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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 December 31, 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
Incorporation or Organization) Identification Number)
16400 Lark Ave., Suite 230, Los Gatos, CA 95032
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(Address of Principal Executive Offices including zip code)
(408) 358-7100
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(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 19,275,211 shares of the Registrant's Common Stock outstanding as of
February 10, 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 December 31, 2002
and March 31, 2002 ........................................... 3
b. Consolidated Statements of Operations and
Comprehensive Loss for the three and nine month
periods ended December 31, 2002 and 2001 ..................... 4
c. Consolidated Statements of Cash Flows for the nine
month periods ended December 31, 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 .................................. 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
CERTIFICATIONS ............................................................ 19
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
DECEMBER 31 MARCH 31
ASSETS 2002 2002
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents (including restricted cash of
$693,286 at March 31, 2002) $ 2,505,467 $ 4,797,589
Trade receivables (net of allowance for doubtful accounts of
$82,590 at December 31, 2002 and $67,000 at March 31, 2002) 400,813 266,220
Income and GST tax receivable 250 3,823
Other receivables 46,203 60,395
Prepaid expenses 107,721 167,998
Net current assets from discontinued operations -- 113,343
------------ ------------
Total current assets 3,060,454 5,409,368
Property and equipment, net 408,827 652,452
Capitalized contract, net 144,238 576,958
GMP intellectual property, net 250,000 1,000,000
Goodwill 2,474,597 2,474,597
Net noncurrent assets from discontinued operations 16,630 21,804
------------ ------------
Total assets $ 6,354,746 $ 10,135,179
============ ============
LIABILITIES:
CURRENT LIABILITIES:
Accounts payable $ 527,836 $ 629,635
Accrued expenses and other current liabilities 150,746 339,787
Notes payable 22,938 693,286
Current portion of capital lease obligations 25,905 89,297
Current portion of advances on technology sales 283,074 269,109
Deferred revenue 655,093 1,323,858
Net current liabilities from discontinued operations 142,490 --
------------ ------------
Total current liabilities 1,808,082 3,344,972
Capital lease obligation, net of current portion 20,355 44,200
Advances on technology sales, net of current portion 345,853 566,542
------------ ------------
Total liabilities 2,174,290 3,955,714
------------ ------------
Minority Interest 391,928 202,528
Commitments and contingencies (Note 7)
PREFERRED SHAREHOLDERS' EQUITY:
Convertible preferred stock, Series B: $0.001 par value; $13.00
liquidation value; authorized: 5,000,000 shares; issued and
outstanding: none at December 31, 2002 and 469,231 at March
31, 2002 (Note 6) -- 469
Additional paid-in capital -- 5,681,987
------------ ------------
Total preferred shareholders' equity -- 5,682,456
------------ ------------
COMMON SHAREHOLDERS' EQUITY
Common stock: $0.01 par value; authorized: 50,000,000 shares;
issued and outstanding: 18,121,365 at December 31, 2002 and
17,200,784 at March 31, 2002 181,214 172,008
Additional paid-in capital 66,135,178 60,396,089
Accumulated other comprehensive loss (142,153) (142,360)
Notes receivable - related parties (109,893) (701,817)
Accumulated deficit (62,275,818) (59,429,439)
------------ ------------
Total common shareholders' equity 3,788,528 294,481
------------ ------------
Total liabilities, minority interest, preferred and
common shareholders' equity $ 6,354,746 $ 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 NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------------ ------------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Revenues:
Wireless Services $ 338,970 $ 346,421 $ 962,773 $ 1,017,190
Enterprise and commerce sales 250,212 255,380 766,775 921,334
Professional and related services 11,475 17,512 51,744 334,274
Logistics 274,512 316,662 866,898 1,186,303
------------ ------------ ------------ ------------
Total Revenue 875,169 935,975 2,648,190 3,459,101
------------ ------------ ------------ ------------
Cost of sales:
Wireless Services 68,160 108,785 246,130 420,031
Enterprise and commerce sales 144,240 155,137 433,895 543,249
Professional and related services 2,587 1,872 5,858 161,538
Logistics 93,529 141,567 359,844 597,249
------------ ------------ ------------ ------------
