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FORM 10-QSB
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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
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(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 February
11, 2000 was 3,493,108.
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<PAGE>
SMARTSERV ONLINE, INC.
FORM 10-QSB
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<S> <C>
Balance Sheets - June 30, 1999 and December 31, 1999 (unaudited)....................................2
Statements of Operations - three months ended December 31, 1999 and
1998 and six months ended December 31, 1999 and 1998 (unaudited)....................................4
Statement of Changes in Stockholders' Deficiency - six months
ended December 31, 1999 (unaudited).................................................................5
Statements of Cash Flows - three months ended December 31, 1999 and
1998 and six months ended December 31, 1999 and 1998 (unaudited)....................................6
Notes to Unaudited Financial Statements.............................................................7
Item 2. Management's Discussion and Analysis or Plan of Operation..........................................13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................................................18
Item 2. Changes in Securities and Use of Proceeds..........................................................19
Item 6. Exhibits and Reports on Form 8-K...................................................................20
Signatures.........................................................................................21
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
SMARTSERV ONLINE, INC.
BALANCE SHEETS
DECEMBER 31, JUNE 30,
1999 1999
-------------------- -------------------
(UNAUDITED)
ASSETS
Current assets
<S> <C> <C>
Cash and cash equivalents $ 371,581 $ 2,165,551
Accounts receivable 386,007 348,278
Prepaid expenses 51,777 50,150
-------------------- -------------------
Total current assets 809,365 2,563,979
-------------------- -------------------
Property and equipment, net 461,198 498,448
Other assets
Capitalized software development costs,
net of accumulated amortization of $202,834 at
December 31, 1999 and $82,108 at June 30, 1999 1,115,906 683,337
Security deposits 73,374 74,834
-------------------- -------------------
1,189,280 758,171
-------------------- -------------------
Total Assets $ 2,459,843 $ 3,820,598
==================== ===================
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
SMARTSERV ONLINE, INC.
BALANCE SHEETS
DECEMBER 31, JUNE 30,
1999 1999
-------------------- -------------------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities
<S> <C> <C>
Accounts payable $ 886,196 $ 780,543
Accrued liabilities 358,359 474,189
Accrued liabilities to warrant holders -- 1,311,365
Salaries payable 48,193 93,443
Capital lease obligation 23,942 70,147
Deferred revenues - current portion 1,656,632 1,656,632
-------------------- -------------------
Total current liabilities 2,973,322 4,386,319
-------------------- -------------------
Deferred revenues - long-term portion 3,313,267 4,141,579
COMMITMENTS AND CONTINGENCIES - NOTE 7
STOCKHOLDERS' DEFICIENCY
Preferred stock - $0.01 par value
Authorized - 1,000,000 shares
Issued and outstanding - None
Common stock - $.01 par value
Authorized - 40,000,000 shares
Issued and outstanding - 1,199,787 shares at June 30, 1999
and 1,460,215 shares at December 31, 1999 14,601 11,998
Common stock subscribed 675,853 1,812,554
Notes receivable from officers (675,853) (1,812,554)
Additional paid-in capital 42,121,283 20,679,611
Unearned compensation (2,920,394) (3,452,904)
Accumulated deficit (43,042,236) (21,946,005)
-------------------- -------------------
Total stockholders' deficiency (3,826,746) (4,707,300)
-------------------- -------------------
Total Liabilities and Stockholders' Deficiency $ 2,459,843 $ 3,820,598
==================== ===================
</TABLE>
See accompanying notes.
3
<PAGE>
<TABLE>
<CAPTION>
SMARTSERV ONLINE, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS SIX MONTHS
ENDED DECEMBER 31 ENDED DECEMBER 31
--------------------------------------- -------------------------------------
1999 1998 1999 1998
------------------- ----------------- ----------------- -----------------
Revenues $ 912,621 $ 344,024 $ 1,720,913 $ 693,729
------------------- ----------------- ----------------- -----------------
Costs and expenses:
<S> <C> <C> <C> <C>
Costs of revenues 207,779 182,437 445,412 389,521
Product development expenses 87,377 24,170 134,222 51,216
Selling, general and administrative
expenses 725,427 666,693 1,302,974 1,167,130
Stock-based compensation 21,362,068 335,004 21,635,019 665,425
------------------- ----------------- ----------------- -----------------
Total costs and expenses 22,382,651 1,208,304 23,517,627 2,273,292
------------------- ----------------- ----------------- -----------------
Loss from operations (21,470,030) (864,280) (21,796,714) (1,579,563)
------------------- ----------------- ----------------- -----------------
Other income (expense):
Interest income 2,016 706 13,033 2,908
Interest expense and other
financing costs (30,250) (669,701) (30,250) (810,797)
Prepaid warrant costs 717,700 -- 717,700 --
------------------- ----------------- ----------------- -----------------
689,466 (668,995) 700,483 (807,889)
------------------- ----------------- ----------------- -----------------
Net loss $ (20,780,564) $ (1,533,275) $ (21,096,231) $ (2,387,452)
=================== ================= ================= =================
Basic and diluted earnings per common share $ (14.75) $ (1.41) $ (15.19) $ (2.36)
=================== ================= ================= =================
Weighted average shares outstanding 1,409,046 1,089,881 1,388,546 1,010,487
=================== ================= ================= =================
</TABLE>
See accompanying notes.
