71,163 86,072
Deferred revenues 36,102 24,914
------------ ------------
Total current liabilities 1,338,178 1,234,878
------------ ------------
Long-term portion of capital lease obligation 120,237 160,139
Notes payable -- 550,000
STOCKHOLDERS' EQUITY
Common stock - $.01 par value
Authorized - 15,000,000 shares
Issued and outstanding - 3,695,000 shares
at June 30, 1997 and December 31, 1997 36,950 36,950
Additional paid-in capital 15,008,392 9,046,592
Unearned compensation (1,538,625) --
Accumulated deficit (12,715,250) (9,781,870)
------------ ------------
Total stockholders' equity (deficiency) 791,467 (698,328)
------------ ------------
Total Liabilities and Stockholders' Equity (Deficiency) $ 2,249,882 $ 1,246,689
============ ============
</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
-------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 181,594 $ 283,257 $ 381,787 $ 297,109
----------- ----------- ----------- -----------
Costs and expenses:
Costs of revenues 340,713 360,175 718,685 527,360
Product development expenses 222,632 299,941 427,705 492,707
Selling, general and administrative
expenses 630,764 953,835 1,160,227 1,440,899
----------- ----------- ----------- -----------
Total costs and expenses 1,194,109 1,613,951 2,306,617 2,460,966
----------- ----------- ----------- -----------
Loss from operations (1,012,515) (1,330,694) (1,924,830) (2,163,857)
----------- ----------- ----------- -----------
Other income (expense):
Interest income 21,544 24,846 22,631 65,185
Interest expense and other
financing costs (424,869) (2,695) (1,031,181) (5,708)
----------- ----------- ----------- -----------
(403,325) 22,151 (1,008,550) 59,477
----------- ----------- ----------- -----------
Net loss $(1,415,840) $(1,308,543) $(2,933,380) $(2,104,380)
=========== =========== =========== ===========
Basic and diluted earnings per common
share (Note 2) $ (0.38) $ (0.35) $ (0.79) $ (0.57)
=========== =========== =========== ===========
Weighted average shares outstanding
(Note 2) 3,695,000 3,695,000 3,695,000 3,695,000
=========== =========== =========== ===========
</TABLE>
See accompanying notes
3
<PAGE>
SMARTSERV ONLINE, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PAID-IN UNEARNED ACCUMULATED
SHARES PAR VALUE CAPITAL COMPENSATION DEFICIT TOTAL
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1997 3,695,000 $ 36,950 $ 9,046,592 $ -- $ (9,781,870) $ (698,328)
Issuance of 4,000 Prepaid
Common Stock Purchase
Warrants, net of direct
costs of $545,000 -- -- 3,455,000 -- -- 3,455,000
Issuance of Common Stock
Purchase Warrants to a
financial consultant in
connection with the
issuance of 4,000 Prepaid
Common Stock Purchase
Warrants -- -- 1,619,600 (1,619,600) -- --
Issuance of Common Stock
Purchase Warrants in
connection with the
issuance of notes -- -- 887,200 -- -- 887,200
Amortization of unearned
compensation over the term
of the agreement -- -- -- 80,975 -- 80,975
Net loss for the period -- -- -- -- (2,933,380) (2,933,380)
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1997 3,695,000 $ 36,950 $ 15,008,392 $ (1,538,625) $(12,715,250) $ 791,467
============ ============ ============ ============ ============ ============
</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
-------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(1,415,840) $(1,308,543) $(2,933,380) $(2,104,380)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization of property
and equipment 47,264 21,425 93,337 38,326
Non-cash interest expense and other
financing costs 422,100 -- 1,037,664 --
Changes in market value of employee options -- 224,555 -- 188,293
Amortization of unearned revenues (2,377) -- (4,667) --
Amortization and write-off of deferred charges -- 9,000 63,000 18,000
Amortization of unearned compensation 80,975 -- 80,975 --
Other changes that provided (used) cash
Accounts receivable 53,764 (111,360) 22,620 (112,402)
Inventories -- (30,000) -- (30,000)
Prepaid expenses and other receivables 7,920 (28,545) 13,082 (87,126)
Accounts payable and accrued liabilities (388,198) 154,748 107,279 48,469
Accrued interest -- -- (16,323) --
Payroll taxes payable (107,524) 4,386 (23,801) 6,588
Salaries payable 51,657 21,779 39,866 9,976
Unearned revenues 3,377 20,000 15,855 20,000
Security deposit reduction -- -- 14,253 --
----------- ----------- ----------- -----------
Net cash used in operating activities (1,246,882) (1,022,555) (1,490,240) (2,004,256)
----------- ----------- ----------- -----------
INVESTING ACTIVITIES
Purchase of equipment (31,245) (119,570) (42,876) (218,743)
----------- ----------- ----------- -----------
Net cash used in investing activities (31,245) (119,570) (42,876) (218,743)
----------- ----------- ----------- -----------
FINANCING ACTIVITIES
Repayment of capital lease obligation (17,935) -- (54,811) --
Proceeds from the issuance of short-term notes -- -- 196,500 --
Proceeds from the issuance of warrants, net -- -- 2,643,941 --
Costs of the issuance of warrants -- -- (25,000) --
Proceeds from officers' loans -- -- 37,500 --
Repayment of officers' loans (12,500) -- (37,500) --
----------- ----------- ----------- -----------
Net cash provided by (used in) financing
activities (30,435) -- 2,760,630 --
----------- ----------- ----------- -----------
Increase (decrease) in cash and cash equivalents (1,308,562) (1,142,125) 1,227,514 (2,222,999)
Cash and cash equivalents - beginning of period 2,629,421 2,379,976 93,345 3,460,850
----------- ----------- ----------- -----------
Cash and cash equivalents - end of period $ 1,320,859 $ 1,237,851 $ 1,320,859 $ 1,237,851
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
5
<PAGE>
SMARTSERV ONLINE, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION
SmartServ Online, Inc. (the "Company") commenced operations on August 20, 1993.
