================================================================================
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, 2000
--------------
COMMISSION FILE NUMBER 0-28008
-------
SMARTSERV ONLINE, INC.
- --------------------------------------------------------------------------------
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3750708
- --------------------------------------------------------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
METRO CENTER, ONE STATION PLACE, STAMFORD, CONNECTICUT 06902
- --------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(203) 353-5950
- --------------------------------------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER 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 MAY 15,
2000 WAS 4,099,614.
================================================================================
<PAGE>
SMARTSERV ONLINE, INC.
FORM 10-QSB
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Financial Statements
<S> <C>
Balance Sheets - June 30, 1999 and March 31, 2000 (unaudited).......................................2
Statements of Operations - three months ended March 31, 2000 and
1999 and nine months ended March 31, 2000 and 1999 (unaudited)......................................4
Statement of Changes in Stockholders' Deficiency - nine months
ended March 31, 2000 (unaudited)....................................................................5
Statements of Cash Flows - three months ended March 31, 2000 and
1999 and nine months ended March 31, 2000 and 1999 (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..........................................................20
Item 6. Exhibits and Reports on Form 8-K...................................................................22
Signatures.........................................................................................23
</TABLE>
1
<PAGE>
SMARTSERV ONLINE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
2000 1999
-------------------- ------------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents $ 5,175,577 $ 2,165,551
Accounts receivable 265,465 348,278
Prepaid expenses 204,061 50,150
-------------------- ------------------
Total current assets 5,645,103 2,563,979
-------------------- ------------------
Property and equipment - net 530,594 498,448
Other assets
Capitalized software development costs - net of accumulated
amortization of $291,219 at March 31, 2000 and $82,108 at
June 30, 1999 1,321,040 683,337
Security deposits 73,374 74,834
-------------------- ------------------
1,394,414 758,171
-------------------- ------------------
Total Assets $ 7,570,111 $ 3,820,598
==================== ==================
</TABLE>
See accompanying notes.
2
<PAGE>
SMARTSERV ONLINE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
2000 1999
-------------------- ------------------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities
<S> <C> <C>
Accounts payable $ 919,580 $ 780,543
Accrued liabilities 249,181 474,189
Accrued liabilities to warrant holders -- 1,311,365
Salaries payable 108,198 93,443
Capital lease obligation -- 70,147
-------------------- ------------------
Total current liabilities 1,276,959 2,729,687
-------------------- ------------------
Deferred revenues 4,555,739 5,798,211
STOCKHOLDERS' EQUITY (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 - 4,098,388 shares at March 31, 2000 and
and 1,199,787 shares at June 30, 1999 40,983 11,998
Common stock subscribed 57,614 1,812,554
Additional paid-in capital 61,956,440 20,679,611
Unearned compensation (2,621,539) (3,452,904)
Notes receivable from officers (666,841) (1,812,554)
Accumulated deficit (57,029,244) (21,946,005)
-------------------- ------------------
Total stockholders' equity (deficiency) 1,737,413 (4,707,300)
-------------------- ------------------
Total Liabilities and Stockholders' Equity (Deficiency) $ 7,570,111 $ 3,820,598
==================== ==================
</TABLE>
See accompanying notes.
3
<PAGE>
SMARTSERV ONLINE, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED MARCH 31 ENDED MARCH 31
--------------------------------------- --------------------------------------
2000 1999 2000 1999
------------------ ----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Revenues $989,943 $334,624 $2,710,856 $1,028,353
------------------ ----------------- ----------------- ----------------
Costs and expenses:
Costs of revenues 157,942 204,277 603,355 593,798
Product development expenses 106,312 81,389 240,532 132,605
Selling, general and administrative
expenses 747,227 609,094 2,050,202 1,799,139
Stock-based compensation 14,001,007 399,092 35,636,026 1,041,602
------------------ ----------------- ----------------- ----------------
Total costs and expenses 15,012,488 1,293,852 38,530,115 3,567,144
------------------ ----------------- ----------------- ----------------
Loss from operations (14,022,545) (959,228) (35,819,259) (2,538,791)
------------------ ----------------- ----------------- ----------------
Other income (expense):
Interest income 45,537 864 58,570 3,772
Interest expense and other
financing costs (10,000) (1,420,546) (40,250) (2,231,343)
Prepaid warrant costs -- -- 717,700 --
------------------ ----------------- ----------------- ----------------
35,537 (1,419,682) 736,020 (2,227,571)
------------------ ----------------- ----------------- ----------------
Net loss $ (13,987,008) $ (2,378,910) $(35,083,239) $ (4,766,362)
================== ================= ================= ================
Basic and diluted earnings per
common share $ (4.33) $ (1.98) $ (17.55) $ (4.45)
================== ================= ================= ================
Weighted average shares outstanding 3,232,687 1,198,563 1,998,790 1,072,264
================== ================= ================= ================
</TABLE>
See accompanying notes.