4
<PAGE>
<TABLE>
<CAPTION>
SMARTSERV ONLINE, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
SIX MONTHS ENDED DECEMBER 31, 1999
(UNAUDITED)
NOTES
COMMON STOCK COMMON RECEIVABLE ADDITIONAL
PAR STOCK FROM PAID-IN UNEARNED ACCUMULATED
SHARES VALUE SUBSCRIBED OFFICERS CAPITAL COMPENSATION DEFICIT
---------- ----------- ------------- ------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1999 1,199,787 $11,998 $1,812,554 $(1,812,554) $20,679,611 $(3,452,904) $(21,946,005)
Issuance of Common Stock in
connection with the
settlement of obligations
to a Prepaid Warrant holder 180,000 1,800 -- -- 266,895 -- --
Issuance of Common Stock upon
exercise of employee stock
options 8,195 81 -- -- 10,494 -- --
Issuance of warrants to
purchase 200,000 shares
of Common Stock in
connection with investment
advisory services -- -- -- -- 60,000 (60,000) --
Conversion of 87.8 Prepaid
Common Stock Purchase
Warrants into Common Stock 30,525 305 -- -- (305) -- --
Revaluation of subscriptions
for 824,319 shares of
Common Stock and notes
receivable in connection
with officers' employment
contracts -- -- (1,194,315) 1,194,315 -- -- --
Subscription for 76,818 shares
of Common Stock and note
receivable in connection
with restricted stock
purchase agreement -- -- 57,614 (57,614) -- -- --
Issuance of Common Stock upon
exercise of warrants to
purchase Common Stock 41,708 417 -- -- 62,079 -- --
Amortization of unearned
compensation over the term
of consulting agreements -- -- -- -- -- 592,510 --
Change in market value of
employee stock options -- -- -- -- 2,224,709 -- --
Authorization of the issuance
202,000 shares of Common
Stock in connection with
officers'employment
contracts -- -- -- -- 3,181,500 -- --
Change in market value of
Common Stock subscriptions -- -- -- -- 15,636,300 -- --
Net loss for the period -- -- -- -- -- -- (21,096,231)
---------- ----------- ------------- ------------- ------------- -------------- --------------
Balances at December 31, 1999 1,460,215 $14,601 $ 675,853 $(675,853) $42,121,283 $(2,920,394) $(43,042,236)
========== =========== ============= ============= ============= ============== ==============
</TABLE>
See accompanying notes.
5
<PAGE>
<TABLE>
<CAPTION>
SMARTSERV ONLINE, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS SIX MONTHS
ENDED DECEMBER 31 ENDED DECEMBER 31
------------------------------------ --------------------------------------
1999 1998 1999 1998
----------------- ---------------- ------------------ -----------------
OPERATING ACTIVITIES
<S> <C> <C> <C> <C>
Net loss $ (20,780,564) $ (1,533,275) $ (21,096,231) $ (2,387,452)
Adjustments to reconcile net loss to net cash used
for operating activities:
Depreciation and amortization 125,080 69,198 221,346 116,901
Noncash interest expense and other
financing costs -- 666,070 -- 794,245
Noncash compensation costs 21,060,813 -- 21,042,509 --
Noncash consulting costs 301,255 335,004 592,510 665,425
Amortization of unearned revenues (414,156) (15,534) (828,312) (31,068)
Changes in operating assets and liabilities
Accounts receivable (117,156) 816 (37,729) 34,811
Prepaid expenses (11,112) 11,009 (1,627) (72,627)
Accounts payable and accrued liabilities (576,689) 377,988 (1,052,847) 539,050
Accrued interest payable -- 3,776 -- 3,776
Salaries payable (20,854) (34,915) (45,250) (34,910)
Unearned revenues -- 13,051 -- 213,051
Security deposit -- -- 1,460 --
----------------- ---------------- ------------------ -----------------
Net cash used for operating activities (433,383) (106,812) (1,204,171) (158,798)
----------------- ---------------- ------------------ -----------------
INVESTING ACTIVITIES
Purchase of equipment (38,985) (11,057) (63,370) (22,695)
Capitalization of software development costs (309,070) (262,810) (553,295) (495,815)
----------------- ---------------- ------------------ -----------------
Net cash used for investing activities (348,055) (273,867) (616,665) (518,510)
----------------- ---------------- ------------------ -----------------
FINANCING ACTIVITIES
Repayment of capital lease obligation (23,495) (20,516) (46,205) (40,353)
Proceeds from the issuance of notes -- 435,000 -- 435,000
Proceeds from the issuance of common stock 73,071 -- 73,071 --
Deferred financing costs -- (35,000) -- (35,000)
----------------- ---------------- ------------------ -----------------
Net cash provided by financing activities 49,576 379,484 26,866 359,647
----------------- ---------------- ------------------ -----------------
Decrease in cash (731,862) (1,195) (1,793,970) (317,661)
Cash - beginning of period 1,103,443 37,759 2,165,551 354,225
----------------- ---------------- ------------------ -----------------
Cash - end of period $ 371,581 $ 36,564 $ 371,581 $ 36,564
================= ================ ================== =================
</TABLE>
See accompanying notes.
6
<PAGE>
SMARTSERV ONLINE, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. ORGANIZATION
SmartServ Online, Inc. (the "Company") commenced operations on August 20, 1993.
The Company offers a range of services designed to facilitate e-commerce by
providing transactional and information services to its alliance partners
("Strategic Marketing Partners"). The Company has developed online financial,
transactional and media applications using a unique "device independent"
delivery solution and makes these services available through its application
software and communication architecture to wireless telephones and personal
digital assistants, personal computers and the Internet. The Company's services
include stock trading, real-time stock quotes, business and financial news,
sports information, private-labeled electronic mail, national weather reports
and other business and entertainment information.
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, 1999 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, 1999. 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, 1999 are not
necessarily indicative of those expected for the year ending June 30, 2000.