The Company makes available online information and transactional services to
subscribers through screen-based phones, personal computers, personal digital
assistants, the Internet, interactive voice response systems, alpha-numeric
pagers and other personal communications systems. The Company also offers a
range of services designed to meet the varied needs of clients of potential
Strategic Marketing Partners, as well as potential direct subscribers,
including: business credit information, investment newsletters, stock research
reports, stock quotes, nationwide business and residential directory services,
business and financial news, sports information, research and analysis reports,
trading activity reports by insiders of corporations, online FedEx package
tracking, electronic mail, national weather reports and other business and
entertainment information. The Company's software architecture and capabilities
format information for a particular device and present the information in a
user-friendly manner.
On March 21, 1996, the Company completed an Initial Public Offering of 1,695,000
shares of $.01 par value common stock at $5.00 per share and 1,725,000 common
stock purchase warrants at $.10 per warrant. The Company received $7,058,648
from the Offering, net of the costs of issuing these securities of $1,588,852.
On September 30, 1997, the Company completed a private placement ("Placement")
of $4 million of Prepaid Common Stock Purchase Warrants ("Prepaid Warrants") as
more fully disclosed in Note 6. An integral part of this Placement was the
conversion of notes payable and accrued interest thereon, aggregating $836,059,
into such Prepaid Warrants. The net proceeds to the Company of $2,643,941 have
provided it with working capital to allow it to continue its marketing efforts.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
- ---------------------
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information,
the instructions of Form 10-QSB and Rule 310 of Regulation SB and, therefore, do
not include all information and notes necessary for a presentation of results of
operations, financial position and cash flows in conformity with generally
accepted accounting principles. The balance sheet at June 30, 1997 has been
derived from the audited financial statements at that date, but does not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. The financial statements should be
read in conjunction with the Company's Annual Report on Form 10-KSB/A for the
year ended June 30, 1997. In the opinion of the Company, all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation have
been made. Results of operations for the six months ended December 31, 1997 are
not necessarily indicative of those expected for the year ending June 30, 1998.
The Company has completed development of its information platform and
communications software and exited the developmental stage; however, it has yet
to generate significant revenues. The Company has incurred recurring operating
losses and its operations have not produced a positive cash flow.
6
<PAGE>
Additionally, there is no assurance that the Company will generate future
revenues or cash flow from operations.
Reclassifications
- -----------------
Certain amounts in the 1996 financial statements have been reclassified to
conform to the 1997 presentation.
Basic and Diluted Earnings Per Share
- ------------------------------------
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, Earnings per Share. Statement 128 replaced the
previously reported primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants, and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts for
all periods have been presented, and where necessary, restated to conform to the
Statement 128 requirements. The weighted-average shares outstanding are
determined as the mean average of the shares outstanding and assumed to be
outstanding during the period.