4
<PAGE>
SMARTSERV ONLINE, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
NINE MONTHS ENDED MARCH 31, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
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>
Balance 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 180,000 1,800 -- -- 266,895 -- --
holder
Issuance of Common Stock
upon exercise of employee
stock options 47,808 478 -- -- 80,290 -- --
Issuance of warrants to
purchase 284,000 shares
of Common Stock for
various consulting
services -- -- -- -- 137,300 (77,400) --
Conversion of 1,357 Prepaid
Common Stock Purchase
Warrants into Common Stock 810,785 8,107 -- -- (8,107) -- --
Issuance of 1,103,157 shares
of Common Stock in
connection with
Officer's Restricted
Stock Purchase and
Employment Agreements 1,026,319 10,263 (1,754,940) 1,145,713 3,940,976 -- --
Issuance of Common Stock
upon exercise of warrants
to purchase Common Stock 500,689 5,007 -- -- 707,938 -- --
Amortization of unearned
compensation over the
terms of consulting
agreements -- -- -- -- -- 908,765 --
Issuance of 333,000 shares
of Common Stock and
warrants to purchase
18,640 shares of Common
Stock in connection with
private placement, net of
direct costs of $326,200 333,000 3,330 -- -- 4,665,675 -- --
Change in market value of
employee stock options and
stock subscriptions -- -- -- -- 31,485,862 -- --
Net loss for the period -- -- -- -- -- -- (35,083,239)
-----------------------------------------------------------------------------------------
Balance at March 31, 2000 4,098,388 $40,983 $57,614 $(666,841) $61,956,440 $ (2,621,539) $(57,029,244)
=========================================================================================
</TABLE>
See accompanying notes.
5
<PAGE>
SMARTSERV ONLINE, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED MARCH 31 ENDED MARCH 31
------------------------------------ --------------------------------------
2000 1999 2000 1999
----------------- ---------------- ------------------ -----------------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net loss $ (13,987,008) $ (2,378,910) $(35,083,239) $ (4,766,362)
Adjustments to reconcile net loss to net cash used
for operating activities:
Depreciation and amortization 146,891 97,739 368,237 237,555
Noncash interest expense and other
financing costs -- 665,360 -- 1,459,605
Noncash compensation costs 13,624,852 38,837 34,667,361 38,837
Noncash consulting costs 376,155 360,255 968,665 1,002,765
Amortization of unearned revenues (414,160) (115,534) (1,242,472) (146,602)
Changes in operating assets and liabilities
Accounts receivable 120,542 16,770 82,813 51,581
Prepaid expenses (152,284) 36,580 (153,911) (36,047)
Accounts payable and accrued liabilities 75,705 305,480 (977,142) 844,530
Accrued interest payable -- 13,807 -- 17,583
Salaries payable 60,005 29,864 14,755 (5,046)
Unearned revenues -- 13,152 -- 226,203
Security deposit -- -- 1,460 --
----------------- ---------------- ------------------ -----------------
Net cash used for operating activities (149,302) (916,600) (1,353,473) (1,075,398)
----------------- ---------------- ------------------ -----------------
INVESTING ACTIVITIES
Purchase of equipment (127,901) (146,104) (191,271) (168,799)
Capitalization of software development costs (293,519) (176,970) (846,814) (672,785)
----------------- ---------------- ------------------ -----------------
Net cash used for investing activities (421,420) (323,074) (1,038,085) (841,584)
----------------- ---------------- ------------------ -----------------
FINANCING ACTIVITIES
Repayment of capital lease obligation (23,942) (21,222) (70,147) (61,575)
Proceeds from the issuance of notes -- 43,500 -- 478,500
Repayment of notes -- (75,000) -- (75,000)
Proceeds from the issuance of common stock, net of
direct costs of $326,200 5,398,660 -- 5,471,731 --
Deferred financing costs -- -- -- (35,000)
Proceeds of advances from DTN Corporation -- 1,408,287 -- 1,408,287
----------------- ---------------- ------------------ -----------------
Net cash provided by financing activities 5,374,718 1,355,565 5,401,584 1,715,212
----------------- ---------------- ------------------ -----------------
Increase (decrease) in cash and cash equivalents 4,803,996 115,891 3,010,026 (201,770)
Cash and cash equivalents - beginning of period 371,581 36,564 2,165,551 354,225
----------------- ---------------- ------------------ -----------------
