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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2003
COMMISSION FILE NUMBER: 1-15569
SEMOTUS SOLUTIONS, INC.
(Exact name of small business issuer in its charter)
Nevada 36-3574355
------------------------------ ---------------------------
(State or other jurisdiction of (IRS Employer Identification
Incorporation or Organization) Number)
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 20,140,997 shares of the Registrant's Common Stock outstanding as of
August 10, 2003.
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 June 30, 2003
and March 31, 2003 3
b. Consolidated Statements of Operations and
Comprehensive Loss for the three-month periods
ended June 30, 2003 and 2002 4
c. Consolidated Statements of Cash Flows for the three
months ended June 30, 2003 and 2002 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 13
ITEM 4. CONTROLS AND PROCEDURES 13
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 13
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 14
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 14
ITEM 5. OTHER INFORMATION 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14
SIGNATURES 15
2
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
ASSETS
June 30 March 31
2003 2003
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 1,745,302 $ 1,976,062
Trade receivables (net of allowance for doubtful accounts of
$6,090 at June 30, 2003 and $77,090 at March 31, 2003) 186,155 140,646
Prepaid expenses and other current assets 39,772 52,161
Current assets held for sale -- 298,200
------------ ------------
Total current assets 1,971,229 2,467,069
Property and equipment, net 292,081 342,614
Goodwill, net 1,430,141 1,430,141
Non-current assets held for sale -- 408,732
------------ ------------
Total assets $ 3,693,451 $ 4,648,556
============ ============
LIABILITIES
CURRENT LIABILITIES:
Accounts payable $ 387,526 $ 392,826
Accrued vacation 64,889 69,808
Other accrued liabilities 52,690 79,999
Notes payable 37,925 56,224
Current portion of capital lease obligations 20,977 23,731
Deferred revenue 108,748 79,119
Current liabilities related to assets held for sale -- 300,717
------------ ------------
Total current liabilities 672,755 1,002,424
Capital lease obligation, net of current portion 3,829 15,189
Non-current liabilities related to assets held for sale -- 321,216
------------ ------------
Total liabilities 676,584 1,338,829
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Commitments and contingencies (Note 8)
------------ ------------
COMMON SHAREHOLDERS' EQUITY
Common stock: $0.01 par value; authorized: 50,000,000 shares; issued
and outstanding: 20,100,997 at June 30, 2003 and 19,275,211
at March 31, 2003 201,010 192,752
Additional paid-in capital 66,501,024 66,163,351
Accumulated other comprehensive loss (78,333) (93,306)
Notes receivable - related parties (72,341) (91,281)
Accumulated deficit (63,534,493) (62,861,789)
------------ ------------
Total common shareholders' equity 3,016,867 3,309,727
------------ ------------
Total liabilities and common shareholders' equity $ 3,693,451 $ 4,648,556
============ ============
See accompanying notes to consolidated financial statements.
3
SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(unaudited)
Three Months Ended
June 30,
2003 2002
------------ ------------
Revenues: $ 353,662 $ 614,094
Cost of sales: 82,388 215,951
------------ ------------
Gross Profit 271,274 398,143
Operating expenses:
Research and development 161,676 224,854
Sales and marketing 187,998 276,949
General and administrative 367,041 541,523
Depreciation and amortization 54,958 333,275
Stock, option and warrant expense 378,650 21,054
------------ ------------
Total operating expenses 1,150,323 1,397,655
------------ ------------
Operating loss from continuing operations (879,049) (999,512)
Other income 206,345 104,841
------------ ------------
Net loss from continuing operations (672,704) (894,671)
Net loss from discontinued operations -- (139,887)
------------ ------------
Net loss (672,704) (1,034,558)
Other comprehensive income - Translation adjustment 14,973 14,231
------------ ------------
Comprehensive loss $ (657,731) $ (1,020,327)
============ ============
Net loss per common share:
Basic $ (0.03) $ (0.06)
Diluted $ (0.03) $ (0.06)
Weighted average shares used in per share
calculation, basic and diluted 19,730,808 17,382,241
============ ============
See accompanying notes to consolidated financial statements.
