RESEARCH TRIANGLE PARK, N.C. – Smart Online is warning investors that the company lacks the “working capital” to maintain operations beyond July of next year.

In a filing with the Securities and Exchange Commission and an earnings release disclosed late Friday, Smart Online said its “recurring losses” had reached $57 million since its launch in 1993. While the firm did cut its red ink drastically and also drove up revenues in 2006, its language in the filing was clear.

“At December 31, 2006, we had a $3.8 million working capital deficit,” Smart Online told the SEC. “Our working capital, including our line of credit and recent financing transaction for $6 million, is not sufficient to fund our operations beyond July 2008, unless we substantially increase our revenue, limit expenses or raise substantial additional financing.”

The $6 million was raised in February. Another $1.2 million was raised in January. That deal included salary cuts for top Smart Online executives. The cuts were voluntary, according to the company.

However, a spokesman for the company, Tom Furr, called Monday and said that management believes that Smart Online is ‘positioned nicely" for 2007. He noted that the firm had "plenty of money in the bank," expenses are down and revenues are up. He also noted that Smart Online received a positve audting report from Sherby & Co. out of New York.

Shares in Smart Online (OTCBB: SOLN) closed at $2.80 on Friday, up 5 cents.

The SEC filing and earnings update were issued after the markets closed.

Smart Online is seeking to succeed as a provider of software-as-a-service, with customers paying subscription fees in order to access a variety of programs.

“We have had recurring losses from operations since inception, and have deficiencies in working capital and equity capital,” the Smart Online filing said. “If we do not rectify these deficiencies through additional financing or growth, we may have to cease operations and liquidate our business.”

"Because we have only nominal tangible assets, you may lose your entire investment," the filing said.

The filing also noted that an SEC investigation last year curtailed trading of stock. In the earnings announcement, the company said the SEC probe and an internal investigation cost $1 million.

“Factors such as the suspension of trading of shares of our common stock by the SEC, and the resulting drop in share price, trading volume and liquidity; the commercial success of our existing services and products; the timing and success of any new services and products; the progress of our research and development efforts; our results of operations; the status of competitive services and products; and the timing and success of potential strategic alliances or potential opportunities to acquire technologies or assets may require us to seek additional funding sooner than we expect,” Smart Online added in the filing. “If we fail to raise sufficient financing, we will not be able to implement our business plan, we may have to liquidate our business and you may lose your investment.”

The firm also said that it had “drawn down” some $2.1 million in a $2.5 million line of credit from Wachovia.

Smart Online went public in April of 2005 with shares trading as high as $11.50. They hit a low of 90 cents in the fourth quarter of last year.

In its earnings announcement, Smart said 2006 revenues climbed 69 percent to $3.6 million over 2005.

The company also slashed its losses to $5.4 million from $16.1 million the previous year. Net loss per share dropped to 33 cents from $1.20 the previous year.

In a statement, Chief Executive Officer Michael Nouri noted that the company “faced tremendous difficulties” in 2006. However, he added that the firm planned to “aggressively advance” the software-as-a-service model in 2007.

As of Dec. 31, Smart Online listed current assets of $925,490, down from $2.6 million at the end of 2005.