Recent Accounting Pronouncements
- --------------------------------
In February 1997, the FASB issued Statement No. 129, Disclosure of Information
about Capital Structure. This Statement established standards for disclosing
information about an entity's capital structure. This statement is effective for
fiscal years ending on or after December 15, 1997. The Company plans to adopt
and apply the provisions of this statement for the fiscal year ending June 30,
1998. The resulting effect of the application of this statement is not expected
to have a material impact on the financial statements.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1997
--------- ---------
<S> <C> <C>
Data processing equipment $ 606,653 $ 564,098
Data processing equipment purchased under a capital lease 246,211 246,211
Office furniture and equipment 69,196 69,196
Display equipment 9,635 9,635
Leasehold improvements 36,678 36,357
--------- ---------
968,373 925,497
Accumulated depreciation, including $32,828 and $8,207 at
December 31, 1997 and June 30, 1997, respectively, for
equipment purchased under a capital lease (275,120) (181,783)
========= =========
$ 693,253 $ 743,714
========= =========
</TABLE>
4. NOTES PAYABLE
On May 29, 1997, the Company entered into a line of credit facility with a
financial institution for a maximum borrowing thereunder of $550,000. Borrowings
under this facility were to be repaid on August 27, 1997, along with interest at
the rate of 24% per annum. On July 21, 1997 and September 16, 1997, the facility
was amended to provide for additional borrowings of up to $222,222. On September
7
<PAGE>
30, 1997, notes payable of $772,222 and accrued interest thereon of $63,837 were
converted into the Company's Prepaid Warrants as more fully described in Note 6.
In conjunction with the origination of the line of credit facility, the Company
issued 250,000 Common Stock Purchase Warrants to the financial institution.
Similarly, the Company issued 50,500 warrants for each of the July and September
amendments. As a result of the Company's default on the note in August, the
Company was required to issue 300,500 "default" warrants to such institution.
These 651,500 warrants were issued at exercise prices ranging from $1.125 to
$2.825 and expire in September 2002. Certain of the warrants contain variable
exercise provisions predicated on the price of the Company's Common Stock at the
time of exercise. Accordingly, the exercise price of the warrants has been
adjusted at December 31, 1997 to a maximum of $0.75, the closing price of the
Company's Common Stock at that date. Since compensation expense varies with the
changes in the market value of the underlying common stock the warrants have
been revalued in accordance with the Black-Scholes pricing methodology and
recorded in the statement of operations as financing costs.
5. LOANS PAYABLE TO OFFICERS
Loans payable to officers of the Company were non-interest bearing and due on
demand. The last of such loans was repaid on October 2, 1997.
6. EQUITY TRANSACTIONS
On September 30, 1997, The Zanett Securities Company ("Zanett"), acting as
placement agent for the Company, completed the private placement ("Placement")
of $4 million of the Company's Prepaid Common Stock Purchase Warrants ("Prepaid
Warrants"). The sale of these Prepaid Warrants was exempt from the registration
requirements of the Securities Exchange Act pursuant to Regulation D thereof.
Each Prepaid Warrant entitles the holder to purchase that number of shares of
Common Stock that is equal to $1,000 divided by the applicable exercise price.
Such exercise price is determined initially as 70% of the average closing bid
price of the Common Stock for the 10 trading days ending on the day prior to
exercise of the Prepaid Warrants. Additionally, the exercise discount shall be
increased by 1% for each subsequent 60 day period that the Prepaid Warrants
remain unexercised. The exercise price, however, shall never exceed $1.40. The
Prepaid Warrants may be exercised on the earlier of the date upon which a
registration statement is declared effective by the SEC or December 29, 1997.
The sale of Common Stock issued upon exercise of such Warrants is restricted to
one-third for the first 60, 90 and 120 days subsequent to the registration
statement becoming effective. The Prepaid Warrants expire on September 30, 2002.
Terms of the Placement included the conversion by Zanett of notes payable in the
amount of $772,222 and accrued interest thereon of $63,837 into Prepaid
Warrants. The net proceeds of the Placement of $2,643,941 are being used for
general working capital requirements.
As compensation for its services, Zanett received a placement fee and an
unaccountable expense allowance of 10% ($400,000) and 3% ($120,000),
respectively, of the gross proceeds of the Placement. Additionally, the Company
issued 600,000 Common Stock Purchase Warrants to Zanett that are exercisable at
$1.125 per share of Common Stock. These warrants expire on September 30, 2002.
Also in conjunction with the Placement, the Company entered into an agreement
with a financial consultant who is an affiliate of Zanett Lombardier, Ltd, an
investor in the Prepaid Warrants. During the five-year term of the agreement
such consultant will provide the Company with advisory services relating to
financial and strategic ventures and alliances, investment banking and general
financial
8
<PAGE>
advisory services, and advice and assistance with the Company's market
development activities. As compensation for these services, the Company
authorized the issuance of 3,555,555 Common Stock Purchase Warrants to this
consultant that are exercisable at $1.125 per share of Common Stock. Of such
amount, the issuance of 3,055,555 Common Stock Purchase Warrants is contingent
upon the approval of the Company's shareholders. At September 30, 1997, the
Company valued these warrants using the Black-Scholes pricing methodology at
approximately $4,400,000. However, since the issuance of 3,055,555 Common Stock
Purchase Warrants requires the approval of the Company's shareholders, the
measurement of compensation expense varies with changes in the market value of
the underlying stock. Accordingly, unearned compensation has been adjusted to
$1,619,600 at December 31, 1997. Such amount has been recorded in stockholders'
equity as unearned compensation and will be amortized to income over the
five-year term of the agreement. These warrants expire on September 30, 2002.
7. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31 SIX MONTHS ENDED DECEMBER 31
-------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Numerator:
Net loss $(1,415,840) $(1,308,543) $(2,933,380) $(2,104,380)
=========== =========== =========== ===========
Denominator:
Weighted-average shares 3,695,000 3,695,000 3,695,000 3,695,000
=========== =========== =========== ===========
Basic and diluted earnings per
common share $ (0.38) $ (0.35) $ (0.79) $ (0.57)
=========== =========== =========== ===========
</TABLE>
At December 31, 1997 there were, exclusive of the Common Stock Purchase Warrants
issued in connection with the issuance of notes payable (Note 4) and the Prepaid
Warrants (Note 6), 2,462,500 Common Stock Purchase Warrants outstanding. Such
warrants have exercise prices ranging from $2.00 to $12.00 per share and expire
from March 2001 through September 2002. None of these warrant issuances have
been included in the computation of diluted loss per share because their
inclusion would be antidilutive. Additionally, the Company has established an
employee stock option plan for the benefit of directors, employees and
consultants to the Company. These options are intended to qualify as incentive
stock options within the meaning of Section 422 of the Internal Revenue Code, as
amended, or as nonqualified stock options. The options are generally exercisable
after one year from date of grant and no options may be granted after April 15,
2006. The Board of Directors has authorized the issuance of up to 650,000
options, 200,000 of which are subject to stockholder approval. At December 31,
1997, there are options outstanding for the purchase of 303,475 shares of the
Company's Common Stock.
SUBSEQUENT EVENTS
Subsequent to December 31, 1997, investors in the Company's Prepaid Warrants
converted $175,000 of such warrants into 263,339 shares of Common Stock at
exercise prices of $0.515 and $0.850 per share.
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
screen-based telephones, personal computers, personal digital assistants, the
Internet, interactive voice response systems, alpha-numeric paging devices and
other personal communications systems to clients of potential Strategic
Marketing Partners, as well as to prospective direct subscribers. The Company
has exited from the development stage with the completion of its software
architecture and product offering and has commenced the implementation of its
marketing strategies.
The Company's business plan focuses on the strategy of marketing its services in
partnership with those companies that have an economic incentive to provide the
Company's information platform to their customers. Through the use of this
model, the consumer is a customer of both SmartServ and its Strategic Marketing
Partner. The Company also believes that the sale of its information platform
through the cooperative efforts of partners with more recognizable brand names
than its own is important to its success.
The Company's plan of operation includes programs for marketing simultaneously
at two distinct levels. At the first level, the Company is developing strategic
marketing relationships with key partners that provide access to large numbers
of potential subscribers for its monthly services. These partners include
regional telephone operating companies, long distance carriers, telephone
equipment manufacturers and others who distribute screen telephone equipment,
market local screen telephone services or otherwise benefit from the increased
acceptance of these devices. Screen phones were developed to facilitate the use
of caller ID, call waiting and other services offered at a premium by the
telephone companies. To these partners, the Company's services are perceived as
a means of increasing interest in and sales of screen telephones, and there is
thus a strong incentive to promote the Company's services as a value-added
benefit. In September 1997, the Company signed a 3 year contract with
Sprint/United Management Company ("Sprint") for the delivery of the Company's
information services into additional markets beyond the initial trial city--Las
Vegas. In December 1997, Sprint commenced the deployment of the Company's
services in three Florida markets. The Company anticipates that this will result
in the deployment of the Company's information services in New York, North
Carolina, Chicago, Los Angeles and other designated markets as part of a
national campaign.
The Company has also signed an agreement with CIDCO Incorporated, a leading
marketer of screen-based phones and other Caller ID devices, whereby CIDCO will
offer the Company's suite of online financial and entertainment information to
buyers of the CIDCO CST 2100 screen phone. These services are to marketed as
"CIDCO Personal Information Services". CIDCO clients include Southwestern Bell
and Bell Atlantic.
The Company is also working with businesses, such as brokerage firms, that need
to disseminate proprietary information more effectively to their existing client
base. The Company's information platform and communications architecture allows
the bundling of its partners' proprietary information with its own value-added
information, and makes this package available to subscribers 24 hours per day,
365 days per year. The Company is currently working with Schroder & Co. Inc.
