Delaware
|
95-4439334
|
|
(State or other jurisdiction of incorporation or organization)
|
(I.R.S. Employer Identification No.)
|
|
4505 Emperor Blvd., Ste. 320
Durham, North Carolina
|
27703
|
|
(Address of principal executive offices)
|
(Zip Code)
|
Large accelerated filer
|
¨
|
Accelerated filer | o |
Non-accelerated filer
|
¨
|
Smaller reporting company
|
þ |
(Do not check if a smaller reporting company) |
Page No.
|
|||||
PART I – FINANCIAL INFORMATION
|
|||||
Item 1.
|
Financial Statements
|
||||
Balance Sheets as of June 30, 2011 (unaudited) and December 31, 2010
|
3 | ||||
Statements of Operations (unaudited) for the three and six months ended June 30, 2011 and 2010
|
4 | ||||
Statements of Cash Flows (unaudited) for the six months ended June 30, 2011 and 2010
|
5 | ||||
Notes to Financial Statements (unaudited)
|
6 | ||||
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
12 | |||
Item 3.
|
Quantitative and Qualitative Disclosures About Market Risk
|
21 | |||
Item 4.
|
Controls and Procedures
|
21 | |||
PART II – OTHER INFORMATION
|
|||||
Item 6.
|
Exhibits
|
22 | |||
Signatures
|
23 |
June 30,
|
December 31,
|
|||||||
2011
|
2010
|
|||||||
(unaudited)
|
||||||||
ASSETS
|
||||||||
Current Assets:
|
||||||||
Cash and cash equivalents
|
$
|
826,631
|
$
|
860,211
|
||||
Restricted cash
|
171,445
|
249,998
|
||||||
Accounts receivable, net
|
1,958
|
8,931
|
||||||
Prepaid expenses
|
86,267
|
164,692
|
||||||
Total current assets
|
1,086,301
|
1,283,832
|
||||||
Property and equipment, net
|
179,903
|
202,922
|
||||||
Other assets
|
15,370
|
5,000
|
||||||
TOTAL ASSETS
|
$
|
1,281,574
|
$
|
1,491,754
|
||||
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
||||||||
Current liabilities
|
||||||||
Accounts payable
|
$
|
698,831
|
$
|
551,759
|
||||
Notes payable (See Note 3)
|
5,015,753
|
40,564
|
||||||
Deferred revenue
|
18,157
|
22,271
|
||||||
Accrued liabilities - Nouri
|
667,227
|
1,400,000
|
||||||
Accrued liabilities (See Note 2)
|
1,906,603
|
2,119,376
|
||||||
Total current liabilities
|
8,306,571
|
4,133,970
|
||||||
Long-term liabilities:
|
||||||||
Long-term portion of notes payable (See Note 3)
|
14,033,436
|
16,666,469
|
||||||
Deferred revenue
|
2,424
|
294
|
||||||
Total long-term liabilities
|
14,035,860
|
16,666,763
|
||||||
Total liabilities
|
22,342,431
|
20,800,733
|
||||||
Commitments and contingencies (See Note 4)
|
||||||||
Stockholders' equity (deficit):
|
||||||||
Preferred stock, 0.001 par value, 5,000,000 shares authorized, no shares issued and outstanding at June 30, 2011 and December 31, 2010
|
-
|
-
|
||||||
Common stock, $.001 par value, 45,000,000 shares authorized, 18,352,543 and 18,342,543 shares Issued and outstanding at June 30, 2011 and December 31, 2010 respectively.
|
18,353
|
18,343
|
||||||
Additional paid-in capital
|
67,106,737
|
67,070,568
|
||||||
Accumulated deficit
|
(88,185,947
|
)
|
(86,397,890
|
)
|
||||
Total Stockholders’ Equity (Deficit)
|
(21,060,857
|
)
|
(19,308,979
|
)
|
||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
$
|
1,281,574
|
$
|
1,491,754
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|||||||||||
|
|
June 30, 2011
|
|
|
June 30, 2010
|
|
|
June 30, 2011
|
|
|
June 30, 2010
|
|||||
REVENUES:
|
||||||||||||||||
Subscription fees
|
$
|
90,375
|
$
|
123,146
|
$
|
193,647
|
$
|
259,404
|
||||||||
Professional service fees
|
-
|
7,050
|
-
|
69,825
|
||||||||||||
License fees
|
-
|
70,850
|
-
|
158,650
|
||||||||||||
Hosting fees
|
-
|
37,722
|
-
|
81,994
|
||||||||||||
Other revenue
|
20,697
|
20,950
|
56,162
|
53,745
|
||||||||||||
Total revenues
|
111,072
|
259,718
|
249,809
|
623,618
|
||||||||||||
COST OF REVENUES
|
201,889
|
336,310
|
394,205
|
702,244
|
||||||||||||
GROSS LOSS
|
(90,817
|
)
|
(76,592
|
)
|
(144,396
|
)
|
(78,626
|
)
|
||||||||
OPERATING EXPENSES:
|
||||||||||||||||
General and administrative
|
308,763
|
389,469
|
647,731
|
1,061,888
|
||||||||||||
Sales and marketing
|
146,888
|
179,640
|
288,942
|
332,275
|
||||||||||||
Research and development
|
104,932
|
10,380
|
263,821
|
42,385
|
||||||||||||
Loss on disposal of assets, net
|
3,471
|
-
|
3,471
|
-
|
||||||||||||
Total operating expenses
|
564,054
|
579,489
|
1,203,965
|
1,436,548
|
||||||||||||
LOSS FROM OPERATIONS
|
(654,871
|
)
|
(656,081
|
)
|
(1,348,361
|
)
|
(1,515,174
|
)
|
||||||||
OTHER INCOME (EXPENSE):
|
||||||||||||||||
Interest expense, net
|
(322,386
|
)
|
(233,025
|
)
|
(616,715
|
)
|
(443,720
|
)
|
||||||||
Gain on legal settlements, net
|
177,000
|
401,107
|
177,019
|
553,970
|
||||||||||||
Total other (expense) income
|
(145,386
|
)
|
168,082
|
(439,696
|
)
|
110,250
|
||||||||||
NET LOSS
|
$
|
(800,257
|
)
|
$
|
(487,999
|
)
|
$
|
(1,788,057
|
)
|
$
|
(1,404,924
|
)
|
||||
NET LOSS PER COMMON SHARE:
|
||||||||||||||||
Basic and fully diluted
|
$
|
(0.04
|
)
|
$
|
(0.03
|
)
|
$
|
(0.10
|
)
|
$
|
(0.08
|
)
|
||||
WEIGHTED-AVERAGE NUMBER OF SHARES USED IN COMPUTING NET LOSS PER COMMON SHARE
|
||||||||||||||||
Basic and fully diluted
|
18,352,543
|
18,342,542
|
18,352,543
|
18,342,542
|
Six Months
|
Six Months
|
|||||||
Ended
|
Ended
|
|||||||
June 30, 2011
|
June 30, 2010
|
|||||||
CASH FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net Loss
