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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2002
Commission file number: 1-15569
SEMOTUS SOLUTIONS, INC.
----------------------------------------------------
(Exact name of small business issuer in its charter)
Nevada 36-3574355
- ------------------------------- ----------------------------
(State or other jurisdiction of (IRS Employer Identification
Incorporation or Organization) Number)
1735 Technology Drive, Suite 790, San Jose, CA 95110
-----------------------------------------------------------
(Address of Principal Executive Offices including zip code)
(408) 367-1700
---------------------------
(Issuer's telephone number)
Indicate by a check mark whether the issuer (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 [ ]
There were 17,522,165 shares of the Registrant's common stock outstanding as of
August 6, 2002.
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SEMOTUS SOLUTIONS, INC.
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
a. Consolidated Balance Sheets as of June 30,
2002 and March 31, 2002 3
b. Consolidated Statements of Operations and
Comprehensive Loss for the three-month periods
ended June 30, 2002 and 2001 4
c. Consolidated Statements of Cash Flows for the
three months ended June 30, 2002 and 2001 5
d. Notes to the Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. 17
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 17
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17
ITEM 5. OTHER INFORMATION 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURES 18
2
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMNTS
SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
ASSETS June 30 March 31
2002 2002
CURRENT ASSETS: ----------- -----------
Cash and cash equivalents (including restricted
cash of $693,286 at June 30 and March 31, 2002) $ 4,065,776 $ 4,869,578
Trade receivables (net of allowance for
doubtful accounts of $73,000 at June 30,
2002 and $67,000 at March 31, 2002) 315,642 320,566
Income and GST tax receivable 6,268 3,823
Other receivables 55,309 60,395
Finished goods inventory (net of reserve of
$40,900 at June 30, and March 31, 2002) 134,662 178,171
Prepaid expenses 171,336 170,514
----------- -----------
Total current assets 4,748,993 5,603,047
Property and equipment, net 608,659 682,461
Capitalized contract, net 432,718 576,958
GMP intellectual property, net 750,000 1,000,000
Goodwill 2,599,597 2,474,597
----------- -----------
Total assets $ 9,139,967 $10,337,063
=========== ===========
LIABILITIES
Current liabilities:
Accounts payable $ 859,535 $ 799,385
Accrued expenses and other current liabilities 196,111 359,091
Notes payable 723,105 693,286
Current portion of capital lease obligation 91,629 93,922
Current portion of advances on technology sales 271,370 269,109
Deferred revenue 988,559 1,323,858
----------- -----------
Total current liabilities 3,130,309 3,538,651
Capital lease obligation, net of current portion 28,590 52,405
Advances on technology sales, net of current
portion 492,979 566,542
----------- -----------
Total liabilities 3,651,878 4,157,598
----------- -----------
Minority interest 286,958 202,528
Commitments and contingencies (Note 6)
PREFERRED SHAREHOLDERS' EQUITY:
Convertible preferred stock, Series B: $0.001 par
value; $13.00 liquidation value; authorized:
5,000,000 shares; issued and outstanding: 469,231
at June 30, 2002 and March 31, 2002 469 469
Additional paid-in capital 5,681,987 5,681,987
----------- -----------
Total preferred shareholders' equity 5,682,456 5,682,456
----------- -----------
COMMON SHAREHOLDERS' EQUITY (deficit):
Common stock: $0.01 par value; authorized:
50,000,000 shares; issued and outstanding:
17,479,226 at June 30, 2002 and 17,200,784
at March 31, 2002 174,793 172,008
Additional paid-in capital 60,555,593 60,396,089
Accumulated other comprehensive loss (128,129) (142,360)
Notes receivable - related parties (619,587) (701,817)
Accumulated deficit (60,463,995) (59,429,439)
----------- -----------
Total common shareholders' equity (deficit) (481,325) 294,481
----------- -----------
Total liabilities, minority interest,
preferred and common shareholders' equity $ 9,139,967 $10,337,063
=========== ===========
See accompanying notes to consolidated financial statements.
3
SEMOTUS SOLUTIONS,INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(unaudited)
Three Months Ended
June 30,
2002 2001
----------- -----------
Revenues:
Wireless services $ 349,590 $ 317,976
Enterprise and commerce sales 418,908 491,370
Professional and related services 19,294 295,862
Logistics 277,705 489,077
----------- -----------
Total revenue 1,065,497 1,594,285
----------- -----------
Cost of sales:
Wireless Services 70,326 208,309
Enterprise and commerce sales 313,992 362,280
Professional and related services 2,271 153,063
Logistics 119,309 278,736
----------- -----------
Total cost of revenue 505,898 1,002,388
----------- -----------
Gross Profit 559,599 591,897
Operating Expenses:
(Exclusive of depreciation and amortization
and stock, option and warrant expense)
Research and development 96,239 524,301
Sales and marketing 98,592 800,640
General and administrative 50,424 1,557,205
Impairment of goodwill -- 650,000
Depreciation and amortization:
Research and development 34,135 26,483
General and administrative 318,743 974,216
----------- -----------
352,878 1,000,699
Stock, option and warrant expense:
Sales and marketing -- 21,000
General and administrative 21,054 152,917
----------- -----------
21,054 173,917
----------- -----------
Total operating expenses 1,719,187 4,706,762
Operating Loss (1,159,588) (4,114,865)
Net interest income 23,877 113,893
Other income 80,176 71,154
----------- -----------
Total interest and other income 104,053 185,047
----------- -----------
Net loss before minority interest (1,055,535) (3,929,818)
Minority interest 20,978 --
----------- -----------
Net loss (1,034,557) (3,929,818)
Other comprehensive income
loss - Translation adjustment 14,231 (14,118)
----------- -----------
Comprehensive loss $(1,020,326) $(3,943,936)
=========== ===========
Net loss per common share:
Basic $ (0.06) $ (0.24)
Diluted $ (0.06) $ (0.24)
Weighted average shares used in per share
calculation, basic and diluted 17,382,241 16,481,656
=========== ===========
See accompanying notes to consolidated financial statements.
