8-K

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of Earliest Event Reported): June 29, 2006

Smart Online, Inc.
__________________________________________
(Exact name of registrant as specified in its charter)

Delaware	001-32634	95-4439334
_____________________ (State or other jurisdiction	_____________ (Commission	______________ (I.R.S. Employer
of incorporation)	File Number)	Identification No.)
2530 Meridian Parkway, 2nd Floor, Durham, North Carolina		27713
_________________________________ (Address of principal executive offices)		___________ (Zip Code)

Registrant’s telephone number, including area code: 919-765-5000

Not Applicable
______________________________________________
Former name or former address, if changed since last report

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

[  ]  Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
[  ]  Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
[  ]  Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
[  ]  Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 1.01 Entry into a Material Definitive Agreement.

Smart Online, Inc. ("Smart Online") entered into a letter agreement, effective June 29, 2006, with its former independent certified public accountants, BDO Seidman, LLP ("BDO"). Under the terms of the letter agreement, Smart Online agreed to pay BDO a total of $120,000 in twelve (12) equal monthly installments beginning June 30, 2006. These payments are being made in settlement of $246,855 that BDO claims is owed by Smart Online in connection with audit services performed by BDO under a letter agreement between BDO and Smart Online, dated May 27, 2004.

As previously reported by Smart Online on a Current Report on Form 8-K/A filed on December 23, 2005, BDO was dismissed by Smart Online's Audit Commtittee effective November 15, 2005. There were no "disagreements" (as such term is defined in Item 304(a)(1)(iv) of Regulation S-K) or "reportable events" (as such term is defined in Item 304(a)(1)(v)(A) through (D) of Regulation S-K and its related instructions) with BDO at any time during the year ended De cember 31, 2003 and December 31, 2004 and the period January 1, 2005 through September 30, 2005 regarding any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedures that if not resolved to the satisfaction of BDO would have caused it to make reference to such disagreements in its reports.

The foregoing discussion is only a summary of the letter agreement and is qualified in its entirety by reference to the letter agreement, which is filed as Exhibit 10.1 to this Form 8-K and incorporated by reference herein.

Item 2.02 Results of Operations and Financial Condition.

On July 7, 2006, Smart Online issued a press release announcing results for the fiscal year ended December 31, 2005 and final findings of it.

The press release is attached as Exhibit 99.1 and incorporated into this Item 2.02 by reference. The information in this report under Item 2.02 shall not be deemed to be "filed" for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Furthermore, the press release and the information in this report under Item 2.02 shall not be deemed to be incorporated by reference into the filings of the Company under the Securities Act of 1933, as amended.

Item 8.01 Other Events.

As previously disclosed in Smart Online’s current reports on Form 8-K filed on March 17, 2006 and June 29, 2006, Smart Online’s Audit Committee retained independent outside legal counsel to assist the Audit Committee in its internal investigation of matters relating to the Order of Suspension of Trading issued by the Securities Exchange Commission on January 17, 2006. In the press release attached to this report as Exhibit 99.1, Smart Online announced that on July 7, 2006, the independent outside legal counsel shared final findings with the Audit Committee, which were then shared with the full Board of Directors. The Audit Committee has not concluded that any of Smart Online’s officers or directors have engaged in fraudulent or criminal activity. However, the Audit Committee did conclude that Smart Online lacked an adequate control environment, and will take action to address certain conduct of management that was revealed as a result of the investigation. As one of the results of the se findings, Mr. Jeffrey LeRose was appointed to the position of non-executive Chairman of the Board of Directors to separate the leadership of the Board of Directors from the management of Smart Online, which is a recommended best practice for solid corporate governance. Mr. Nouri has stepped down as Chairman of the Board of Directors, but will continue to serve as Smart Online’s President, Chief Executive Officer and as a member of the Board of Directors.

Item 9.01 Financial Statements and Exhibits.

10.1 Letter Agreement between Smart Online, Inc. and BDO Seidman, LLP, effective June 29, 2006.

99.1 Press Release, dated July 7, 2006.

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 hereunto duly authorized.

	Smart Online, Inc.
July 7, 2006	By:	/s/ Nicholas A. Sinigaglia
		Name: Nicholas A. Sinigaglia
		Title: Chief Financial Officer

Exhibit Index

Exhibit No.	Description
10.1	Letter Agreement between Smart Online, Inc. and BDO Seidman, LLP, effective June 29, 2006.
99.1	Press Release, dated July 7, 2006.