("Schroder") in an effort to provide proprietary account information to the
customers of its correspondent relationships. As a direct result of this
relationship, the Company is providing its stock quote product and online
trading services to the customers of a correspondent relationship. Additionally,
the Company has an agreement with another Schroder correspondent firm to make
the Company's "BrokerNet" program available to its 400 independent stockbrokers.
At the second level, the Company has initiated a direct marketing program for
its SmartServ "Pro" stock quote services. The response to advertisements in
Investors' Business Daily and television commercials run on cable station CNBC
have demonstrated that a strong and active market exists for this information.
Management believes that most of the Company's revenues will ultimately be
derived from end users who purchase the Company's services through Strategic
Marketing Partners with mass distribution
10
<PAGE>
capabilities. The Company anticipates that Strategic Marketing Partners will
brand the Company's "bundled" information services with their own private label,
promote the packaged offering and then distribute the Company's information
package on screen-based phones, PCs, PDAs, the Internet, interactive voice
response systems, alpha-numeric pagers and other PCS devices to their clients.
The Company has the ability to customize the information package to be offered
to each Strategic Marketing Partner, and in turn to their end users.
The market for online information and transactional services is highly
competitive and subject to rapid innovation and technological change, shifting
consumer preferences and frequent new service introductions. The Company
believes that potential new competitors, including large multimedia and
information systems companies, are increasing their focus on transaction
processing. Increased competition in the market for the Company's services could
materially and adversely affect the Company's results of operations through
price reductions and loss of potential market share. The Company's ability to
compete in the future depends on its ability to maintain the technological and
performance advantages of its current distribution platform and to introduce new
applications that achieve market acceptance.
Notwithstanding the execution of a contract with Sprint and the continual
discussions with potential Strategic Marketing Partners about potential
marketing relationships, there can be no assurance that the Company's products
and services will continue to be accepted in the marketplace by the ultimate
consumers.
Management anticipates that staffing requirements associated with the
implementation of its plan of operation will result in the addition of a minimum
of 3 to 6 personnel during the period ending June 30, 1998. Such personnel will
be added to assist with the programming requirements of Strategic Marketing
Partners' product offerings and for customer support.
RESULTS OF OPERATIONS
During the fiscal year ended June 30, 1997, the Company commenced the
implementation of its marketing strategies. At December 31, 1997, the Company
has approximately 3,500 customers.
QUARTER ENDED DECEMBER 31, 1997 VS. QUARTER ENDED DECEMBER 31, 1996
During the quarter ended December 31, 1997, total revenues amounted to $181,594,
consisting primarily of subscription fees for the SmartServ Online "Pro"
real-time stock quote service ($136,800) and sales generated from the Company's
relationships with Sprint ($24,500) and Schroder ($17,500). In September 1996,
the Company commenced the implementation of its marketing plan with a national
advertising campaign. Total revenues during the quarter ended December 1996 were
$283,257, consisting of subscription fees from the sale of the Company's
information services of $40,834, revenues from the sale of related telephone
equipment for the delivery of these services to customers of $97,489, and fees
for the enhancement, implementation, and marketing of services associated with
the Company's arrangement with Schroder of $144,934.
During the quarter ended December 31, 1997, the Company incurred costs of
revenues of $340,713. Such costs consisted primarily of information and
communication costs ($132,600), personnel costs ($92,300), and computer hardware
leases, depreciation and maintenance ($102,800). During the quarter ended
December 31, 1996, the costs of revenues were $360,175. Such costs consisted
primarily of information and communication costs ($60,000), personnel costs
($146,700), computer hardware leases, depreciation and maintenance ($38,100),
and purchases of screen-based phones for resale ($87,600).
11
<PAGE>
Included in personnel costs in 1996 is a non-cash charge of $35,600 for the
change in the market value of employee stock options.
Product development expenses were $222,632 vs. $299,941 for the quarter ended
December 31, 1996. Such costs consisted primarily of personnel costs ($130,600)
and computer systems consultants ($78,800). During the quarter ended December
31, 1996, such product development expenses consisted primarily of personnel
costs ($220,100) and systems consultants ($71,600). Included in personnel costs
for the quarter ended December 31, 1996 is a non-cash charge of $53,400 for the
change in the market value of employee stock options.