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 period ended December 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 $7,124,126, $5,040,009 and $4,434,482 for the years ended June 30,
1999, 1998 and 1997, respectively, and as of December 31, 1999 had an
accumulated deficit of $43,042,236 and a deficiency of net assets of $3,826,746.
The Company is also a defendant in several legal proceedings (see Note 7) which
could have a material adverse effect on the Company's financial position, cash
flow, and results of operations. 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.
7
<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.
USE OF ESTIMATES
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
REVENUE RECOGNITION
- -------------------
Revenues are recognized as services are provided. Deferred revenues, resulting
from customer prepayments, are recognized as services are provided throughout
the term of the agreement. Deferred revenues resulting from the Company's
agreements with Data Transmission Network Corporation ("DTN") are being
amortized over the term of the anticipated future revenue stream, a period of 42
months.
BASIC AND DILUTED EARNINGS PER SHARE
- ------------------------------------
The weighted average shares outstanding are determined as the mean average of
the shares outstanding and assumed to be outstanding during the period.
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.
STOCK BASED COMPENSATION
- ------------------------
The Company maintains stock option plans for employees and non-employee
directors that provide for the granting of stock options for a fixed number of
shares with an exercise price equal to the fair value of the shares at the date
of grant. The Company accounts for these stock compensation plans in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25"). Certain options are subject to the variable plan
requirements of APB No. 25 which requires the Company to record compensation
expense for changes in the fair value of the Company's Common Stock.
SUPPLEMENTAL CASH FLOW DATA
- ---------------------------
Interest, debt origination and other financing costs paid during the six months
ended December 31, 1999 and 1998 were $-0- and $20,762, respectively.
8
<PAGE>
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 1999
-------------------- -----------------
<S> <C> <C>
Data processing equipment $ 763,580 $ 700,210
Data processing equipment purchased under a capital lease 246,211 246,211
Office furniture and equipment 71,423 71,423
Display equipment 9,635 9,635
Leasehold improvements 36,678 36,678
-------------------- -----------------
1,127,527 1,064,157
Accumulated depreciation, including $131,312 and $106,691
at December 31, 1999 and June 30, 1999, respectively, for
equipment purchased under a capital lease (666,329) (565,709)
==================== =================
$ 461,198 $ 498,448
==================== =================
</TABLE>
4. EQUITY TRANSACTIONS
On July 1, 1999, the Company entered into an agreement with a holder of $325,000
of the Company's Prepaid Common Stock Purchase Warrants ("Prepaid Warrants"), to
settle the Company's obligation to such holder pursuant to the default
provisions of the Prepaid Warrants. Accordingly, the Company paid $325,000 to
redeem the Prepaid Warrants and issued 180,000 shares of Common Stock in full
settlement of all obligations to the holder. Settlement costs of $268,695 were
recorded during the year ended June 30, 1999.
During the period July 1, 1999 through December 31, 1999, holders of $87,803 of
the Company's Prepaid Warrants converted such warrants into 30,525 shares of
Common Stock at an exercise price of $2.88 per share.
On October 13, 1999, the Board of Directors authorized the establishment of the
Company's 1999 Employee Stock Option Plan ("1999 Plan"). The 1999 Plan provides
for the issuance of options to employees and directors for the purchase of a
maximum of 400,000 shares of Common Stock of the Company at not less than the
fair value of the Common Stock on the date of grant. Additionally, the Board of
Directors authorized the repricing of the restricted shares granted to Messrs.
Cassetta and Rossi to $.75 per share, the fair value of the shares at that date.
The restricted stock awards are variable plan awards pursuant to APB No. 25 and
accordingly, the Company is required to recognize compensation expense for the
changes in the market value of the its Common Stock. In conjunction therewith,
the Company has recorded a charge to compensation expense of $15,636,300 for the
three and six month periods ended December 31, 1999, as well as a corresponding
increase to additional paid-in capital.
Also on October 13, 1999, the Board of Directors authorized the Company to enter
into a restricted stock agreement with Robert Pearl, Director of Business
Development, pursuant to which Mr. Pearl will be awarded 1% of the fully diluted
shares of Common Stock of the Company as of that date at the purchase price of
$.75 per share.
In October 1999, the Company entered into a consulting agreement with a
financial advisor to the Company. As consideration for such services, the
Company granted such advisor warrants to purchase 100,000 shares of Common Stock
at an exercise price of $2.625 per share and warrants to purchase 100,000 shares
of Common Stock at $3.65 per share. The warrants expire on October 24, 2004. The
Company recorded a noncash charge of $60,000 to unearned compensation which is
being amortized to income over the one year term of the agreement.
9
<PAGE>
In November 1999, the Company issued 25,042 shares of Common Stock to Zanett
Lombardier, Ltd pursuant to the cashless exercise provisions of warrants to
purchase 50,084 shares of Common Stock.
In December 1999, the Board of Directors authorized the issuance of 148,000
shares of Common Stock to Mr. Sebastian Cassetta in satisfaction of its bonus
obligation to Mr. Cassetta pursuant to his employment contract. The Company has
recorded a charge to compensation expense of $2,331,000 for the change in the
fair value of the Company's Common Stock between the due date of the obligation
and the grant date of the Common Stock.
In December 1999, the Board of Directors authorized the issuance of 54,000
shares of Common Stock to Mr. Mario Rossi in satisfaction of its bonus
obligation to Mr. Rossi pursuant to his employment contract. The Company has
recorded a charge to compensation expense of $850,500 for the change in the fair
value of the Company's Common Stock between the due date of the obligation and
the grant date of the Common Stock.
In December 1999, the Company issued 16,666 shares of Common Stock to
Ehrenkrantz King Nussbaum, Inc., financial advisors to the Company, upon the
exercise of warrants to purchase such Common Stock. The exercise price of the
warrants was $3.75 per share.