|
$
|
(1,788,057
|
)
|
$
|
(1,404,924
|
)
|
||
Adjustments to reconcile net loss to net cash used in operating activities:
|
||||||||
Depreciation
|
26,145
|
69,046
|
||||||
Bad debt expense
|
-
|
249,760
|
||||||
Stock-based compensation expense
|
36,180
|
11,642
|
||||||
Loss on disposal of assets
|
4,376
|
-
|
||||||
Changes in assets and liabilities:
|
||||||||
Accounts receivable
|
6,973
|
(185,426
|
)
|
|||||
Notes receivable
|
-
|
(51,278
|
)
|
|||||
Prepaid expenses
|
78,425
|
110,701
|
||||||
Other assets
|
(10,370
|
)
|
2,496
|
|||||
Deferred revenue
|
(1,984
|
)
|
(8,163
|
)
|
||||
Accounts payable
|
147,072
|
(183,570
|
)
|
|||||
Accrued and other expenses
|
(945,545
|
)
|
(332,385
|
)
|
||||
Net cash used in operating activities
|
(2,446,785
|
)
|
(1,722,101
|
)
|
||||
CASH FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Purchases of furniture and equipment
|
(7,506
|
)
|
(4,372
|
)
|
||||
Net cash used in investing activities
|
(7,506
|
)
|
(4,372
|
)
|
||||
CASH FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Restricted cash used to pay IDB interest expense and fees
|
78,555
|
-
|
||||||
Repayments on notes payable
|
(32,844
|
)
|
(2,991,573
|
)
|
||||
Debt borrowings
|
2,375,000
|
4,620,566
|
||||||
Net cash provided by financing activities
|
2,420,711
|
1,628,993
|
||||||
NET (DECREASE) IN CASH AND CASH EQUIVALENTS
|
(33,580
|
)
|
(97,480
|
)
|
||||
CASH AND CASH EQUIVALENTS,
|
||||||||
BEGINNING OF PERIOD
|
860,211
|
119,796
|
||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD
|
$
|
826,631
|
$
|
22,316
|
||||
Supplemental disclosures of cash flow information:
|
||||||||
Cash paid during the period for:
|
||||||||
Interest
|
$
|
593,673
|
$
|
467,489
|
||||
Taxes
|
$
|
-
|
$
|
-
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||||
2011
|
2010
|
2011
|
2010
|
|||||||||||||
Dividend yield
|
0.0
|
%
|
0.0
|
%
|
0.0
|
%
|
0.0
|
%
|
||||||||
Expected volatility
|
90.59
|
%
|
98.3
|
%
|
91.52
|
%
|
98.5
|
%
|
||||||||
Risk free interest rate
|
2.51
|
%
|
1.40
|
%
|
2.68
|
%
|
1.79
|
%
|
||||||||
Expected lives (years)
|
3.75
|
3
|
3.5
|
3
|
June 30,
|
December 31,
|
|||||||
2011
|
2010
|
|||||||
Class Action law suit settlement
|
1,622,500
|
1,874,500
|
||||||
Accrued payroll and related costs
|
154
|
3,406
|
||||||
Custom accounting development cost
|
75,436
|
75,436
|
||||||
Professional services
|
14,594
|
-
|
||||||
Interest payable to IDB and Bondholders (See Note 3)
|
165,174
|
141,895
|
||||||
Other accrued items
|
28,745
|
24,139
|
||||||
$
|
1,906,603
|
$
|
2,119,376
|
Note Description
|
As of
June 30, 2011
|
As of
December 31, 2010
|
Maturity
|
Rate
|
|||||||||
IDB credit facility
|
$
|
5,000,000
|
$
|
4,000,000
|
May 2012
|
Prime, not less than 4.0
|
%
|
||||||
Insurance premium note
|
-
|
21,778
|
July 2011
|
5.4
|
%
|
||||||||
Various capital leases
|
174,189
|
185,255
|
Various
|
8.0-18.0
|
%
|
||||||||
Convertible notes
|
13,875,000
|
12,500,000
|
November 2013
|
8.0
|
%
|
||||||||
Totals
|
19,049,189
|
16,707,033
|
|||||||||||
Less current portion of debt
|
5,015,753
|
40,564
|
|||||||||||
Long –term portion of debt
|
$
|
14,033,436
|
$
|
16,666,469
|
As of June 30, 2011
|
|||||||||||
Note Buyer
|
Date of Purchase
|
Amount of
Convertible
Note
|
Interest
Rate
|
Due Date
|
|||||||
Atlas Capital
|
Various
|
$
|
11,425,000
|
8
|
%
|
11/14/2013
|
|||||
Blueline Fund
|
November 14, 2007
|
500,000
|
8
|
%
|
11/14/2013
|
||||||
Crystal Management
|
Various
|
750,000
|
8
|
%
|
11/14/2013
|
||||||
HSBC Private Bank (Suisse), SA
|
November 21, 2008
|
250,000
|
8
|
%
|
11/14/2013
|
||||||
UBP, Union Bancaire Privee
|
Various
|
900,000
|
8
|
%
|
11/14/2013
|
||||||
William Furr
|
November 14, 2007
|
250,000
|
8
|
%
|
11/14/2013
|
||||||
Less – lease conversion
|
September 4, 2009
|
(200,000
|
)
|
||||||||
Total Convertible Notes
|
$
|
13,875,000
|
Shares
|
Weighted
Average
Exercise
Price
|
|||||||
BALANCE, December 31, 2010
|
283,000
|
$
|
2.34
|
|||||
Granted
|
-
|
-
|
||||||
Exercised
|
-
|
-
|
||||||
Canceled
|
(2,500
|
)
|
1.10
|
|||||
BALANCE, June 30, 2011
|
280,500
|
$
|
2.36
|
Currently Exercisable
|
|||||||||||||||||||||
Exercise Price
|
Number of
Options
Outstanding
|
Average
Remaining
Contractual
Life (Years)
|
Weighted
Average
Exercise
Price
|
Number of
Shares
|
Weighted
Average
Exercise
Price
|
||||||||||||||||
$1.10 |
65,500
|
9.5
|
$
|
1.10
|
14,500
|
$
|
1.10
|
||||||||||||||
$1.14 |
125,000
|
8.5
|
$
|
1.14
|
68,750
|
$
|
1.14
|
||||||||||||||
From $2.50 to $3.50
|
45,000
|
3.9
|
$
|
3.31
|
45,000
|
$
|
3.31
|
||||||||||||||
$5.00 |
25,000
|
3.8
|
$
|
5.00
|
25,000
|
$
|
5.00
|
||||||||||||||
$8.61 |
20,000
|
4.0
|
$
|
8.61
|
20,000
|
$
|
8.61
|
||||||||||||||
Totals
|
280,500
|
7.3
|
$
|
2.36
|
173,250
|
$
|
3.12
|
Three Months Ended June 30, 2011
|
|||||||
Revenue Type
|
Revenues
|
% of Total
Revenues
|
|||||
Customer A
|
Subscription fees and other revenue
|
$
|
88,383
|
80
|
%
|
||
Customer B
|
Subscription fees
|
22,588
|
20
|
%
|
|||
Others
|
Various
|
101
|
-
|
%
|
|||
Total
|
|
$
|
111,072
|
100
|
%
|
Three Months Ended June 30, 2010
|
|||||||
Revenue Type
|
Revenues
|
% of Total
Revenues
|
|||||
Customer A
|
Subscription fees and other revenue
|
$
|
95,573
|