4
SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended
June 30,
2002 2001
----------- -----------
Cash flows from operating activities:
Net loss $(1,034,557) $(3,929,818)
Foreign currency translation adjustment 14,231 (14,118)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 352,878 1,000,699
Compensation expense related to stock
issued for services 21,054 173,917
Net amortization of contract income (105,855) --
Amortization of technology advances (71,302) (79,804)
Amortization of notes receivable 70,241 103,419
Impairment of goodwill -- 650,000
Non-cash settlements of liabilities 27,121 --
Changes in assets and liabilities net of acquired
assets and liabilities due to acquisitions:
Accounts and other receivables 7,565 4,604
Inventory 43,509 3,899
Capitalized in-progress contract costs -- (39,956)
Prepaid expenses and other assets (823) (170,863)
Accounts payable 60,150 42,710
Accrued liabilities (162,980) 5,424
Deferred revenue (86,398) (4,504)
----------- -----------
Net cash used in operating activities (865,166) (2,254,391)
----------- -----------
Cash flows from investing activities:
Acquisition of property and equipment (17,937) (10,971)
Cash received from FY2002 acquisitions, net 1,096,472
Sale of Kinetidex technology 350,000
Minority investment in subsidiary 105,409 --
----------- -----------
Net cash provided by (used in) investing
activities 87,472 1,435,501
----------- -----------
Cash flows from financing activities:
Repayments of notes payable to bank -- (151,672)
Repayments of capital lease obligations (26,108) (19,575)
Proceeds from exercise of options and warrants -- 11,668
----------- -----------
Net cash (used in) provided by financing
activities (26,108) (159,579)
----------- -----------
Net (decrease) in cash and cash equivalents (803,802) (978,469)
Cash and cash equivalents, beginning of period 4,176,292 7,844,042
----------- -----------
Cash and cash equivalents, end of period $ 3,372,490 $ 6,865,573
=========== ===========
See accompanying notes to consolidated financial statements.
5
SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(unaudited)
Three Months Ended June 30,
2002 2001
----------- -----------
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest $ 10,156 $ 12,660
=========== ===========
Cash paid for income taxes $ 5,981 $ 5,381
=========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Non-cash purchase consideration for the
acquisition of Wizshop, Inc. and
Application Design Associates, Inc.
through the issuance of common stock $ -- $ 4,666,000
=========== ===========
Common stock issued for services $ 21,054 $ 173,917
=========== ===========
Common stock issued for liabilities $ 16,235 $ --
=========== ===========
Property and equipment purchased through
the issuance of capital leases $ -- $ 11,254
=========== ===========
See accompanying notes to consolidated financial statements.
6
SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. FORMATION AND BUSINESS OF THE COMPANY:
Semotus(TM) Solutions, Inc. ("Semotus" or the "Company"), changed its name from
Datalink.net, Inc. as of January 11, 2001. The Company, originally Datalink
Systems Corporation, was formed under the laws of the State of Nevada on June
18, 1996. On June 27, 1996, the Company went public through an acquisition of a
public corporation, Datalink Communications Corporation ("DCC"), which was
previously Lord Abbott, Inc., a Colorado corporation formed in 1986. As a part
of the transaction, the Company also acquired a Canadian corporation, DSC
Datalink Systems Corporation, incorporated in Vancouver, British Columbia, now
named Semotus Systems Corp.
Semotus is a leading provider of enterprise application software connecting
employees to critical business systems, information, and processes. Semotus
helps mobile employees make better and faster decisions, increase customer
satisfaction, and improve efficiencies in their business processes for shorter
sales and service cycles. The Company's products serve such vertical markets as
workforce automation and financial services. Semotus' enterprise application
software provides mobility, convenience, efficiency and improves profitability.
For more information please go to our website at http://www.semotus.com.
2. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Semotus Solutions, Inc. and its subsidiaries. The consolidated balance sheet as
of June 30, 2002, the consolidated statements of operations and comprehensive
loss for the three months ended June 30, 2002 and 2001, and the consolidated
statements of cash flows for the three months ended June 30, 2002 have been
prepared by the Company, without audit and with the instructions to Form 10-Q
and Regulation S-K. In the opinion of management, all adjustments (including
normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-month period ended June 30, 2002
are not necessarily indicative of the results that may be expected for the year
ending March 31, 2003. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. The Company believes that
the disclosures provided are adequate to make the information presented not
misleading. These consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and related notes
included in the Company's Annual Report on Form 10-K for the year ended March
31, 2002.