4
SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended
June 30,
2003 2002
----------- -----------
Cash flows from operating activities:
Net loss $ (672,704) $(1,034,558)
Loss from discontinued operations -- 139,887
----------- -----------
Net loss from continuing operations (672,704) (894,671)
Foreign currency translation adjustment 14,973 14,231
Adjustments to reconcile net loss from continuing
operations to net cash used in operating activities
from continuing operations:
Depreciation and amortization 54,958 333,275
Compensation expense related to stock and stock
options issued for services 378,650 21,054
Net amortization of contract income -- (105,855)
Amortization of advances on technology sales -- (71,302)
Amortization of notes receivable 18,940 (82,230)
Net gain from disposition of assets (3,618) --
Non-cash settlement of liabilities (5,543) 30,152
Changes in assets and liabilities net of acquired
assets and liabilities due to acquisitions:
Accounts and other receivables (45,509) (35,356)
Prepaid expenses and other assets 12,388 19,616
Accounts payable (5,300) 66,625
Accrued liabilities (32,228) (151,062)
Deferred revenue 29,629 (37,385)
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Net cash used in operating activities (255,364) (892,908)
----------- -----------
Cash flows from investing activities:
Acquisition of property & equipment -- (17,937)
----------- -----------
Net cash used in investing activities -- (17,937)
----------- -----------
Cash flows from financing activities:
Repayments of notes payable (18,299) --
Repayments of capital lease obligations (9,378) (22,119)
Proceeds from exercise of options and warrants 52,281 --
----------- -----------
Net cash provided by (used in) financing activities 24,604 (22,119)
----------- -----------
Net cash provided by discontinued operations -- 223,908
Net decrease in cash and cash equivalents (230,760) (709,056)
Cash and cash equivalents, beginning of period 1,976,062 4,751,094
----------- -----------
Cash and cash equivalents, end of period $ 1,745,302 $ 4,042,038
=========== ===========
See accompanying notes to consolidated financial statements.
5
SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(unaudited)
Three Months Ended
June 30,
2003 2002
---------- ----------
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest $ 5,473 $ 9,329
========== ==========
Cash paid for income taxes $ -- $ 5,981
========== ==========
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Additional non-cash purchase consideration paid to
shareholder of Cross Communications, Inc. pursuant
to the third year share price guarantee and settlement
of the Merger Agreement $ 30,815 $ --
========== ==========
Non-cash compensation expense due to variable accounting
for repriced stock options $ 347,835 $ --
========== ==========
Common stock issued for services $ -- $ 21,054
========== ==========
Common stock issued for liabilities $ -- $ 16,235
========== ==========
See accompanying notes to consolidated financial statements.
6
SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. FORMATION AND BUSINESS OF THE COMPANY:
Semotus(TM) Solutions, Inc. ("Semotus" or the "Company"), changed its name from
Datalink.net, Inc. as of January 11, 2001. The Company, originally Datalink
Systems Corporation, was formed under the laws of the State of Nevada on June
18, 1996. On June 27, 1996, the Company went public through an acquisition of a
public corporation, Datalink Communications Corporation ("DCC"), which was
previously Lord Abbott, Inc., a Colorado corporation formed in 1986. As a part
of the transaction, the Company also acquired a Canadian corporation, DSC
Datalink Systems Corporation, incorporated in Vancouver, British Columbia, now
named Semotus Systems Corp.
Semotus is a leading provider of enterprise application software connecting
employees to critical business systems, information, and processes. Semotus
helps mobile employees make better and faster decisions, increase customer
satisfaction, and improve efficiencies in their business processes for shorter
sales and service cycles. The Company's products serve such vertical markets as
workforce automation and financial services. Semotus' enterprise application
software provides mobility, convenience, efficiency and improves profitability.
For more information please go to our website at http://www.semotus.com.
2. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Semotus Solutions, Inc. and its subsidiaries. The consolidated balance sheet as
of June 30, 2003, the consolidated statements of operations and comprehensive
loss for the three-month periods ended June 30, 2003 and 2002, and the
consolidated statements of cash flows for the three months ended June 30, 2003
and 2002 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
period ended June 30, 2003 are not necessarily indicative of the results that
may be expected for the year ending March 31, 2004. 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, 2003.
