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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 September 30, 2002
Commission file number: 1-15569
SEMOTUS SOLUTIONS, INC.
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(Exact name of small business issuer in its charter)
Nevada 36-3574355
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(State or other jurisdiction of (IRS Employer Identification
Incorporation or Organization) Number)
16400 Lark Ave., Suite 230, Los Gatos, CA 95032
(Address of Principal Executive Offices including zip code)
(408) 358-7100
(Issuer's telephone number)
Check whether the issuer (1) 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 18,106,997 shares of the Registrant's Common Stock outstanding as of
November 8, 2002.
Transitional Small Business Disclosure Format: Yes [_] No [X]
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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 September 30, 2002
and March 31, 2002 3
b. Consolidated Statements of Operations and
Comprehensive Loss for the three and six month
periods ended September 30, 2002 and 2001 4
c. Consolidated Statements of Cash Flows for the six
month periods ended September 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
ITEM 4. CONTROLS AND PROCEDURES 16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 16
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 16
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 16
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
CERTIFICATIONS 19
2
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
September 30, March 31,
ASSETS 2002 2002
------------ -----------
CURRENT ASSETS:
Cash and cash equivalents (including restricted
cash of $693,286 at March 31, 2002) $ 2,807,419 $ 4,797,589
Trade receivables (net of allowance for
doubtful accounts of $77,000 at September 30,
2002 and $67,000 at March 31, 2002) 275,184 266,220
Income and GST tax receivable 2,574 3,823
Other receivables 56,245 60,395
Prepaid expenses 130,981 167,998
Net current assets from discontinued operations -- 113,343
------------ ------------
Total current assets 3,272,403 5,409,368
Property and equipment, net 488,760 652,452
Capitalized contract, net 288,478 576,958
GMP intellectual property, net 500,000 1,000,000
Goodwill 2,474,597 2,474,597
Net noncurrent assets from discontinued operations 16,364 21,804
------------ ------------
Total assets $ 7,040,602 $ 10,135,179
============ ============
LIABILITIES:
CURRENT LIABILITIES:
Accounts payable $ 772,727 $ 629,635
Accrued expenses and other current liabilities 178,034 339,787
Notes payable 17,938 693,286
Current portion of capital lease obligations 30,904 89,297
Current portion of advances on technology sales 275,991 269,109
Deferred revenue 679,631 1,323,858
Net current liabilities from discontinued operations 141,909 --
------------ ------------
Total current liabilities 2,097,134 3,344,972
Capital lease obligation, net of current portion 22,121 44,200
Advances on technology sales, net of current portion 419,416 566,542
------------ ------------
Total liabilities 2,538,671 3,955,714
------------ ------------
Minority Interest 181,046 202,528
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 September 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:
Common stock: $0.01 par value; authorized: 50,000,000
shares; issued and outstanding: 18,106,997 at
September 30, 2002 and 17,200,784 at March 31, 2002 181,071 172,008
Additional paid-in capital 60,429,487 60,396,089
Accumulated other comprehensive loss (140,073) (142,360)
Notes receivable - related parties (128,183) (701,817)
Accumulated deficit (61,703,873) (59,429,439)
------------ ------------
Total common shareholders' equity (deficit) (1,361,571) 294,481
------------ ------------
Total liabilities, minority interest, preferred and
common shareholders' equity $ 7,040,602 $ 10,135,179
============ ============
See accompanying notes to consolidated financial statements.