EX-10.1

June 16, 2006

Laurence W. Goldberg Director, Receivables Management BDO Seidman, LLP 4035 Premier Drive	Reference Number: 20060612
High Point, NC 27265	Via U.S. Mail

RE: Payment of Smart Online, Inc. Audit Fees

Dear Mr. Goldberg:

I am writing in regard to the amounts that BDO Seidman, LLP (“BDO”) claims are owed by Smart Online, Inc. (“SOLN”) for the services performed by BDO in connection with BDO’s duties as SOLN’s independent certified public accountant. Those services were performed under the terms of a letter agreement between BDO and SOLN, dated May 27, 2004 (the “Audit Agreement”). Currently, BDO is claiming that SOLN still owes $246,855 in connection with these services under the Audit Agreement (the “Service Fees”).

In settlement of that amount, SOLN hereby agrees to pay BDO a total of one-hundred twenty thousand dollars ($120,000) in twelve (12) equal monthly installments of ten thousand dollars ($10,000) (each such payment an “Installment Payment”). The first Installment Payment shall be due on the last day of the month of the date that BDO signs this letter agreement. Each subsequent Installment Payment shall be due and payable on the last day of each month following the month of the Effective Date.

By executing this letter agreement in the space provided below, BDO accepts the payment terms as set forth above as payment in full of the Service Fees. In the event BDO does not receive an Installment Payment in accordance with the terms of this letter agreement, BDO shall have the right to seek payment of $246,855, less any amounts paid to BDO by SOLN. In the event that BDO does not receive an Installment Payment in accordance with the terms set forth above, BDO shall notify SOLN, and SOLN shall have ten (10) days to cure. Nothing in this letter agreement shall be construed as an acknowledgement or admission by either party of any liability whatsoever, including without limitation the amount of the Service Fees owed to BDO; nor shall this letter agreement be construed as a waiver or in any other manner adversely effect any other rights not specifically set forth herein held by either party.

Very truly yours,

/s/ Michael Nouri
Michael Nouri
President and CEO

Agreed and accepted:
BDO SEIDMAN, LLP

By: /s/ Laurence W. Goldberg


Name: Laurence W. Goldberg
Title: Director – Receivables Management

For Immediate Release

Media:
Thomas Furr
Smart Online, Inc.
919-765-5000
tfurr@smartonline.com

Smart Online Reports Q4 and Full Year 2005 Financial Results;
Independent Counsel Shares Final Findings of Audit Committee Investigation

Smart Online Increases Fourth Quarter Revenue

RESEARCH TRIANGLE PARK, N.C., July 07, 2006 — Smart Online today reported results for the fourth quarter (unaudited) and twelve months ended (audited) December 31, 2005.

“The fourth quarter was a growth period for Smart Online during which we continued to execute our strategy to take advantage of the growing small business software-as-a-services sector,” said Michael Nouri, president and chief executive officer of Smart Online. “Our team has worked tirelessly to continue to build out our broad suite of applications with the recent launch of our new Sales Force Automation product. We believe this effort is further validation to our commitment to provide our small business customers a full suite of daily use software-as-a-service (SaaS) applications to manage their money, customers, and employees.”

For the fourth quarter of 2005, revenue increased to $1,697,930 compared to $279,852 for the same period in 2004. Gross margins were 81% for the fourth quarter for both 2005 and 2004. Net loss attributable to common stockholders for the quarter was $12,254,789, or $0.84 per share, compared to $296,691, or $0.03 per share, in the fourth quarter of 2004. Of the fourth quarter loss, $9,737,500 was a non-cash charge related to common shares issued for certain investor relations services. Acquisitions closed in the fourth quarter accounted for $1,348,869 or 79% of consolidated fourth quarter revenue. (All fourth quarter numbers are unaudited).

For the twelve months ended December 31, 2005, revenue increased to $2,701,976 compared to $1,002,970 for the same period in 2004. Gross margins improved from 79.0% of revenue to 85.0%. Net loss attributable to common shareholders was $15,590,609, or $1.20 per share, compared to a lost of $2,671,929, or $0.82 per share, for the same period in 2004. Of the twelve months ended December 31, 2005 loss, $9,737,500 was a non-cash charge related to common shares issued for certain investor relations services. Acquisitions closed in the fourth quarter accounted for $1,348,869 or 50% of consolidated revenue for the twelve months ended December 31, 2005.

