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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 MARCH 31, 1999
COMMISSION FILE NUMBER 0-28008
SMARTSERV ONLINE, INC.
- --------------------------------------------------------------------------------
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3750708
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
METRO CENTER, ONE STATION PLACE, STAMFORD, CONNECTICUT 06902
- --------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(203) 353-5950
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE)
YES ______ NO X
THE NUMBER OF SHARES OF COMMON STOCK, $.01 PAR VALUE, OUTSTANDING AS OF
SEPTEMBER 27, 1999 WAS 1,379,769.
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<PAGE>
FORM 10-QSB
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<S> <C>
Balance Sheets - June 30, 1998 and March 31, 1999 (unaudited).......................................2
Statements of Operations - three months ended March 31, 1999 and
1998 and nine months ended March 31, 1999 and 1998 (unaudited)......................................4
Statement of Changes in Stockholders' Deficiency - nine months
ended March 31, 1999 (unaudited)....................................................................5
Statements of Cash Flows - three months ended March 31, 1999 and
1998 and nine months ended March 31, 1999 and 1998 (unaudited)......................................7
Notes to Unaudited Financial Statements.............................................................8
Item 2. Management's Discussion and Analysis or Plan of Operation..........................................16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................................................22
Item 2. Changes in Securities and Use of Proceeds..........................................................23
Item 6. Exhibits and Reports on Form 8-K...................................................................24
Signatures.........................................................................................25
</TABLE>
1
<PAGE>
SMARTSERV ONLINE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1999 1998
-------------------- -------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash $ 152,455 $ 354,225
Accounts receivable, net of an allowance for losses
of $-0- at March 31, 1999 and June 30, 1998 59,470 111,051
Prepaid expenses 59,986 130,603
-------------------- -------------------
Total current assets 271,911 595,879
-------------------- -------------------
Property and equipment - net 627,657 610,537
Other assets
Capitalized software development costs - net of accumulated
amortization of $49,212 623,573 --
Deferred financing costs 82,047 --
Security deposits 70,437 70,437
-------------------- -------------------
776,057 70,437
-------------------- -------------------
Total Assets $ 1,675,625 $ 1,276,853
==================== ===================
SEE ACCOMPANYING NOTES.
</TABLE>
2
<PAGE>
SMARTSERV ONLINE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1999 1998
-------------------- -------------------
(UNAUDITED)
<S> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities
Notes payable $ 616,794 --
Accounts payable 1,128,412 $ 800,545
Accrued liabilities 1,473,502 736,137
Accrued interest payable 17,583 --
Payroll taxes payable 3,691 4,294
Salaries payable 48,571 53,014
Current portion of capital lease obligation 84,272 76,127
Due to Data Transmission Network Corporation 1,408,287 --
Deferred revenues 855,650 776,049
-------------------- -------------------
Total current liabilities 5,636,762 2,446,166
-------------------- -------------------
Long-term portion of capital lease obligation 7,828 77,548
STOCKHOLDERS' DEFICIENCY
Preferred Stock - $.01 par value
Authorized - 1,000,000 shares
Issued and outstanding - none
Common Stock - $.01 par value
Authorized - 40,000,000 shares
Issued and outstanding - 836,227 shares at
June 30, 1998 and 1,199,787 shares
at March 31, 1999 11,998 8,362
Common stock subscribed 1,812,554 --
Notes receivable from officers (1,812,554) --
Additional paid-in capital 20,376,144 18,184,580
Deferred financing costs (1,024,707) --
Unearned compensation (3,744,159) (4,617,924)
Accumulated deficit (19,588,241) (14,821,879)
-------------------- -------------------
Total stockholders' deficiency (3,968,965) (1,246,861)
-------------------- -------------------
Total Liabilities and Stockholders' Deficiency $ 1,675,625 $ 1,276,853
==================== ===================
SEE ACCOMPANYING NOTES.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
SMARTSERV ONLINE, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS NINE MONTHS
ENDED MARCH 31 ENDED MARCH 31
------------------------------------------------------------------------------
1999 1998 1999 1998
------------------ ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Revenues $334,624 $231,309 $1,028,353 $613,096
------------------ ----------------- ---------------- -----------------
Costs and expenses:
Costs of revenues 212,997 323,579 602,518 1,042,264
Product development expenses 81,389 218,727 132,605 646,432
Selling, general and administrative
expenses 999,466 753,501 2,832,021 1,913,728
------------------ ----------------- ---------------- -----------------
Total costs and expenses 1,293,852 1,295,807 3,567,144 3,602,424
------------------ ----------------- ---------------- -----------------
Loss from operations (959,228) (1,064,498) (2,538,791) (2,989,328)
------------------ ----------------- ---------------- -----------------
Other income (expense):
Interest income 864 10,883 3,772 33,514
Interest expense and other
financing costs (1,420,546) (182,088) (2,231,343) (857,169)
------------------ ----------------- ---------------- -----------------
(1,419,682) (171,205) (2,227,571) (823,655)
------------------ ----------------- ---------------- -----------------
Net loss $ (2,378,910) $(1,235,703) $ (4,766,362) $ (3,812,983)
================== ================= ================ =================
Comprehensive loss $ (2,378,910) $ (1,235,703) $ (4,766,362) $ (3,812,983)
================== ================= ================ =================
Basic and diluted earnings per common
share $ (1.98) $ (1.78) $ (4.45) $ (5.67)
================== ================= ================ =================
Weighted average shares outstanding 1,198,563 695,601 1,072,264 672,253
================== ================= ================ =================
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
<TABLE>
<CAPTION>
SMARTSERV ONLINE, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
NINE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
NOTES
COMMON STOCK COMMON RECEIVABLE ADDITIONAL DEFERRED
PAR STOCK FROM PAID-IN FINANCING UNEARNED ACCUMULATED
SHARES VALUE SUBSCRIBED OFFICERS CAPITAL COSTS COMPENSATION DEFICIT
------------------- ----------- ------------ ------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1998 836,227 $8,362 -- -- $18,184,580 -- $(4,617,924) $(14,821,879)
Conversion of 276.67
Prepaid Common Stock
Purchase Warrants into
Common Stock 178,560 1,786 -- -- (1,786) -- -- --
Issuance of Common Stock to
Prepaid Warrant holders
as consideration for
amending certain terms
and conditions 60,000 600 -- -- 146,713 -- -- --
Issuance of Common Stock
Purchase Warrants in
connection with
prepayments made by a
marketing partner -- -- -- -- 6,300 -- -- --
Issuance of 1,100,000
Common Stock Purchase
Warrants in connection
with the issuance of 8%
convertible notes -- -- -- -- 1,573,000 (1,573,000) -- --
Beneficial conversion
feature of 8%
convertible notes -- -- -- -- 550,000 -- -- --
Issuance of Common Stock in
partial settlement of
litigation 125,000 1,250 -- -- 131,500 -- -- --
Issuance of Common Stock
Purchase Warrants in
partial settlement of
litigation -- -- -- -- 13,000 -- -- --
Amortization of unearned
compensation over the
term of the consulting
agreement -- -- -- -- -- -- 873,765 --
Amortization of deferred
financing costs incurred
in connection with the