3
SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(unaudited)
Three Months Ended Six Months Ended
September 30, September 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Revenues:
Wireless Services $ 274,213 $ 352,793 $ 623,803 $ 670,769
Enterprise and commerce sales 250,647 548,813 516,563 665,954
Professional and related services 20,975 20,900 40,269 316,762
Logistics 314,681 380,564 592,386 869,641
------------ ------------ ------------ ------------
Total Revenue 860,516 1,303,070 1,773,021 2,523,126
------------ ------------ ------------ ------------
Cost of sales:
Wireless Services 107,644 102,937 177,970 311,246
Enterprise and commerce sales 144,241 340,416 289,655 388,112
Professional and related services 1,000 6,603 3,271 159,666
Logistics 147,006 176,946 266,315 455,682
------------ ------------ ------------ ------------
Total cost of revenue 399,891 626,902 737,211 1,314,706
------------ ------------ ------------ ------------
Gross Profit 460,625 676,168 1,035,810 1,208,420
Operating Expenses from continuing operations:
(Exclusive of depreciation and amortization
and stock, option and warrant expense)
Research and development 219,266 361,985 515,505 867,117
Sales and marketing 232,889 481,968 529,445 1,254,110
General and administrative 1,171,149 1,189,238 1,824,591 2,478,869
Impairment of goodwill -- -- -- 650,000
Depreciation and amortization:
Research and development 29,982 22,926 117,829 49,408
General and administrative 309,983 812,948 567,994 1,781,038
------------ ------------ ------------ ------------
Stock, option and warrant expense:
Sales and marketing -- 21,000 -- 42,000
General and administrative 1,867 95,511 22,921 248,428
------------ ------------ ------------ ------------
Total operating expenses 1,965,136 2,985,576 3,578,285 7,370,970
------------ ------------ ------------ ------------
Operating Loss from continuing operations (1,504,511) (2,309,408) (2,542,475) (6,162,550)
Net interest income 10,882 38,807 35,245 151,903
Other income 253,896 75,720 334,797 139,629
------------ ------------ ------------ ------------
Total interest and other income 264,778 114,527 370,042 291,532
------------ ------------ ------------ ------------
Net loss before minority interest (1,239,733) (2,194,881) (2,172,433) (5,871,018)
Minority Interest 13,292 -- 34,270 --
------------ ------------ ------------ ------------
Net loss from continuing operations (1,226,441) (2,194,881) (2,138,163) (5,871,018)
Loss from discontinued operations (2,710) (482,032) (125,545) (735,713)
------------ ------------ ------------ ------------
Net Loss (1,229,151) (2,676,913) (2,263,708) (6,606,731)
Other comprehensive income loss - Translation
adjustment (11,944) (16,402) 2,287 (30,520)
------------ ------------ ------------ ------------
Comprehensive loss $ (1,241,095) $ (2,693,315) $ (2,261,421) $ (6,637,251)
============ ============ ============ ============
Net loss per common share:
Basic $ (0.07) $ (0.16) $ (0.13) $ (0.40)
Diluted $ (0.07) $ (0.16) $ (0.13) $ (0.40)
Weighted average shares used in per share
calculation, basic and diluted 17,802,122 16,976,049 17,591,807 16,730,203
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
4
SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended
September 30,
---------------------------
2002 2001
------------ ------------
Cash flows from operating activities:
Net loss $ (2,263,708) $ (6,606,731)
Foreign currency translation adjustment 2,287 (30,520)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 685,823 1,830,446
Compensation expense related to stock issued
for services 22,921 242,928
Net amortization of contract income (211,710) (394,876)
Amortization of technology advances (140,244) (157,614)
Amortization of Notes Receivable 556,357 179,029
Impairment of goodwill -- 650,000
Non-cash settlement of liabilities 41,780 --
Loss from discontinued operations 125,545 735,713
Changes in assets and liabilities net of acquired
assets and liabilities due to acquisitions:
Accounts and other receivables (3,565) 217,851
Prepaid expenses and other assets 37,017 (33,846)
Accounts payable 140,571 79,982
Accrued liabilities (161,752) (9,022)
Deferred revenue (97,879) 32,630
Advances on Technology Sales 4,621 --
------------ ------------
Net cash used in operating activities (1,261,936) (3,264,030)
------------ -------------
Cash flows from investing activities:
Acquisition of property and equipment (19,516) (16,535)
Cash received from FY2002 acquisitions, net -- 1,096,472
Sale of Kinetidex technology -- 350,000
Minority investment in subsidiary (503) --
------------ ------------
Net cash (used in) provided by investing activities (20,019) 1,429,937
------------ ------------
Cash flows from financing activities:
Repayments of notes payable (11,881) (153,864)
Repayments of capital lease obligations (31,536) (40,185)
Proceeds from exercise of options and warrants -- 11,668
------------ ------------
Net cash used in financing activities (43,417) (182,381)
------------ ------------
Net cash provided by discontinued operations 28,488 6,114
Net (decrease) in cash and cash equivalents (1,296,884) (2,010,360)
Cash and cash equivalents, beginning of period 4,104,303 7,330,749
------------ ------------
Cash and cash equivalents, end of period $ 2,807,419 $ 5,320,389
============ ============
See accompanying notes to consolidated financial statements.