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries:, DSC Datalink Systems Corporation (Canadian
subsidiary), Cross Communications, Inc., Simkin, Inc., ISS, Inc. (dba Wares on
the Web) FiveStar Advantage, Inc., WizShop, Inc. and Application Design
Associates, Inc. All significant intercompany transactions and balances have
been eliminated in consolidation. Operations of the Canadian subsidiary consist
mainly of research and development and engineering on behalf of the parent. All
other subsidiaries generate revenues from the sales of products and services.
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenue and expense during the reporting
period. Actual results could differ from those estimates.
7
3. RECENT PRONOUNCEMENTS
In June 2001, the FASB issued FASB Statements No. 141, "Business Combinations"
(SFAS 141), and No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). SFAS
141 requires the use of the purchase method of accounting and prohibits the use
of the pooling-of-interests method of accounting for business combinations
initiated after June 30, 2001. SFAS 141 also requires that the Company recognize
acquired intangible assets apart from goodwill if the acquired intangible assets
meet certain criteria. SFAS 141 applies to all business combinations initiated
after June 30, 2001 and for purchase business combinations completed on or after
July 1, 2001. It also requires, upon adoption of SFAS 142, that the Company
reclassify the carrying amounts of intangible assets and goodwill based on the
criteria in SFAS 141.
SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. SFAS 142 requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption. The Company is
also required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142. The Company adopted SFAS 141
and 142 as of April 1, 2002 and is no longer amortizing goodwill. The effect of
the adoption of these Statements resulted in the net loss for the three months
ended June 30, 2002 being smaller by $179,735 due to not amortizing goodwill.
In August 2001, the FASB issued SFAS No. 143 (SFAS 143) "Accounting for
Obligations Associated with the Retirement of Long-Lived Assets". SFAS 143
addresses financial accounting and reporting for the retirement obligation of an
asset. SFAS 143 states that companies should recognize the asset retirement
cost, at its fair value, as part of the cost of the asset and classify the
accrued amount as a liability in the balance sheet. The asset retirement
liability is then accreted to the ultimate payout as interest expense. The
initial measurement of the liability would be subsequently updated for revised
estimates of the discounted cash outflows. SFAS 143 will be effective for fiscal
years beginning after June 15, 2002. The Company does not expect that the
implementation of SFAS 143 will have any material impact on its financial
position, results of operations, or cash flows.
In October 2001, the FASB issued SFAS No. 144 (SFAS 144) "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS 144 supersedes SFAS No. 121
by requiring that one accounting model be used for long-lived assets to be
disposed of by sale, whether previously held and used or newly acquired, and by
broadening the presentation of discontinued operations to include more disposal
transactions. SFAS 144 was adopted effective April 1, 2002. The impact of
adopting SFAS 144 on the Company's financial position and result of operations
was not material.
4. EARNINGS PER SHARE (EPS) DISCLOSURES:
The Company has adopted SFAS No. 128 "Earnings Per Share " (EPS). Basic EPS is
computed as net income (loss) divided by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur from common shares issuable through stock options, warrants and
other convertible securities. Common equivalent shares are excluded from the
computation of net loss per share if their effect is anti-dilutive.
For the three months ended June 30, 2002 and 2001, 7,517,303 potential shares
and 7,490,355 potential shares, respectively, were excluded from the shares used
to calculate diluted EPS as their effect is anti-dilutive.
8
5. FIVESTAR ADVANTAGE, INC.
As part of Semotus' Centralization and Consolidation Plan, which is further
described in the Company's March 31, 2002 10-K, Semotus reduced its e-commerce
and m-commerce presence with the elimination of unprofitable products and
services in that segment. FiveStar was not expected to make a significant
contribution to the Company's future profitability as its operations were
unprofitable. Therefore, Semotus decided to close the facilities and cease the
operations as of the end of June 2002. Furthermore, due to the large excess of
liabilities over assets, FiveStar filed for liquidation under Chapter 7 of the
U.S. Bankruptcy Code on June 28, 2002.
6. COMMITMENTS AND CONTINGENCIES:
The Company continues to be a party to certain commitments and contingencies, as
previously reported in Note 20 and Part II, Item 3 of Registrant's Form 10K for
the year ended March 31, 2002. Please also refer to Park II, Item 1 of this
report.
7. SEGMENT INFORMATION
Semotus' business has evolved into four segments: wireless services, enterprise
and commerce sales, professional and related services and logistic system sales.
Semotus' wireless services segment focuses in three areas: Company hosted
solutions, client hosted (premise-based) solutions, and financial consumer
solutions. The Company creates wireless information products by customizing and
delivering actionable and time sensitive information whenever that information
is most valuable to the customer. Services and applications are device agnostic
and protocol independent, integrating seamlessly into every enterprise
infrastructure and working with every wireless carrier and all text messaging
devices. Semotus provides two different wireless solutions: (i) Company-hosted
where Semotus hosts and manages the information on its servers and (ii) premise
based where Semotus installs and engineers the software and information on the
customer's servers.