37
|
%
|
||
Customer B
|
Subscription fees
|
44,919
|
17
|
%
|
|||
Others
|
Various
|
119,226
|
46
|
%
|
|||
Total
|
|
$
|
259,718
|
100
|
%
|
Six Months Ended June 30, 2011
|
|||||||
Revenue Type
|
Revenues
|
% of Total
Revenues
|
|||||
Customer A
|
Subscription fees and other revenue
|
$
|
196,772
|
79
|
%
|
||
Customer B
|
Subscription fees
|
50,657
|
20
|
%
|
|||
Others
|
Various
|
2,380
|
1
|
%
|
|||
Total
|
|
$
|
249,809
|
100
|
%
|
Six Months Ended June 30, 2010
|
|||||||
Revenue Type
|
Revenues
|
% of Total
Revenues
|
|||||
Customer A
|
Subscription fees and other revenue
|
$
|
207,454
|
33
|
%
|
||
Customer B
|
Subscription fees
|
97,359
|
16
|
%
|
|||
Others
|
Various
|
318,805
|
51
|
%
|
|||
Total
|
|
$
|
623,618
|
100
|
%
|
●
|
Subscription fees – monthly fees charged to customers for access to our SaaS applications. Subscription fees primarily consist of sales of subscriptions through private-label marketing partners to end users. We typically have a revenue-share arrangement with these private-label marketing partners in order to encourage them to market our products and services to their customers. We make subscription sales either on a subscription or on a “for fee” basis. Subscriptions are generally payable on a monthly basis and are typically paid via credit card of the individual end user. In the past, we recognized all subscription revenue on a gross basis and in accordance with our policy to periodically review our accounting policies we recognized that certain contracts require the reporting of subscription revenue on a gross basis and others on a net basis according to United States Generally Accepted Accounting Principles (“US GAAP”). On that basis, we continue to report subscription revenue from certain contracts on a gross basis and others on a net basis. The net effect of this reclassification of expenses only impacts gross revenue and certain gross expenses; it does not change the net income. Subscription fees are recognized as earned through our revenue sharing arrangements.
|
●
|
Professional service fees – fees related to consulting services, some of which complement our other products and applications. For example, a customer may request that we re-design its website to better accommodate our products or to improve its own website traffic or adapt our mobile platform to their specific requirements. We typically bill professional service fees on a time and material basis. These fees are recognized upon the delivery of services and acceptance by the customer.
|
●
|
License fees – fees charged for perpetual or term license agreements for the use of the SmartOn™ Cause, SmartOn™ Mobile, SmartOn™ CommUnity or any of our applications that may be offered as part of our platforms. Revenue is generally recognized on a monthly basis during the term of contract.
|
●
|
Hosting fees – fees charged to customers with network accessibility for any of the Smart Online platform products or applications. Revenue is generally recognized on a monthly basis as services are provided.
|
●
|
Other revenue – revenues generated from non-core activities such as maintenance fees; original equipment manufacturer, or OEM, contracts; and miscellaneous other revenues
|
Three Months Ended
June 30, 2011 |
Three Months Ended
June 30, 2010 |
2011 vs 2010
|
||||||||||||||||||||||
% of
|
% of
|
Change
|
||||||||||||||||||||||
Dollars
|
Revenue
|
Dollars
|
Revenue
|
Dollars
|
Percent
|
|||||||||||||||||||
REVENUES:
|
||||||||||||||||||||||||
Subscription fees
|
$ | 90,375 | 81.4 | % | $ | 123,146 | 47.4 | % | $ | (32,771 | ) | -27 | % | |||||||||||
Professional service fees
|
- | - | % | 7,050 | 2.7 | % | (7,050 | ) | -100 | % | ||||||||||||||
License fees
|
- | - | % | 70,850 | 27.3 | % | (70,850 | ) | -100 | % | ||||||||||||||
Hosting fees
|
- | - | % | 37,722 | 14.5 | % | (37,722 | ) | -100 | % | ||||||||||||||
Other revenue
|
20,697 | 18.6 | % | 20,950 | 8.1 | % | (253 | ) | -1 | % | ||||||||||||||
Total revenues
|
111,072 | 100.0 | % | 259,718 | 100.0 | % | (148,646 | ) | -57 | % | ||||||||||||||
COST OF REVENUES
|
201,889 | 181.8 | % | 336,310 | 129.5 | % | (134,421 | ) | -40 | % | ||||||||||||||
GROSS LOSS
|
(90,817 | ) | -81.8 | % | (76,592 | ) | -29.5 | % | 14,225 | 19 | % | |||||||||||||
OPERATING EXPENSES:
|
||||||||||||||||||||||||
General and administrative
|
308,763 | 278.0 | % | 389,469 | 150.0 | % | (80,706 | ) | -21 | % | ||||||||||||||
Sales and marketing
|
146,888 | 132.2 | % | 179,640 | 69.2 | % | (32,752 | ) | -18 | % | ||||||||||||||
Research and development
|
104,932 | 94.5 | % | 10,380 | 4.0 | % | 94,552 | 911 | % | |||||||||||||||
Loss on disposal of assets
|
3,471 | 3.1 | % | - | - | 3,471 | 100 | % | ||||||||||||||||
Total operating expenses
|
564,054 | 507.8 | % | 579,489 | 223.1 | % | (15,435 | ) | -3 | % | ||||||||||||||
LOSS FROM OPERATIONS
|
(654,871 | ) | -589.6 | % | (656,081 | ) | -252.6 | % | (1,210 | ) | -1 | % | ||||||||||||
OTHER INCOME (EXPENSE):
|
||||||||||||||||||||||||
Interest expense, net
|
(322,386 | ) | -290.2 | % | (233,025 | ) | -89.7 | % | 89,361 | 38 | % | |||||||||||||
Gain on legal settlements, net
|
177,000 | 159.4 | % | 401,107 | 154.4 | % | (224,107 | ) | -56 | % | ||||||||||||||