During the fiscal year ended June 30, 1999, the Company recorded a charge of
$717,700 as the potential cost of its default pursuant the terms of the Prepaid
Warrants. At December 31, 1999, the Company received waivers from such default
and reversed such previously recorded costs.
5. 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
--------------------------------------- --------------------------------------
1999 1998 1999 1998
----------------- ------------------ ------------------ ------------------
Numerator:
<S> <C> <C> <C> <C>
Net loss $(20,780,564) $ (1,533,275) $ (21,096,231) $ (2,387,452)
================== ================= ================== ==================
Denominator:
Weighted average shares 1,409,046 1,089,881 1,388,546 1,010,487
================== ================= ================== ==================
Basic and diluted earnings per
common share $ (14.75) $ (1.41) $ (15.19) $ (2.36)
================== ================= ================== ==================
</TABLE>
At December 31, 1999, $1,881,197 of the Company's prepaid common stock purchase
warrants ("Prepaid Warrants") were outstanding. At that date, the Prepaid
Warrants were convertible into 1,217,403 shares of Common Stock. Additionally,
there were 3,911,000 common stock purchase warrants outstanding. Such warrants
have exercise prices ranging from $.60 to $72.00 per share and expire from March
2001 through January 2004. Based on the closing price ($19.72) of the Company's
Common Stock at December 31, 1999, there were, exclusive of the Prepaid
Warrants, currently exercisable in-the-money warrants outstanding for the
purchase of 3,898,000 shares of Common Stock. Additionally, the Company has
established employee stock option plans and authorized restricted stock awards
to employees, directors 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 December 31, 1999, options and
restricted stock awards have been authorized for the purchase of 1,593,000
shares of the
10
<PAGE>
Company's Common Stock. None of the warrants, options or
restricted stock awards have been included in the computation of diluted loss
per share because their inclusion would be antidilutive.
6. STOCK-BASED COMPENSATION
In connection with the grant of certain stock options, warrants and other
compensation arrangements, the Company has recorded charges to earnings that are
noncash in nature. These grants are subject to the variable plan requirements of
APB No. 25 that requires the Company to record compensation expense for changes
in the fair value of the Company's Common Stock.
The following table shows the amount of stock-based compensation that would have
been recorded in the categories of the statement of operations had stock-based
compensation not been separately stated therein:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED DECEMBER 31 ENDED DECEMBER 31
--------------------------------------- -------------------------------------
1999 1998 1999 1998
------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Costs of revenues $ 602,468 $ -- $ 597,701 $ --
Product development expenses -- -- -- --
Selling, general and administrative
expenses 20,759,600 335,004 21,037,318 665,425
=================== ================= ================= =================
$ 21,362,068 $ 335,004 $ 21,635,019 $ 665,425
=================== ================= ================= =================
</TABLE>
7. 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 four other
defendants in the United States District Court for the District of Connecticut.
The complaint asserted claims under Sections 10(b) and 18 of the Securities
Exchange Act of 1934, as well as several state law claims, including breach of
contract, fraud and misrepresentation. Mr. Fishman alleged that the Company (1)
failed to pay him the benefits and compensation to which he was entitled and (2)
made material misrepresentations in its filings with the Securities and Exchange
Commission. On December 11, 1998, the Court granted the Company's motion to
dismiss Mr. Fishman's action without prejudice to the plaintiff to seek leave to
file an amended complaint within 30 days. On May 12, 1999, the Court denied the
plaintiff's subsequent motion for leave to file a substituted complaint on the
basis that the federal securities law claim, the only federal claim alleged by
the plaintiff, was still deficient. Accordingly, the federal securities claim
was dismissed with prejudice. On or about June 4, 1999, Mr. Fishman commenced an
action against the same defendants and added as a seventh defendant, the
Company's former President, Steven Francesco, 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 have answered the complaint and filed
counterclaims for fraudulent inducement and breach of contract. Plaintiff has
responded to the counterclaims and discovery is proceeding. Although the Company
is vigorously defending this action, there can be no assurance that it will be
successful.
On or about May 11, 1998, Ronald G. Weiner filed a complaint against the Company
and Mr. Francesco in the Supreme Court of the State of New York, County of New
York. The complaint alleges, among other things, that in May 1993, by letter
from Mr. Francesco, Mr. Weiner was offered a 10% equity stake in Smart Phone
Services, Inc. ("SPS"), a Subchapter S company of which Mr. Francesco allegedly
was the President and sole
11
<PAGE>
shareholder, in exchange for his active involvement in, among other things,
raising capital and managing the financial aspects of SPS. The complaint alleges
that, in November 1993, Mr. Francesco sent a letter to Mr. Weiner in which he
(i) represented that SPS had failed to attract a single investor and (ii)
withdrew his offer to Mr. Weiner of a 10% equity position in SPS. The complaint
further alleges that, in conversations with Mr. Weiner beginning in November
1993, Mr. Francesco represented that he was ceasing all efforts to capitalize
SPS. The complaint alleges, among other things, that Mr. Francesco and SPS
breached their agreement with Mr. Weiner by withdrawing their offer to him of a
10% equity stake in SPS, and that, at the time Mr. Francesco represented that he
was ceasing efforts to capitalize SPS, he had actually formed the Company and
was actively seeking investors for it. The complaint further alleges that the
Company is a successor entity to SPS and that, therefore, the Company is liable
for SPS' and Mr. Francesco's alleged conduct in derogation of their alleged
agreement with Mr. Weiner. The complaint seeks, among other things, (i) a
declaratory judgment declaring Mr. Weiner a 10% equity shareholder of the
Company, (ii) a constructive trust in Mr. Weiner's favor for 10% of the
Company's equity shares and (iii) restitution against Mr. Francesco and the
Company for unjust enrichment. On his unjust enrichment claim, Mr. Weiner seeks
unspecified damages that he alleges to be at least $250,000. In its answer to
the complaint, the Company has denied the material allegations of the complaint
and asserted affirmative defenses. No discovery in this action has yet been
taken. Although the Company is vigorously defending this action, there can be no
assurance that it will be successful.