Cash and cash equivalents - end of period $ 5,175,577 $ 152,455 $ 5,175,577 $ 152,455
================= ================ ================== =================
</TABLE>
See accompanying notes.
6
<PAGE>
SMARTSERV ONLINE, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
MARCH 31, 2000
1. ORGANIZATION
SmartServ Online, Inc. (the "Company") commenced operations on August 20, 1993.
The Company delivers Internet-based and wireless content, as well as
"Web-to-Wireless" applications, such as securities trade order routing, that
enable e-commerce by providing transactional and information services to its
alliance partners. The Company has developed online financial, transactional and
media applications using a unique "device independent" delivery solution and
makes these services available to wireless telephones and personal digital
assistants, personal computers and the Internet through its application software
and communications architecture. The Company's services facilitate stock trading
and disseminate real-time stock quotes, business and financial news, sports
information, private-labeled electronic mail, national weather reports and other
business and entertainment 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 accounting principles generally accepted in the United States 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, 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 nine months ended March 31, 2000 are not necessarily
indicative of those expected for the year ending June 30, 2000.
USE OF ESTIMATES
- ----------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States, 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, commencing on June 1, 1999.
7
<PAGE>
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, which have been repriced, 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.
RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------
In December 1999, the SEC staff released Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 provides
interpretive guidance on the recognition, presentation and disclosure of revenue
in the financial statements. SAB 101 must be applied to the financial statements
no later than the quarter ending September 30, 2000. The Company does not
believe that the adoption of SAB 101 will have a material affect on the
Company's financial results.
3. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
Property and equipment consist of the following:
MARCH 31, JUNE 30,
2000 1999
------------------- -----------------
<S> <C> <C>
Data processing equipment $ 891,481 $ 700,210
Data processing equipment 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
------------------- -----------------
1,255,428 1,064,157
Accumulated depreciation, including $143,623 and $106,691 at
March 31, 2000 and June 30, 1999, respectively, for equipment
under a capital lease (724,834) (565,709)
------------------- -----------------
$ 530,594 $ 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, holders of $1,357,000 of the Company's Prepaid Warrants
converted such warrants into 810,785 shares of Common Stock at exercise prices
ranging from $1.40 to $8.40 per share.
8
<PAGE>
In October 1999, 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. Through December 31, 1999, the restricted
stock awards were variable plan awards pursuant to APB No. 25 and accordingly,
the Company was required to recognize compensation expense for the changes in
the market value of its Common Stock. In conjunction therewith, the Company has
recorded a charge to compensation expense of $15,636,300 for the nine-month
period ended March 31, 2000, as well as a corresponding increase to additional
paid-in capital.
In October 1999, the Board of Directors authorized the Company to enter into a
restricted stock agreement with Robert Pearl, Vice President Strategy and
Alliances, pursuant to which Mr. Pearl was awarded 76,818 shares of Common Stock
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. In consideration of $125,000 and the
issuance of warrants to purchase 8,000 shares of Common Stock at $18.375 per
share, the Company extended this agreement for the two-year period commencing
October 24, 2000. The warrants expire on October 24, 2004. The Company recorded
a noncash charge of $62,400 to unearned compensation for the value of the
warrants which is being amortized to income over the term of the agreement.