issuance of 8%
convertible notes -- -- -- -- -- 548,293 -- --
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
SMARTSERV ONLINE, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
NINE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
NOTES
COMMON STOCK COMMON RECEIVABLE ADDITIONAL DEFERRED
PAR STOCK FROM PAID-IN FINANCING UNEARNED ACCUMULATED
SHARES VALUE SUBSCRIBED OFFICERS CAPITAL COSTS COMPENSATION DEFICIT
------------------- ----------- ------------ ------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Common Stock subscriptions
and notes receivable in
connection with
officers' employment
agreements -- -- 1,812,554 (1,812,554) -- -- -- --
Revaluation of employee
stock options to market -- -- -- -- 38,837 -- -- --
Issuance of 40,833 Common
Stock Purchase Warrants
to a financial consultant
as compensation for
services rendered -- -- -- -- 59,000 -- -- --
Redemption of Prepaid
Common Stock Purchase
Warrants -- -- -- -- (325,000) -- -- --
Net loss for the period -- -- -- -- -- -- -- (4,766,362)
---------- -------- ----------- ------------ ------------- ------------- -------------- --------------
Balance at March 31, 1999 1,199,787 $11,998 $1,812,554 $(1,812,554) $20,376,144 $(1,024,707) $ (3,744,159) $(19,588,241)
========== ======== =========== ============ ============= ============= ============== ==============
</TABLE>
SEE ACCOMPANYING NOTES
6
<PAGE>
SMARTSERV ONLINE, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED MARCH 31 ENDED MARCH 31
------------------------------------ -------------------------------------
1999 1998 1999 1998
----------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>>
OPERATING ACTIVITIES
Net loss $ (2,378,910) $ (1,235,703) $ (4,766,362) $ (3,812,983)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation of property and equipment 54,197 47,984 151,679 141,321
Non-cash interest expense and other
financing costs 665,360 123,100 1,459,605 804,664
Amortization of consulting costs 374,004 80,980 1,039,429 161,955
Revaluation of employee stock options 38,837 -- 38,837 --
Amortization of unearned revenues (115,534) (13,562) (146,602) (18,229)
Amortization and write-off of deferred charges -- -- -- 63,000
Amortization of capitalized software costs 29,793 -- 49,212 --
Other changes that provided (used) cash
Accounts receivable 16,770 (50,938) 51,581 (28,318)
Prepaid expenses 36,580 3,655 (36,047) 16,737
Accounts payable and accrued liabilities 305,480 179,434 844,530 286,713
Accrued interest 13,807 -- 17,583 (16,323)
Payroll taxes payable 1,509 (4,713) (603) (28,514)
Salaries payable 28,355 (49,587) (4,443) (9,721)
Unearned revenues 13,152 22,022 226,203 37,877
Security deposit reduction -- (3,472) -- 10,781
----------------- ---------------- ----------------- -----------------
Net cash used in operating activities (916,600) (900,800) (1,075,398) (2,391,040)
----------------- ---------------- ----------------- -----------------
INVESTING ACTIVITIES
Purchase of equipment (146,104) (7,425) (168,799) (50,301)
Capitalization of software development costs (176,970) -- (672,785) --
----------------- ---------------- ----------------- -----------------
Net cash used in investing activities (323,074) (7,425) (841,584) (50,301)
----------------- ---------------- ----------------- -----------------
FINANCING ACTIVITIES
Repayment of capital lease obligation (21,222) (18,546) (61,575) (73,357)
Proceeds from the issuance of notes 43,500 -- 478,500 196,500
Repayment of notes (75,000) -- (75,000) --
Proceeds from the issuance of warrants, net -- -- -- 2,643,941
Costs of the issuance of warrants -- -- -- (25,000)
Deferred financing costs -- -- (35,000) --
Proceeds of advances from DTN Corporation 1,408,287 -- 1,408,287 --
Proceeds from officers' loans -- -- -- 37,500
Repayment of officers' loans -- -- -- (37,500)
----------------- ----------------- ----------------- -----------------
Net cash provided by (used in) financing
activities 1,355,565 (18,546) 1,715,212 2,742,084
----------------- ---------------- ----------------- -----------------
Increase (decrease) in cash and cash equivalents 115,891 (926,771) (201,770) 300,743
Cash and cash equivalents - beginning of period 36,564 1,320,859 354,225 93,345
----------------- ---------------- ----------------- -----------------
Cash and cash equivalents - end of period $ 152,455 $ 394,088 $ 152,455 $ 394,088
================= ================ ================= =================
SEE ACCOMPANYING NOTES.
</TABLE>
7
<PAGE>
SMARTSERV ONLINE, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
MARCH 31, 1999
1. ORGANIZATION
SmartServ Online, Inc. (the "Company") commenced operations on August 20, 1993.
The Company makes online information and transactional services available to
subscribers, through proprietary application software and communications
architecture, for use with wireless PCS devices, PCs, PDAs, the Internet,
interactive voice response systems, alpha-numeric pagers and screen-based
phones. The Company also offers a range of services designed to meet the varied
needs of clients of potential strategic marketing partners, such as real-time
stock quotes, business and financial news, sports information, research and
analysis reports, private-labeled electronic mail, national weather reports,
local news 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.
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 S-B 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, 1998 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, 1998. 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, 1999 are not
necessarily indicative of those expected for the year ending June 30, 1999.
The Company has completed development of its core applications software and
communications architecture; however, it has yet to generate revenues in an
amount sufficient to support its operations. 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's financial statements for
the nine months ended March 31, 1999 have been prepared on a going concern basis
which contemplates the realization of assets and the settlement of liabilities
and commitments in the normal course of business. The Company incurred net
losses of $5,040,009, $4,434,482, and $2,966,287 for the years ended June 30,
1998, 1997, and 1996, respectively, and as of March 31, 1999 had an accumulated
deficit of $19,588,241. In addition, as of March 31, 1999, the Company had a
working capital deficiency of $5,364,851 and a deficiency of net assets of
$3,968,965. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of these uncertainties.
8
<PAGE>
The Company's stockholders approved a one-for-six reverse stock split at a
Special Meeting on October 15, 1998. Such reverse stock split became effective
on October 26, 1998. All applicable financial statement amounts and related
disclosures have been restated to give effect to this transaction.
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"). 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.
COMPREHENSIVE INCOME
- --------------------
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Comprehensive Income" which requires
companies to report a new, additional measure of income on the income statement
in a full set of general-purpose financial statements. Comprehensive Income
includes foreign currency translation gains and losses and unrealized gains and
losses on equity securities that have been previously excluded from income and
reflected instead in equity. There were no components of comprehensive income
excluded from income and reflected in equity for the nine months ended March 31,
1999 and 1998.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
- --------------------------------------
In connection with certain contracts entered into between the Company and its
strategic marketing partners, the Company has capitalized software development
costs related to certain product enhancements in accordance with Statement of
Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed", effective July 1, 1998.
RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, as amended by SOP 98-4, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). The
adoption of SOP 98-1 is not expected to have a material effect on the Company's
operations. SOP 98-1 is required to be adopted by the Company no later than July
1, 1999.
9
<PAGE>
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1999 1998
------------------- -----------------
<S> <C> <C>
Data processing equipment $ 784,560 $ 616,587
Data processing equipment purchased under a capital lease 246,211 246,211
Office furniture and equipment 71,423 70,597
Display equipment 9,635 9,635
Leasehold improvements 36,678 36,678
------------------- -----------------
1,148,507 979,708
Accumulated depreciation, including $94,381 and $57,449 at March 31,
1999 and June 30, 1998, respectively, for equipment purchased under a
capital lease (520,850) (369,171)
------------------- -----------------
$ 627,657 $ 610,537
=================== =================
</TABLE>
4. DUE TO DATA TRANSMISSION NETWORK CORPORATION ("DTN")
Coincident with the execution of the January 26, 1999 Letter of Intent, DTN
agreed to provide the Company with liquidity sufficient to support its
operations. Such advances, which totaled $2,058,030 at June 24, 1999, were
repaid at the closing of the June 24, 1999 agreement.
5. NOTES PAYABLE
Commencing November 20, 1998 through January 27, 1999, the Company sold five and
one-half (5.5) units, each consisting of a secured convertible note in the
principal amount of $100,000 and warrants to purchase Common Stock of the
Company. The notes and the warrants are convertible and exercisable,
respectively, at $.60 per share of Common Stock. The convertible notes are
secured by all of the Company's assets, mature on November 15, 1999, and are
classified as a current liability in the accompanying balance sheet. The notes
bear interest at eight percent (8%) per annum, payable semi-annually, in kind or
in cash at the Company's option and may be prepaid without premium or penalty.
The Company has agreed to register the shares of Common Stock issuable upon
exercise of the warrants and conversion of the notes. In addition to customary
fees and expenses, Spencer Trask Securities, Inc. ("Spencer Trask") the
placement agent, received for nominal consideration, warrants to purchase ten
percent (10%) of the shares of Common Stock of the Company issuable on
conversion of the notes and exercise of the warrants at $.72 per share. The
issuance to the noteholders of warrants to purchase 916,667 shares of Common
Stock, as well as those issued to Spencer Trask for the purchase of 183,333
shares of Common Stock have been valued in accordance with the Black-Scholes
pricing methodology and recorded in stockholders' equity as deferred financing
costs. All costs associated with the issuance of the convertible notes are being
amortized to interest expense and other financing costs using the interest
method. Also in connection with the 8% convertible notes, the Company has
recorded a non-cash charge to interest expense and other financing costs
representing the perceived cost of the beneficial conversion feature of the
notes. Emerging Issues Task Force Issue 98-5, "Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios" ("Issue 98-5") defines the beneficial conversion feature as
the non-detachable conversion feature that is "in-the-money" at the date of
issuance. Issue 98-5 requires the recognition of the intrinsic value of the
conversion feature as the difference between the conversion price and the fair
value of the common stock into which the notes are
10
<PAGE>
convertible. Such amount is limited to the proceeds of the financing ($550,000)
and has been recorded in interest expense and other financing costs as of the
date of issuance. The Company repaid the 8% convertible notes in June 1999.
On December 30, 1998, the Company executed an agreement with a service provider
whereby certain obligations of the Company, amounting to $141,794, were
converted into a note payable. The note bears interest at twelve percent (12%)
per annum, is payable on demand and has been classified as a current liability
in the accompanying balance sheet. On June 28, 1999, the outstanding balance at
March 31, 1999 of $66,794 was repaid.
Interest paid during the nine months ended March 31, 1999 and 1998 was $25,762
and $26,238, respectively.
6. EQUITY TRANSACTIONS
During the period July 1, 1998 through March 31, 1999, holders of 276.67 of the
Company's Prepaid Warrants converted such warrants into 178,560 shares of Common
Stock at exercise prices ranging from $.75 to $2.38 per share.
On August 31, 1998, the Company issued 32,953 shares of Common Stock to Zanett
Lombardier, Ltd. and 17,047 shares of Common Stock to Bruno Guazzoni in
consideration of their agreement to certain restrictions on the exercise of
Prepaid Warrants and the resale of the shares of Common Stock issuable on
exercise thereof. Such shares have been recorded at the fair value of the
Company's Common Stock at that date as other financing costs.
On September 8, 1998, the Company issued warrants to purchase 3,000 shares of
Common Stock to DTN for prepayment of certain guaranteed payments in accordance
with the Software License and Service Agreement between the parties dated April
23, 1998. Such warrants are exercisable at $3.00 per share of Common Stock and
have been recorded in accordance with the Black-Scholes pricing methodology as
other financing costs.
On November 17, 1998, the Company issued 125,000 shares of Common Stock and
warrants to purchase 16,667 shares of Common Stock, exercisable at $5.00 per
share until November 11, 2001, to Mr. Steven Francesco, a former officer of the
Company, as partial consideration for the settlement of his claims against the
Company and certain of its officers and directors. The shares have been recorded
in selling, general and administrative expenses at the fair value of the
Company's Common Stock at that date while the warrants have been recorded in
accordance with the Black-Scholes pricing methodology.
Between November 20, 1998 and December 3, 1998, the Company issued warrants to
purchase 833,334 shares of Common Stock to investors in connection with the
issuance of $500,000 of convertible notes. The notes are convertible into Common
Stock at $.60 per share and mature on November 15, 1999. The warrants are
exercisable at $.60 per share and expire on the fifth anniversary of the date of
issuance. Spencer Trask received a commission of $50,000 and an unaccountable
expense allowance of $15,000 in connection with this transaction. Additionally,
the Company issued warrants to purchase 166,666 shares of Common Stock to
Spencer Trask exercisable at $.72 per share through November 29, 2003. These
warrants have been recorded as deferred financing costs in accordance with the
Black-Scholes pricing methodology. The Company repaid the convertible notes in
June 1999.
On December 29, 1998, the Board of Directors approved the terms of employment
contracts for Messrs. Sebastian E. Cassetta, Chairman and Chief Executive
Officer, and Mario F. Rossi, Vice President of Technology. Accordingly, the
Company and Mr. Cassetta have entered into an employment agreement
11
<PAGE>
("Cassetta Agreement"), effective January 1, 1999 and expiring on December 31,
2001, providing for (i) base compensation of $185,000 per annum, (ii) additional
compensation of up to 100% of base compensation, (iii) continuation of existing
life and disability insurance policies, (iv) all benefits available to other
employees and (v) the sale to him of 618,239 shares of restricted stock
representing 9% of the fully diluted shares of Common Stock of the Company. Mr.