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.,
Five Star Advantage, Inc., WizShop.com, Inc. and Application Design Associates,
Inc. (ADA). 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. Five Star's and Wares on the Web's operations have been discontinued as
of June 28, 2002 and August 19, 2002, respectively. ADA has been sold as of May
6, 2003. WizShop's remaining contract for customer loyalty software expired on
March 31, 2003 and currently the subsidiary has no further contracts in process.
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 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.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51." This
interpretation addresses the consolidation by business enterprises of variable
interest entities as defined in the interpretation. The interpretation applies
immediately to variable interests in variable interest entities created or
obtained after January 31, 2003. The interpretation is applied to the enterprise
no later than the end of the first reporting period beginning after June 15,
2003. The application of this interpretation is not expected to have a material
effect on the Company's financial statements. The interpretation requires
certain disclosures in financial statements issued after January 31, 2003 if it
is reasonably possible that the Company will consolidate or disclose information
about variable interest entities when the interpretation becomes effective. As
of June 30, 2003, the Company does not have any variable interest entities.
In November 2002, the Emerging Issues Task Force issued its final consensus on
Revenue Arrangements with Multiple Deliverables. This guidance is effective for
revenue arrangements entered into in fiscal periods beginning after June 15,
2003 or alternatively, entities may elect to report the change in accounting as
a cumulative-effect adjustment. EITF 00-21 discusses criteria necessary to
determine when an arrangement
7
may be viewed to have separate units of accounting (and thus revenue) and when
an arrangement should be viewed as a single unit of accounting. The Company is
currently reviewing how this might affect revenue recognition for arrangements
the Company could enter into that have multiple deliverables. At June 30, 2003,
Semotus does not have any contracts with multiple deliverables.
In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instrument embedded in other contracts, and for
hedging activities under SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities". The Statement clarifies and creates more consistent
reporting of contracts as either derivatives or hybrid financial instruments.
The Statement is effective for contracts entered into or modified after June 30,
2003. The Company historically has not used derivatives or hedging instruments.
Currently, the Company does have a small exposure to the Canadian - U.S. dollar
exchange rate, but has not deemed it necessary to hedge this exposure.
In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity and is
effective for financial instruments entered into or modified after May 31, 2003.
The Company adopted SFAS No. 150 on June 1, 2003 and does not expect the
adoption to have a material impact on the Company's results of operations or
financial condition
4. OTHER INCOME
Other income is substantially comprised of the $210,194 litigation settlement
with Earthlink offset somewhat by miscellaneous expenses. Wizshop.com, Inc., one
of our wholly-owned subsidiaries, filed a lawsuit against Earthlink Network,
Inc. and Earthlink Operations, Inc. (collectively "Earthlink") on April 15, 2002
in the California Superior Court. This suit alleged eight causes of action
against Earthlink, including breach of written agreement, promissory fraud,
fraudulent concealment, breach of fiduciary duty, constructive fraud, unfair
business practices, accounting and constructive trust. The suit arose out of
Earthlink's breach of the written agreement with Wizshop, and Earthlink's
apparent acts of fraud in connection with Earthlink's failure and refusal to
accurately account for and pay to Wizshop revenues to which Wizshop was entitled
to under the agreement.. On May 19, 2003, the parties reached a settlement and
signed a settlement and mutual general release agreement, in which Earthlink
agreed to pay to WizShop a total sum of $210,000.
5. STOCK-BASED COMPENSATION EXPENSE
The Company accounts for employee stock-based compensation plans using the
intrinsic value method of recognition and measurement principles as delineated
in APB Opinion 25, "Accounting for Stock Issued to Employees" and related
interpretations. No stock based employee compensation cost is reflected in the
statement of operations upon granting of stock options, as all options granted
under the Company's Stock Option Plan had an exercise price equal to the market
value of the underlying common stock on the day of grant. However, since certain
employee stock options were repriced in October 2002, the Company accounted for
those options under the variable accounting requirements of APB Opinion 25 and
FIN 44, and accordingly, compensation expense was recorded since the current
market price of the underlying stock exceeded the exercise price on the date the
grant was repriced.