Total cost of sales 308,516 407,361 1,045,727 1,722,067
------------ ------------ ------------ ------------
Gross Profit 566,653 528,614 1,602,463 1,737,034
Operating Expenses from continuing operations:
(Exclusive of depreciation and amortization
and stock, option and warrant expense)
Research and development 179,969 309,712 695,474 1,176,829
Sales and marketing 268,825 388,281 798,270 1,642,391
General and administrative 472,327 776,111 2,296,919 3,254,966
Impairment of goodwill -- -- -- 650,000
Depreciation and amortization:
Research and development 982 22,605 118,810 72,013
General and administrative 328,942 807,959 896,935 2,588,997
------------ ------------ ------------ ------------
Stock, option and warrant expense:
Sales and marketing -- 21,000 -- 63,000
General and administrative 1,362 74,847 24,283 323,275
------------ ------------ ------------ ------------
Total operating expenses 1,252,407 2,400,515 4,830,691 9,771,471
------------ ------------ ------------ ------------
Operating Loss from continuing operations (685,754) (1,871,901) (3,228,228) (8,034,437)
Net interest income 9,756 68,402 45,001 220,305
Other income 100,658 68,779 435,455 208,394
------------ ------------ ------------ ------------
Total interest and other income 110,414 137,181 480,456 428,699
------------ ------------ ------------ ------------
Net loss before minority interest (575,340) (1,734,720) (2,747,772) (7,605,738)
Minority Interest 3,711 -- 37,981 --
------------ ------------ ------------ ------------
Net loss from continuing operations (571,629) (1,734,720) (2,709,791) (7,605,738)
Loss from discontinued operations (315) (235,679) (125,860) (971,392)
------------ ------------ ------------ ------------
Net Loss (571,944) (1,970,399) (2,835,651) (8,577,130)
Other comprehensive income loss -
Translation adjustment (2,080) (6,744) 207 (37,264)
------------ ------------ ------------ ------------
Comprehensive loss $ (574,024) $ (1,977,143) $ (2,835,444) $ (8,614,394)
============ ============ ============ ============
Net loss per common share:
Basic $ (0.03) $ (0.11) $ (0.16) $ (0.51)
Diluted $ (0.03) $ (0.11) $ (0.16) $ (0.51)
Weighted average shares used in per share
calculation, basic and diluted 18,108,715 17,185,991 17,764,736 16,882,685
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
4
SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
NINE MONTHS ENDED
DECEMBER 31,
---------------------------------
2002 2001
-------------- --------------
Cash flows from operating activities:
Net loss $ (2,835,651) $ (8,577,130)
Foreign currency translation adjustment 207 (37,264)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,015,745 2,661,010
Compensation expense related to stock issued for services 24,283 386,275
Net amortization of contract income (317,565) (500,731)
Amortization of advances on technology sales (206,724) (233,345)
Amortization of Notes Receivable 574,647 255,982
Impairment of goodwill -- 650,000
Loss from Sale of Assets 1,220 --
Non-cash settlement of liabilities 165,215 --
Loss from discontinued operations 125,860 971,392
Changes in assets and liabilities net of acquired assets and
liabilities due to acquisitions:
Accounts and other receivables (116,828) 69,737
Inventory -- (7,065)
Prepaid expenses and other assets 60,277 (943)
Accounts payable (97,186) 83,444
Accrued liabilities (189,041) (11,235)
Deferred revenue 127,788 205,285
Advances on Technology Sales 11,704 --
-------------- --------------
Net cash used in operating activities (1,656,049) (4,084,588)
-------------- --------------
Cash flows from investing activities:
Acquisition of property and equipment (22,083) (20,707)
Cash received from FY2002 acquisitions, net -- 1,096,472
Sale of Fixed Assets 560 --
Sale of Kinetidex technology -- 350,000
Minority investment in subsidiary 210,379 --
-------------- --------------
Net cash provided by investing activities 188,856 1,425,765
-------------- --------------
Cash flows from financing activities:
Repayments of notes payable (22,881) (154,283)
Repayments of capital lease obligations (38,928) (46,010)
Proceeds from exercise of options and warrants -- 11,668
Repurchase of Preferred Stock (Note 6) (100,000) --
-------------- --------------
Net cash used in financing activities (161,809) (188,625)
-------------- --------------
Net cash provided by discontinued operations 30,166 88,573
Net decrease in cash and cash equivalents (1,598,836) (2,758,875)
Cash and cash equivalents, beginning of period 4,104,303 7,330,749
-------------- --------------
Cash and cash equivalents, end of period $ 2,505,467 $ 4,571,874
============== ==============
See accompanying notes to consolidated financial statements.