8. SUBSEQUENT EVENTS
On January 18, 2000, the Company completed an offering ("Offering") of 333,000
shares of Common Stock to accredited investors. Gross proceeds from the Offering
amounted to $4,995,000 or $15.00 per share of Common Stock. The Company has
agreed to file a registration statement with the Securities and Exchange
Commission ("SEC") within 90 days to register the shares and use its best
efforts to have such registration declared effective. Should the Company fail to
file a registration statement with the SEC within 90 days, the holders will be
entitled to receive an additional number of shares equal to 10% of the shares
purchased in the Offering. The sale of these shares and warrants was exempt from
the registration requirements of the Securities Act of 1933, as amended,
pursuant to Section 4(2) thereof.
In January 2000, the Company issued 618,239 shares of Common stock to Sebastain
Cassetta in connection with a restricted stock purchase agreement between the
Company and Mr. Cassetta. The Company received cash in the amount of $6,182 and
a note in the amount of $457,497. The note bears interest at 6.75% and is
secured by the Common Stock. No sales commissions were paid in connection with
such transaction. These shares were issued in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act.
In January 2000, the Company issued 206,080 shares of Common Stock to Mario
Rossi in connection with a restricted stock purchase agreement between the
Company and Mr. Rossi. The Company received cash in the amount of $2,061 and a
note in the amount of $152,499. The note bears interest at 6.75% and is secured
by the Common Stock. No sales commissions were paid in connection with such
transaction. These shares were issued in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act.
In January 2000, the Company issued 306,667 shares to certain participants of
the Company's November 1998 interim financing upon the exercise of warrants to
purchase such shares. Proceeds from the exercise of such warrants were $184,000.
These shares were issued in reliance upon the exemption from registration
provided by Section 4(2) of the Securities Act.
In January and February 2000, $739,000 of Prepaid Warrants were converted into
an aggregate of 527,855 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.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
- -------
PLAN OF OPERATION
The Company delivers Internet-based content and trade order routing solutions,
as well as "Web-to-Wireless" applications that drive transactions to its
strategic alliances ("Strategic Marketing Partners") and their customers. The
Company has developed online financial, transactional and media applications
using a unique "device-independent" delivery solution.
The Company's plan of operation includes programs for the sale of the Company's
information and transactional application services through Strategic Marketing
Partners utilizing a "business-to-business" strategy. Such a strategy provides
access to a large number of potential subscribers and allows 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.
As an early entrant in the dynamic market of distribution of financial
information and transaction services via wireless telephones and PDAs, the
Company is developing strategic marketing relationships with the wireless
equipment manufacturers, carriers and other value-added service providers and
potential corporate partners. The Company continuously seeks to increase product
performance and widen its distribution by building and maintaining this network
of Strategic Marketing Partners. Combining the Company's application development
and data platform with the core competencies of its Strategic Marketing
Partners, the Company is offering a packaged turnkey solution for extending
content and transactions to the wireless environment. 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 routing stock order entries; however, the Company has yet to derive any
revenues from such efforts.
Management believes that most of the Company's revenues will ultimately be
derived from consumers who purchase the Company's services through Strategic
Marketing Partners. The Company anticipates that Strategic Marketing Partners
will brand the Company's "bundled" information services with their own private
label and promote and distribute the Company's packaged offering to their
clients. The Company has the ability to customize the information package to be
offered to each Strategic Marketing Partner, by device. With the licensing of
four of the Company's Internet products by DTN, the Company has 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 eight to twelve people during the period ending June 30, 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.
RESULTS OF OPERATIONS
QUARTER ENDED DECEMBER 31, 1999 VS. QUARTER ENDED DECEMBER 31, 1998
During the quarters ended December 31, 1999 and 1998, the Company recorded
revenues of $912,621 and $344,024, respectively. Substantially all of such
revenues were earned through the Company's licensing agreement with DTN.
13
<PAGE>
During the quarter ended December 31, 1999, the Company incurred costs of
revenues of $207,779. Such costs consisted primarily of information and
communication costs ($38,900), personnel costs ($63,000), and computer hardware
leases, depreciation and maintenance costs ($76,600). During the quarter ended
December 31, 1998, the Company incurred costs of revenues of $182,437. These
costs consisted primarily of information and communication costs ($69,200),
personnel costs ($32,800), and computer hardware leases, depreciation and
maintenance costs ($80,000). In accordance with the terms of the Company's
agreement with it, DTN has assumed responsibility for costs related to the
delivery of information and the growth of the infrastructure relative to support
the customers of DTN. Product development expenses were $87,377 and $24,170 for
the quarters ended December 31, 1999 and 1998, respectively. Such costs
consisted primarily of personnel costs of $13,500 and $3,800 in 1999 and 1998,
respectively, and amortization expense relating to capitalized software
development costs of $73,800 and $19,400 in 1999 and 1998, respectively. During
the quarters ended December 31, 1999 and 1998, the Company capitalized $309,070
and $262,810, respectively, of development costs 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 December 31, 1999, the Company incurred selling,
general and administrative expenses of $725,427. Such costs were incurred
primarily for personnel costs ($379,000), facilities ($47,100), marketing and
advertising costs ($80,000) and professional fees ($170,200). During the quarter
ended December 31, 1998, the Company incurred selling, general and
administrative expenses of $666,693. Such costs consisted primarily of personnel
costs ($210,300), marketing and advertising costs ($94,800), professional fees
($239,300), facilities ($65,500) and telecommunications costs ($19,000).