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.
During the period, the Board of Directors authorized the issuance of an
aggregate of 202,000 shares of Common Stock to Messrs. Cassetta and Rossi in
satisfaction of its bonus obligations to Messrs. Cassetta and Rossi, pursuant to
their employment contracts. The Company has recorded a charge to compensation
expense of $3,181,500 for the change in fair value of the Company's Common Stock
between the due date of the obligation and the grant date of the Common Stock.
The Company also issued 824,319 shares of Common Stock to Messrs. Cassetta and
Rossi in connection with restricted stock purchase agreements between the
Company and Messrs. Cassetta and Rossi. The Company received cash in the amount
of $8,243 and notes in the amount of $609,996. The notes bear interest at 6.75 %
and are secured by the Common Stock.
During the period, the Company granted warrants to purchase 16,000 shares of
Common Stock at an exercise price of $4 to a computer software consultant. The
Company recorded a noncash charge of $15,000 to unearned compensation which is
being amortized to income over the term of the agreement.
During the period, the Company issued 333,334 shares of Common Stock to certain
participants of the Company's November 1998 financing upon the exercise of
warrants to purchase such shares. Proceeds from the exercise of these warrants
were $200,000.
During the period, the Company issued warrants to purchase 10,000 shares of
Common Stock at an exercise price of $2.50 per share to a marketing consultant
in connection with services rendered to the Company. Such warrants were recorded
in accordance with the Black Scholes pricing methodology. The Company recorded a
charge to earnings of $19,900 in connection with such issuance.
9
<PAGE>
In January 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. In
connection with this transaction, the Company issued warrants to purchase 18,640
shares of Common Stock at $15.00 per share through January 18, 2005 to American
First Associates Corp. in connection with services as placement agent for the
Offering.
During the period, the Company issued warrants to purchase 50,000 shares of
Common Stock at an exercise price of $3.00 per share to a marketing consultant
in connection with the completion of services rendered to the Company. The
Company recorded a charge to earnings of $40,000 in connection with such
issuance.
During the period, the Company issued 142,308 shares of Common Stock to certain
investors at prices ranging from $0.60 to $9.28 per share upon exercise of
warrants to purchase such shares. Proceeds from the exercise of these warrants
were $512,900.
5. 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
--------------------------------------- --------------------------------------
2000 1999 2000 1999
------------------ ----------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Numerator:
Net loss $ (13,987,008) $ (2,378,910) $ (35,083,239) $ (4,766,362)
================== ================= ================== ==================
Denominator:
Weighted average shares 3,232,687 1,198,563 1,998,790 1,072,264
================== ================= ================== ==================
Basic and diluted earnings per
common share $ (4.33) $ (1.98) $ (17.55) $ (4.45)
================== ================= ================== ==================
</TABLE>
At March 31, 2000 $612,000 of the Company's prepaid common stock purchase
warrants ("Prepaid Warrants") were outstanding. At that date, the Prepaid
Warrants were convertible into 437,000 shares of Common Stock. Additionally
there were 3,597,200 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 October 2004. 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 March 31, 2000, options and restricted stock
awards have been authorized for the purchase of 733,000 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.
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 require the Company to record compensation expense for changes
in the fair value of the Company's Common Stock.
10
<PAGE>
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 NINE MONTHS
ENDED MARCH 31 ENDED MARCH 31
--------------------------------------- --------------------------------------
2000 1999 2000 1999
------------------ ----------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Costs of revenues $ 3,039,090 $ 8,720 $ 3,636,791 $ 8,720
Selling, general and administrative
expenses 10,961,917 390,372 31,999,235 1,032,882
------------------ ----------------- ------------------ ------------------
$ 14,001,007 $ 399,092 $ 35,636,026 $ 1,041,602
================== ================= ================== ==================
</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 counter-claim, and discovery is proceeding. By pleading dated
February 29, 2000, Mr. Fishman filed an application with the Court seeking entry
of a prejudgment remedy in the amount of $19,250,000. To date, Mr. Fishman's
application has not been acted on by the Court and no hearing date has been set.