5
SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(unaudited)
Six Months Ended
September 30,
2002 2001
------------ ------------
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest $ 21,559 $ 48,320
============ ============
Cash paid for income taxes $ 5,981 $ 1,900
============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Non-cash purchase consideration for the acquisition
of Wizshop.com, Inc. and Application Design
Associates, Inc. through the issuance of common stock $ -- $ 4,666,000
============ ============
Common stock issued for services $ 22,921 $ 242,928
============ ============
Common stock issued for liabilities $ 41,780 --
============ ============
Property and equipment purchased through the
issuance of capital leases $ -- $ 90,340
============ ============
See accompanying notes to consolidated financial statements.
5
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 September 30, 2002, the consolidated statements of operations and
comprehensive loss for the three and six month periods ended September 30,, 2002
and 2001, and the consolidated statements of cash flows for the three and six
month periods ended September 30 2002 and 2001 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 and six month periods ended September 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.
FiveStar's and Wares on the Web's operations have been discontinued as of June
28, 2002 and August 19,, 2002, respectively. 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.
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
7
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. In accordance with
the adoption, the Company has classified the operations of FiveStar and Wares on
the Web as discontinued operations, see Note 5, "Discontinued Operations".
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 six months ended September 30, 2002 and 2001, 7,174,563 potential shares
and 7,452,572 potential shares, respectively, were excluded from the shares used
to calculate diluted EPS as their effect is anti-dilutive.
5. DISCONTINUED OPERATIONS.
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, , FiveStar filed for
liquidation under Chapter 7 of the U.S. Bankruptcy Code on June 28, 2002. In
continuing with the reduced e-commerce and m-commerce presence and the
elimination of unprofitable products and services, Semotus decided to
discontinue the operations of Wares on the Web in August, 2002. The Wares on the
Web operations were unprofitable. Furthermore, Wares on the Web filed for
liquidation under Chapter 7 of the U.S. Bankruptcy Code on August 19, 2002.
In accordance with FAS 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", the operations of FiveStar Advantage, Inc. have been
recorded as discontinued operations in the three month and six month periods
ended September 30, 2002. FiveStar was part of the Enterprise and Commerce Sales
segment. The disposal of the assets and liabilities is now under the control of
the U.S. Bankruptcy Court and a gain or loss on disposal will be recognized at
the time of the final disposition by the Court, which is not expected to be
material. In the same manner, Wares on the Web's operations have been recorded
as discontinued in the three months ended September 30, 2002. It also was part
of the Enterprise and Commerce Sales segment. The disposal of the assets and
liabilities is now under the control of the U.S. Bankruptcy Court and a gain or
loss on disposal will be recognized at the time of the final disposition by the
Court, which is not expected to be material.
The major classes of assets and liabilities included in the discontinued
operations are as follows: at September 30, 2002 and March 31, 2002
respectively, inventory of $134,563 and $178,171 and payables of $207,668 and
$166,394. At March 31, 2002 there was also $71,989 in cash and $54,346 in
accounts receivable. At September 30, 2002, both cash and receivables were
immaterial. Revenue from FiveStar recorded in the six months ended September 30,
2002 was $ 152,992 and for the three and six month periods ended September 30,
2001 was $400,398 and $774,627. There was no revenue from the Fivestar
operations in the three months ended September 30, 2002. Revenue for Wares on
the Web recorded in the three months ended September 30, 2002 and 2001 was
$5,865 and $147,577.
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.
8
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.. The online services include website development and
maintenance, sales, marketing, and customer retention programs and services.
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.
All segment financial information presented is unaudited.