Cassetta's additional compensation will be equal to 10% of his base compensation
for each 10% increase in sales during the first year of the Cassetta Agreement,
subject to a maximum of 100% of base compensation. In each subsequent year of
the Cassetta Agreement, Mr. Cassetta will receive additional compensation equal
to 5% of his base compensation for each 5% increase in sales, subject again to a
maximum of 100% of base compensation. The purchase price ($2.20 per share) of
the restricted stock is equal to 110% of fair market value of the Company's
Common Stock for the 30 days preceding the date of the stock purchase agreement
("Cassetta Stock Purchase Agreement") contemplated by the Cassetta Agreement.
The purchase price will be paid with a 5 year, non-recourse promissory note,
secured by the stock, at an interest rate of 1% below the prime rate on the date
of the Cassetta Stock Purchase Agreement. The Cassetta Stock Purchase Agreement
contains certain repurchase options for the Company's behalf, as well as a put
option for Mr. Cassetta's behalf in the event of the termination of his
employment. In the event that Mr. Cassetta's employment is terminated without
cause, Mr. Cassetta will receive a lump sum severance payment equal to his full
base salary for the remaining term of the Cassetta Agreement, discounted to the
present value using an 8% discount rate and continuing benefit coverage for the
lesser of 12 months or the remaining term of the Cassetta Agreement.
The Company and Mr. Rossi have also entered into an employment agreement ("Rossi
Agreement"), effective January 1, 1999 and expiring on December 31, 2001,
providing for (i) base compensation of $135,000 per annum, (ii) additional
compensation of up to 50% of base compensation, (iii) continuation of existing
life and disability insurance policies, (iv) all benefits available to other
employees and (v) the sale to him of 206,080 shares of restricted stock
representing 3% of the fully diluted shares of Common Stock of the Company. Mr.
Rossi's additional compensation will be equal to 5% of his base compensation for
each 10% increase in sales during the first year of the Rossi Agreement, subject
to a maximum of 50% of base compensation. In each subsequent year of the Rossi
Agreement, Mr. Rossi will receive additional compensation equal to 2.5% of base
compensation for each 5% increase in sales, subject again to a maximum of 50% of
base compensation. The purchase price ($2.20 per share) of the restricted stock
is equal to 110% of fair market value for the 30 days preceding the date of the
stock purchase agreement ("Rossi Stock Purchase Agreement") contemplated by the
Rossi Agreement. The purchase price will be paid with a 5 year, non-recourse
promissory note, secured by the stock, at an interest rate of 1% below the prime
rate on the date of the Rossi Stock Purchase Agreement. The Rossi Stock Purchase
Agreement contains certain repurchase options for the Company's behalf, as well
as a put option for Mr. Rossi's behalf in the event of the termination of his
employment. In the event that Mr. Rossi's employment is terminated without
cause, Mr. Rossi will receive a lump sum severance payment equal to his full
base salary for the remaining term of the Rossi Agreement, discounted to the
present value using an 8% discount rate and continuing benefit coverage for the
lesser of 12 months or the remaining term of the Rossi Agreement.
On January 14, 1999, the Company issued 10,000 shares of Common Stock to Arnhold
& S. Bleichroeder, Inc., an investor in the Company's Prepaid Warrants, in
consideration of an agreement to waive certain events of default under such
Prepaid Warrants. These shares have been recorded at the fair value of the
Company's Common Stock at that date as other financing costs.
On January 20, 1999, the Company agreed to cancel warrants to purchase 20,833
shares of Common Stock exercisable at $15.75 and $19.50 per share to Mr. Steven
Rosner, a financial advisor to the Company, and to grant Mr. Rosner warrants to
purchase 40,833 shares of Common Stock at $.60 per share for his efforts at
arranging the Company's relationship with Spencer Trask. Such warrants will
expire on January 20, 2004. These warrants have been recorded in accordance with
the Black-Scholes pricing methodology as selling, general and administrative
expenses.
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<PAGE>
On January 28, 1999, the Company issued warrants to purchase 83,333 shares of
Common Stock to Mr. Bruno Guazzoni, an investor in the Company's Prepaid
Warrants, in connection with the issuance of $50,000 of convertible notes. Such
warrants are exercisable at $.60 per share and expire on November 19, 2003.
Spencer Trask, the placement agent, received a commission of $5,000, an
unaccountable expense allowance of $1,500 and warrants to purchase 16,667 shares
of Common Stock at $.72 per share through January 26, 2004 in connection with
this transaction. These warrants have been recorded in accordance with the
Black-Scholes pricing methodology as deferred financing costs.
The Company is in default of certain provisions enumerated in the Prepaid
Warrants and has been unable to obtain appropriate waivers from holders of
$1,669,000 of such Prepaid Warrants. Accordingly, the Company has recorded a
charge to interest and financing costs in the amount of $717,670, representing
the potential penalties due such holders.
7. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
THREE MONTHS MARCH 31 NINE MONTHS ENDED MARCH 31
--------------------------------------- --------------------------------------
1999 1998 1999 1998
------------------ ----------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Numerator:
Net loss $ (2,378,910) $ (1,235,703) $ (4,766,362) $ (3,812,983)
================== ================= ================== ==================
Denominator:
Weighted average shares 1,198,563 695,601 1,072,264 672,253
================== ================= ================== ==================
Basic and diluted earnings per
common share $ (1.98) $ (1.78) $ (4.45) $ (5.67)
================== ================= ================== ==================
</TABLE>
At March 31, 1999, there were 3,103,000 common stock purchase warrants
outstanding. Such warrants have exercise prices ranging from $0.60 to $72.00 per
share and expire from March 2001 through January 2004. 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
partially exercisable after one year from date of grant and no options may be
granted after April 15, 2006. At March 31, 1999, there are options outstanding
for the purchase of 286,267 shares of the Company's Common Stock. None of the
warrants or options have been included in the computation of diluted loss per
share because their inclusion would be antidilutive.
8. COMMITMENTS AND CONTINGENCIES
By letter dated April 10, 1998, Michael Fishman, then Vice President of Sales
for the Company, resigned his position. On or about April 24, 1998, Mr. Fishman
filed a complaint against the Company, Sebastian E. Cassetta and others in the
United States District Court for the District of Connecticut. On or about August
20, 1998, Mr. Fishman served a first amended complaint. On December 11, 1998,
the Court dismissed the first amended complaint. By motion dated January 7,
1999, Mr. Fishman moved for leave to
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<PAGE>
serve a second amended complaint. On February 16, 1999, the Company filed papers
in opposition to Mr. Fishman's motion for leave to serve a second amended
complaint.
In his proposed second amended complaint, Mr. Fishman alleges, among other
things, that (i) he relied on false statements that the Company allegedly made,
in filings with the Securities and Exchange Commission and otherwise, in
accepting a position with the Company and (ii) the Company constructively
discharged him by breaching the terms of its employment agreement with him. The
proposed second amended complaint seeks to assert claims against the Company for
(i) fraud under the federal securities laws, (ii) breach of various terms of the
Company's employment agreement with Mr. Fishman, (iii) breach of the implied
duty of good faith and fair dealing, (iv) fraudulent misrepresentation, (v)
negligent misrepresentation, (vi) intentional misrepresentation and (vii)
failure to pay wages.