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 Mr.
Francesco and the Company 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 (1) represented that SPS had failed to
attract a single investor and (2) 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
11
<PAGE>
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 SmartServ 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, (1) a declaratory judgment declaring Mr. Weiner a 10%
equity shareholder of the Company, (2) a constructive trust in Mr. Weiner's
favor for 10% of the Company `s equity shares and (3) 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
the Company's answer to the complaint, the Company 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.
On or about February 29, 2000, Commonwealth Associates, L.P. filed a complaint
against the Company in the Supreme Court of the State of New York, County of New
York. The complaint alleges that on or about August 19, 1999, Commonwealth and
the Company entered into an engagement letter pursuant to which Commonwealth was
to provide financial advisory and investment banking services to the
Company in connection with a possible combination between the Company and Data
Link Systems Corporation. The engagement letter provided for a nonrefundable fee
of $15,000 payable in cash or common stock at the Company's option. The
complaint alleges that notwithstanding the terms of the engagement letter the
fee was to be paid in stock and seeks 13,333 shares of common stock or at least
$1,770,000 together with interest and costs. In the Company's answer to the
complaint, the Company denied the material allegations of the complaint.
Discovery in this action has recently commenced and 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.
8. SUBSEQUENT EVENTS
On May 15, 2000, the Company completed an offering of 353,535 shares of its
Common Stock to accredited investors. Proceeds from this transaction amounted to
$16,715,000, net of commissions and expenses of $785,000.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
- ------
PLAN OF OPERATION
The Company delivers Internet-based and wireless content as well as
"Web-to-Wireless" applications, such as securities trade order routing, that
enable e-commerce by providing transactional and information services to its
alliance partners. 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 its
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 for the distribution of financial
information and transaction services via wireless telephones and personal
digital assistants, or PDAs, the Company is developing strategic marketing
relationships with 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 continue to be
derived from consumers who purchase its services through Strategic Marketing
Partners. The Company anticipates that Strategic Marketing Partners will brand
its 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 its Internet
products by DTN in 1998, 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 six 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.
13
<PAGE>
RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 2000 VS. QUARTER ENDED MARCH 31, 1999
During the quarters ended March 31, 2000 and 1999, the Company recorded revenues
of $989,943 and $334,624, respectively. Substantially all of such revenues were
earned through the Company's licensing of its products to DTN. Of such amounts,
the Company recorded $414,160 and $115,534, respectively, as amortization of
deferred revenues emanating from its licensing agreement with DTN.
During the quarter ended March 31, 2000, the Company incurred costs of revenues
of $157,942. These costs consisted primarily of information and communication
costs ($32,700), personnel costs ($29,200), and computer hardware leases,
depreciation and maintenance costs ($81,100). During the quarter ended March 31,
1999, the Company incurred costs of revenues of $204,277. Such costs consisted
primarily of information and communication costs ($44,400), personnel costs
($45,500), and computer hardware leases, depreciation and maintenance costs
($94,700). In accordance with the terms of the Company's agreement with it, 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. Product
development costs were $106,312 and $81,389 for the quarters ended March 31,
2000 and 1999, respectively. Such costs consisted primarily of personnel costs
of $17,900 and $5,600 in 2000 and 1999, respectively, and amortization expenses
relating to capitalized software development costs of $88,400 and $74,800 in
2000 and 1999, respectively. During the quarters ended March 31, 2000 and 1999,
the Company capitalized $293,519 and $176,970, 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 March 31, 2000, the Company incurred selling, general
and administrative expenses of $747,227. Such costs were incurred primarily for
personnel costs ($275,200), facilities ($48,700), marketing and advertising
costs ($134,600) and professional fees ($207,400). During the quarter ended
March 31, 1999, the Company incurred selling, general and administrative
expenses of $609,094. Such costs were incurred primarily for personnel costs
($204,000), marketing and advertising costs ($53,700), professional fees
($195,800), facilities ($51,000) and communications costs ($18,000).