Enterprise Professional Logistic
Wireless and commerce and related system Corporate
Services sales services sales and other Total
------------ ------------ ------------ ------------ ------------ ------------
As of and for the Three Months
Ended September 30, 2002
Revenue $ 274,213 $ 250,647 $ 20,975 $ 314,681 -- $ 860,516
Gross Profit 166,569 106,406 19,975 167,675 -- 460,625
Operating loss* (485,698) 74,995 14,357 (15,726) (1,092,440) (1,504,511)
Depreciation and amortization 81,754 -- -- 8,211 250,000 339,965
Capital expenditures (1,579) -- -- -- -- (1,579)
Total assets, September 30, 2002* 3,364,652 952,262 266,920 126,526 2,330,243 7,040,602
Six Months Ended September 30, 2002
Revenue $ 623,803 $ 516,563 $ 40,269 $ 592,386 -- $ 1,773,021
Gross Profit 445,833 226,908 36,998 326,071 -- 1,035,810
Operating Loss* (814,471) 165,406 23,326 (47,960) (1,868,776) (2,542,475)
Depreciation and amortization 165,029 2,493 1,880 16,421 500,000 685,823
Capital expenditures (19,516) -- -- -- -- (19,516)
Total assets, September 30, 2002* 3,364,652 952,262 266,920 126,526 2,330,243 7,040,602
As of and for the Three Months
Ended September 30, 2001
Revenue $ 352,793 $ 548,813 $ 20,900 $ 380,564 -- $ 1,303,070
Gross Profit 249,856 208,397 14,297 203,618 -- 676,168
Operating loss* (143,348) (25,658) (42,305) (74,500) (2,023,597) (2,309,408)
Depreciation and amortization 77,814 21,744 5,998 7,772 722,546 835,874
Capital expenditures 1,430 -- -- 4,134 -- 5,564
Total assets, September 30, 2001* 9,556,918 5,344,748 963,818 1,348,642 4,653,379 21,867,505
Six Months Ended September 30, 2001
Revenue $ 670,769 $ 665,954 $ 316,762 $ 869,641 -- $ 2,523,126
Gross Profit 359,523 277,842 157,096 413,959 -- 1,208,420
Operating Loss* (516,400) (223,480) (447,291) (13,661) (4,961,719) (6,162,550)
Depreciation and amortization 160,131 45,098 63,868 13,009 1,548,340 1,830,446
Capital expenditures 10,820 -- -- 5,715 -- 16,535
Total assets, September 30, 2001* 9,556,918 5,344,748 963,818 1,348,642 4,653,379 21,867,505
*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 $2,330,243 of assets at September 30,
2002 under "Corporate and other" is substantially comprised of the GMP
Intellectual Property asset and goodwill. The $4,653,379 of assets under
"Corporate and other" at September 30, 2001 is substantially all comprised of
the GMP Intellectual Property asset.
9
Further, the selected profit and loss items in the three and six month periods
ended September 30, 2002 and 2001 and total assets at September 30, 2002 and
2001 respectively, have been adjusted for the discontinued operations of
FiveStar and Wares on the Web, which are categorized in the Enterprise and
Commerce Sales segment. See Note 5, "Discontinued Operations".
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.
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. WizShop, the remaining subsidiary in the Enterprise and Commerce Sales
segment,still receives small monthly sponsorship and advertising revenue, and
has one large customer loyalty software contract. Most of 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, and in August, Wares on the Web was closed as the
market for e-commerce and web based services remains depressed, see Note 5,
"Discontinued Operations".
As a result of the centralization and consolidation implementation, the net loss
declined to $1,229,151 from $2,676,913 and to $0.07 per share from $0.16 per
share in the three months ended September 30, 2002 versus 2001 and the net loss
declined to $2,263,708 from $6,606,731 and to $0.13 per share from $0.40 per
share in the six months ended September 30, 2002 versus 2001. Likewise, the
10
overall cash decline was reduced to $1,296,884 from $2,010,360 in the six months
ended September 30, 2002 versus 2001.
RESULTS OF OPERATIONS FOR THE THREE MONTHS AND SIX MONTHS ENDED SEPTEMBER 30,
2002 AND 2001
REVENUES
Revenues for the three months and six months ended September 30, 2002 were
$860,516 and $1,773,021, respectively, as compared to $1,303,070 and $2,523,126,
respectively, for the three and six months ended September 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 34% and 30% respectively in the three months and six
months ended September 30, 2002 versus 2001. All segments of the Company's
business were affected. Potential customers have delayed capital spending
decisions or have kept most of the work in-house. New sales of wireless and
software products and services have slowed. 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 22% and 7 % decline in revenues in the three and six months ended September
30, 2002 respectively, versus 2001 result from the continued decline in
corporate capital spending. Both HiplinkXS and the financial service products,
Global Market Pro and Equity Market Pro, have experienced a longer sale cycle
which has delayed and postponed their purchases...
Enterprise and Commerce Sales
The 54% and 22% decline in revenues in the three month and six month periods
ended September 30, 2002 versus 2001, respectively is primarily due to the
initial implementation of a customer loyalty software contract at WizShop in the
quarter ended September 30, 2001. The capitalized contract costs and the
commensurate deferred revenue were recognized at that time, which created large
initial revenues. Since then, the contract has been amortized over its term,
which ends March 31, 2003.