Semotus' enterprise and commerce sales line of business provides online
transactional information and sales of products and services. This line of
business also serves as the platform for the Company's m-commerce initiatives.
The online services include website development and maintenance, sales,
marketing, customer retention programs and services, logistics, distribution,
and tracking and reporting.
Semotus uses the enterprise and commerce business to add-on wireless products
such as alerts to wireless devices, comparative data information and real time
messaging.
Semotus' professional services line of business provides customers with online
and wireless information and operations consulting, software engineering and
training. This line of business provides the software tools and management to
install and efficiently run online and wireless operations. The professional and
related services business provides Semotus with access to customers who have
wireless requirements that can be met with Semotus' wireless solutions.
The logistic system sales line of business provides proprietary software with
complementary hardware and consulting to satisfy a customer's complete
logistical needs. These system installations provide automated logistical
solutions for equipment deployment, call centers, dispatching and servicing.
9
All segment financial information presented is unaudited.
Professional Logistic
Wireless Enterprise and and related system Corporate
Services commerce sales services sales and other Total
------------ ------------ ----------- ------------ ------------ ------------
As of and for the
Three Months Ended
June 30, 2002
Revenue $ 349,590 $ 418,908 $ 19,294 $ 277,705 $ -- $ 1,065,497
Gross profit 279,264 104,916 17,023 158,396 -- 559,599
Operating loss* (328,774) (31,212) 8,969 (32,234) (776,338) (1,159,588)
Depreciation and
amortization 83,275 9,513 1,880 8,210 250,000 352,878
Capital expenditures 17,937 -- -- -- -- 17,937
Total assets, June 30, 2002* 4,961,411 1,301,946 261,225 190,353 2,425,033 9,139,967
Three Months Ended
June 30, 2001
Revenue $ 317,976 $ 491,370 $ 295,862 $ 489,077 $ -- $ 1,594,285
Gross profit 109,667 129,090 142,799 210,341 -- 591,897
Operating loss* (373,052) (459,544) (404,986) 60,839 (2,938,122) (4,114,865)
Depreciation and
amortization 82,317 29,480 57,870 5,237 825,795 1,000,699
Capital expenditures 9,390 -- -- 1,581 -- 10,971
Total assets 10,215,218 6,437,470 1,322,533 1,631,768 5,440,000 25,046,989
*Certain corporate marketing, research and development and general and
administrative costs have not been allocated to the segments and have been
included in "Corporate and other". The $2,425,033 of assets at June 30, 2002
under "Corporate and other" is substantially comprised of the GMP Intellectual
Property asset and goodwill. The $5,440,000 of assets under "Corporate and
other" at June 30, 2001 is substantially all comprised of the GMP Intellectual
Property asset.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with the attached
financial statements and notes thereto. Except for the historical information
contained herein, the matters discussed below are forward-looking statements
that involve certain risks and uncertainties, including, among others, the risks
and uncertainties discussed below.
CRITICAL ACCOUNTING POLICIES
We described our critical accounting policies in Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations," of
our Annual Report on Form 10-K for the year ended March 31, 2002.
Our critical accounting policies are those that are most important to the
portrayal of our financial condition and results of operation, and require our
management's significant judgments and estimates and such consistent application
fairly depicts our financial condition and results of operations for all periods
presented.
Critical accounting policies affecting us have not changed materially since
March 31, 2002.
10
OVERVIEW
Semotus still reports four business segments: wireless services, enterprise and
commerce sales, professional and related services, and logistic system sales.
However, at the end of this fiscal year 2002, Semotus determined that the
economy would continue in a weak recovery and that the market for technology
products would stay anemic. Accordingly, the Company has centralized and
consolidated its organization and its operations. Semotus has organized its
operations around two core lines of businesses, while maintaining but
de-emphasizing its other operations: i) financial services with the Global
Market Pro and Equity Market Pro products and services and ii) workforce
automation with the HiplinkXS family of products and services. These products
maintain high gross and operating margins and form the core of the enterprise
software marketing strategy with wireless and mobile features available in the
software.
Logistic systems, largely ADA's products and services, continue as part of
Semotus' wireless and mobile strategy. This field force automation software
provides Semotus with a unique platform for its wireless productivity
enhancement tools such as Hiplink.
Certain professional services have been de-emphasized. As well, M-commerce
initiatives have been reduced. The e-commerce economy has contracted and
m-commerce is not expected to make a significant contribution in the market in
the near future. Consequently, Semotus has reduced its e-commerce and m-commerce
presence with the elimination of unprofitable products and services in that
segment. At Wares on the Web, one e-commerce customer remains and at WizShop,
while there is still some small monthly sponsorship and advertising revenue, the
operations have been largely consolidated into Semotus' other divisions and
subsidiaries. At the end of June, FiveStar's operations were closed as the
market for e-fulfillment is currently unprofitable, see Note 5, "FiveStar
Advantage, Inc."