During the quarter ended December 31, 1997, the Company incurred selling,
general and administrative expenses of $630,764 vs. $953,835 for the quarter
ended December 31, 1996. Such costs were incurred primarily for personnel costs
($266,200), facilities ($50,200), marketing and advertising costs ($41,700),
professional fees ($209,100), and telecommunications costs ($40,000). Included
in professional fees is an $80,975 non-cash charge for the amortization of
unearned compensation associated with the issuance of Common Stock Purchase
Warrants to a financial consultant. During the quarter ended December 31, 1996,
the Company commenced an effort to build an infrastructure capable of supporting
its operations and the marketing and advertising of its information product
offering. Such costs were incurred primarily for advertising and marketing
($312,700), personnel costs ($377,500), professional fees ($127,300) and
telecommunications costs ($19,800). Included in personnel costs in 1996 is a
non-cash charge of $135,000 for the change in market value of employee stock
options.
Interest income for the quarter ended December 31, 1997 amounted to $21,544 vs.
$24,846 for the quarter ended December 31, 1996. During the quarter ended
December 31, 1997 such amounts were earned from the Company's investments in
highly rated bank certificates of deposit while during the quarter ended
December 31, 1996 such amounts were earned primarily from the Company's
investments in highly liquid commercial paper. During the quarter ended December
31, 1997 interest and financing costs included a non-cash charge of $422,100 for
the revaluation of certain Common Stock Purchase Warrants issued in connection
with the Company's May 1997 line of credit facility.
SIX MONTHS ENDED DECEMBER 31, 1997 VS. SIX MONTHS ENDED DECEMBER 31, 1996
During the six months ended December 31, 1997, the Company recorded revenues of
$381,787, consisting of $261,700 from the sale of subscriptions to its
information services, $55,000 from enhancement, implementation, and marketing
services associated with its arrangement with Schroder, and $53,700 from the
Company's relationship with Sprint. The Company commenced the implementation of
its marketing plan during the six months ended December 1996, and recorded
revenues of $152,100 from the sale of its information services and the related
screen-based telephones. Additionally, the Company recorded revenues of $145,000
related to the enhancement, implementation and marketing of services associated
with its arrangement with Schroder.
During the six months ended December 31, 1997, the Company incurred costs of
revenues of $718,685. Such costs consisted primarily of information and
communication costs ($323,100), personnel costs ($183,800), and computer
hardware leases, depreciation and maintenance ($182,600). During the six months
ended December 31, 1996, the costs of revenues were $527,360. Such costs
consisted primarily of information and communication costs ($97,200), personnel
costs ($228,600), and computer hardware leases, depreciation and maintenance
($76,500), and purchases of screen-based phones for resale ($95,500). Included
in personnel costs in 1996 is a non-cash charge of $29,200 for the change in the
market value of employee stock options.
Product development expenses were $427,705 during the six months ended December
31, 1997 vs. $492,707 for the six months ended December 31, 1996. Such costs
consisted primarily of personnel costs ($275,000) and computer systems
consultants ($132,700). During the six months ended December 31, 1996, such
product development expenses consisted primarily of personnel costs ($342,300)
and systems consultants ($133,300). Included in personnel costs in 1996 is a
non-cash charge of $43,800 for the change in the market value of employee stock
options.
12
<PAGE>
During the six months ended December 31, 1997, the Company incurred selling,
general and administrative expenses of $1,160,227, primarily for personnel costs
($478,200), facilities ($98,800), marketing and advertising costs ($78,900), and
professional fees ($336,200). Included in professional fees is a non-cash charge
of $63,000 for the write-off of prepaid consulting fees incurred in connection
with the Company's Initial Public Offering of Securities and an $80,975 non-cash
charge for the amortization of unearned compensation associated with the
issuance of Common Stock Purchase Warrants to a financial consultant. Selling,
general and administrative expenses for the six months ended December 31, 1996
were $1,440,899. Such costs consisted primarily of personnel costs ($491,400),
facilities ($75,000), marketing and advertising costs ($418,100), and
professional fees ($257,400). Included in personnel costs for 1996 was a
non-cash charge of approximately $115,000 related to the change in value of
employee stock options.
Interest income for the six months ended December 31, 1997 amounted to $22,631
vs. $65,185 for the six months ended December 31, 1996. During the six months
ended December 31, 1997, such amounts were earned from the Company's investments
in highly rated bank certificates of deposit while during the six months ended
December 31, 1996, such amounts were earned primarily from the Company's
investments in highly liquid commercial paper. Interest and financing costs for
the six months ended December 31, 1997 were $1,031,181. Such amounts were
incurred primarily in connection with the issuance of short-term notes payable
and associated Common Stock Purchase Warrants. The Common Stock Purchase
Warrants have been recorded in the financial statements in accordance with the
Black-Scholes pricing methodology. Interest costs for the six months ended
December 31, 1996 were incurred in connection with an insurance financing
agreement and amounted to $5,708.
CAPITAL RESOURCES AND LIQUIDITY
Since inception of the Company on August 20, 1993 through March 21, 1996, the
date of the IPO, the Company had funded its operations through a combination of
private debt and equity financings totaling $2,900,000 and $300,000,
respectively.