5
SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(unaudited)
NINE MONTHS ENDED
DECEMBER 31,
---------------------------------
2002 2001
-------------- --------------
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest $ 64,589 $ 66,574
============== ==============
Cash paid for income taxes $ 3,701 $ 5,190
============== ==============
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
============== ==============
Additional non-cash purchase consideration paid to
shareholder of Cross Communications, Inc. pursuant to the
first year performance criteria of the Merger Agreement $ -- $ 18,086
============== ==============
Additional non-cash purchase consideration paid to shareholders
of WizShop.com, Inc. pursuant to the Merger Agreement $ 122,681 $ --
============== ==============
Common stock issued for services $ 24,283 $ 386,275
============== ==============
Common stock issued for liabilities $ 165,215 $ --
============== ==============
Property and equipment purchased through the issuance
of capital leases $ -- $ 122,971
============== ==============
Warrants issued as part of the consideration for repurchase
of preferred stock $ 90,497 $ --
============== ==============
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 December 31, 2002, the consolidated statements of operations and
comprehensive loss for the three and nine month periods ended December 31, 2002
and 2001, and the consolidated statements of cash flows for the nine month
periods ended December 31, 2002 and 2001 have been prepared by the Company,
without audit and in accordance 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 nine month periods ended
December 31, 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: Semotus Systems Corporation (Canadian
subsidiary), Cross Communications, Inc., Simkin, Inc., Wares on the Web, Inc.,
FiveStar Advantage, Inc., WizShop.com, 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 company.
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 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal
Activities" ("SFAS 146"). SFAS 146 addresses significant issues regarding the
recognition, measurement, and reporting of costs that are associated with exit
and disposal activities, including restructuring activities that are currently
accconted for under EITF No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit and Activity (including Certain
Costs Incurred in a Restructuring)." The scope of SFAS 146 also includes costs
related to terminating a contract that is not a capital lease and termination
benefits that employees who are involuntarily terminated receive under the terms
of a one-time benefit arrangement that is not an ongoing benefit arrangement or
an individual deferred-compensation contract. SFAS 146 is effective for exit or
disposal activities that are initiated after December 31, 2002 and early
application is encouraged. The Company's adoption of SFAS 146 on January 1, 2003
had no impact on the Company's financial position or results of operations.
In November 2002, the FASB issued FASB Interpretation NO. 45 ("FIN 45"),
"GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING
INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS, AN INTERPRETATION OF FASB
STATEMENTS NO. 5, 57, AND 107 AND RESCISSION OF FASB INTERPRETATION NO. 34." FIN
45 clarifies the requirements of FASB Statement No. 5, "ACCOUNTING FOR
CONTINGENCIES" relating to the guarantor's accounting for, and disclosure of the
issuance of certain types of guarantees. The disclosure provisions of the
Interpretation are effective for financial statements of interim or annual
reports that end after December 15, 2002, irrespective of the guarantor's
year-end. The Company's adoption of FIN 45 did not have a material impact in the
Company's financial position or results of operations.
7
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation, Transition and Disclosure." SFAS No. 148 amends SFAS No. 123 and
requires prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. SFAS No. 148 is effective for
fiscal years ending after December 15, 2002 and is effective for interim periods
beginning after December 15, 2002. The Company's adoption of SFAS NO. 148 on
January 1, 2003 did not have a material effect on the Company's financial
position or results of 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 nine months ended December 31, 2002 and 2001, 6,569,039 potential shares
and 7,319,276 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 nine month period ended December 31,
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 nine months ended December 31, 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 December 31, 2002 and March 31, 2002 respectively,
inventory of $134,563 and $178,171 and payables of $208,249 and $166,394. At
March 31, 2002 there was also $71,989 in cash and $54,346 in accounts
receivable. At December 31, 2002, both cash and receivables were immaterial.