Professional and Related Services
Revenues were essentially the same in the three months ended September 30, 2002
versus 2001 and declined 87% in the six months ended September 30, 2002 versus
2001 due largely to the reduction in new professional service contracts at
Simkin and also directly the result of the sale of Simkin's Kinetidex 2.0
product in June 2001 for which certain services were performed. Further, the
Wares on the Web subsidiary was closed in August 2002 and since then has
contributed minor amounts of revenue.
Logistic System Sales
The 17% and 32% decline in revenues in the three and six month periods ended
September 30, 2002 versus 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 54% and 58% in the three and six
months ended September 30, 2002 from 52% and 48% in the same periods ended
September 30, 2001. The increase is the result of continuing 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 and Wares
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 declined to 61% from 71% in the three
months ended September 30, 2002 versus 2001, but increased to 71% from 54% in
the six months ended September 30, 2002 versus 2001. The decline in the
three-month gross profit margin is due to the decline in revenues, which has
reduced the fixed cost coverage. Such fixed costs include airtime, data feeds
and user fees. Further, Semotus paid one-time settlements to certain data feed
suppliers whose services were no longer needed.
The increase in the six-month gross profit margin is due to: 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.
Enterprise and Commerce Sales
The gross profit margin in this segment icreased slightly to 42% and 44% in the
three and six months ended September 30, 2002 from 38% and 42% in the same
periods ended September 30, 2001. After the elimination of unprofitable products
and services and the closing of the FiveStar and Wares operations, the gross
margin has stabilized in the 40% range. The major portion of this segment's
gross margin comes from the customer loyalty software contract at WizShop.
11
Professional and Related Services
The gross profit margin in this segment increased to 95% and 92% in the three
and six month periods ended September 30, 2002 from 68% and 50% in the three and
six month periods ended September 30, 2001. This is 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 was approximately the same at 53% for the three months
ended September 30, 2002 versus 54% for the three months ended September 30,
2001 and it increased to 55% from 48% in the six months ended September 30, 2002
versus 2001. This is 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 and has
allowed ADA to maintain that gross margin in the most recent quarter.
OPERATING EXPENSES
Operating expenses declined overall in the three month and six month periods
ended September 30, 2002 versus the same periods 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 Six Months Ended
September 30, September 30,
--------------------------------------------------------------- -------------------------
Description 2002 2001 2002 2001
--------------------------------- ----------- ----------- ----------- -----------
Research and development $ 219,266 $ 361,985 $ 515,505 $ 867,117
Sales and marketing 232,889 481,968 529,445 1,254,110
General and administrative 1,171,149 1,189,238 1,824,591 2,478,869
Net impairment of goodwill -- -- 650,000
Depreciation and amortization 339,965 835,874 685,823 1,830,446
Stock, option and warrant expense 1,867 116,511 22,921 290,428
----------- ----------- ----------- -----------
Total $ 1,965,136 $ 2,985,576 $ 3,578,285 $ 7,370,970
-------------------------------------------------------------------------------------------
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. 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 and develop a sales and
marketing strategy, 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 and six months ended
September 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 footnote 4, "Sale of
Technology and Net Impairment of Goodwill", 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.
12
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
and six months ended September 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 and six months ended September 30, 2002 or
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 and six months ended September
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 and six months period ended September 30, 2002 versus 2001 as Semotus
continues with operating losses. Amortization of technology advances decreased
somewhat in the three months ended September 30, 2002, due to the application of
the effective interest method of amortization on the balances.
COMPREHENSIVE LOSS
The comprehensive loss of $1,241,095 or $0.07 per share and $2,261,421 or $0.13
per share for the three months and six months ended September 30, 2002,
respectively, compared to $ 2,693,315 or $0.16 per share and $6,637,251 or $0.40
per share for the three months and six months ended September 30, 2001,
respectively, 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".
All segment financial information presented is unaudited.