Total other expense
|
(145,386 | ) | -130.9 | % | 168,082 | 64.7 | % | (313,468 | ) | -187 | % | |||||||||||||
NET LOSS
|
$ | (800,257 | ) | -720.5 | % | $ | (487,999 | ) | -187.9 | % | $ | 312,258 | 64 | % |
Three Months Ended June 30,
|
Change
|
|||||||||||||||
2011
|
2010
|
Dollars
|
Percent
|
|||||||||||||
Interest (expense) net
|
$
|
(322,386
|
)
|
$
|
(233,025
|
)
|
$
|
89,361
|
38
|
%
|
||||||
Gain on legal settlements, net
|
177,000
|
401,107
|
(224,107
|
)
|
-56
|
%
|
||||||||||
Total other income (expense)
|
$
|
(145,386
|
)
|
$
|
168,082
|
$
|
(313,468
|
)
|
-187
|
%
|
Six Months EndedJune 30, 2011 | Six Months EndedJune 30, 2010 |
2011 vs 2010
|
||||||||||||||||||||||
% of
|
% of
|
Change
|
||||||||||||||||||||||
Dollars
|
Revenue
|
Dollars
|
Revenue
|
Dollars
|
Percent
|
|||||||||||||||||||
REVENUES:
|
`
|
|||||||||||||||||||||||
Subscription fees
|
$ | 193,647 | 77.5 | % | $ | 259,404 | 41.6 | % | $ | (65,757 | ) | -25.3 | % | |||||||||||
Professional service fees
|
- | - | % | 69,825 | 11.2 | % | (69,825 | ) | -100.0 | % | ||||||||||||||
License fees
|
- | - | % | 158,650 | 25.4 | % | (158,650 | ) | -100.0 | % | ||||||||||||||
Hosting fees
|
- | - | % | 81,994 | 13.1 | % | (81,994 | ) | -100.0 | % | ||||||||||||||
Other revenue
|
56,162 | 22.5 | % | 53,745 | 8.6 | % | 2,417 | 4.5 | % | |||||||||||||||
Total revenues
|
249,809 | 100.0 | % | 623,618 | 100.0 | % | (373,809 | ) | -59.9 | % | ||||||||||||||
COST OF REVENUES
|
394,205 | 157.8 | % | 702,244 | 112.6 | % | (308,039 | ) | -43.9 | % | ||||||||||||||
GROSS LOSS
|
(144,396 | ) | -57.8 | % | (78,626 | ) | -12.6 | % | 65,770 | 83.6 | % | |||||||||||||
OPERATING EXPENSES:
|
||||||||||||||||||||||||
General and administrative
|
647,731 | 259.3 | % | 1,061,888 | 170.3 | % | (414,157 | ) | -39.0 | % | ||||||||||||||
Sales and marketing
|
288,942 | 115.7 | % | 332,275 | 53.3 | % | (43,333 | ) | -13.0 | % | ||||||||||||||
Research and development
|
263,821 | 105.6 | % | 42,385 | 6.8 | % | 221,436 | 522.4 | % | |||||||||||||||
Loss on disposal of assets, net
|
3,471 | 1.4 | % | - | - | % | 3,471 | 100 | % | |||||||||||||||
Total operating expenses
|
1,203,965 | 482.0 | % | 1,436,548 | 230.4 | % | (232,583 | ) | -16.2 | % | ||||||||||||||
LOSS FROM OPERATIONS
|
(1,348,361 | ) | -539.8 | % | (1,515,174 | ) | -243.0 | % | (166,813 | ) | -11.0 | % | ||||||||||||
OTHER INCOME (EXPENSE):
|
||||||||||||||||||||||||
Interest expense, net
|
(616,715 | ) | -246.9 | % | (443,720 | ) | -71.2 | % | 172,995 | 39.0 | % | |||||||||||||
Gain on legal settlements, net
|
177,019 | 70.9 | % | 553,970 | 88.8 | % | (376,951 | ) | -68.0 | % | ||||||||||||||
Total other expense
|
(439,696 | ) | -176.0 | % | 110,250 | 17.7 | % | (549,946 | ) | -498.8 | % | |||||||||||||
NET LOSS
|
$ | (1,788,057 | ) | -715.8 | % | $ | (1,404,924 | ) | -225.3 | % | $ | 383,133 | 27.3 | % |
Six Months Ended June 30,
|
Change
|
|||||||||||||||
2011
|
2010
|
Dollars
|
Percent
|
|||||||||||||
Interest expense, net
|
$
|
(616,715
|
)
|
$
|
(443,720
|
)
|
$
|
172,995
|
39.0
|
%
|
||||||
Gain on legal settlements, net
|
177,019
|
553,970
|
(376,951
|
)
|
-68.0
|
%
|
||||||||||
Total other (expense) income
|
$
|
(439,696
|
)
|
$
|
110,250
|
$
|
(549,946
|
)
|
-498.8
|
%
|
Six Months Ended June 30,
|
Change
|
|||||||||||||||
2011
|
2010
|
Dollars
|
Percent
|
|||||||||||||
Net cash (used) in operating activities
|
$
|
(2,446,785
|
)
|
$
|
(1,722,101
|
)
|
$
|
724,684
|
42.1
|
%
|
Six Months Ended June 30,
|
Change
|
|||||||||||||||
2011
|
2010
|
Dollars
|
Percent
|
|||||||||||||
Net cash (used) in investing activities
|
$
|
(7,506
|
)
|
$
|
(4,372)
|
$
|
3,134
|
71.7
|
%
|
Six Months Ended June 30,
|
Change
|
|||||||||||||||
2011
|
2010
|
Dollars
|
Percent
|
|||||||||||||
Net cash provided by financing activities
|
$
|
2,420,710
|
$
|
1,628,993
|
$
|
791,717
|
48.6
|
%
|
Note Description
|
As of
June 30, 2011
|
As of
December 31, 2010
|
Maturity
|
Rate
|
|||||||||
IDB credit facility
|
$
|
5,000,000
|
$
|
4,000,000
|
May 2012
|
Prime, not less than 4.0
|
%
|
||||||
Insurance premium note
|
-
|
21,778
|
July 2011
|
5.4
|
%
|
||||||||
Various capital leases
|
174,189
|
185,255
|
Various
|
8.0-18.0
|
%
|
||||||||
Convertible notes
|
13,875,000
|
12,500,000
|
November 2013
|
8.0
|
%
|
||||||||
Totals
|
19,049,189
|
16,707,033
|
|||||||||||
Less current portion of debt
|
5,015,753
|
40,564
|
|||||||||||
Long –term portion of debt
|
$
|
14,033,436
|
$
|
16,666,469
|
As of June 30, 2011
|
|||||||||||
Note Buyer
|
Date of Purchase
|
Amount of
Convertible
Note
|
Interest
Rate
|
Due Date
|
|||||||
Atlas Capital
|
Various
|
$
|
11,425,000
|
8
|
%
|
11/14/2013
|
|||||
Blueline Fund
|
November 14, 2007
|
500,000
|
8
|
%
|
11/14/2013
|
||||||
Crystal Management
|
Various
|
750,000
|
8
|
%
|
11/14/2013
|
||||||
HSBC Private Bank (Suisse), SA
|
November 21, 2008
|
250,000
|
8
|
%
|
11/14/2013
|
||||||
UBP, Union Bancaire Privee
|
Various
|
900,000
|
8
|
%
|
11/14/2013
|
||||||
William Furr
|
November 14, 2007
|
250,000
|
8
|
%
|
11/14/2013
|
||||||
Less – lease conversion
|
September 4, 2009
|
(200,000
|
)
|
||||||||
Total Convertible Notes
|
$
|
13,875,000
|
ITEM 3.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
ITEM 4.