By order dated May 12, 1999, the Court dismissed Mr. Fishman's federal
securities law claims with prejudice and declined to exercise supplemental
jurisdiction over Mr. Fishman's state law claims.
On or about June 4, 1999, Mr. Fishman commenced an action against the same
defendants in the Connecticut Superior Court for the Judicial District of
Stamford/Norwalk at Stamford alleging breach of contract, breach of duty of good
faith and fair dealing, fraudulent misrepresentation, negligent
misrepresentation, intentional misrepresentation and failure to pay wages. The
defendants' response to this complaint was filed on September 30, 1999.
By memorandum dated April 10, 1998, Jonathan Paschkes, then Vice President of
Marketing for the Company, resigned his position. On or about November 17, 1998,
Mr. Paschkes filed a complaint against the Company and Sebastian E. Cassetta in
the United States District Court, District of Connecticut. In the complaint, Mr.
Paschkes alleges (i) fraudulent inducement to him to accept his position with
the Company; (ii) breach of various terms of the Company's employment contract
with him; and (iii) failure by the Company to pay him wages and bonuses and
issue options to him pursuant to the terms of his employment contract. On his
fraudulent inducement and breach of contract claims, Mr. Paschkes seeks
unspecified damages that he alleges to be at least $2,000,000 for each. On his
failure to pay wages claim, Mr. Paschkes seeks unspecified actual and punitive
damages that he alleges to be at least $200,000. On or about February 18, 1999,
Mr. Paschkes filed an amended complaint. The Company has answered the amended
complaint and has asserted counterclaims against Mr. Paschkes for fraudulent
inducement, breach of contract, conversion and statutory theft. Discovery is
proceeding. Although the Company is vigorously defending this action, there can
be no assurance that it will be successful.
While the Company intends to vigorously defend these actions, the unfavorable
outcome of any such action could have a material adverse effect on the Company's
financial condition, results of operations, and cash flows.
The Company and holders of warrants to purchase 2,057,055 shares of common stock
entered into an agreement in contemplation of a financing transaction providing
that upon 61 days written notice prior to the date of the Private Placement
Memorandum, the holders may require that the Company exchange some or all of the
warrants into a pro-rata amount of shares up to a maximum of 342,842. Such
financing never occurred and presently, there is disagreement as to each
parties' relative rights and obligations under this agreement.
14
<PAGE>
9. SUBSEQUENT EVENTS
On January 26, 1999, the Company and DTN signed a Letter of Intent whereby the
Company would be merged with a subsidiary of DTN. The transaction was subject to
the execution of a definitive merger agreement. On June 24, 1999, the Company
and DTN entered into an agreement that terminated the Letter of Intent and
amended the Software License and Service Agreement dated April 23, 1998. In
consideration of the receipt of $5.5 million, the Company granted DTN an
exclusive perpetual worldwide license to the Company's (i) real-time stock quote
product, (ii) an online trading vehicle for customers of small and medium sized
brokerage companies, (iii) an administrative reporting package for brokers of
small and medium sized brokerage companies, and (iv) a FIX capable order
entry/routing system. The Company will continue to operate and support these
products in exchange for a percentage of the revenues earned by DTN therefrom.
On June 28, 1999, the Company and Spencer Trask entered into an agreement
providing for the settlement of the Company's obligations pursuant a Letter of
Intent dated August 11, 1998, as amended on November 24 1998, and a Letter of
Intent dated September 3, 1998 (together the "Letters of Intent"). In
consideration of the payment of $150,000 and the repayment of the 8% convertible
notes held by Spencer Trask and Kevin Kimberlin Partners, LP, an affiliate of
Spencer Trask, the Company has terminated the Letters of Intent and all
obligations thereunder.
On July 1, 1999, the Company entered into an agreement with Arnhold and S.
Bleichroeder, Inc. ("ASB"), a holder of $325,000 of the Company's Prepaid
Warrants, to settle the Company's obligation to ASB pursuant to the default
provisions of the Prepaid Warrants. Pursuant to such agreement, the Company paid
ASB $325,000 to redeem the Prepaid Warrants and issued 180,000 shares of Common
Stock in full settlement of all obligations to ASB. The Company has agreed to
file a registration statement with the Securities and Exchange Commission and to
use its best efforts to have such registration statement declared effective by
September 28, 1999. Settlement costs of $241,246 have been recorded as interest
and other financing costs during the period ended March 31, 1999.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
- ------
PLAN OF OPERATION
The Company provides online information and transactional services through
wireless PCS devices, PCs, PDAs, the Internet, interactive voice response
systems, alpha-numeric paging devices and screen-based telephones to clients of
potential strategic marketing partners. Effective June 1996, the Company exited
from the development stage with the completion of its core application software
and communications architecture and has commenced the implementation of its
marketing strategies.
The Company's plan of operation includes programs for marketing and developing
strategic marketing relationships with key partners that provide access to large
numbers of potential subscribers for its services. The Company's strategy of
forming alliances with strategic marketing partners that have established
relationships with its potential customers enables the Company to maximize its
market reach at minimal operating costs. The flexibility of the Company's
application software and communications architecture enables the customization
of each information package offered to each strategic marketing partner, and in
turn to their end users. The use of this model has resulted in the distribution
of SmartServ information products by DTN as "DTNIQ", "TradeNet" and "BrokerNet",
by Sprint/United Management Corp. as "Sprint Information Services", by CIDCO
Inc. as "CIDCO Information Services" and by ALLTEL Communications Company as
"ALLTEL Information Services".
As an early entrant in the dynamic market for distribution of financial
information and trading services via wireless devices, the Company is developing
strategic marketing relationships with wireless equipment manufacturers,
carriers and potential corporate partners. Management believes the wireless area
has tremendous potential for distribution of the Company's information products
and as a source of revenues from "fee based" transactions such as stock trading.
The Company is also working with businesses that desire to provide new services,
such as those provided by the Company, to an existing base of clients. 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.
Management believes that most of the Company's revenues will ultimately be
derived from end users that purchase the Company's services through strategic
marketing partners with mass distribution capabilities. The Company anticipates
that strategic marketing partners will brand the Company's "bundled" information
services with their own private label, promote the packaged offering and then
distribute the Company's information package on wireless PCS devices, PCs, PDAs,
the Internet, interactive voice response systems, alpha-numeric pagers and
screen-based phones 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. With the licensing of three of the Company's
Internet products to DTN in April 1998, the Company discontinued efforts to
develop a direct subscriber base.
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 2000. Such personnel will be
added to assist with the programming requirements of strategic marketing
partners' product offerings, for customer support, and sales and marketing.
16
<PAGE>
RESULTS OF OPERATIONS
As discussed above, the Company has discontinued its efforts to market products
to the retail market via its own direct marketing programs. Currently, the
Company is working with businesses that desire to provide new services to an
existing base of clients. Additionally, the Company continues to seek
relationships with brokerage firms and disseminators of financial information,
whose clients can benefit from the efficiency, convenience and timeliness of the
information services provided by the Company. The high quality of the Company's
services and systems' architecture continues to draw interest from potential
partners; however, while the Company continues to have discussions about
potential marketing opportunities with major telecommunications and stock
brokerage companies, there can be no assurance that the Company will enter into
agreements with any such companies.