During the quarter ended March 31, 2000, noncash charges for stock-based
compensation amounted to $14,001,007 compared to $399,092 during the quarter
ended March 31, 1999. Such noncash charges in 2000 were primarily related to
personnel costs ($13,624,900) resulting from the valuation of stock-based
compensation 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. Noncash charges for professional fees for the quarters
ended March 31, 2000 and 1999, were $366,200 and $360,300, respectively,
resulting from the issuance of common stock purchase warrants to various
financial, marketing and technical consultants. The value of such common stock
purchase warrants was recorded in accordance with the Black-Scholes pricing
methodology.
Interest income for the quarters ended March 31, 2000 and 1999 amounted to
$45,537 and $864, respectively. During the quarter ended March 31, 2000, such
amounts were earned from the Company's investments in highly rated commercial
paper. During the quarter ended March 31, 1999, such amounts were earned
primarily from the Company's cash balances. During the quarters ended March 31,
2000 and 1999, interest and financing costs were $10,000 and $1,420,546,
respectively. During the quarter ended March 31, 2000 such costs were related to
the partial redemption of the Company's Prepaid Warrants. During the quarter
ended March 31, 1999, such costs consisted primarily of interest and the
amortization of deferred financing costs ($454,700) associated with the issuance
of $550,000 of
14
<PAGE>
convertible notes in December 1998 and January 1999, and costs ($958,900)
associated with the settlement of obligations to holders of the Company's
Prepaid Warrants.
NINE MONTHS ENDED MARCH 31, 2000 VS. NINE MONTHS ENDED MARCH 31, 1999
During the nine months ended March 31, 2000 and 1999, the Company recorded
revenues of $2,710,856 and $1,028,353, respectively. Substantially all of such
revenues were earned through the Company's licensing of its products to DTN. Of
such amounts, the Company recorded $1,242,472 and $146,602, respectively, as
amortization of deferred revenues emanating from its licensing agreement with
DTN.
During the nine months ended March 31, 2000, the Company incurred costs of
revenues of $603,355. These costs consisted primarily of information and
communication costs ($98,600), personnel costs ($152,700), computer hardware
leases, depreciation and maintenance costs ($242,400) and consulting fees
($43,600). During the nine months ended March 31, 1999, the Company incurred
costs of revenues of $593,798. Such costs consisted primarily of information and
communication costs ($209,200), personnel costs ($108,500), and computer
hardware leases, depreciation and maintenance costs ($255,400). Product
development costs were $240,532 and $132,605 for the nine months ended March 31,
2000 and 1999, respectively. Such costs consisted primarily of personnel costs
of $31,400 and $8,900 in 2000 and 1999, respectively, and amortization expenses
relating to capitalized software development costs of $209,100 and $94,200 in
2000 and 1999, respectively. During the nine months ended March 31, 2000 and
1999, the Company capitalized $846,814 and $672,875, respectively, of
development costs in accordance with Statement 86.
During the nine months ended March 31, 2000, the Company incurred selling,
general and administrative expenses of $2,050,202. Such costs were incurred
primarily for personnel costs ($888,700), facilities ($145,800), marketing and
advertising costs ($294,000) and professional fees ($555,200). During the nine
months ended March 31, 1999, the Company incurred selling, general and
administrative expenses of $1,799,139. Such costs were incurred primarily for
personnel costs ($599,200), marketing and advertising costs ($210,300),
professional fees ($616,000), facilities ($166,600) and telecommunications costs
($51,700).
During the nine months ended March 31, 2000, noncash charges for stock-based
compensation amounted to $35,636,026 compared to $1,041,602 during the nine
months ended March 31, 1999. Such noncash charges in 2000 were primarily related
to personnel costs ($34,677,300) resulting from the valuation of stock-based
compensation in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25"). Noncash charges
pertaining to professional fees amounted to $958,700 and $1,002,800, for the
nine months ended March 31, 2000 and 1999, respectively. These noncash
professional fees resulted from the issuance of common stock purchase warrants
to various various financial, marketing and technical consultants. The value of
such common stock purchase warrants was recorded in accordance with the
Black-Scholes pricing methodology.