Revenue from FiveStar recorded in the nine months ended December 31, 2002 was
$152,992 and for the three and nine-month periods ended December 31, 2001 was
$329,902 and $1,104,529. There was no revenue from the Fivestar operations in
the three months ended December 31, 2002. Revenue from Wares recorded in the
nine months ended December 31, 2002 was $26,570, and for the three month and
nine month periods ended December 31, 2001 was $157,716 and $599,652,
respectively. There was no revenue from the Wares operations in the three months
ended December 31, 2002.
6. REPURCHASE OF PREFERRED STOCK:
On December 31, 2002, Semotus Solutions, Inc. and Brown Simpson Partners I, Ltd.
(successors-in-interest to Brown Simpson Strategic Growth Fund, Ltd. And Brown
Simpson Strategic Growth Fund, L.P.) entered into a Preferred Stock Buy Back and
Mutual Release Agreement. As part of the Agreement, Semotus repurchased from
Brown Simpson all of the outstanding shares of the Company's Series B
Convertible Preferred Stock. The Series B Convertible Preferred Stock was
reflected on Semotus' balance sheet as $5.7 million in Preferred Shareholder
Equity. In consideration of the aforesaid purchase of the Shares, Semotus paid
one hundred thousand dollars ($100,000.00) and issued to Brown Simpson 846,154
warrants to purchase shares of Common Stock of Semotus, exercisable at $0.01 per
share. In addition, in consideration for Brown Simpson agreeing to enter into a
settlement and mutual release related to its anti-dilution claim, the Company is
revising Brown Simpson's existing 1,153,846 (post-split) warrants to provide for
an exercise price of $0.01 per share. On January 24, 2003, Brown Simpson
exercised 1,153,846 warrants by remitting $11,538.46 to Semotus, and Brown
Simpson was issued 1,153,846 shares of common stock.
7. COMMITMENTS AND CONTINGENCIES:
Effective October 23, 2002 the Board of Directors of the Company approved the
repricing of most of the options under the Company's 1996 Stock Option Plan, as
amended, with exercise prices ranging from $0.22 to $0.84 per share held by most
of the employees (including executive officers) and Board members of the
Company. The Board of Directors determined such a reprice to be appropriate in
order to sustain the incentivization of its employees. The option grants were
repriced to an exercise price of $0.15 per share (the current fair market value
of the Company's common stock as of the reprice date) and an exercise price of
$0.17 per share (110% of the fair market value at the date of reprice) for those
persons owning more than 10% of the voting power of all classes of stock. All
grants maintained their existing vesting schedule. This is deemed to be a
8
repricing under FIN 44 and will result in variable plan accounting. While no
compensation expense was required to be recognized in the three months and nine
months ended December 31, 2002, expense will be recognized in the future if the
stock price increases above the revised exercise price of the options.
On April 1, 2003, Global Beverage Group ("GBG"), the 49% owner of ADA, has the
option to purchase Semotus' 51% ownership of ADA for either (i) $2.5 million in
cash, or (ii) the return of 500,000 shares of Semotus common stock originally
issued to John Hibben, the President of ADA, as part of the Merger Agreement
between Semotus and ADA, and subsequently transferred from John Hibben to GBG as
part of GBG's 49% stock purchase of ADA.
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 Part II, Item 1 of this
report for additional litigation contingencies.
8. 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.. 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.
