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): April 13, 2010
 
 
Smart Online, Inc.
(Exact name of registrant as specified in its charter)

Delaware
  
001-32634
  
95-4439334
(State or other Jurisdiction of Incorporation)
  
(Commission File Number)
  
(IRS Employer Identification No.)
 
4505 Emperor Blvd., Suite 320
Durham, North Carolina
  
27703
(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:
 
o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
 
o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
 
o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
 
o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 
 
 

Item 4.02  Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review.
 
On April 13, 2010, the Audit Committee of Smart Online, Inc. (the “Company”), in consultation with Cherry, Bekaert & Holland, the Company’s independent registered public accountants, concluded that the Company’s financial statements for the fiscal year ended December 31, 2008 and for the fiscal quarters ended March 31, 2009, June 30, 2009 and September 30, 2009 should no longer be relied upon because of an error in such financial statements.

The Board of Directors unanimously approved, authorized and directed the restatements of the foregoing financial statements and the filing of this Report on Form 8-K by resolution adopted on April 15, 2010. The Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009, as filed with the Securities and Exchange Commission (the “Commission”), is consistent with the Company’s restated financial statements.

The financial statements have been restated to include net subscription revenue as compared to the gross subscription revenue as presented in prior filings for 2009 and 2008.  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 marketing partners in order to encourage them to market our products and services to their customers. Subscriptions are generally payable on a monthly basis and are typically paid via credit card of the individual end user. We accrue any payments received in advance of the subscription period as deferred revenue and amortize them over the subscription period. 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 identified the fact that certain contracts require the reporting of subscription revenue on a gross basis and others on a net basis according to 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.  The effects of these reclassifications for 2009 and 2008 are presented in detail below:

   
2009
    
2008
  
   
As Reported
    
As Restated
    
As Reported
    
As Restated
  
Quarter Ended March 31
                        
REVENUES:
                        
Subscription fees
   $ 473,579     $ 241,783     $ 742,839     $ 479,341  
Professional service fees
     118,773       118,773       504,083       504,083  
License fees
     11,250       11,250       100,000       100,000  
Hosting fees
     72,211       72,211       59,482       59,482  
Other revenue
     37,671       37,671       40,759       40,759  
Total revenues
     713,484       481,688       1,447,163       1,183,665  
                                 
COST OF REVENUES
     492,601       492,601       711,667       711,667  
GROSS PROFIT
     220,883       (10,913 )     735,496       471,998  
OPERATING EXPENSES
     1,703,804       1,472,008       2,390,622       2,127,124  
LOSS FROM OPERATIONS
     (1,482,921 )     (1,482,921 )     (1,655,126 )     (1,655,126 )
OTHER INCOME (EXPENSE)
     (111,732 )     (111,732 )     (175,757 )     (175,757 )
NET LOSS
   $ (1,594,653 )   $ (1,594,653 )   $ (1,830,883 )   $ (1,830,883 )
                                 
NET LOSS PER COMMON SHARE:
                                
Basic and fully diluted
   $ (0.09 )   $ (0.09 )   $ (0.10 )   $ (0.10 )

 
 
 
 
   
2009
    
2008
  
   
As Reported
    
As Restated
    
As Reported
    
As Restated
  
Quarter Ended June 30
                        
REVENUES:
                        
Subscription fees
   $ 668,344     $ 209,819     $ 747,068     $ 464,456  
Professional service fees
     79,726       79,726       932,444       932,444  
License fees
     11,250       11,250       3,750       3,750  
Hosting fees
     33,045       33,045       36,196       36,196  
Other revenue
     36,806       36,806       36,173       36,173  
Total revenues
     829,171       370,646       1,755,631       1,473,019  
                                 
COST OF REVENUES
     202,333       202,333       647,528       647,528  
GROSS PROFIT
     626,838       168,313       1,108,103       825,491  
OPERATING EXPENSES
     2,202,532       1,744,007       2,232,752       1,950,140  
LOSS FROM OPERATIONS
     (1,575,694 )     (1,575,694 )     (1,124,649 )     (1,124,649 )
OTHER INCOME (EXPENSE)
     (158,343 )     (158,343 )     (177,410 )     (177,410 )
NET LOSS
   $ (1,734,037 )   $ (1,734,037 )   $ (1,302,059 )   $ (1,302,059 )
                                 
NET LOSS PER COMMON SHARE:
                                