13
Enterprise Professional Logistic
Wireless and commerce and related system Corporate
Services sales services sales and other Total
------------ ------------ ------------ ------------ ------------ ------------
As of and for the Three Months
Ended September 30, 2002
Revenue $ 274,213 $ 250,647 $ 20,975 $ 314,681 -- $ 860,516
Gross Profit 166,569 106,406 19,975 167,675 -- 460,625
Operating loss* (485,698) 74,995 14,357 (15,726) (1,092,440) (1,504,511)
Depreciation and amortization 81,754 -- -- 8,211 250,000 339,965
Capital expenditures (1,579) -- -- -- -- (1,579)
Total assets, September 30, 2002* 3,364,652 952,262 266,920 126,526 2,330,243 7,040,602
Six Months Ended September 30, 2002
Revenue $ 623,803 $ 516,563 $ 40,269 $ 592,386 -- $ 1,773,021
Gross Profit 445,833 226,908 36,998 326,071 -- 1,035,810
Operating Loss* (814,471) 165,406 23,326 (47,960) (1,868,776) (2,542,475)
Depreciation and amortization 165,029 2,493 1,880 16,421 500,000 685,823
Capital expenditures (19,516) -- -- -- -- (19,516)
Total assets, September 30, 2002* 3,364,652 952,262 266,920 126,526 2,330,243 7,040,602
As of and for the Three Months
Ended September 30, 2001
Revenue $ 352,793 $ 548,813 $ 20,900 $ 380,564 -- $ 1,303,070
Gross Profit 249,856 208,397 14,297 203,618 -- 676,168
Operating loss* (143,348) (25,658) (42,305) (74,500) (2,023,597) (2,309,408)
Depreciation and amortization 77,814 21,744 5,998 7,772 722,546 835,874
Capital expenditures 1,430 -- -- 4,134 -- 5,564
Total assets, September 30, 2001* 9,556,918 5,344,748 963,818 1,348,642 4,653,379 21,867,505
Six Months Ended September 30, 2001
Revenue $ 670,769 $ 665,954 $ 316,762 $ 869,641 -- $ 2,523,126
Gross Profit 359,523 277,842 157,096 413,959 -- 1,208,420
Operating Loss* (516,400) (223,480) (447,291) (13,661) (4,961,719) (6,162,550)
Depreciation and amortization 160,131 45,098 63,868 13,009 1,548,340 1,830,446
Capital expenditures 10,820 -- -- 5,715 -- 16,535
Total assets, September 30, 2001* 9,556,918 5,344,748 963,818 1,348,642 4,653,379 21,867,505
*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 $2,330,243 of assets at September 30,
2002 under "Corporate and other" is substantially comprised of the GMP
Intellectual Property asset and goodwill. The $4,653,379 of assets under
"Corporate and other" at September 30, 2001 is substantially all comprised of
the GMP Intellectual Property asset.
Further, the selected profit and loss items in the three and six month periods
ended September 30, 2002 and 2001 and total assets at September 30, 2002 and
2001 respectively, have been adjusted for the discontinued operations of
FiveStar and Wares on the Web, which are categorized in the Enterprise and
Commerce Sales segment. See Note 5, "Discontinued Operations".
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 35% for the six month
period ended September 30, 2002 versus 2001. The sources and uses of cash are
summarized as follows (unaudited):
SIX MONTHS ENDED
SEPTEMBER 30,
-------------------------
2002 2001
----------- -----------
Cash used in operating activities $(1,261,936) $(3,264,030)
Cash (used in) provided by investing activities (20,019) 1,429,937
Cash used in financing activities (43,417) (182,381)
Net cash provided by discontinued operations 28,488 6,114
----------- -----------
Net decrease in cash and cash equivalents $(1,296,884) $(2,010,360)
=========== ===========
14
Cash used in operating activities from continuing operations consisted
principally of a net loss of $2,263,708 offset somewhat by non-cash charges of
$685,823 of depreciation and amortization and $22,921 of stock based
compensation. . Additionally, the loss from the discontinued operations
contributed $125,545. Other operating activities that contributed to offsetting
the use of cash were $80,987 in the net change of current assets and current
liabilities. This largely resulted from decreases in accrued liabilities and
deferred revenue of $161,752 and $97,879 respectively, offset somewhat by
increases in accounts payable of $140,571.
Cash used in investing activities consisted principally of capital expenditures
of $19,516 largely for computer hardware and software.
Cash flows from financing activities produced a net decrease in cash of $43,417,
which resulted from repayments on notes payable and capital leases.
As of September 30, 2002, the Company had cash and cash equivalents amounting to
$2,807,419, a decrease of $1,296,884 from the balance at March 31, 2002. Working
capital decreased to $1,175,269 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 September 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 was adopted effective April 1, 2002. In accordance with
the adoption, the Company has classified the operations of FiveStar and Wares on
the Web as discontinued operations, see Note 5, " Discontinued Operations".