WIRELESS ENTERPRISE AND PROFESSIONAL AND LOGISTIC CORPORATE
SERVICES COMMERCE SALES RELATED SERVICES SYSTEM SALES AND OTHER TOTAL
----------- ----------- ----------- ----------- ----------- -----------
AS OF AND FOR THE THREE MONTHS
ENDED DECEMBER 31, 2002
- -----------------------------------
Revenue $ 338,970 $ 250,212 $ 11,475 $ 274,512 $ -- $ 875,169
Gross Profit 270,810 105,972 8,888 180,983 -- 566,653
Operating loss* (16,330) 89,950 (496) 6,188 (765,066) (685,754)
Depreciation and amortization 28,922 43,471 -- 7,531 250,000 329,924
Capital expenditures 2,567 -- -- -- -- 2,567
Total assets, December 31, 2002* 3,614,285 713,951 263,530 134,168 1,628,812 6,354,746
NINE MONTHS ENDED DECEMBER 31, 2002
- -----------------------------------
Revenue $ 962,773 $ 766,775 $ 51,744 $ 866,898 $ -- $ 2,648,190
Gross Profit 716,643 332,880 45,886 507,054 -- 1,602,463
Operating Loss* (830,801) 255,358 22,830 (41,772) (2,633,843) (3,228,228)
Depreciation and amortization 193,951 45,964 1,880 23,950 750,000 1,015,745
Capital expenditures 22,083 -- -- -- -- 22,083
Total assets, December 31, 2002* 3,614,285 713,951 263,530 134,168 1,628,812 6,354,746
9
AS OF AND FOR THE THREE MONTHS
ENDED DECEMBER 31, 2001
- -----------------------------------
Revenue $ 346,421 $ 255,380 $ 17,512 $ 316,662 $ -- $ 935,975
Gross Profit 237,636 100,243 15,640 175,095 -- 528,614
Operating loss* (122,550) 45,551 4,148 (119,979) (1,679,071) (1,871,901)
Depreciation and amortization 73,742 21,744 7,486 8,393 719,199 830,564
Capital expenditures 4,172 -- -- -- -- 4,172
Total assets, December 31, 2001* 8,797,980 4,802,917 828,350 1,417,831 4,153,816 20,000,894
NINE MONTHS ENDED DECEMBER 31, 2001
- -----------------------------------
Revenue $ 1,017,190 $ 921,334 $ 334,274 $ 1,186,303 $ -- $ 3,459,101
Gross Profit 597,159 378,085 172,736 589,054 -- 1,737,034
Operating Loss* (638,934) (177,929) (443,143) (133,640) (6,640,791) (8,034,437)
Depreciation and amortization 233,873 66,842 71,354 21,402 2,267,539 2,661,010
Capital expenditures 14,992 -- -- 5,715 -- 20,707
Total assets, December 31, 2001* 8,797,980 4,802,917 828,350 1,417,831 4,153,816 20,000,894
* 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".
Further, the selected profit and loss items in the three and nine month periods
ended December 31, 2002 and 2001 and total assets at December 31, 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 operations, 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.
10
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 $571,944 from $1,970,399 and to $0.03 per share from $0.11 per share
in the three months ended December 31, 2002 versus 2001 and the net loss
declined to $2,835,651 from $8,577,130 and to $0.16 per share from $0.51 per
share in the nine months ended December 31, 2002 versus 2001. Likewise, the
overall cash decline was reduced to $1,598,836 from $2,758,876 in the nine
months ended December 31, 2002 versus 2001.
RESULTS OF OPERATIONS FOR THE THREE MONTHS AND NINE MONTHS ENDED DECEMBER 31,
2002 AND 2001
REVENUES
Revenues for the three months and nine months ended December 31, 2002 were
$875,169 and $2,648,190, respectively, as compared to $935,975 and $3,459,101,
respectively, for the three and nine months ended December 31, 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 6% and 23% respectively in the three months and nine
months ended December 31, 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 2% and 5% decline in revenues in the three and nine months ended December
31, 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 revenues.
Enterprise and Commerce Sales
The 2% and 17% decline in revenues in the three month and nine month periods
ended December 31, 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 declined 34% and 85% in the three and nine months ended December 31,
2002, respectively, 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 subsidiary was closed in August 2002 and since then has
contributed minor amounts of revenue.
Logistic System Sales
The 13% and 27% decline in revenues in the three and nine month periods ended
December 31, 2002 versus 2001, respectively, 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 65% and 61% in the three and nine
months ended December 31, 2002 from 56% and 50% in the same periods ended
December 31, 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 increased to 80% from 69% in the three
months ended December 31, 2002 versus 2001, and also increased to 74% from 59%
in the nine months ended December 31, 2002 versus 2001. The increase in the
three and nine-month gross profit margins 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.
11
Enterprise and Commerce Sales
The gross profit margin in this segment increased to 42% and 43% in the three
and nine months ended December 31, 2002 from 39% and 41% in the same periods
ended December 31, 2001. This increase is due to the elimination of unprofitable
products and services and the closing of the FiveStar and Wares operations. The
major portion of this segment's gross margin comes from the customer loyalty
software contract at WizShop.