QUARTER ENDED MARCH 31, 1999 VS. QUARTER ENDED MARCH 31, 1998
During the quarter ended March 31, 1999, the Company earned revenues of
$334,624, primarily from the licensing of its products to DTN. During the
quarter ended March 31, 1998, total revenues amounted to $231,309, consisting
primarily of subscription fees for the SmartServ Online "Pro" real-time stock
quote service ($136,600) and sales generated from the Company's relationships
with Sprint ($22,500) and Schroder and Company ($72,000). At March 31, 1999 and
1998, the Company recorded deferred revenues of $855,650 and $24,562,
respectively. At March 31, 1999 such amount represented deferred revenues
associated with the licensing and service agreement between the Company and DTN
dated April 23, 1998. At March 31, 1998 such amounts arose from customer
prepayments that were recognized into income as the services were provided.
During the quarter ended March 31, 1999, the Company incurred costs of revenues
of $212,997. These costs consist primarily of information and communication
costs ($44,396), personnel costs ($54,227), and computer hardware leases,
depreciation and maintenance costs ($94,663). During the quarter ended March 31,
1998, the Company incurred costs of revenues of $323,579. Such costs consisted
primarily of information and communication costs ($161,400), personnel costs
($83,700), and computer hardware leases, depreciation and maintenance costs
($77,300). Information and communication costs decreased in the quarter ended
March 31, 1999, compared to the prior year as a result of the licensing
agreement entered into between the Company and DTN. In accordance with the terms
of the agreement, DTN has assumed responsibility for such costs related to the
delivery of information and the growth of the infrastructure relative to the
customers of DTN. Personnel costs decreased in the quarter ended March 31, 1999
compared to the prior year as a result of the migration of personnel resources
into product development areas in 1999. Product development costs were $81,389
and $218,727 for the quarters ended March 31, 1999 and 1998, respectively. The
decrease in the product development costs for the quarter ended March 31, 1999
compared to the quarter ended March 31, 1998 results from the capitalization of
software development costs related to certain product enhancements in accordance
with Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed" ("Statement
86"). During the quarter ended March 31, 1999, such costs consisted primarily of
the amortization of capitalized software development costs. During the quarter
ended March 31, 1998, such costs consisted primarily of personnel costs
($125,500) and computer system consultants ($93,200). During the quarter ended
March 31, 1999, the Company capitalized $176,970 of development costs in
accordance with Statement 86. No such costs were capitalized during the quarter
ended March 31, 1998.
During the quarter ended March 31, 1999, the Company incurred selling, general
and administrative expenses of $999,466 compared to $753,501 for the quarter
ended March 31, 1998. In 1999, selling, general and administrative expenses
consisted primarily of personnel costs ($234,084), marketing and advertising
costs ($53,656), professional fees ($556,043), facilities ($50,977) and
telecommunications costs ($18,000). Included in professional fees are non-cash
charges of $414,004 resulting from the
17
<PAGE>
issuance of common stock purchase warrants to financial consultants. The value
of such common stock purchase warrants was recorded in accordance with the
Black-Scholes pricing methodology. For 1998, selling, general and administrative
expenses were incurred primarily for personnel costs ($252,000), facilities
($49,000), marketing and advertising costs ($33,000) and professional fees
($310,000). Included in professional fees is an $80,980 non-cash charge for the
amortization of unearned compensation associated with the issuance of common
stock purchase warrants to a financial consultant.
Interest income for the quarters ended March 31, 1999 and 1998 amounted to $864
and $10,883, respectively. During the quarter ended March 31, 1999, such amounts
were earned primarily from the Company's cash balances. During the quarter ended
March 31, 1998, such amounts were earned from the Company's investments in
highly rated bank certificates of deposit. During the quarters ended March 31,
1999 and 1998, interest and financing costs were $1,420,546 and $182,088,
respectively. During the quarter ended March 31, 1999, such costs consisted
primarily of interest and the amortization of deferred financing costs
($454,667) associated with the issuance of $550,000 of convertible notes in
December 1998 and January 1999, costs ($241,246) associated with the settlement
of obligations to a holder of the Company's Prepaid Warrants and potential costs
($717,670) associated with an event of default under the Prepaid Warrants.
Interest and financing costs for 1998 included a non-cash charge of $123,100 for
the revaluation of certain common stock purchase warrants issued in connection
with the Company's May 1997 line of credit facility.
NINE MONTHS ENDED MARCH 31, 1999 VS. NINE MONTHS ENDED MARCH 31, 1998
During the nine months ended March 31, 1999, the Company earned revenues of
$1,028,353, primarily from the licensing of its products to DTN. During the nine
months ended March 31, 1998, the Company earned revenues of $613,096, consisting
of $407,000 from the sale of subscriptions to its information services, $127,000
from enhancement, implementation, and marketing services associated with its
arrangement with Schroder and Company, and $76,000 from the Company's
relationship with Sprint.
During the nine months ended March 31, 1999, the Company incurred costs of
revenues of $602,518. These costs consist primarily of information and
communication costs ($209,242), personnel costs ($117,260), and computer
hardware leases, depreciation and maintenance costs ($255,417). During the nine
months ended March 31, 1998, the Company incurred costs of revenues of
$1,042,264. Such costs consisted primarily of information and communication
costs ($484,600), personnel costs ($267,500), and computer hardware leases,
depreciation and maintenance costs ($259,800). Information and communication
costs decreased in the nine months ended March 31, 1999, compared to the prior
year as a result of the licensing agreement entered into between the Company and
DTN. Personnel costs decreased in the nine months ended March 31, 1999 compared
to the prior year as a result of the migration of personnel resources into
product development areas in 1999. Product development costs were $132,605 and
$646,432 for the nine months ended March 31, 1999 and 1998, respectively. The
decrease in the product development costs for the nine months ended March 31,
1999 compared to the nine months ended March 31, 1998 results from the
capitalization of software development costs related to certain product
enhancements in accordance with Statement 86. During the nine month period ended
March 31, 1999, such costs consisted primarily of the amortization of
capitalized software development costs. During the nine months ended March 31,
1998, such costs consisted primarily of personnel costs ($400,500) and computer
system consultants ($226,000). During the nine months ended March 31, 1999, the
Company capitalized $672,785 of development costs in accordance with Statement
86. No such costs were capitalized during the nine months ended March 31, 1998.
During the nine months ended March 31, 1999, the Company incurred selling,
general and administrative expenses of $2,832,021. Such expenses were incurred
primarily for personnel costs ($629,366), marketing and advertising costs
($210,279), professional fees ($1,618,718), facilities ($166,553) and
telecommunication costs ($51,700). Included in professional fees are non-cash
charges of $1,079,429
18
<PAGE>
resulting from the issuance of common stock purchase warrants to financial
consultants. The value of such common stock purchase warrants was recorded in
accordance with the Black-Scholes pricing methodology. During the nine months
ended March 31, 1998, the Company incurred selling, general and administrative
expenses of $1,913,728, primarily for personnel costs ($730,100), facilities
($147,800), marketing and advertising costs ($120,200) and professional fees
($646,300). 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 ("IPO") and a $161,955 non-cash
charge for the amortization of unearned compensation associated with the
issuance of common stock purchase warrants to a financial consultant.