On January 17, 2006, the Securities and Exchange Commission (“SEC”) temporarily suspended the trading of the securities of the Company. In its “Order of Suspension of Trading,” the SEC stated that the reason for the suspension was a lack of current and accurate information concerning the Company’s securities because of possible manipulative conduct occurring in the market for the Company’s stock. Simultaneously with the suspension, the SEC advised us that it is conducting a non-public investigation. In March 2006, our Board of Directors authorized its Audit Committee to conduct an internal investigation of matters relating to the SEC matter. The Audit Committee retained independent outside legal counsel to assist in conducting the investigation. On July 7, 2006, the independent outside legal counsel shared final findings with the Audit Committee, which were then shared with the full Board of Directors. The Audit Committee has not concluded that any of our officers or directors have engaged in fraudulent or criminal activity. However, it did conclude that we lacked an adequate control environment, and will take action to address certain conduct of management that was revealed as a result of the investigation. As one of the results of these findings, Mr. Jeffrey LeRose was appointed to the position of non-executive Chairman of the Board of Directors to separate the leadership of the Board of Directors from the management of the Company, which is a recommended best practice for solid corporate governance. Mr. Nouri has stepped down as Chairman of the Board of Directors, but will continue to serve as our President, Chief Executive Officer and as a member of the Board of Directors.

In commenting on the final findings, Mr. Nouri stated, “I would like to thank Mr. LeRose for accepting this additional responsibility, which will take more time and effort on his behalf. The Company and I are focused on and committed to improving the corporate governance and compliance practices throughout the Company.”

Mr. LeRose added, “In order to achieve Smart Online’s significant potential, we will be implementing additional changes to our controls and procedures to address the issues raised during the investigation. This, in combination with previously planned actions, will assist the Company in complying with Section 404 of the Sarbanes-Oxley Act, which compliance is required by non-accelerated filers, such as Smart Online, by the end of 2007.”

About Smart Online, Inc.
Smart Online Inc. (SOLN), a pioneer of Web-native applications, offers a private-label syndicated online business platform that enables Web delivery of applications and services used to start and grow small-to-medium size businesses. In 1999, Smart Online converted its business applications to a Software-as-a-Service (SaaS) Web delivery model. Today, the company markets its Web-based business applications to customers via http://www.smartonline.com and by private-labeling its syndicated software services to Fortune 2000 corporations in the financial services, media, manufacturing and telco industries. These companies private-label and add to their Web sites Smart Online’s applications to enable their existing business customers, and new customers, to runtheir businesses more efficiently without the upfront capital typically required for integrated business software and IT resources.

The tables attached to this release are an integral part of the release and should be read in conjunction with this release.

Smart Online, the Smart Online logo, and OneBiz Conductor are trademarks and/or registered trademarks of Smart Online Inc. in the United States. Other marks belong to their respective owners.

Forward-Looking Statements
This announcement contains forward-looking statements regarding the investigation of the Securities and Exchange Commission into trading of the Company’s securities and an internal investigation. These statements involve risks and uncertainties, and actual results could differ materially from those discussed. Factors that could cause or contribute to such differences include, but are not limited to how long it takes to implement the controls and procedures stemming from the Audit Committee’s investigation; the unresolved status of the SEC investigation; the considerable management time and attention required and substantial expenses incurred related to the SEC and Audit Committee investigations regardless of their outcome; and our ability to attract qualified independent Board members. The conclusions of the Audit Committee are based on the information reviewed by the Audit Committee with assistance of independent counsel and are limited to matters related to the SEC investigation. More information about potential factors which could affect our business and financial results is included in our Annual Report on Form 10-K for the year ended December 31, 2004 and subsequent reports filed with the SEC. All forward-looking statements are based on information available to us on the date hereof, and we assume no obligation to update such statements.

(tables follow)
Balance Sheet

	December 31, 2005		December 31, 2004
	(audited)		(audited)
			$
Current Assets	$	2,615,290		667,548
			$
Total Assets	$	_14,558,079		773,701
			$
Current Liabilities	$	4,922,159		1,592,977
			$
Long-Term Obligations	$	2,963,289		1,091,814
			$
Total Liabilities	$	7,885,448		2,684,791
			$
Total Stockholder’s Equity (Deficit)	$	6,672,631		(1,911,090	)

Statement of Operations

	Three Months Ended						Twelve Months Ended
	(unaudited)						(audited)
	December 31, 2005			December 31, 2004			December 31, 2005			December 31, 2004
Revenue	$	1,697,930		$	279,852		$	2,701,976		$	1,002,970
Operating Expenses	$	13,533,123		$	726,789		$	18,367,983		$	3,593,289
Loss from Operations	$	(12,156,577	)	$	(499,303	)	$	(16,066,829	)	$	(2,801,935	)
Net Loss Attributed to Common Stockholders	$	(12,254,789	)	$	(296,691	)	$	(15,590,609	)	$	(8,319,049	)
Net Loss per Share	$						$			$
– Basic and Diluted		(0.84	)	$	(0.03	)		(1.20	)		(0.82	)
Number of Shares Used in Per Share Calculation		14,667,137			11,630,471			12,960,006			10,197,334