As a result of the centralization and consolidation implementation, the net loss
declined to $1,034,557 from $3,929,818 and to $0.06 per share from $0.24 per
share in the three months ended June 30, 2002 versus 2001. Likewise, the overall
cash decline was reduced to $803,802 from $978,469 in the three months ended
June 30, 2002 versus 2001.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2002 AND 2001
REVENUES
Revenues for the three months ended June 30, 2002 were $1,065,497, as compared
to $1,594,285, for the three months ended June 30, 2001.
Given the continued decline in economic activity and weakened capital and
consumer spending for technology products and services, Semotus experienced a
decline in revenues of 33% in the three months ended June 30, 2002 versus 2001.
All segments of the Company's business were affected except for the wireless
segment. The increase in sales of wireless products and services was more than
offset by declines in logistic system sales and professional services as new
contracts for system integration services and engineering consulting services
did not materialize. Potential customers have delayed capital spending decisions
or have kept most of the work in-house. Further, Semotus' Centralization and
Consolidation Plan has eliminated unprofitable products and services, which has
largely been in the professional services and enterprise and commerce segments.
The Plan has accounted for some of the revenue decline in professional services,
but is the main reason for most of the decline in the enterprise and commerce
segment. The e-commerce economy has contracted and is not expected to recover in
the near future.
Wireless Services
The 10% increase in revenues in the three months ended June 30, 2002 versus 2001
is due to the increased sales of the newest version of Hiplink XS, Semotus'
field force automation product. The financial service products, Global Market
Pro and Equity Market Pro, have maintained their level of revenues even as the
financial service market is experiencing significant declines in sales and
trading activity.
Enterprise and Commerce Sales
The 15% decline in revenues in the three months ended June 30, 2002 versus 2001
is largely due to above mentioned Centralization and Consolidation Plan and the
closing of the operations of FiveStar Advantage, Inc.
11
Professional and Related Services
The 93% decline in revenues in the three months ended June 30, 2002 versus 2001
is due to the reduction in new professional service contracts at Wares and also
directly the result of the sale of Simkin's Kinetidex 2.0 product in June 2001.
Simkin's revenues have remained at much lower levels since that time, with fewer
medical software training contracts.
Logistic System Sales
The 43% decline in revenues in the June 30, 2002 quarter versus the same quarter
in 2001 is a direct result of less capital spending on system integration
projects and the beverage industry reducing new capital spending. ADA received
fewer system integration contracts. Further, ADA is in process of upgrading its
core asset tracking and management software, which has not been completed. The
new software should provide further incentives for customers to upgrade and
increase revenues at ADA.
COST OF REVENUES AND GROSS MARGIN
The overall gross profit margin increased to 53% from 37% in the three months
ended June 30, 2002 versus 2001. The increase is the result of changes in
product mix from lower margin enterprise and commerce segment product to higher
margin wireless and logistic system segment products. Further, with the
elimination of unprofitable products and services and the closing of the
FiveStar operations, the overall gross profit margin improved since the
remaining products and services carried much higher margins.
Wireless services
The gross profit margin for this segment has increased significantly to 80% from
34% in the three months ended June 30, 2002 versus 2001. This increase is the
result of the continuation of a changing product mix: i) increased higher margin
sales of enterprise products such as Global Market Pro, ii) the introduction of
a higher margin version of Hiplink, a field force automation wireless product,
and iii) the reduction and discontinuance of lower margin consumer products.
Further, Semotus has been able to renegotiate data feed contracts to lower costs
for the financial service products which has added to the improved gross profit
margin.
Enterprise and commerce sales
The gross profit margin for this segment is approximately the same at 25% for
the three months ended June 30, 2002 versus 26% for the same period in 2001.
There are two counter trends affecting the gross margin: 1) the addition of a
higher margin contract at WizShop for a customer loyalty and tracking software,
and 2) the decline in gross margin at FiveStar as consumer spending has shifted
the product mix to lower margin items.
Professional and related services
The gross profit margin in this segment increased to 88% from 48% in the three
months ended June 30, 2002 versus 2001 as a direct result of the elimination of
unprofitable contracts and services. The remaining professional service business
carries much higher margins since the services are extensions of existing
contracts that do not require as much start-up costs.
Logistic system sales
The gross profit margin for this segment increased to 57% from 43% in the three
months ended June 30, 2002 versus the same period in 2001 principally due to a
shift in the mix of services provided in the system integration contracts. ADA
experienced more demand for higher margin software and consulting services and
less demand for lower margin hardware. This services shift improved the overall
gross profit margin.
12
OPERATING EXPENSES
Operating expenses declined overall in the three month period ended June 30,
2002 versus the same period in the last fiscal year, due to the Centralization
and Consolidation Plan, which has significantly reduced operating expenses in
all areas of the firm including research and development, sales and marketing
and general and administrative cost centers. The Company categorizes operating
expenses into five major categories: research and development, sales and
marketing, general and administrative, depreciation and amortization, and stock,
option and warrant expense. The table below summarizes the changes in these five
categories of operating expenses (unaudited):
Three Months Ended
June 30
Description 2002 2001
- --------------- ----------- -----------
Research and development $ 296,239 $ 524,301
Sales and marketing 298,592 800,640
General and administrative 750,424 1,557,205
Net impairment of goodwill -- 650,000
Depreciation and amortization 352,878 1,000,699
Stock, option and warrant expense 21,054 173,917
----------- -----------
Total $ 1,719,187 $ 4,706,762
=========== ===========
Research and development expenses are expenses incurred in developing new
products and product enhancements for current products. These expenditures are
charged to expense as incurred. In the three months ended June 30, 2002, much of
the development work for the Global Market Pro, Equity Market Pro and HiplinkXS
products has been completed which has reduced research and development expenses.