Professional and Related Services
The gross profit margin in this segment declined to 77% in the three-month
period ended December 31, 2002 from 89% in the three-month period ended December
31, 2001. However, the gross profit margin increased to 89% in the nine-month
period ended December 31, 2002 from 52% in the nine-month period ended December
31, 2001. The decline in the three-month gross profit margin is primarily due to
the decline in revenues, which has reduced the fixed cost coverage. The
nine-month period increase 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 increased to 66% for the three months ended December 31,
2002 versus 55% for the three months ended December 31, 2001 and it increased to
58% from 50% in the nine months ended December 31, 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 has allowed ADA to increase the gross profit margin.
OPERATING EXPENSES
Operating expenses declined overall in the three month and nine month periods
ended December 31, 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 NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------------- --------------------------
DESCRIPTION 2002 2001 2002 2001
- --------------------------------- ------------ ------------ ------------ ------------
Research and development $ 179,969 $ 309,712 $ 695,474 $ 1,176,829
Sales and marketing 268,825 388,281 798,270 1,642,391
General and administrative 472,327 776,111 2,296,919 3,254,966
Net impairment of goodwill -- -- -- 650,000
Depreciation and amortization 329,924 830,564 1,015,745 2,661,010
Stock, option and warrant expense 1,362 95,847 24,283 386,275
------------ ------------ ------------ ------------
Total $ 1,252,407 $ 2,400,515 $ 4,830,691 $ 9,771,471
- --------------------------------- ------------ ------------ ------------ ------------
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 nine months ended
December 31, 2002 as personnel and offices were reduced and operating functions
were consolidated.
The net impairment of goodwill is related to an impairment charge to goodwill
related to Simkin for $650,000. As noted in Note 5 of Semotus' Form 10K for the
year ended March 31, 2002, "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
12
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.
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 nine months ended December 31, 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 FIN No. 44,
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 nine months ended December 31, 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 nine months ended December
31, 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 nine month periods ended December 31, 2002 versus 2001 as Semotus
continues with operating losses. Amortization of technology advances decreased
somewhat in the three months ended December 31, 2002, due to the application of
accelerated amortization on the balances.
COMPREHENSIVE LOSS
The comprehensive loss of $574,024 or $0.03 per share and $2,835,444 or $0.16
per share for the three months and nine months ended December 31, 2002,
respectively, compared to $1,977,143 or $0.11 per share and $8,614,394 or $0.51
per share for the three months and nine months ended December 31, 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 8, "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.
WIRELESS ENTERPRISE AND PROFESSIONAL AND LOGISTIC CORPORATE
SERVICES COMMERCE SALES RELATED SERVICES SYSTEM SALES AND OTHER TOTAL
----------- ----------- ----------- ----------- ----------- -----------
AS OF AND FOR THE THREE MONTHS
ENDED DECEMBER 31, 2002
- -----------------------------------
Revenue $ 338,970 $ 250,212 $ 11,475 $ 274,512 $ -- $ 875,169
Gross Profit 270,810 105,972 8,888 180,983 -- 566,653
Operating loss* (16,330) 89,950 (496) 6,188 (765,066) (685,754)
Depreciation and amortization 28,922 43,471 -- 7,531 250,000 329,924
Capital expenditures 2,567 -- -- -- -- 2,567
Total assets, December 31, 2002* 3,614,285 713,951 263,530 134,168 1,628,812 6,354,746
13
NINE MONTHS ENDED DECEMBER 31, 2002
- -----------------------------------
Revenue $ 962,773 $ 766,775 $ 51,744 $ 866,898 $ -- $ 2,648,190
Gross Profit 716,643 332,880 45,886 507,054 -- 1,602,463
Operating Loss* (830,801) 255,358 22,830 (41,772) (2,633,843) (3,228,228)
Depreciation and amortization 193,951 45,964 1,880 23,950 750,000 1,015,745
Capital expenditures 22,083 -- -- -- -- 22,083
Total assets, December 31, 2002* 3,614,285 713,951 263,530 134,168 1,628,812 6,354,746
AS OF AND FOR THE THREE MONTHS
ENDED DECEMBER 31, 2001
- -----------------------------------
Revenue $ 346,421 $ 255,380 $ 17,512 $ 316,662 $ -- $ 935,975
Gross Profit 237,636 100,243 15,640 175,095 -- 528,614
Operating loss* (122,550) 45,551 4,148 (119,979) (1,679,071) (1,871,901)
Depreciation and amortization 73,742 21,744 7,486 8,393 719,199 830,564
Capital expenditures 4,172 -- -- -- -- 4,172
Total assets, December 31, 2001* 8,797,980 4,802,917 828,350 1,417,831 4,153,816 20,000,894
NINE MONTHS ENDED DECEMBER 31, 2001
- -----------------------------------
Revenue $ 1,017,190 $ 921,334 $ 334,274 $ 1,186,303 $ -- $ 3,459,101
Gross Profit 597,159 378,085 172,736 589,054 -- 1,737,034
Operating Loss* (638,934) (177,929) (443,143) (133,640) (6,640,791) (8,034,437)
Depreciation and amortization 233,873 66,842 71,354 21,402 2,267,539 2,661,010
Capital expenditures 14,992 -- -- 5,715 -- 20,707
Total assets, December 31, 2001* 8,797,980 4,802,917 828,350 1,417,831 4,153,816 20,000,894
* 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".