Interest income for the quarters ended December 31, 1999 and 1998 amounted to
$2,016 and $706, respectively. Such amounts were earned primarily from the
Company's cash balances and from the Company's investments in highly rated bank
certificates of deposit. Interest and financing costs were $30,250 and $669,701
during the quarters ended December 31, 1999 and 1998, respectively. At December
31, 1999, the Company received a waiver of certain events of default pursuant to
its Prepaid Warrants, and accordingly, reversed previously recorded penalties
amounting to $717,700. During the quarter ended December 31, 1998, such costs
were incurred in connection with the $500,000 interim financing in December
1998, and the issuance of 50,000 shares of Common Stock to holders of $1,669,000
of Prepaid Warrants, in consideration of such holders agreeing to restrictions
on the exercise of the Prepaid Warrants and the resale of the shares of Common
Stock issuable upon such exercise.
SIX MONTHS ENDED DECEMBER 31, 1999 VS. SIX MONTHS ENDED DECEMBER 31, 1998
During the six months ended December 31, 1999 and 1998, the Company recorded
revenues of $1,720,913 and $693,729. Substantially all of such revenues were
earned through the Company's licensing agreement with DTN.
During the six months ended December 31, 1999, the Company incurred costs of
revenues of $445,412. Such costs consisted primarily of information and
communication costs ($87,300), personnel costs ($123,500), and computer hardware
leases, depreciation and maintenance costs ($161,300). During the six months
ended December 31, 1998, the Company incurred cost of revenues of $389,521.
These costs consist primarily of information and communication costs ($164,800),
personnel costs ($62,000), and computer hardware leases, depreciation and
maintenance costs ($160,800). Product development expenses were $134,222 and
$51,216 for the six months ended December 31, 1999 and 1998, respectively. In
1999 such costs consisted primarily of personnel costs of $13,500 and
amortization expense relating to capitalized software development costs of
$120,700. In 1998 such costs consisted primarily of personnel costs ($4,500),
amortization expense relating to capitalized software development costs
($19,400) and computer system consultants ($18,800). During the six months ended
December 31, 1999 and 1998, the Company capitalized $553,295 and $495,815,
respectively, of development costs in accordance with Statement 86.
14
<PAGE>
During the six months ended December 31, 1999, the Company incurred selling,
general and administrative expenses of $1,302,974, primarily for personnel costs
($613,500), facilities ($97,100), marketing and advertising costs ($159,400) and
professional fees ($347,800). During the six months ended December 31, 1998, the
Company incurred selling, general and administrative expenses of $1,167,130.
Such expenses were incurred primarily for personnel costs ($395,300), marketing
and advertising costs ($156,600), professional fees ($397,300), facilities
($115,600) and telecommunication costs ($33,700).
Interest income for the six months ended December 31, 1999 and 1998 amounted to
$13,033 and $2,908, respectively. During the six months ended December 31, 1999
and 1998, interest income was earned primarily from the Company's cash balances.
Interest and financing costs for the six months ended December 31, 1999 and 1998
were $30,250 and $810,797, respectively. At December 31, 1999, the Company
received a waiver of certain events of default pursuant to its Prepaid Warrants,
and accordingly, reversed previously recorded penalties amounting to $717,700.
During the six months ended December 31, 1998, such costs were incurred in
connection with the $500,000 interim financing in December 1998, and the
issuance of 50,000 shares of Common Stock to holders of $1,669,000 of Prepaid
Warrants, in consideration of such holders agreeing to restrictions on the
exercise of the Prepaid Warrants and the resale of the shares of Common Stock
issuable upon such exercise.
15
<PAGE>
CAPITAL RESOURCES AND LIQUIDITY
Since inception of the Company on August 20, 1993 through March 21, 1996, the
date of the initial public offering of securities ("IPO"), the Company had
funded its operations through a combination of private debt and equity
financings totaling $4,160,000 and $12,877,500, respectively.
In May 1997, the Company arranged a line of credit facility with Zanett
Lombardier, Ltd ("ZLL"). 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 56,627
common stock purchase warrants to ZLL. Similarly, the Company issued 11,438
warrants for each of the July and September amendments. These warrants are
currently exercisable at prices ranging from $4.97 to $6.07 and expire in
September 2002.
In May 1997, the Company entered into a three 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, Zanett Securities Corporation, now known as Planet Zanett
Internet Incubator, 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 Prepaid Warrants expire on
September 30, 2000. As part of the Placement, ZLL 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 Placement of $2,643,941 were used for general working capital
requirements.
On April 23, 1998, the Company entered into a Software License and Service
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 received minimum monthly payments of $100,000
through April 1999.
On June 24, 1999, the Company and DTN entered into a License Agreement that
amended the Software License and Service Agreement dated April 23, 1998. In
consideration of the receipt of $5.175 million, the Company granted DTN an
exclusive perpetual worldwide license to the Company's Internet-based (i)
real-time stock quote product, (ii) online trading vehicle for customers of
small and medium sized brokerage companies, (iii) administrative reporting
package for brokers of small and medium sized brokerage companies, and (iv)
order entry/routing system. Additionally, the Company received $324,000 in
exchange for an agreement to issue warrants to purchase 300,000 shares of the
Company's Common Stock at an exercise price of $8.60 per share. The Company has
agreed to continue to operate these products and provide maintenance and
enhancement services in exchange for a percentage of the revenues earned by DTN
therefrom. The cost of the Company's commitment to provide such maintenance and
enhancement services is limited to a maximum of 20% of the revenues earned by
the Company. None of the Company's wireless products were included in this
transaction. Although the Company believes that DTN has 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.