Remaining engineering costs are production projects for the existing products
and services and engineering work on the update to ADA's asset tracking and
management software.
Sales and marketing expenses consist of costs incurred to develop and implement
marketing and sales programs for the Company's product lines. These include
costs required to staff the marketing department, participation in trade shows,
media development and advertising, and web site development and maintenance.
These costs also include the expenses of hiring sales personnel and maintaining
a customer support call center. These costs have declined principally due to the
reduction in general advertising and non-sales supported marketing. There has
also been a reduction in marketing personnel as the Company has shifted to
emphasizing marketing and sales support for its existing products.
General and administrative expenses include senior management, accounting, legal
and consulting. This category also includes the costs associated with being a
publicly traded company, including the costs of the AMEX listings, investor and
public relations, rent, administrative personnel, and other overhead related
costs. These costs declined during the three months ended June 30, 2002 as
personnel and offices were reduced and operating functions were consolidated.
The net impairment of goodwill is comprised of two components: (i) the sale of
Simkin's Kinetidex technology for $350,000 and (ii) an impairment charge to
goodwill related to Simkin for $650,000. As noted in Note 5, "Sale of Technology
and Net Impairment of Goodwill", of our Annual Report on Form 10-K for the year
ended March 31, 2002, Semotus elected to sell the royalty rights and software of
Kinetidex 2.0 to Micromedex, Inc., the joint developer and exclusive distributor
of the product. Semotus received $350,000 for the product and all future royalty
rights. Semotus considered a variety of factors for a potential impairment of
goodwill, which included the sale of the technology, future prospects of
Simkin's business, and importantly, the consideration paid for Simkin, which was
substantially all common stock. Subsequent to the acquisition, the price of the
common stock of Semotus had declined from $14.375 to $1.59 as of June 30, 2001.
Consequently, Semotus elected to take a goodwill impairment charge of $650,000.
13
Depreciation and amortization expense includes depreciation of computers and
other related hardware and certain fixtures. Amortization includes goodwill
costs for periods prior to April 1, 2002 and certain intellectual property
costs. The decrease in this expense is primarily the result of the adoption of
SFAS 142, "Goodwill and Other Intangible Assets" in which goodwill is no longer
amortized. Further, Semotus elected to take an impairment charge of $3,541,017
for intangible assets at March 31, 2002 which has reduced the asset value of
intangible assets other than goodwill to $1,000,000 at March 31, 2002. This
impairment charge has reduced the amortization associated with the intangible
assets.
The non-cash charges for compensation consists mainly of grants of stock,
options and warrants for services provided to the Company. Such services include
financial, marketing and public relations consulting. Additionally, common stock
was issued for certain accrued liabilities. The decline in non-cash charges for
compensation is due mainly to the termination of contracts with service
providers, which called for stock or warrant compensation, as well as the
decline in the stock and option grants to service providers, in the three months
ended June 30, 2002.
The common stock issued was valued at its fair market value at the time of
issuance, or in the instance of common stock purchase warrants, in accordance
with the Black-Scholes pricing guidelines. Certain employee stock 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. While no compensation expense was required
to be recognized in the three months ended June 30, 2002 and 2001, expense will
be recognized in the future if the stock price increases above the revised
exercise price of the options.
NON-OPERATING INCOME AND EXPENSES
Non-operating income and expenses for the three ended June 30, 2002 and 2001 are
primarily interest income from invested cash, interest expense from notes
payable, amortization of advances from technology sales received in previous
periods, and the owner's fees and offsetting interest income recognized, related
to the technology sales. See the Consolidated Statement of Operations and
Comprehensive Loss and Notes to the Financial Statements in our Annual Report on
Form 10-K for the year ended March 31, 2002.
Net interest income declined as less cash was available for investment during
the three month period ended June 30, 2002 versus 2001 as Semotus continues with
operating losses. Amortization of technology advances decreased somewhat in the
three months ended June 30, 2002, due to the application of the effective
interest method of amortization on the balances.
COMPREHENSIVE LOSS
The 74% reduction in the comprehensive loss to $1,020,326 or $(0.06) per share
for the three months ended June 30, 2002, compared to $3,943,936 or $(0.24) per
share for the three months ended June 30, 2001, is a direct result of the
implementation of cost reduction programs which have consolidated and
centralized Semotus' operating units and the elimination of unprofitable
products and services.
SEGMENT RESULTS
Semotus' business has evolved into four segments: wireless services, enterprise
and commerce sales, professional and related services and logistic system sales.
(See Note 7, "Segment Information" for further information about each of the
segments.)
Specific results of the segments are discussed under "Revenues" and "Cost of
Revenues and Gross Margin" in this section titled "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
14
All segment financial information presented is unaudited.