Interest income for the nine months ended March 31, 2000 and 1999 amounted to
$58,570 and $3,772, respectively. During the nine months ended March 31, 2000,
such amounts were earned from the Company's investments in highly rated
commercial paper. During the nine months ended March 31, 1999, such amounts were
earned primarily from the Company's cash balances. During the nine months ended
March 31, 2000 and 1999, interest and financing costs were $40,250 and
$2,231,343, respectively. During the nine months ended March 31, 2000 such costs
were related to a partial redemption of the Company's Prepaid Warrants. During
the nine months ended March 31, 1999, such costs consisted primarily of interest
and the amortization of deferred financing costs ($454,700) associated with the
issuance of $550,000 of convertible notes in December 1998 and January 1999, and
costs ($958,900) associated with the settlement of obligations to holders of the
Company's Prepaid Warrants. The Company has received a waiver of certain events
of default pursuant to its Prepaid Warrants, and accordingly, reversed
15
<PAGE>
previously recorded charges of $717,700. The common stock purchase warrants have
been recorded in the financial statements in accordance with the Black-Scholes
pricing methodology.
CAPITAL RESOURCES AND LIQUIDITY
On June 24, 1999, the Company and DTN entered into a License Agreement that
amended the companies' previous agreement. 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 financial ability to distribute the Company's services to
thousands of potential customers, there can be no assurance that the products
and services will continue to be accepted by the ultimate consumer on a
widespread basis.
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 Common
Stock in full settlement of all obligations to ASB.
During the quarter ended March 31, 2000, the Company issued 474,022 shares of
Common Stock to investors upon exercise of warrants to purchase such shares.
Proceeds from the exercise of these warrants were $696,944.
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. American
First Associates Corp., 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.
On May 15, 2000, the Company completed an offering of 353,535 shares of its
Common Stock to accredited investors. Proceeds from this transaction amounted to
$16,715,000, net of commissions and other expenses of $785,000. The proceeds
from this transaction will enable the Company to expand its sales and marketing
capabilities and expand its processing capacity to meet the continuing demands
of its Strategic Marketing Partners.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------
In December 1999, the SEC staff released Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 provides
interpretive guidance on the recognition, presentation and disclosure of revenue
in the financial statements. SAB 101 must be applied to the financial statements
no later than the quarter ending September 30, 2000. The Company does not
believe that the adoption of SAB 101 will have a material affect on the
Company's financial results.
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
16
<PAGE>
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, 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.
17
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
By letter dated April 10, 1998, Michael Fishman, then the Company's Vice
President of Sales, 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 counter-claim, and discovery is
proceeding. By pleading dated February 29, 2000, Mr. Fishman filed an
application with the Court seeking entry of a prejudgment remedy in the amount
of $19,250,000. To date, Mr. Fishman's application has not been acted on by the
Court and no hearing date has been set. 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 Mr.
Francesco and the Company 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 (1) represented that SPS had failed to
attract a single investor and (2) 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 SmartServ 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, (1) a declaratory judgment declaring Mr. Weiner a 10%
equity shareholder of the Company, (2) a constructive trust in Mr. Weiner's
favor for 10% of the Company's equity shares and (3) 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
the Company's answer to the complaint, the Company 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>
On or about February 29, 2000, Commonwealth Associates, L.P. filed a complaint
against the Company in the Supreme Court of the State of New York, County of New
York. The complaint alleges that on or about August 19, 1999, Commonwealth and
the Company entered into an engagement letter pursuant to which Commonwealth was
to provide financial advisory and investment banking services to the Company in
connection with a possible combination between the Company and Data Link Systems
Corporation. The engagement letter provided for a nonrefundable fee of $15,000
payable in cash or common stock at the Company's option. The complaint alleges
that notwithstanding the terms of the engagement letter the fee was to be paid
in stock and seeks 13,333 shares of common stock or at least $1,770,000 together
with interest and costs. In the Company's answer to the complaint, the Company
denied the material allegations of the complaint. Discovery in this action has
recently commenced and is proceeding. Although the Company is vigorously
defending this action there can be no assurance that the Company 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 our financial
condition, results of operations and cash flows.
19
<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").