Interest income for the nine months ended March 31, 1999 and 1998 amounted to
$3,772 and $33,514, respectively. During the nine months ended March 31, 1999,
interest income was earned primarily from the Company's cash balances. During
the nine months ended March 31, 1998, such amounts were earned from the
Company's investments in highly rated bank certificates of deposit. Interest and
financing costs for the nine months ended March 31, 1999 and 1998 were
$2,231,343 and $857,169, respectively. During the nine months ended March 31,
1999, such costs were incurred primarily in connection with the $550,000 interim
financing in November 1998 and January 1999, the issuance of 60,000 shares of
Common Stock to holders of certain Prepaid Warrants in consideration of such
holders agreeing to restrictions on the exercise of the Prepaid Warrants, the
resale of the shares of Common Stock issuable upon such exercise, the waiver of
certain rights and the settlement of certain obligations in connection with the
Company's default under such Prepaid Warrants and potential costs associated
with an event of default under the Prepaid Warrants. During the nine months
ended March 31, 1998, 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.
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 $3,610,000 and $12,877,500,
respectively.
On September 30, 1997, Zanett Securities Corporation ("Zannett"), acting as
placement agent for the Company, completed a private placement ("1997
Placement") of $4 million of the Company's prepaid common stock purchase
warrants ("Prepaid Warrants"). The Prepaid Warrants expire on September 30,
2000. As part of the 1997 Placement, Zanett Lombardier, Ltd converted a note
payable of $772,222, issued pursuant to a Line of Credit Agreement dated May 29,
1997, as amended, and accrued interest thereon of $63,837 into Prepaid Warrants.
The net proceeds of the 1997 Placement of $2,643,941 were used for general
working capital requirements.
In September 1997, the Company entered into a three year agreement with
Sprint/United Management Corp. with respect to the expansion of its services
provided pursuant to a March 1997 agreement. Such agreement provided for the
potential deployment of the Company's services on a nationwide basis.
In April 1998, the Company entered into an agreement with DTN, whereby the
Company licensed to DTN the rights to market three of the Company's Internet
products. The Company received $850,000 upon execution of the contract and has
received minimum monthly payments of $100,000 through April 1999. Thereafter,
cash flow from license fees is determined as a percentage of revenues earned by
DTN through sales to its customers. Additionally, DTN has agreed to absorb the
costs associated with the expansion of the computer and communications hardware
necessary to support the expansion of the user base.
19
<PAGE>
In September 1998, DTN advanced the Company the last 2 payments under its
licensing agreement to enhance the Company's cash flow. In addition to a 12%
discount for the cost of money, DTN received warrants to purchase 3,000 shares
of Common Stock exercisable at $3.00 per share.
Although the Company believes that both Sprint and DTN have the experience and
the financial ability to distribute the Company's services to thousands of
potential customers, there can be no assurance that the products and services
will be accepted by the ultimate consumer on a widespread basis.
On August 11, 1998, the Company entered into a letter of intent, as amended on
November 24, 1998, with Spencer Trask Securities, Inc. ("Spencer Trask") (the
"Letter of Intent") which provided for the retention of Spencer Trask to act as
exclusive placement agent in connection with a private placement ("Placement")
by the Company of a minimum of $5,000,000 and a maximum of $10,000,000 of
securities of the Company.
In anticipation of completing the Placement, the Company completed an interim
financing of $550,000 of securities of the Company. The Company sold five and
one-half (5.5) units, each consisting of a secured convertible note in the
principal amount of $100,000 and warrants to purchase Common Stock of the
Company. The notes and the warrants are convertible and exercisable,
respectively, at $.60 per share of Common Stock. The convertible notes bear
interest at eight percent (8%) per annum, are secured by all of the Company's
assets, and mature on November 15, 1999. Such notes were repaid in June 1999.
On December 30, 1998, the Company executed an agreement with a service provider
whereby certain obligations of the Company, amounting to $141,794, were
converted into a note payable. The note bears interest at twelve percent (12%)
per annum and is payable on demand. At March 31, 1999, the outstanding balance
had been reduced to $66,794. Such amount was repaid on June 30, 1999.
On January 26, 1999, the Company and DTN signed a Letter of Intent whereby the
Company would be merged with a subsidiary of DTN. The transaction was subject to
the execution of a definitive merger agreement. On June 24, 1999, the Company
and DTN entered into an agreement that terminated the Letter of Intent and
amended the Software License and Service Agreement dated April 23, 1998. In
consideration of the receipt of $5.5 million, the Company granted DTN an
exclusive perpetual worldwide license to the Company's (i) real-time stock quote
product, (ii) an online trading vehicle for customers of small and medium sized
brokerage companies, (iii) an administrative reporting package for brokers of
small and medium sized brokerage companies, and (iv) a FIX capable order
entry/routing system. The Company will continue to operate and support these
products in exchange for a percentage of the revenues earned by DTN therefrom.
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. No
assurance can be given that such goals will be obtained or that any expected
revenues or cash flows will be achieved.
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,
20
<PAGE>
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,
potential transactions and other risk factors detailed in this Quarterly Report
on Form 10-QSB and in the Company's other Securities and Exchange Commission
filings.
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PART II. OTHER INFORMATION
SMARTSERV ONLINE, INC.
ITEM 1. LEGAL PROCEEDINGS
By letter dated April 10, 1998, Michael Fishman, then Vice President of Sales
for the Company, resigned his position. On or about April 24, 1998, Mr. Fishman
filed a complaint against the Company, Sebastian E. Cassetta and others in the
United States District Court for the District of Connecticut. On or about August
20, 1998, Mr. Fishman served a first amended complaint. On December 11, 1998,
the Court dismissed the first amended complaint. By motion dated January 7,
1999, Mr. Fishman moved for leave to serve a second amended complaint. On
February 16, 1999, the Company filed papers in opposition to Mr. Fishman's
motion for leave to serve a second amended complaint.
In his proposed second amended complaint, Mr. Fishman alleges, among other
things, that (i) he relied on false statements that the Company allegedly made,
in filings with the Securities and Exchange Commission and otherwise, in
accepting a position with the Company and (ii) the Company constructively
discharged him by breaching the terms of its employment agreement with him. The
proposed second amended complaint seeks to assert claims against the Company for
(i) fraud under the federal securities laws, (ii) breach of various terms of the
Company's employment agreement with Mr. Fishman, (iii) breach of the implied
duty of good faith and fair dealing, (iv) fraudulent misrepresentation, (v)
negligent misrepresentation, (vi) intentional misrepresentation and (vii)
failure to pay wages.
By order dated May 12, 1999, the Court dismissed Mr. Fishman's federal
securities law claims with prejudice and declined to exercise supplemental
jurisdiction over Mr. Fishman's state law claims.