In November 1998, the Company completed a 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 8% 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.
Such notes were repaid in June 1999.
On July 1, 1999, the Company entered into an agreement with Arnhold & S.
Bleichroeder, Inc. ("ASB") to settle the Company's obligation to ASB pursuant to
the default provisions of the Prepaid Warrants. Accordingly, the Company paid
ASB $325,000 to redeem the Prepaid Warrants and issued 180,000 shares of
16
<PAGE>
Common Stock in full settlement of all obligations to ASB.
In January 2000, the Company issued 306,667 shares of Common Stock to certain
investors in the November 1998 interim financing upon the exercise of warrants
to purchase such shares. Proceeds from the exercise of these warrants were
$184,000.
On January 18, 2000, the Company completed an offering ("Offering") of 333,000
shares of its Common Stock to accredited investors. Gross proceeds from the
Offering amounted to $4,995,000 or $15.00 per share of Common Stock. The Company
has agreed to file a registration statement with the Securities and Exchange
Commission ("SEC") within 90 days to register the shares and use its best
efforts to have such registration declared effective. Should the Company fail to
file a registration statement with the SEC within 90 days, the holders will be
entitled to receive an additional number of shares equal to 10% of the shares
purchased in the Offering.
The Company's financial statements for the period ended December 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 $7,124,126, $5,040,009, and
$4,434,482 for the years ended June 30, 1999, 1998 and 1997, respectively, and
as of December 31, 1999 had an accumulated deficit of $43,042,236 and a
deficiency of net assets of $3,826,746. However, giving consideration to the
just completed Offering, the Company has stockholders' equity at December 31,
1999, on a pro-forma basis, of approximately $863,700. The Company is also a
defendant in several legal proceedings that could have a material adverse effect
on the Company's financial position, cash flows, and results of operations. The
Company's operating history and environment raise substantial doubt about its
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.
The Company has retained Chase Securities, Inc. as its investment banking firm
to assist the Company with raising additional capital for continued development
of its technology and expansion. 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, 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.
17
<PAGE>
PART 2. OTHER INFORMATION
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 four other
defendants in the United States District Court for the District of Connecticut.
The complaint asserted claims under Sections 10(b) and 18 of the Securities
Exchange Act of 1934, as well as several state law claims, including breach of
contract, fraud and misrepresentation. Mr. Fishman alleged that the Company (1)
failed to pay him the benefits and compensation to which he was entitled and (2)
made material misrepresentations in its filings with the Securities and Exchange
Commission. On December 11, 1998, the Court granted the Company's motion to
dismiss Mr. Fishman's action without prejudice to the plaintiff to seek leave to
file an amended complaint within 30 days. On May 12, 1999, the Court denied the
plaintiff's subsequent motion for leave to file a substituted complaint on the
basis that the federal securities law claim, the only federal claim alleged by
the plaintiff, was still deficient. Accordingly, the federal securities claim
was dismissed with prejudice. On or about June 4, 1999, Mr. Fishman commenced an
action against the same defendants and added as a seventh defendant, the
Company's former President, Steven Francesco, 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 have answered the complaint and filed
counterclaims for fraudulent inducement and breach of contract. Plaintiff has
responded to the counterclaims and discovery is proceeding. Although the Company
is vigorously defending this action, there can be no assurance that it will be
successful.
On or about May 11, 1998, Ronald G. Weiner filed a complaint against the Company
and Mr. Francesco in the Supreme Court of the State of New York, County of New
York. The complaint alleges, among other things, that in May 1993, by letter
from Mr. Francesco, Mr. Weiner was offered a 10% equity stake in Smart Phone
Services, Inc. ("SPS"), a Subchapter S company of which Mr. Francesco allegedly
was the President and sole shareholder, in exchange for his active involvement
in, among other things, raising capital and managing the financial aspects of
SPS. The complaint alleges that, in November 1993, Mr. Francesco sent a letter
to Mr. Weiner in which he (i) represented that SPS had failed to attract a
single investor and (ii) withdrew his offer to Mr. Weiner of a 10% equity
position in SPS. The complaint further alleges that, in conversations with Mr.
Weiner beginning in November 1993, Mr. Francesco represented that he was ceasing
all efforts to capitalize SPS. The complaint alleges, among other things, that
Mr. Francesco and SPS breached their agreement with Mr. Weiner by withdrawing
their offer to him of a 10% equity stake in SPS, and that, at the time Mr.
Francesco represented that he was ceasing efforts to capitalize SPS, he had
actually formed the Company and was actively seeking investors for it. The
complaint further alleges that the Company is a successor entity to SPS and
that, therefore, the Company is liable for SPS' and Mr. Francesco's alleged
conduct in derogation of their alleged agreement with Mr. Weiner. The complaint
seeks, among other things, (i) a declaratory judgment declaring Mr. Weiner a 10%
equity shareholder of the Company, (ii) a constructive trust in Mr. Weiner's
favor for 10% of the Company's equity shares and (iii) restitution against Mr.
Francesco and the Company for unjust enrichment. On his unjust enrichment claim,
Mr. Weiner seeks unspecified damages that he alleges to be at least $250,000. In
its answer to the complaint, the Company has denied the material allegations of
the complaint and asserted affirmative defenses. No discovery in this action has
yet been taken. Although the Company is vigorously defending this action there
can be no assurance that it will be successful.