Further, the selected profit and loss items in the three and nine month periods
ended December 31, 2002 and 2001 and total assets at December 31, 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 42% for the nine month
period ended December 31, 2002 versus 2001. The sources and uses of cash are
summarized as follows (unaudited):
NINE MONTHS ENDED
DECEMBER 31,
- -----------------------------------------------------------------------------
2002 2001
------------ ------------
Cash used in operating activities $ (1,656,049) $ (4,084,588)
Cash provided by investing activities 188,856 1,425,765
Cash used in financing activities (161,809) (188,625)
Net cash provided by discontinued operations 30,166 88,573
------------ ------------
Net decrease in cash and cash equivalents $ (1,598,836) $ (2,758,875)
============ ============
14
Cash used in operating activities from continuing operations consisted
principally of a net loss of $2,835,651 offset somewhat by non-cash charges of
$1,015,745, of depreciation and amortization, $574,647 of amortization of notes
receivable, $165,215 of settlement of liabilities and $24,283 of stock based
compensation. Additionally, the loss from the discontinued operations
contributed $125,860. Other operating activities that contributed to offsetting
the use of cash were $202,775 in the net change of current assets and current
liabilities. This largely resulted from decreases in accrued liabilities and
accounts payable of $189,041 and $97,186 respectively and increases in accounts
receivable of $116,828, offset somewhat by increases in deferred revenue of
$127,788.
Cash provided by investing activities consisted principally of the continuing
investment in ADA of $210,379, by the 49% owner of ADA, Global Beverage Group.
This was offset somewhat by capital expenditures of $22,083.
Cash flows from financing activities produced a net decrease in cash of
$161,809, which resulted primarily from the repurchase by the Company of its
preferred stock for $100,000 in cash as part of the consideration (see Note 6,
"Repurchase of Preferred Stock"), as well as from repayments on notes payable
and capital leases.
As of December 31, 2002, the Company had cash and cash equivalents amounting to
$2,505,467, a decrease of $2,292,122 from the balance at March 31, 2002. Working
capital decreased to $1,252,372 at December 31, 2002 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 December 31, 2002.
Management believes that it has adequate working capital for the next 12 months.
RECENT PRONOUNCEMENTS:
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal
Activities" ("SFAS 146"). SFAS 146 addresses significant issues regarding the
recognition, measurement, and reporting of costs that are associated with exit
and disposal activities, including restructuring activities that are currently
accconted for under EITF No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit and Activity (including Certain
Costs Incurred in a Restructuring)." The scope of SFAS 146 also includes costs
related to terminating a contract that is not a capital lease and termination
benefits that employees who are involuntarily terminated receive under the terms
of a one-time benefit arrangement that is not an ongoing benefit arrangement or
an individual deferred-compensation contract. SFAS 146 is effective for exit or
disposal activities that are initiated after December 31, 2002 and early
application is encouraged. The Company's adoption of SFAS 146 on January 1, 2003
had no impact on the Company's financial position or results of operations.