The IPO of 1,695,000 common shares and 1,725,000 common stock purchase warrants
on March 21, 1996 provided the Company with gross proceeds of $8,647,500. Direct
costs associated with the IPO were approximately $1,589,000.
During the first half of the year ended June 30, 1997, the Company's operations
were funded through the proceeds of the March 1996 IPO and revenues generated
from the Company's marketing and advertising programs. Commencing with the
second half of 1997, the Company experienced both equity and working capital
constraints resulting from the information delivery system's inability to
support and retain the volume of users generated by the Company's marketing and
advertising programs. In May 1997, the Company arranged a line of credit
facility with a financial institution. Such line of credit was originated for a
maximum borrowing amount of $550,000. In July and September 1997, the facility
was amended to allow for additional borrowings of up to $222,222. In conjunction
with the origination of the line of credit facility, the Company issued 250,000
Common Stock Purchase Warrants to the financial institution. Similarly, the
Company issued 50,500 warrants for each of the July and September amendments. As
a result of the Company's default on the note in August, the Company was
required to issue 300,500 "default" warrants to such institution. These 651,500
warrants were issued at exercise prices ranging from $1.125 to $2.825 and expire
in September 2002. Certain of the warrants contain variable exercise provisions
predicated on the price of the Company's common stock at the time of exercise.
Accordingly, the exercise price of the warrants has been adjusted at December
31, 1997 to a maximum of $0.75, the closing price of the Company's common stock
at that date. Since compensation expense varies with the changes in the market
value of the underlying common stock the warrants have been revalued in
accordance with the Black-Scholes pricing methodology and recorded in the
statement of operations as financing costs.
13
<PAGE>
In May 1997, the Company entered into a 3 year noncancelable capital lease for
certain computer equipment used to provide information services. The cost of
this equipment ($246,211) is being financed through the manufacturer's finance
division.
On September 30, 1997, The Zanett Securities Company ("Zanett"), acting as
placement agent for the Company, completed a private placement ("Placement") of
$4 million of the Company's Prepaid Common Stock Purchase Warrants ("Prepaid
Warrants"). The sale of these Prepaid Warrants was exempt from the registration
requirements of the Securities Act of 1933, as amended, pursuant to Regulation
D. Each Prepaid Warrant entitles the holder to purchase that number of shares of
Common Stock that is equal to $1,000 divided by the applicable exercise price.
Such exercise price is determined initially as 70% of the average closing bid
price of the Common Stock for the 10 trading days ending on the day prior to
exercise of the Prepaid Warrants. Additionally, the exercise discount shall by
increased by 1% for each subsequent 60 day period that the Prepaid Warrants
remain unexercised. The exercise price, however, shall never exceed $1.40. The
Prepaid Warrants may be exercised on the earlier of the date upon which a
registration statement is declared effective by the SEC or December 29, 1997.
The sale of Common Stock issued upon exercise of the Prepaid Warrants is
restricted to one-third for the first 60, 90 and 120 days subsequent to the
registration statement becoming effective. The Prepaid Warrants expire on
September 30, 2000.
As compensation for the successful completion of the Placement, Zanett received
a placement fee and an unaccountable expense allowance of 10% and 3%,
respectively, of the gross proceeds of the Placement. Additionally, the Company
issued 600,000 Common Stock Purchase Warrants to Zanett that are exercisable at
$1.125 per share of Common Stock.
Also in conjunction with the Placement, the Company entered into an agreement
with a financial consultant who is an affiliate of Zanett Lombardier, Ltd, an
investor in the Prepaid Warrants. During the five-year term of the agreement
this consultant will provide the Company with advisory services relating to
financial and strategic ventures and alliances, investment banking and general
financial advisory services, and advice and assistance with the Company's market
development activities. As compensation for these services, the Company
authorized the issuance of 3,555,555 Common Stock Purchase Warrants to this
consultant that are exercisable at $1.125 per share of Common Stock. Of such
amount, the issuance of 3,055,555 Common Stock Purchase Warrants is contingent
upon the approval of the Company's shareholders. At September 30, 1997, the
Company valued these warrants using the Black-Scholes pricing methodology at
approximately $4,400,000. However, since the issuance of 3,055,555 Common Stock
Purchase Warrants requires the approval of the Company's shareholders, the
measurement of compensation expense varies with changes in the market value of
the underlying stock. Accordingly, unearned compensation has been adjusted to
$1,619,600 at December 31, 1997. Such amount has been recorded in stockholders'
equity as unearned compensation and will be amortized to income over the
five-year term of the agreement. These warrants expire on September 30, 2002.