|
CONTROLS AND PROCEDURES
|
Exhibit No.
|
Description
|
|
31.1*
|
Certification of Principal Executive Officer Pursuant to Rule 13a-14(a)
|
|
31.2*
|
Certification of Principal Financial Officer Pursuant to Rule 13a-14(a)
|
|
Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350
|
||
32.2**
|
Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350
|
|
101.1**
|
The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, formatted in XBRL (extensible Business Reporting Language): (i) the Balance Sheets, (ii) the Statements of Operations, (iii) the Statements of Cash Flows and (iv) related notes to these financial statements, tagged as blocks of text.**
|
SMART ONLINE, INC. | |||
By:
|
/s/ Dror Zoreff
|
||
August 12, 2011
|
Dror Zoreff
|
||
Principal Executive Officer, Interim CEO and President
|
|||
SMART ONLINE, INC.
|
|||
By:
|
/s/ Thaddeus J. Shalek
|
||
August 12, 2011
|
Thaddeus J. Shalek
|
||
Principal Accounting Officer and Chief Financial Officer
|
Exhibit No.
|
Description
|
|
31.1*
|
Certification of Principal Executive Officer Pursuant to Rule 13a-14(a)
|
|
31.2*
|
Certification of Principal Financial Officer Pursuant to Rule 13a-14(a)
|
|
32.1**
|
Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350
|
|
32.2**
|
Certification of Principal Financial Officer/Principal Accounting Officer Pursuant to 18 U.S.C. Section 1350
|
|
101.1**
|
The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, formatted in XBRL (extensible Business Reporting Language): (i) the Balance Sheets, (ii) the Statements of Operations, (iii) the Statements of Cash Flows and (iv) related notes to these financial statements, tagged as blocks of text.**
|
1.
|
I have reviewed this Quarterly Report on Form 10-Q for the quarterly period ended June 30 , 2011 of Smart Online, Inc.;
|
2.
|
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
|
3.
|
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
|
4.
|
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
|
(a)
|
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
|
|
(b)
|
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
|
|
(c)
|
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
|
|
(d)
|
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
|
|
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
|
||
(a)
|
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
|
|||
(b)
|
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
|
Date: August 12, 2011
|
By:
|
/s/ Dror Zoreff | |
Dror Zoreff | |||
Principal Executive Officer, Interim CEO and President |
1.
|
I have reviewed this Quarterly Report on Form 10-Q for the quarterly period ended June 30 , 2011 of Smart Online, Inc.;
|
|
2.
|
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
|
|
3.
|
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
|
|
4.
|
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
|
|
(a)
|
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
|
|
(b)
|
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
|
|
(c)
|
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
|
|
(d)
|
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
|
|
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
|
||
(a)
|
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
|
|
(b)
|
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
|
August 12, 2011
|
By:
|
/s/ Thaddeus J. Shalek
|
|
Thaddeus J. Shalek
|
|||
Principal Accounting Officer and Chief Financial Officer
|
(1)
|
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
|
(2)
|
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
|
Date: August 12, 2011
|
|
/s/ Dror Zoreff | |
Dror Zoreff | |||
Principal Executive Officer, Interim CEO and President |
(1)
|
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
|
(2)
|
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
|
August 12, 2011
|
|
/s/ Thaddeus J. Shalek
|
|
Thaddeus J. Shalek
|
|||
Principal Accounting Officer and Chief Financial Officer
|
Balance Sheets (Parenthetical) (USD $)
|
Jun. 30, 2011
|
Dec. 31, 2010
|
---|---|---|
Stockholders' deficit: | Â | Â |
Preferred stock, par value | $ 0.001 | $ 0.001 |
Preferred stock, authorized | 5,000,000 | 5,000,000 |
Preferred stock, issued | 0 | 0 |
Preferred stock, outstanding | 0 | 0 |
Common stock, par value | $ 0.001 | $ 0.001 |
Common stock, authorized | 45,000,000 | 45,000,000 |
Common stock, issued | 18,352,543 | 18,342,542 |
Common stock, outstanding | 18,352,543 | 18,342,542 |
Statements of Operations (Unaudited) (USD $)
|
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2011
|
Jun. 30, 2010
|
Jun. 30, 2011
|
Jun. 30, 2010
|
|
REVENUES: | Â | Â | Â | Â |
Subscription fees | $ 90,375 | $ 123,146 | $ 193,647 | $ 259,404 |
Professional service fees | 0 | 7,050 | 0 | 69,825 |
License fees | 0 | 70,850 | 0 | 158,650 |
Hosting fees | 0 | 37,722 | 0 | 81,994 |
Other revenue | 20,697 | 20,950 | 56,162 | 53,745 |
Total revenues | 111,072 | 259,718 | 249,809 | 623,618 |
COST OF REVENUES | 201,889 | 336,310 | 394,205 | 702,244 |
GROSS PROFIT | (90,817) | (76,592) | (144,396) | (78,626) |
OPERATING EXPENSES: | Â | Â | Â | Â |
General and administrative | 308,763 | 389,469 | 647,731 | 1,061,888 |
Sales and marketing | 146,888 | 179,640 | 288,942 | 332,275 |
Research and development | 104,932 | 10,380 | 263,821 | 42,385 |
Loss on disposal of assets, net | 3,471 | 0 | 3,471 | 0 |
Total operating expenses | 564,054 | 579,489 | 1,203,965 | 1,436,548 |
LOSS FROM OPERATIONS | (654,871) | (656,081) | (1,348,361) | (1,515,174) |
OTHER INCOME (EXPENSE): | Â | Â | Â | Â |
Interest expense, net | (322,386) | (233,025) | (616,715) | (443,720) |
Gain on legal settlements, net | 177,000 | 401,107 | 177,019 | 553,970 |
Total other expense | (145,386) | 168,082 | (439,696) | 110,250 |
NET LOSS | $ (800,257) | $ (487,999) | $ (1,788,057) | $ (1,404,924) |
NET LOSS PER COMMON SHARE: | Â | Â | Â | Â |