18
<PAGE>
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 1, 1999, the Company entered into an agreement with Arnhold & 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. Accordingly, the Company paid $325,000 to
redeem the Prepaid Warrants and issued 180,000 shares of Common Stock in full
settlement of all obligations to ASB. No commissions were paid in connection
with such transaction. These shares were issued in reliance upon the exemption
from registration provided by Section 4(2) of the Securities Act of 1933, as
amended (the "Securities Act").
In November 1999, $87,803 of Prepaid Warrants were converted into an aggregate
of 30,525 shares of Common Stock of the Company. No sales commissions were paid
in connection with such transaction. The shares were issued in reliance upon the
exemption from registration provided by Section 3(a)(9) of the Securities Act.
In November 1999, Zanett Lombardier, Ltd converted certain warrants held by it
into an aggregate of 25,042 shares of Common Stock. No sales commissions were
paid in connection with such transaction. These shares were issued in reliance
upon the exemption from registration provided by Section 4(2) of the Securities
Act.
In December 1999, the Company issued 16,666 shares of Common Stock to
Ehrenkrantz King Nussbaum, Inc. financial advisors to the Company, upon the
exercise of warrants to purchase such Common Stock. Proceeds from the exercise
of these warrants were $62,497. No sales commissions were paid in connection
with such transaction. The shares were issued in reliance upon the exemption
from registration provided by Section 4(2) of the Securities Act.
In January 2000 the Company issued 306,667 shares to certain investors in the
Company's November 1998 interim financing upon the exercise of warrants to
purchase such shares. Proceeds from the exercise of these warrants were
$184,000. No sales commissions were paid in connection with such transaction.
These shares were issued in reliance upon the exemption from registration
provided by Section 4(2) of the Securities Act.
In January 2000, the Company issued 618,239 shares of Common stock to Sebastain
Cassetta in connection with a restricted stock purchase agreement between the
Company and Mr. Cassetta. The Company received cash in the amount of $6,182 and
a note in the amount of $457,497. The note bears interest at 6.75% and is
secured by the Common Stock. No sales commissions were paid in connection with
such transaction. These shares were issued in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act.
In January 2000, the Company issued 206,080 shares of Common Stock to Mario
Rossi in connection with a restricted stock purchase agreement between the
Company and Mr. Rossi. The Company received cash in the amount of $2,061 and a
note in the amount of $152,499. The note bears interest at 6.75% and is secured
by the Common Stock. No sales commissions were paid in connection with such
transaction. These shares were issued in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act.
In January and February 2000, $739,000 of Prepaid Warrants were converted into
an aggregate of 527,855 shares of Common Stock of the Company. No sales
commissions were paid in connection with such transactions. The shares were
issued in reliance upon the exemption from registration provided by Section
3(a)(9) of the Securities Act.
On January 18, 2000, the Company completed an offering ("Offering") of 333,000
shares of Common Stock to accredited investors. Gross proceeds from the Offering
amounted to $4,995,000 or $15.00 per share of Common Stock. The Company has
agreed to file a registration statement with the SEC within 90 days to register
the shares and use its best efforts to have such registration declared
effective. Should the Company fail to file a registration statement with the SEC
within 90 days, the holders will be entitled to receive an additional number of
shares equal to 10% of the shares purchased in the Offering. America First
Associates Corp. ("Associates"), the placement agent for 233,000 shares sold in
the Offering, received a commission of $279,600, an unaccountable expense
allowance of $25,000 and warrants to purchase 18,640 shares of Common Stock at
$15.00 per share through January 18, 2005 in connection with this transaction.
The sale of these shares and warrants was exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) thereof.
19
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibit is included herein:
Exhibit 27 - Financial Data Schedule
(b) REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the three
months ended December 31, 1999.
20
<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 22, 2000 /s/ SEBASTIAN E. CASSETTA
------------------- ----------------------------------
Sebastian E. Cassetta
Chairman of the Board, Chief
Executive Officer
Date: February 22, 2000 /s/ THOMAS W. HALLER
------------------- ----------------------------------
Thomas W. Haller
Chief Financial Officer, Treasurer
21
<PAGE>
EXHIBIT 27 - FINANCIAL DATA SCHEDULE
ITEM 601(C) OF REGULATION S-B
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1999 FINANCIAL STATEMENTS OF SMARTSERV ONLINE, INC. AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
December 31, 1999
<S> <C>
Cash and cash items $ 371,581
Marketable securities --
Notes and accounts receivable -trade:
Billed 386,007
Unbilled --
Allowances for doubtful accounts --
Prepaid expenses 51,777
Total current assets 809,365
Property and equipment 1,127,527
Accumulated depreciation 666,329
Total assets 2,459,843
Total current liabilities 2,973,322
Bonds, mortgages and similar debt --
Common Stock 14,601
Preferred Stock - mandatory redemption --
Preferred Stock - no mandatory redemption --
Other stockholders' equity (deficit) (3,841,347)
Total liabilities and stockholders' equity (deficiency) (3,826,746)
Net sales of information services 1,720,913
Total revenues 1,720,913
Cost of services 579,634
Total costs and expenses of sales 579,634
Other costs and expenses 22,937,993
Provision for doubtful accounts and notes --
Interest, amortization of debt discount and other financing costs (687,450)
Income/(loss) before taxes (21,096,231)
Income tax expense --
Income/(loss) from continuing operations (21,096,231)
Discontinued operations --
Extraordinary items --
Cumulative effect of changes in accounting principles --
Net income or (loss) $ (21,096,231)
Earnings/(loss) per share - basic $ (15.19)
Earnings/(loss) per share - diluted $ (15.19)
22
</TABLE>