As part of the Placement, Zanett converted notes payable of $772,222, issued
pursuant to a Line of Credit Agreement dated May 29, 1997, as amended, and
accrued interest thereon of $63,837 into Prepaid Warrants. The net proceeds of
the Placement of $2,643,941 are being used for general working capital
requirements.
The Company has entered into a 3 year contract with Sprint and is currently
negotiating agreements with several major stock brokerage firms. The Company's
management believes that upon the successful implementation of its marketing
plan, sufficient revenues will be generated to meet operating requirements.
Management also believes that the successful execution of its proposed plan of
operations will generate sufficient cash flow from operations to enable the
Company to offer its services on an economically sound basis; however, no
assurance can be given that such goals will be obtained or that any expected
revenues or cash flows will be forthcoming.
14
<PAGE>
Management estimates that, without a significant increase in revenues, net
proceeds from the Placement will be sufficient to support the Company's
operations through April 1998. The Company intends to seek additional sources of
capital and liquidity through collaborative agreements, through the conversion
of the outstanding Common Stock Purchase Warrants or through public or private
financing; however, there can be no assurance that additional financing will be
available on acceptable terms or at all.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
- ----------------------------------------------
From time to time, information provided by the Company, statements made by its
employees or information included in its filings with the Securities and
Exchange Commission (including this Form 10-QSB) may contain statements which
are not historical facts, so-called "forward looking statements". These
forward-looking statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. The Company's actual
future results may differ significantly from those stated in any forward-looking
statements. Forward-looking statements involve a number of risks and
uncertainties, including, but not limited to, product demand, pricing, market
acceptance, litigation, intellectual property rights, risks in product and
technology development, product competition, limited number of customers, key
personnel, and other risk factors detailed in this Quarterly Report on Form
10-QSB and in the Company's other Securities and Exchange Commission filings.
15
<PAGE>
PART 2. OTHER INFORMATION
SMARTSERV ONLINE, INC.
ITEM 1. LEGAL PROCEEDINGS
On or about December 15 1997, Steven T. Francesco, then President and Chief
Operating Officer of the Company, filed a complaint against the Company,
Sebastian E. Cassetta (its Chairman of the Board and Chief Executive Officer),
Bruno Guazzoni, Claudio Guazzoni, Zanett Securities, Inc. and Zanett Capital,
Inc. in the Supreme Court of the State of New York, County of New York. In the
amended complaint, which was served on or about December 29, 1997, Mr. Francesco
alleged, among other things, that the Company breached the terms of its
employment agreement with him. The amended complaint seeks damages against the
Company in an unspecified amount and injunctive relief. On February 6, 1998 the
Board of Directors terminated Mr. Francesco's employment with the Company as its
President and Chief Operating Officer. The Company has moved the Court to
dismiss certain of the claims against it. That motion is currently pending. No
disclosure in this action has yet been noticed or taken. The Company will
vigorously defend this action.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8 - K
(a) The following exhibits are included herein:
Exhibit 27 - Financial Data Schedule
(b) REPORTS OF FORM 8-K
Since the end of the fiscal quarter ended September 30, 1997, the
Company filed an amended Current Report on Form 8-K/A reporting Item
5 and containing a pro forma balance sheet as at August 31, 1997, as
well as a Current Report on Form 8-K dated February 11, 1998.
16
<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 23, 1998 /S/ SEBASTIAN E. CASSETTA
----------------- ----------------------------------
Sebastian E. Cassetta
Chairman of the Board, Chief
Executive Officer
Date: FEBRUARY 23, 1998 /S/ THOMAS W. HALLER
----------------- ----------------------------------
Thomas W. Haller
Chief Financial Officer, Treasurer
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1997 FINANCIAL STATMENTS 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-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,320,859
<SECURITIES> 0
<RECEIVABLES> 133,162
<ALLOWANCES> 6,000
<INVENTORY> 41,643
<CURRENT-ASSETS> 1,489,664
<PP&E> 968,373
<DEPRECIATION> 275,120
<TOTAL-ASSETS> 2,249,882
<CURRENT-LIABILITIES> 1,338,178
<BONDS> 120,237
0
0
<COMMON> 36,950
<OTHER-SE> 754,517
<TOTAL-LIABILITY-AND-EQUITY> 2,249,882
<SALES> 381,787
<TOTAL-REVENUES> 381,787
<CGS> 1,146,390
<TOTAL-COSTS> 1,146,390
<OTHER-EXPENSES> 1,160,227
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,031,181
<INCOME-PRETAX> (2,933,380)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,933,380)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,933,380)
<EPS-PRIMARY> (0.79)
<EPS-DILUTED> (0.79)
</TABLE>