Basic and fully diluted | $ (0.04) | $ (0.03) | $ (0.10) | $ (0.08) |
WEIGHTED-AVERAGE NUMBER OF SHARES USED IN COMPUTING NET LOSS PER COMMON SHARE: | Â | Â | Â | Â |
Basic and fully diluted | 18,352,543 | 18,342,542 | 18,352,543 | 18,342,542 |
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Document and Entity Information (USD $)
|
6 Months Ended | |
---|---|---|
Jun. 30, 2011
|
Aug. 06, 2011
|
|
Document And Entity Information | Â | Â |
Entity Registrant Name | SMART ONLINE INC | Â |
Entity Central Index Key | 0001113513 | Â |
Document Type | 10-Q | Â |
Document Period End Date | Jun. 30, 2011 | |
Amendment Flag | false | Â |
Current Fiscal Year End Date | --12-31 | Â |
Is Entity a Well-known Seasoned Issuer? | No | Â |
Is Entity a Voluntary Filer? | No | Â |
Is Entity's Reporting Status Current? | Yes | Â |
Entity Filer Category | Smaller Reporting Company | Â |
Entity Public Float | Â | $ 20,177,896 |
Entity Common Stock, Shares Outstanding | Â | 18,352,543 |
Document Fiscal Period Focus | Q2 | Â |
Document Fiscal Year Focus | 2011 | Â |
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Subsequent Events
|
6 Months Ended |
---|---|
Jun. 30, 2011
|
|
Notes to Financial Statements | Â |
Subsequent Events |
7. SUBSEQUENT EVENTS
During a meeting of our Board of Directors held on June 15, 2011, the Board unanimously approved a resolution to increase the total aggregate principal amount of Notes for sale to new convertible noteholders or existing noteholders from $15.3 million to $20.3 million. The terms of sale, maturity and interest rate remain consistent with the Notes already sold.
On July 1, 2011, the District Court issued the Final Judgment and Order of Partial Dismissal with Prejudice in the Class Action case. The District Court approved the Stipulation and directed that the terms of the Stipulation should be consummated.
Please refer to Part I, Item 3 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2010 for a further description of material legal proceedings. |
Notes Payable
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Notes Payable |
3. NOTES PAYABLE
As of June 30, 2011, the Company had notes payable totaling $19,049,189. The detail of these notes is as follows:
Line of Credit
On December 6, 2010, the Company entered into (i) a $6,500,000 Promissory Note (the IDB Note), as borrower, and (ii) a Letter Agreement for a $6,500,000 Term Loan Facility (the Letter Agreement), each with Israel Discount Bank of New York (IDB) as lender.
Under the IDB Note and Letter Agreement, IDB will make available to the Company one or more term loan advances in the maximum aggregate principal amount of $6,500,000 (the IDB Credit Facility). The IDB Credit Facility is secured by two irrevocable standby letters of credit issued by UBS Switzerland in favor of IDB in the aggregate amount of $6,500,000 (the SBLC), each issued with Atlas Capital S.A. (Atlas) as account party. Atlas and the Company anticipate finalizing in the near future the terms of the Companys reimbursement of Atlas for any future drawdowns on the SBLC. Any advances drawn on the IDB Credit Facility must be repaid on the earlier of (a) May 31, 2012 or (b) 180 days prior to the expiration date of the SBLC. Interest on each advance under the IDB Credit Facility accrues, at the Companys election, at LIBOR plus 300 basis points or IDBs prime rate plus 100 basis points, provided that the annual rate of interest for each advance shall never be less than four percent. Interest accrued on each advance is due quarterly and payable in arrears on the last day of each February, May, August and November commencing on the last day of February 2011.
Convertible Notes
The Company has issued convertible subordinated notes, as amended, (the Notes) under the Convertible Secured Subordinated Note Purchase Agreement, dated November 14, 2007 (as amended, the Note Purchase Agreement), between the Company and the convertible noteholders, under which the Company is entitled to elect to sell to the convertible noteholder, and the convertible noteholders are obligated to buy Notes.
Sales of Notes to the convertible noteholders are subject to certain conditions, including the absence of events or conditions that could reasonably be expected to have a material adverse effect on the ability of the Company to perform its obligations under the Note Purchase Agreement.
As of June 30, 2011, the Company had $13.875 million aggregate principal amount of Notes due November 14, 2013 outstanding, after a $200,000 reduction of such current outstanding debt on account of a sale-leaseback of the Companys equipment with the noteholders in 2009. The Notes have been sold as follows:
The Company may sell up to $20.3 million aggregate principal amount of Notes to new convertible noteholders or existing noteholders with an outside maturity date of November 14, 2013. In addition, the maturity date definition for each of the Notes is the date upon which the note is due and payable, which is the earlier of (1) November 14, 2013, (2) a change of control, or (3) if an event of default occurs, the date upon which noteholders accelerate the indebtedness evidenced by the Notes. The conversion price for each outstanding Note and any additional Notes sold in the future is the same and set at the lowest applicable conversion price for all the Notes, determined according to the formula described in Note 6 in the 2010 Annual Report.
On April 6, 2011, the Company sold a Note to Atlas in the principal amount of $400,000 due November 14, 2013, upon substantially the same terms and conditions as the previously issued Notes. On May 4, 2011, the Company sold a Note to UBP, Union Bancaire Privee in the principal amount of $400,000 due November 14, 2013, upon substantially the same terms and conditions as the previously issued Notes.