During the period ended March 31, 2000, $1,357,000 of Prepaid Warrants were
converted into an aggregate of 810,785 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
4(2) 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. The 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 December 1999, the Company issued warrants to purchase 10,000 shares of
Common Stock at an exercise price of $2.50 per share to the Andrew Seybold Group
LLC in connection with marketing services rendered to 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 4(2)
of the Securities Act.
In January 2000, the Company issued warrants to purchase 50,000 shares of Common
Stock at an exercise price of $3.00 per share to Brauning Consultants in
connection with marketing services rendered to the Company. No sales commissions
were paid in connection
20
<PAGE>
with such transaction. The shares were issued in reliance upon the exemption
from registration provided by Section 4(2) of the Securities Act.
During the period ended March 31, 2000 the Company issued 333,334 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 $200,000. No sales commissions were paid in connection with
such transactions. The shares were issued in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act.
During the period ended March 31, 2000, the Company issued 142,308 shares of
Common Stock to certain warrant holders upon the exercise of warrants to
purchase such shares. No sales commissions were paid in connection with such
transactions. 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 618,239 shares of Common Stock to Sebastian
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. 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 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. The shares were issued in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act.
On January 18, 2000, the Company completed an offering of 333,000 shares of
Common Stock to accredited investors. Gross proceeds from this transaction
amounted to $4,995,000. American First Associates Corp., 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.
On March 15, 2000, the Company issued 148,000 shares of Common Stock to
Sebastian Cassetta in satisfaction of its bonus obligation to Mr. Cassetta
pursuant to his employment contract. 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.
On March 15, 2000, the Company issued 54,000 shares of Common Stock to Mario
Rossi in satisfaction of its bonus obligation to Mr. Rossi pursuant to his
employment contract. 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.
On May 15, 2000, the Company completed an offering of 353,535 shares of its
Common Stock to accredited investors. Gross proceeds from this transaction
amounted to $17,500,000. Chase Securities, Inc., the Placement Agent, received a
commission of $700,000 and an unaccountable expense allowance of $50,000 in
connection with this transaction. The sale of these shares was exempt from the
registration requirements of the Securities Act pursuant to Section 4(2)
thereof.
21
<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, 2000.
On May 16, 2000, the Company filed a report on Form 8-K announcing the
closing of the financing transaction between the Company and certain
accredited investors on May 15, 2000.
22
<PAGE>
SMARTSERV ONLINE, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SmartServ Online, Inc.
(Registrant)
By:
Date: May 22, 2000 /S/ SEBASTIAN E. CASSETTA
------------ ----------------------------------------------
Sebastian E. Cassetta
Chairman of the Board, Chief Executive Officer
Date: May 22, 2000 /S/ THOMAS W. HALLER
------------ ----------------------------------------------
Thomas W. Haller
Chief Financial Officer, Treasurer
23
<PAGE>
EXHIBIT INDEX
-------------
EXHIBIT DESCRIPTON
Exhibit 27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH
31, 2000 FINANCIAL STATEMENTS 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-30-2000
<PERIOD-START> JUN-30-2000
<PERIOD-END> MAR-31-2000
<CASH> 5,175,577
<SECURITIES> 0
<RECEIVABLES> 265,465
<ALLOWANCES> 0
<INVENTORY> 204,061
<CURRENT-ASSETS> 5,645,103
<PP&E> 1,255,428
<DEPRECIATION> 724,834
<TOTAL-ASSETS> 7,570,111
<CURRENT-LIABILITIES> 1,276,959
<BONDS> 0
0
0
<COMMON> 40,983
<OTHER-SE> 1,696,430
<TOTAL-LIABILITY-AND-EQUITY> 7,570,111
<SALES> 2,710,856
<TOTAL-REVENUES> 2,710,856
<CGS> 843,887
<TOTAL-COSTS> 843,887
<OTHER-EXPENSES> 37,686,228
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (677,450)
<INCOME-PRETAX> (35,083,239)
<INCOME-TAX> 0
<INCOME-CONTINUING> (35,083,239)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (35,083,239)
<EPS-BASIC> (17.55)
<EPS-DILUTED> (17.55)
</TABLE>