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
15
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 the Form 10K 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 September 30, 2002, we had cash and cash equivalents of
$2,807,419. 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 changes in interest
rates for these accounts.
The Company also has short-term notes payable in the amount of $17,938, at
September 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 September 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 September 30,
2002, the cumulative translation loss was $140,073. Given the relative stability
of the Canadian and U.S. dollar exchange rate, the Company has not deemed it
necessary to hedge this exposure.
ITEM 4. CONTROLS AND PROCEDURES
a) Evaluation of disclosure controls and procedures. Semotus' chief executive
officer and chief financial officer evaluated the Company's disclosure controls
and procedures as of November 8, 2002, and concluded that the Company's
disclosure controls and procedures were effective as of this date.
b) Changes in internal controls. There were not any significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to November 8, 2002.
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 November 18, 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 September 30, 2002, the Company did not issue any
shares of its common stock to suppliers of services to the Company. However, the
Company did issue 613,403 shares of common stock to Wizshop Shareholders, in
accordance with the first year stock price guarantee provision as set forth in
the Merger Agreement by and among Wizshop.com, Inc., Wiz Acquisition, Inc. and
Semotus. Additionally, the Company issued 14,368 shares to a company as part of
a settlement arrangement.
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.
16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
We held our Annual Meeting of Stockholders on September 17, 2002, for the
purpose of (1) electing five directors, (2) ratifying the appointment of Burr,
Pilger & Mayer LLP as the Company's independent accountants for the fiscal year
ending March 31, 2003, and (3) approving an amendment to the Company's employee
stock option plan to increase the number of shares of common stock issuable upon
the exercise of options granted under the plan from 4,345,000 shares to
5,200,000. The following summarizes the voting results:
Item (1). Stockholders elected Anthony N. LaPine, Frederick M. Hoar, Jason
Pavona, Robert Lanz and Mark Williams each until the next Annual Meeting of
Stockholders or until their successors have been duly elected and qualified. The
vote for each director was as follows:
Director Votes For % of Vote Votes Withheld
----------------- ---------- --------- --------------
Anthony N. LaPine 13,374,735 97.6% 330,613
Frederick M. Hoar 13,423,077 97.9% 282,271
Jason Pavona 13,400,407 97.8% 304,941
Robert Lanz 13,423,807 97.9% 281,541
Mark Williams 13,423,907 97.9% 281,441
Item (2). The appointment of Burr, Pilger & Mayer LLP as the Company's
independent accountants for the fiscal year ending March 31, 2003 was approved.
Votes For % of shares represented Votes Against Votes Abstained
- ---------- ----------------------- ------------- ---------------
13,560,769 77.46% 88,052 56,527
Item (3). The amendment to the Company's employee stock option plan to increase
the number of shares of common stock issuable upon the exercise of options
granted under the Plan from 4,345,000 to 5,200,000 shares was approved.
Votes For % of shares represented Votes Against Votes Abstained
- ---------- ----------------------- ------------- ---------------
12,890,168 73.63% 720,161 95,018
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
99.2 Certification Pursuant TO 18 U.S.C. ss.1350
b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K filed on July 22, 2002,
pursuant to Item 4 (Changes in Registrant's Certifying Accountant) and Item
7 (Financial Statements and Exhibits), reporting a change in our
accountants from BDO Seidman LLP to Burr, Pilger & Mayer LLP, and the
Company filed an Amended Current Report on Form 8-K/A on August 26, 2002,
amending its Current Report on Form 8-K filed on July 22, 2002.
17
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: November 13, 2002 By: /s/ Anthony N. LaPine
---------------------------------------
Anthony N. LaPine, President, CEO and
Chief Executive Officer (Principal
Executive Officer)
By: /s/ Charles K. Dargan, II
---------------------------------------
Charles K. Dargan, II, Chief Financial
Officer (Principal Financial Officer)
18
CERTIFICATIONS
I, Anthony N. LaPine, President and Chief Executive Officer of the Company,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Semotus Solutions,
Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures 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 quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002
/s/ Anthony N. LaPine
----------------------------
Anthony N. LaPine
President and Chief Executive Officer
19
I, Charles K. Dargan, II, Chief Financial Officer of the Company, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Semotus Solutions,
Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures 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 quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002
/s/ Charles K. Dargan, II
--------------------------------
Charles K. Dargan, II
Chief Financial Officer
20