On or about June 4, 1999, Mr. Fishman commenced an action against the same
defendants in the Connecticut Superior Court for the Judicial District of
Stamford/Norwalk at Stamford alleging breach of contract, breach of duty of good
faith and fair dealing, fraudulent misrepresentation, negligent
misrepresentation, intentional misrepresentation and failure to pay wages. The
defendants' response to this complaint was filed on September 30, 1999.
By memorandum dated April 10, 1998, Jonathan Paschkes, then Vice President of
Marketing for the Company, resigned his position. On or about November 17, 1998,
Mr. Paschkes filed a complaint against the Company and Sebastian E. Cassetta in
the United States District Court, District of Connecticut. In the complaint, Mr.
Paschkes alleges (i) fraudulent inducement to him to accept his position with
the Company; (ii) breach of various terms of the Company's employment contract
with him; and (iii) failure by the Company to pay him wages and bonuses and
issue options to him pursuant to the terms of his employment contract. On his
fraudulent inducement and breach of contract claims, Mr. Paschkes seeks
unspecified damages that he alleges to be at least $2,000,000 for each. On his
failure to pay wages claim, Mr. Paschkes seeks unspecified actual and punitive
damages that he alleges to be at least $200,000. On or about February 18, 1999,
Mr. Paschkes filed an amended complaint. The Company has answered the amended
complaint and has asserted counterclaims against Mr. Paschkes for fraudulent
inducement, breach of contract, conversion and statutory theft. Discovery is
proceeding. Although the Company is vigorously defending this action, there can
be no assurance that it will be successful.
22
<PAGE>
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the period July 1, 1998 through March 31, 1999, 276.67 Prepaid Warrants
were converted into an aggregate of 178,560 shares of Common Stock of the
Company. No sales commissions were paid in connection with such conversions. The
shares were issued in reliance upon the exemption from registration provided by
Section 3 (a) (9) of the Securities Act of 1933, as amended (the "Securities
Act").
On August 31, 1998, the Company issued 32,953 shares of Common Stock to Zanett
Lombardier, Ltd. and 17,047 shares of Common Stock to Bruno Guazzoni in
consideration for their agreeing to certain restrictions on the exercise of
Prepaid Warrants held by them and the resale of the shares of Common Stock
issuable on exercise thereof. The shares were issued in reliance upon the
exemption from registration provided by Section 4 (2) of the Securities Act.
On September 8, 1998, the Company issued 3,000 common stock purchase warrants to
DTN for prepayment of certain guaranteed payments in accordance with the
Software License and Service Agreement between the parties dated April 23, 1998.
Such warrants are exercisable at $3.00 per share of Common Stock. These warrants
were issued in reliance upon the exemption from registration provided by Section
4 (2) of the Securities Act.
On November 17, 1998, the Company issued 125,000 shares of Common Stock and
warrants to purchase 16,667 shares of Common Stock, exercisable at $5.00 per
share until November 11, 2001, to Mr. Steven Francesco, a former officer of the
Company, as partial consideration for the settlement of his claims against the
Company and certain of its officers and directors. These shares and warrants
were issued in reliance upon the exemption from registration provided by Section
4 (2) of the Securities Act.
Between November 20, 1998 and December 3, 1998, the Company issued warrants to
purchase 833,334 shares of Common Stock to 6 investors in connection with the
issuance of $500,000 of convertible notes. The notes were convertible into
Common Stock at $.60 per share; however, they were repaid in June 1999. The
warrants are exercisable at $.60 per share and expire on the fifth anniversary
of the date of issuance. Spencer Trask received a commission of $50,000 and an
unaccountable expense allowance of $15,000 in connection with this transaction.
Additionally, the Company issued warrants to purchase 166,666 shares of Common
Stock to Spencer Trask exercisable at $.72 per share through November 29, 2003.
These notes and warrants were issued in reliance upon the exemption from
registration provided by Section 4 (2) of the Securities Act.
On January 14, 1999, the Company issued 10,000 shares of Common Stock to Arnhold
& S. Bleichroeder, Inc., a holder of the Company's Prepaid Warrants, in
consideration of an agreement to waive certain events of default under such
Prepaid Warrants. These shares were issued in reliance upon the exemption from
registration provided by Section 4 (2) of the Securities Act.
On January 20, 1999, the Company agreed to cancel warrants to purchase 20,833
shares of Common Stock exercisable at $15.75 and $19.50 per share to Mr. Steven
Rosner, a financial advisor to the Company, and to grant Mr. Rosner warrants to
purchase 40,833 shares of Common Stock at $.60 per share for his efforts at
arranging the Company's relationship with Spencer Trask. Such warrants will
expire on January 20, 2004. These warrants were issued in reliance upon the
exemption from registration provided by Section 4 (2) of the Securities Act.
On January 28, 1999, the Company issued warrants to purchase 83,333 shares of
Common Stock to Mr. Bruno Guazzoni, an investor in the Company's Prepaid
Warrants, in connection with the issuance of $50,000 of convertible notes. Such
warrants are exercisable at $.60 per share and expire on the fifth anniversary
of the date of issuance. Spencer Trask, the placement agent, received a
commission of $5,000, an unaccountable expense allowance of $1,500 and warrants
to purchase 16,667 shares of Common Stock at $.72 per share through January 26,
2004 in connection with this transaction. These notes and warrants were issued
in reliance upon the exemption from registration provided by Section 4 (2) of
the Securities Act
23
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8 - K
(a) The following exhibit is included herein:
Exhibit 27 - Financial Data Schedule
(b) REPORTS OF FORM 8-K
The Company did not file any reports on Form 8-K during the three
months ended March 31, 1999.
24
<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: September 30, 1999 /S/ SEBASTIAN E. CASSETTA
------------------ ----------------------------------------
Sebastian E. Cassetta
Chairman of the Board, Chief
Executive Officer
Date: September 30, 1999 /S/ THOMAS W. HALLER
------------------ ----------------------------------------
Thomas W. Haller
Chief Financial Officer, Treasurer
25
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the march
31, 1999 financial statments of SmartServ Online, Inc. and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> MAR-31-1999
<CASH> 152,455
<SECURITIES> 0
<RECEIVABLES> 59,470
<ALLOWANCES> 0
<INVENTORY> 59,986
<CURRENT-ASSETS> 271,911
<PP&E> 1,148,507
<DEPRECIATION> 520,850
<TOTAL-ASSETS> 1,675,625
<CURRENT-LIABILITIES> 5,636,762
<BONDS> 7,828
0
0
<COMMON> 11,998
<OTHER-SE> (3,980,963)
<TOTAL-LIABILITY-AND-EQUITY> 1,675,625
<SALES> 1,028,353
<TOTAL-REVENUES> 1,028,353
<CGS> 602,518
<TOTAL-COSTS> 735,123
<OTHER-EXPENSES> 2,832,021
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,231,343
<INCOME-PRETAX> (4,766,362)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,766,362)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,766,362)
<EPS-BASIC> (4.45)
<EPS-DILUTED> (4.45)
</TABLE>