During a Board of Directors Meeting, held on June 15, 2011, the Board unanimously approved a resolution to increase the total aggregate principal amount of Notes for sale to new convertible noteholders or existing noteholders from $15.3 million to $20.3 million. The terms of sale, maturity and interest rate remain consistent with the Notes already sold. |
Summary of Business and Significant Accounting Policies
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Summary of Business and Significant Accounting Policies |
1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business - Smart Online, Inc. (the Company) was incorporated in the State of Delaware in 1993. The Company develops and markets software products and services targeted to businesses and not-for profit organizations. These products are delivered via a Software-as-a-Service (SaaS) model. The Company sells its SaaS products and services through direct sales representatives and private-label marketing partners. In addition, the Company provides website consulting services, mobile websites and mobile applications, primarily in the e-commerce retail and direct-selling organization industries. The Company maintains a website for potential partners containing certain corporate information located at www.smartonline.com.
Basis of Presentation - The financial statements as of and for the three and six months ended June 30, 2011 and 2010 included in this Quarterly Report on Form 10-Q are unaudited. The balance sheet as of December 31, 2010 is obtained from the audited financial statements as of that date. The accompanying statements should be read in conjunction with the audited financial statements and related notes, together with managements discussion and analysis of financial condition and results of operations, contained in the Companys Annual Report on Form 10-K for the year ended December 31, 2010 filed with the Securities and Exchange Commission (the SEC) on March 31, 2011 (the 2010 Annual Report).
The financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP). In the opinion of the Companys management, the unaudited statements in this Quarterly Report on Form 10-Q include all normal and recurring adjustments necessary for the fair presentation of the Companys financial position as of June 30, 2011, and its results of operations for the three and six months ended June 30, 2011 and 2010. The results for the three and six months ended June 30, 2011 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2011.
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. During the three and six months ended June 30, 2011 and 2010, the Company incurred net losses as well as negative cash flows, was involved in a class action lawsuit (See Note 7, Commitments and Contingencies, in the 2010 Annual Report), and had deficiencies in working capital. These factors indicate that the Company may be unable to continue as a going concern.
The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts or classification of liabilities that might be necessary should the Company be unable to continue as a going concern. At August 4, 2011, the Company has a commitment from its convertible secured subordinated noteholders to purchase up to an additional $1.225 million in convertible notes upon approval and call by the Companys Board of Directors. There can be no assurance that, if the noteholders do not purchase the $1.225 million in convertible notes, the Company will be able to obtain alternative funding. There can be no assurance that the Companys efforts to raise capital or increase revenue will be successful. If these efforts are unsuccessful, the Company may have to cease operations and liquidate the business. The Companys continuation as a going concern depends upon its ability to generate sufficient cash flows to meet its obligations on a timely basis, to obtain additional financing as may be required, and ultimately to attain profitable operations and positive cash flows.
Significant Accounting Policies - In the opinion of the Companys management, the significant accounting policies used for the three and six months ended June 30, 2011 are consistent with those used for the year ended December 31, 2010. Accordingly, please refer to the 2010 Annual Report for the Companys significant accounting policies.
Use of Estimates - The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions in the Companys financial statements and notes thereto. Significant estimates and assumptions made by management include the determination of the provision for income taxes, the fair market value of stock awards issued, and the period over which revenue is generated. Actual results could differ materially from those estimates.
Reclassifications - Certain prior year and comparative period amounts have been reclassified to conform to current year presentation. These reclassifications had no effect on previously reported net income or stockholders deficit.
Stock-Based Compensation Effective January 1, 2006, the Company began recognizing stock based compensation. Stock-based compensation is recognized on the straight-line method over the requisite service period. Total stock-based compensation expense recognized under US GAAP provisions during the three and six months ended June 30, 2011 was $10,243 and $36,180, respectively, of which $ -0- and $13,850 related to the issuance of restricted stock and $10,243 and $22,330 was expensed associated with stock options. Total stock-based compensation expense during the three and six months ended June 30, 2010 was $8,095 and $11,656, respectively, of which $2,850 and $2,850 related to the issuance of restricted stock and $5,245 and $8,806 was expensed associated with stock options for the respective periods. No stock-based compensation was capitalized in the financial statements.
The fair value of option grants under the Companys equity compensation plan during the three and six months ended June 30, 2011 and 2010 were estimated using the following weighted average assumptions:
Net Loss Per Share - Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the periods. Diluted net loss per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the periods. Common equivalent shares consist of convertible notes, stock options, and warrants that are computed using the treasury stock method. The 1,475,000 shares that will be issued to the claimants in the settled Class Action Settlement described in Notes 4 and 7 below based upon the District Courts decision on July 1, 2011 are not included in the calculation of net loss per share at June 30, 2011. Shares issuable upon the exercise of stock options and warrants, totaling 1,859,035 and 1,794,035 on June 30, 2011 and 2010, respectively, were excluded from the calculation of common equivalent shares, as the impact was anti-dilutive. |
Commitments and Contingencies
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Notes to Financial Statements | Â |
Commitments and Contingencies |
4. COMMITMENTS AND CONTINGENCIES
Lease Commitments
In 2008, the Company entered into a non-cancellable sublease to relocate its North Carolina headquarters to another facility near Research Triangle Park in Durham, N.C., under which the Company prepaid rent in the total amount of $450,080 and purchased existing furniture and fixtures for an additional $49,920, which furniture and fixtures were capitalized for depreciation purposes. Effective May 1, 2010, the sublease was restructured as a direct lease with the owner of the property, with a termination date of September 30, 2011 (the "Lease"). On April 28, 2011, the Company entered into the Lease Amendment (the Lease Amendment) with Nottingham Hall IC, LLC (Nottingham), extending the termination date of the Lease from September 30, 2011 to November 15, 2013.
Rent expense for the six months ended June 30, 2011 and 2010 was $106,152 and $107,509, respectively.
Legal Proceedings
The Company is subject to claims and suits that arise from time to time in the ordinary course of business.
On June 18, 2010, the Company entered into a Stipulation and Agreement of Settlement (the "Stipulation") with the lead plaintiff in the securities class action involving the Company in the case captioned Mary Jane Beauregard vs. Smart Online, Inc., et al , filed in the United States District Court for the Middle District of North Carolina (the Class Action). The Stipulation provides for the settlement of the Class Action on the terms described below. The United States District Court for the Middle District of North Carolina (the District Court) issued an order preliminarily approving the settlement on January 13, 2011, the final settlement hearing was held on May 11, 2011. The District Court approved the Stipulation and directed that the terms of the Stipulation should be consummated.