In November 2002, the FASB issued FASB Interpretation NO. 45 ("FIN 45"),
"GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING
INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS, AN INTERPRETATION OF FASB
STATEMENTS NO. 5, 57, AND 107 AND RESCISSION OF FASB INTERPRETATION NO. 34." FIN
45 clarifies the requirements of FASB Statement No. 5, "ACCOUNTING FOR
CONTINGENCIES" relating to to the guarantor's accounting for, and disclosure of
the issuance of certain types of guarantees. The disclosure provisions of the
Interpretation are effective for financial statements of interim or annual
reports that end after December 15, 2002, irrespective of the guarantor's
year-end. The Company's adoption of FIN 45 did not have a material impact in the
Company's financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation, Transition and Disclosure." SFAS No. 148 amends SFAS No. 123 and
requires prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. SFAS No. 148 is effective for
fiscal years ending after December 15, 2002 and is effective for interim periods
beginning after December 15, 2002. The Company's adoption of SFAS NO. 148 on
January 1, 2003 did not have a material effect on the Company's financial
position or results of 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
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.
15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE REGARDING MARKET RISK
We have limited exposure to financial market risks, including changes in
interest rates. At December 31, 2002, we had cash and cash equivalents of
$2,505,467. 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 $22,938, at
December 31, 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 December 31, 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 December 31,
2002, the cumulative translation loss was $142,153. 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 February 10, 2003, 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 February 10, 2003.
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 was settled on December 31, 2002. Please see Note 6,
"Repurchase of Preferred Stock", Item 2, "Changes in Securities and Use of
Proceeds" and Registrant's Form 8-K filed on January 13, 2003 for more details
of the settlement transaction.
The Earthlink lawsuit previously reported in Registrant's Form 10K for the year
ended March 31, 2002 is proceeding on schedule. A mediation date has been
scheduled for March 27, 2003; however, the litigation will not be suspended
pending any mediation.
Additionally, Semotus and WizShop have been named as two of seventeen corporate
defendants, ten individual defendants and one accountant defendant in a class
action lawsuit brought by the California Teachers' Retirement System. The
lawsuit was filed on November 15, 2002 in the United States District Court for
the Central District of California, Western Division. The suit alleges two
causes of action for violating Section 10(b), 15 U.S.C. Sect. 78j(b) and SEC
Rule 10b-5, 17 C.F.R. Sect. 240.10b-5, and for violating Section 20(a), 15
U.S.C. Sect. 78t(a). The California Teachers' Retirement System seeks general
and compensatory damages according to proof, special damages according to proof,
reasonable attorney's fees, cost and expenses of the proceedings, prejudgment
interest at the maximum legal rate, and such other and further relief as the
Court deems proper. We believe the suit is without merit as to WizShop and
Semotus, and are in the process of getting dismissed from this lawsuit. If we
are not dismissed, we will contest the lawsuit vigorously.
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 December 31, 2002, the Company did not issue any shares
of its common stock to suppliers of services to the Company. However, the
Company did issue 14,368 shares of common stock to a supplier of services as
part of a settlement arrangement.
On December 31, 2002, as part of the Preferred Stock Buy Back and Mutual Release
Agreement with Brown Simpson Partners I, Ltd, Semotus repurchased from Brown
Simpson all of the outstanding shares of the Company's Series B Convertible
Preferred Stock. In consideration of the aforesaid purchase of the Shares,
Semotus paid one hundred thousand dollars ($100,000.00) and issued to Brown
Simpson 846,154 warrants to purchase shares of Common Stock of Semotus,
exercisable at $0.01 per share. In addition, in consideration for Brown Simpson
agreeing to enter into a settlement and mutual release related to its
anti-dilution claim, the Company revised Brown Simpson's existing 1,153,846
(post-split) Warrants to provide for an exercise price of $0.01 per share. On
January 24, 2003, Brown Simpson exercised 1,153,846 warrants by remitting
$11,538.46 to Semotus, and Brown Simpson was issued 1,153,846 shares of common
stock.
16
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 99.2 Certification
Pursuant TO 18 U.S.C. ss.1350
99.2 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 on January 13, 2003 with respect
to a Preferred Stock Buy Back and Mutual Release Agreement signed on December
31, 2002 by and among Semotus and Brown Simpson Partners I, Ltd.
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: FEBRUARY 13, 2003 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: February 13, 2003
/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: February 13, 2003
/S/ CHARLES K. DARGAN, II
- --------------------------------
CHARLES K. DARGAN, II
CHIEF FINANCIAL OFFICER
20