Professional Logistic
Wireless Enterprise and and related system Corporate
Services commerce sales services sales and other Total
------------ ------------ ----------- ------------ ------------ ------------
As of and for the
Three Months Ended
June 30, 2002
Revenue $ 349,590 $ 418,908 $ 19,294 $ 277,705 $ -- $ 1,065,497
Gross profit 279,264 104,916 17,023 158,396 -- 559,599
Operating loss* (328,774) (31,212) 8,969 (32,234) (776,338) (1,159,588)
Depreciation and
amortization 83,275 9,513 1,880 8,210 250,000 352,878
Capital expenditures 17,937 -- -- -- -- 17,937
Total assets, June 30, 2002* 4,961,411 1,301,946 261,225 190,353 2,425,033 9,139,967
Three Months Ended
June 30, 2001
Revenue $ 317,976 $ 491,370 $ 295,862 $ 489,077 $ -- $ 1,594,285
Gross profit 109,667 129,090 42,799 210,341 -- 591,897
Operating loss* (373,052) (459,544) (404,986) 60,839 (2,938,122) (4,114,865)
Depreciation and
amortization 82,317 29,480 57,870 5,237 825,795 1,000,699
Capital expenditures 9,390 -- -- 1,581 -- 10,971
Total assets 10,215,218 6,437,470 1,322,533 1,631,768 5,440,000 25,046,989
*Certain corporate marketing, research and development and general and
administrative costs have not been allocated to the segments and have been
included in "Corporate and other". The $2,425,033 of assets at June 30, 2002
under "Corporate and other" is substantially comprised of the GMP Intellectual
Property asset and goodwill. The $5,440,000 of assets under "Corporate and
other" at June 30, 2001 is substantially all comprised of the GMP Intellectual
Property asset.
LIQUIDITY AND CAPITAL RESOURCES
The overall decrease in the cash position of Semotus is due to the continued
operating losses at the Company. Cash continued to be spent on operating
resources and upgrading and maintaining certain wireless and logistic system
products although a cash management and cost reduction program has been
implemented and has reduced the overall cash loss by 18% for the three month
period ended June 30, 2002 versus 2001. The sources and uses of cash are
summarized as follows (unaudited):
THREE MONTHS ENDED
JUNE 30,
2002 2001
----------- -----------
Cash (used in) operating activities $ (865,166) $(2,254,391)
Cash provided by investing activities 87,472 1,435,501
Cash (used in) financing activities (26,108) (159,579)
----------- -----------
Net decrease in cash and cash equivalents $ 803,802 $ 978,469
=========== ===========
Cash used in operating activities consisted principally of a net loss of
$1,034,577 offset somewhat by non-cash charges of $352,878 of depreciation and
amortization and $21,054 of stock based compensation. Other operating activities
that contributed to the use of cash were $138,977 in the net change of current
assets and current liabilities. This largely resulted from decreases in accrued
liabilities and deferred revenue of $162,980 and $86,398 respectively, offset
somewhat by increases in accounts payable of $60,150 and a reduction in
inventory of $43,509.
15
Cash provided from investing activities of $87,472 resulted principally from an
increase in the minority investment in ADA of $105,409 offset by capital
expenditures of $17,937.
Cash flows from financing activities produced a net decrease in cash of $26,108
which resulted from repayments of capital leases.
As of June 30, 2002, the Company had cash and cash equivalents amounting to
$3,372,490, a decrease of $803,802 from the balance at March 31, 2002. Working
capital decreased to $1,618,684 from $2,064,396 at the fiscal 2002 year end. The
decrease in working capital is from the resources used in the operations of
Semotus as explained above. The Company has not yet generated sufficient
revenues to cover the costs of continued product development and support, sales
and marketing efforts and general and administrative expenses. There are no
material commitments for capital expenditures at June 30, 2002.
Management believes that it has adequate working capital for the next 12 months.
RECENT PRONOUNCEMENTS:
In June 2001, the Financial Accounting Standards Board finalized FASB Statements
No. 141, Business Combination (SFAS 141), and No. 142, "Goodwill and Other
Intangible Assets" (SFAS 142). SFAS 141 requires the use of the purchase method
of accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. SFAS 141
also requires that the Company recognize acquired intangible assets apart from
goodwill if the acquired intangible assets meet certain criteria. SFAS 141
applies to all business combinations initiated after June 30, 2001 and for
purchase business combinations completed on or after July 1, 2001. It also
requires, upon adoption of SFAS 142 that the Company reclassify the carrying
amounts of intangible assets and goodwill based on the criteria in SFAS 141.
SFAS 142 requires, among other things that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. SFAS 142 requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption. The Company is
also required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142. The Company adopted SFAS 142
as of April 1, 2002 and is no longer amortizing goodwill. The effect of the
adoption of these Statements resulted in the net loss for the three months ended
June 30, 2002 being smaller by $179,735 due to not amortizing goodwill.