The Stipulation provides for the certification of a class consisting of all persons who purchased the Company's publicly traded securities between May 2, 2005 and September 28, 2007, inclusive. As per the terms of the Stipulation, the settlement class has received total consideration of a cash payment of $350,000 made by the Company, and a cash payment of $112,500 made by Maxim Group. In addition, Henry Nouri is required to transfer 25,000 shares of Company common stock to the settlement class and the Company is required to issue 1,475,000 shares of Company common stock to the class. Under the terms of the Stipulation, counsel for the settlement class may sell some or all of the common stock received in the settlement before distribution to the class, subject to the limitation that it cannot sell more than 10,000 shares on one day or 50,000 shares in 30 calendar days. Subject to the terms of the Stipulation, we paid the lead plaintiff $75,000 on July 14, 2010, $100,000 on September 15, 2010, $100,000 on December 14, 2010 and $75,000 on March 14, 2011.
The stipulation provides that all claims against the settling defendants are dismissed with prejudice. The claims of the lead plaintiff against Jesup & Lamont Securities Corp. and the Companys former independent registered public accounting firm, Sherb & Co., are not being dismissed and will continue. The Stipulation contains no admission of fault or wrongdoing by the Company or the other settling defendants.
On June 18, 2010, the Company entered into a Settlement Agreement (the "Settlement Agreement") with Dennis Michael Nouri, Reza Eric Nouri, Henry Nouri and Ronna Loprete Nouri (collectively, the Nouri Parties) in settlement of claims filed by the Nouri Parties against the Company in the Court of Chancery of the State of Delaware for advancement of legal expenses and indemnification. The Settlement Agreement provides for the payment by the Company of up to $1,400,000 for the benefit of the Parties.
On January 13, 2011(the Effective Date), the District Court, issued the Order Preliminarily Approving Settlement and Providing Notice. Based upon the Nouri Settlement Agreement and the January 13, 2011 District Court Order Preliminarily Approving Settlement and Providing Notice, the following amounts were paid for the benefit of the Nouri Parties: the amount of $500,000 was paid on January 22, 2011 and $75,000 was paid on March 16, 2011, April 15, 2011, June 14, 2011 and July 14, 2011, $7,773 was paid on May 12, 2011, and an additional $592,227 is payable in seven fixed monthly installments of $75,000 based on the Effective Date, with the last four scheduled installments totaling $300,000 subject to reduction to the extent that fees and disbursements for the Nouris appeal are below certain levels or if the appeal is not taken to final adjudication. The Company was ordered by a Court of proper jurisdiction to withhold $67,227 for future payment of adjudicated debt owed by the Nouris. The Settlement Agreement provides for the exchange of mutual releases by the parties.
On July 1, 2011, the District Court issued the Final Judgment and Order of Partial Dismissal with Prejudice in the Class Action case. The Court approved the Stipulation and directed that the terms of the Stipulation should be consummated. |
Stockholders Equity
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Stockholders Equity |
5. STOCKHOLDERS DEFICIT
Preferred Stock
The Board of Directors is authorized, without further stockholder approval, to issue up to 5,000,000 shares of $0.001 par value preferred stock in one or more series and to fix the rights, preferences, privileges, and restrictions applicable to such shares, including dividend rights, conversion rights, terms of redemption, and liquidation preferences, and to fix the number of shares constituting any series and the designations of such series. There were no shares of preferred stock outstanding at June 30, 2011.
Common Stock
The Company is authorized to issue 45,000,000 shares of common stock, $0.001 par value per share. As of June 30, 2011, it had 18,352,543 shares of common stock outstanding and will issue 1,475,000 shares to the lead plaintiffs counsel as per the Stipulation described in Note 4 above. Holders of common stock are entitled to one vote for each share held.
Warrants
As part of the commission paid to Canaccord Adams, Inc. (CA), the Companys placement agent in the 2007 private placement transaction that closed in February 2007, CA was issued a warrant to purchase 35,000 shares of the Companys common stock at an exercise price of $2.55 per share. This warrant contains a provision for cashless exercise and is exercisable until February 21, 2012. CA and the Company also entered into a Registration Rights Agreement (the CA RRA). Under the CA RRA, the shares issuable upon exercise of the warrant must be included on the same registration statement the Company was obligated to file under a previous registration rights agreement, but CA was not entitled to any penalties for late registration or effectiveness.
As of June 30, 2011, including the warrants described in the foregoing paragraph, the Company had outstanding warrants to purchase up to an aggregate of 479,444 shares of its common stock.
Equity Compensation Plans
The Company adopted its 2004 Equity Compensation Plan (the 2004 Plan) as of March 31, 2004. The 2004 Plan provides for the grant of incentive stock options, non-statutory stock options, restricted stock, and other direct stock awards to employees (including officers) and directors of the Company as well as to certain consultants and advisors. The total number of shares of common stock reserved for issuance under the 2004 plan is 5,000,000 shares, subject to adjustment in the event of a stock split, stock dividend, recapitalization, or similar capital change.
Stock Options The exercise price for incentive stock options granted under the 2004 Plan is required to be no less than the fair market value of the common stock on the date the option is granted, except for options granted to 10% stockholders, which are required to have an exercise price of not less than 110% of the fair market value of the common stock on the date the option is granted. Incentive stock options typically have a maximum term of ten years, except for option grants to 10% stockholders, which are subject to a maximum term of four years. Non-statutory stock options have a term determined by either the Board of Directors or the Compensation Committee. Options granted under the 2004 Plan are not transferable, except by will and the laws of descent and distribution.
The following is a summary of the stock option activity for the six months ended June 30, 2011:
The following table summarizes information about stock options outstanding at June 30, 2011:
At June 30, 2011, there remains $74,247 of unvested expense yet to be recorded related to all options outstanding. |
Major Customers and Concentration of Credit Risk
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Major Customers and Concentration of Credit Risk |
6. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to credit risk principally consist of trade receivables. The Company believes the concentration of credit risk in its trade receivables is substantially mitigated by ongoing credit evaluation processes, relatively short collection terms, and the nature of the Companys customer base, primarily mid- and large-size corporations with significant financial histories. Collateral is not generally required from customers. The need for an allowance for doubtful accounts is determined based upon factors surrounding the credit risk of specific customers, historical trends, and other information.
A significant portion of revenues is derived from certain customer relationships. The following is a summary of customers that represent greater than 10% of total revenues:
As of June 30, 2011, we had current accounts receivable of $ 737,346 and a note receivable from a customer of $100,000; we have established a reserve of $835,388 for bad debts against the total. As of December 31, 2010, one customer accounted for 100% of accounts receivable. |
Balance Sheet Accounts
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Balance Sheet Accounts |
2. BALANCE SHEET ACCOUNTS
Accrued Liabilities
Accrued liabilities, in addition to the accrued liabilities related to the Companys litigation related to certain Nouri Parties (see Note 4 below), consisted of the following:
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