Basic and fully diluted
   $ (0.09 )   $ (0.09 )   $ (0.08 )   $ (0.08 )
 
   
2009
    
2008
  
   
As Reported
    
As Restated
    
As Reported
    
As Restated
  
Quarter Ended September 30
                        
REVENUES:
                        
Subscription fees
   $ 908,007     $ 159,149     $ 642,880     $ 364,136  
Professional service fees
     63,200       63,200       574,970       574,970  
License fees
     11,250       11,250       291,250       291,250  
Hosting fees
     33,751       33,751       70,856       70,856  
Other revenue
     26,300       26,300       31,501       31,501  
Total revenues
     1,042,508       293,650       1,611,457       1,332,713  
                                 
COST OF REVENUES
     430,967       430,967       409,414       409,414  
GROSS PROFIT
     611,541       (137,317 )     1,202,043       923,299  
OPERATING EXPENSES
     3,309,069       2,560,211       2,736,424       2,457,680  
LOSS FROM OPERATIONS
     (2,697,528 )     (2,697,528 )     (1,534,381 )     (1,534,381 )
OTHER INCOME (EXPENSE)
     (169,609 )     (169,609 )     141,962       141,962  
NET LOSS
   $ (2,867,137 )   $ (2,867,137 )   $ (1,392,419 )   $ (1,392,419 )
                                 
NET LOSS PER COMMON SHARE:
                                
Basic and fully diluted
   $ (0.16 )   $ (0.16 )   $ (0.08 )   $ (0.08 )

The foregoing gross revenue and expense adjustments have no impact on the Company’s net income (loss).

In addition to the restatement of subscription revenue, we restated the value of the iMart trade name as of December 31, 2008 because of a recalculation of the net royalty method of valuation.  The restatement caused an increase in the amount of loss on impairment of intangible assets for the year ended December 31, 2008 in the amount of $230,000.  The restated total loss on impairment of intangible assets is $3,702,141 as compared to the original loss of $3,472,141.  The effect of this restatement for 2008 is as follows:

 
 
 
 
For the Year Ended
  
2008
  
   
As Reported
    
As Restated
  
 REVENUES:                
Subscription fees
   $ 2,683,770     $ 1,587,942  
Professional service fees
     2,045,508       1,859,154  
License fees
     26,250       26,250  
Hosting fees
     -       259,675  
Other revenue
     117,457       146,158  
Total revenues
     4,872,985       3,879,179  
                 
COST OF REVENUES
     837,789       2,021,489  
GROSS PROFIT
     4,035,196       1,857,690  
OPERATING EXPENSES
     13,653,175       11,705,668  
LOSS FROM OPERATIONS
     (9,617,979 )     (9,847,978 )
OTHER INCOME (EXPENSE)
     (204,171 )     (204,171 )
NET LOSS
   $ (9,822,150 )   $ (10,052,149 )

The effect on the balance sheet for the affected period is as follows:

   
2008
  
   
As Reported
    
As Restated
  
December 31
                
Intangible Assets, net
   $ 380,000     $ 150,000  
Accumulated deficit
   $ (72,678,076 )   $ (72,908,077 )

The Company’s Audit Committee and executive officers have discussed the restatement of the 2008  and 2009 financial statements and the other matters discussed in this filing with the Company’s independent registered public accountants, Cherry, Bekaert & Holland and the Company has provided Cherry, Bekaert & Holland with a copy of this Report on Form 8-K. Attached as an exhibit to this Report on Form 8-K is a letter from Cherry, Bekaert & Holland  addressed to the  Commission stating that Cherry, Bekaert & Holland agrees with the statements made by the Company in this Item 4.02.

Item 9.01
Financial Statements and Exhibits
 
(d) Exhibits
 
The following Exhibit is furnished with this Report:
 
Exhibit 99.1
Letter to the Company from the Company’s independent registered public accountants, Cherry, Bekaert & Holland, dated April 15, 2010.
 
 
 
 

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.
April 15, 2010
  
 
By:
/s/Thaddeus J. Shalek
 
Name: Thaddeus J. Shalek
 
Title: Interim Chief Financial Officer

 
 
 

Exhibit Index
 
Exhibit No.
  
Description
99.1
  
Letter to the Company from the Company’s independent registered public accountants, Cherry, Bekaert & Holland, dated April 15, 2010.