In August 2001, the FASB issued SFAS No. 143 (SFAS 143) "Accounting for
Obligations Associated with the Retirement of Long-Lived Assets". SFAS 143
addresses financial accounting and reporting for the retirement obligation of an
asset. SFAS 143 states that companies should recognize the asset retirement
cost, at its fair value, as part of the cost of the asset and classify the
accrued amount as a liability in the balance sheet. The asset retirement
liability is then accreted to the ultimate payout as interest expense. The
initial measurement of the liability would be subsequently updated for revised
estimates of the discounted cash outflows. SFAS 143 will be effective for fiscal
years beginning after June 15, 2002. At this time, the Company does not expect
that the implementation of SFAS 143 will have any material impact on its
financial position, results of operations, or cash flows.
In October 2001, the FASB issued SFAS No. 144 (SFAS 144) "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS 144 supersedes the SFAS No.
121 by requiring that one accounting model be used for long-lived assets to be
disposed of by sale, whether previously held and used or newly acquired, and by
broadening the presentation of discontinued operations to include more disposal
transactions. SFAS 144 will be effective for fiscal years beginning after
December 15, 2001. The impact of adopting SFAS 144 on the Company's financial
position and result of operations could be material.
16
FORWARD LOOKING STATEMENTS AND RISK FACTORS
This report includes forward-looking statements relating to, among other things,
projections of future results of operations, our plans, objectives and
expectations regarding our future services and operations and our acquisitions
of Cross, Simkin, Wares, Five Star, Tech-ni-comm, WizShop and Application Design
Associates and general industry and business conditions applicable to us. We
have based these forward-looking statements on our current expectations and
projections about future events. You can find many of these forward-looking
statements by looking for words such as "may", "should", "believes", "expects",
"anticipates", "estimates", "intends", "projects", "goals", "objectives", or
similar expressions in this document or in documents incorporated herein. These
forward-looking statements are subject to a number of risks, uncertainties and
assumptions about us that could cause actual results to differ materially from
those in such forward-looking statements. Such risks, uncertainties and
assumptions include, but are not limited to, our limited operating history, our
historical losses, the infancy of the wireless data industry where there is no
established market for our products and services, our ability to adapt to rapid
technological changes, our dependence on wireless networks owned and controlled
by others, and the other factors that we describe in the section entitled "Risk
Factors" in our Form 10-K for the year ended March 31, 2002. Semotus Solutions
claims the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE REGARDING MARKET RISK
We have limited exposure to financial market risks, including changes in
interest rates. At June 30, 2002, we had cash and cash equivalents of $4,065,776
including restricted cash of $693,286. Cash and cash equivalents consisted of
demand deposits and money market accounts. Because of the cash equivalency of
the money market accounts and the liquidity thereof, there is no material
exposure to interest rates for these accounts.
The Company also has short-term notes payable in the amount of $723,105, at June
30, 2002. These notes are due and payable within one year. Because of the
short-term nature of the notes and the fixed rate on the notes, there is no
material exposure to changes in interest rates for these accounts. The Company
does not have any derivative or hedge instruments at June 30, 2002.
Semotus has a permanent engineering operation in Vancouver, B.C., Canada and
therefore has an exposure to the Canadian and U.S. dollar exchange rate. The
Company, in the ordinary course of its business, transfers funds to the Canadian
company and records the translation at the current exchange rate. The Company
records translation gains and losses in Comprehensive Income. At June 30, 2002,
the cumulative translation loss was $128,129. Given the relative stability of
the Canadian and U.S. dollar exchange rate, the Company has not deemed it
necessary to hedge this exposure.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Brown Simpson lawsuit previously reported in Registrant's Form 10K for the
year ended March 31, 2002 has been stayed until August 29, 2002 pending
settlement negotiations between the parties. The Earthlink lawsuit previously
reported in Registrant's Form 10K for the year ended March 31, 2002 is
proceeding on schedule.
We are also a party to other legal proceedings in the normal course of business.
Based on evaluation of these matters and discussions with counsel, we believe
that liabilities arising from these matters will not have a material adverse
effect on our consolidated results of operations or financial position.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company issued securities, which were not registered under the Securities
Act of 1933, as amended, as follows:
During the Quarter ended June 30, 2002, the Company issued a total of 28,442
shares of its common stock to settle certain liabilities of the Company. The
Company also issued 250,000 shares of its common stock to 2007978 Ontario, Inc.,
pursuant to the first year price guarantee in the acquisition of Application
Design Associates, Inc. ("ADA") and subsequent 49% sale of ADA's stock to
Ontario, Inc., which transferred the rights to these shares to Ontario, Inc.
17
With respect to these transactions, the Company relied on Section 4(2) of the
Securities Act of 1933, as amended. The investors were given complete
information concerning the Company. The appropriate restrictive legend was
placed on the certificates and stop transfer instructions were issued to the
transfer agent.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits
99.1 Certification Pursuant to 18 U.S.C. ss. 1350
b) Reports on Form 8-K:
During the quarter ended June 30, 2002, we did not file any Current Reports
on Form 8-K with the Commission.
18
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.
SEMOTUS SOLUTIONS, INC.
Date: August 14, 2002 By: /s/ Anthony N. LaPine
-------------------------------------
Anthony N. LaPine
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Charles K. Dargan, II
-------------------------------------
Charles K. Dargan, II
Chief Financial Officer
(Principal Financial Officer)
19