The following is a summary of the effect on net income (loss) and per share
impacts if the Company had applied a fair value method prescribed by SFAS No.
123, "Accounting for Stock-Based Compensation" to account for stock-based
compensation for the periods indicated:
THREE MONTHS ENDED
JUNE 30,
2003 2002
----------- -----------
Net loss, as reported $ (672,704) $(1,034,558)
Add: Total stock-based employee compensation expense
determined under intrinsic value based method for all awards 347,835 --
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards (31,139) (5,964)
Pro forma net loss (356,008) (1,040,522)
Net income (loss) per share:
Basic - as reported $ (0.03) $ (0.06)
Basic - pro forma $ (0.02) $ (0.06)
Diluted - as reported $ (0.03) $ (0.06)
Diluted - pro forma $ (0.02) $ (0.06)
These pro forma amounts may not be representative of the effects for future
years as options vest over several years and additional awards are generally
made each year.
8
6. EARNINGS PER SHARE (EPS) DISCLOSURES:
In accordance with SFAS No. 128 "Earnings Per Share " (EPS), the Company reports
Basic and Diluted EPS as follows: Basic EPS is computed as net income (loss)
divided by the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur from common
shares issuable through stock options, warrants and other convertible
securities. Common equivalent shares are excluded from the computation of net
loss per share if their effect is anti-dilutive.
For the three months ended June 30, 2003 and 2002, 4,456,157 potential shares
and 7,517,303 potential shares, respectively, were excluded from the shares used
to calculate diluted EPS as their effect is anti-dilutive.
7. DISCONTINUED OPERATIONS.
As part of Semotus' Centralization and Consolidation Plan, which is further
described in the Company's March 31, 2003 Form 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, Five Star 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.
On January 18, 2002 the Global Beverage Group, "GBG", a Canadian-based direct
store delivery consortium, completed a strategic investment in Semotus' ADA
subsidiary by acquiring a 49% share in ADA. For its 49% stock purchase, GBG paid
Semotus $250,000 in cash and agreed to invest $1 million in ADA over the next 15
months in order to help with the development of the next generation of ADA asset
tracking and management software. In May, 2003, GBG purchased the remaining 51%
of ADA for the return of 500,000 shares of Semotus' common stock. This decision
resulted in the discontinuation of ADA's operations in fiscal year 2003.
In accordance with FAS 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", the operations of FiveStar, Wares and ADA
have been recorded as discontinued operations in the three month period ended
June 30, 2002. The net loss from discontinued operations of $139,887 consisted
of a net loss from operations of $122,835 at Five Star, net income from
operations of $4,779 at Wares and a net loss from operations of $21,831 at ADA
for the three months ended June 30, 2002. A net gain upon disposition of the
assets and liabilities of Five Star and Wares of $128,582 was recognized at
March 31, 2003. No gain or loss was recorded upon the disposition of the assets
and liabilities of ADA, however, a net loss from discontinued operations of
$677,069 was recorded as of March 31, 2003, mostly comprised of an impairment to
goodwill of $635,724.
8. 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
repricing under FIN 44 and will result in variable plan accounting. A
compensation expense in the amount of $347,835 was required to be recognized in
the three months ended June 30, 2003, and expense will be recognized in the
future if the stock price continues to be above the revised exercise price of
the options.
The Company continues to be a party to certain commitments and contingencies, as
previously reported in Note 22 and Part I, Item 3 of Registrant's Form 10K for
the year ended March 31, 2003. Please also refer to Part II, Item 1 of this
report for any additional litigation contingencies.
9. SEGMENT INFORMATION
After the Consolidation and Centralization Plan was largely completed by March
31, 2003, the Company determined that its ongoing operations were in one
segment, wireless and mobile enterprise software. The Company's products consist
mainly of the Global Market Pro family of products and the Hiplink family of
products. Utilizing the definitions described in SFAS 131, "Disclosures about
Segments of an Enterprise and Related Information", the nature of the products
and services are all similar. Accordingly, starting in the current fiscal year,
Semotus will report the single line of business of wireless and mobile
enterprise software and will no longer report operations from three prior
segments: Enterprise and Commerce Sales, Professional and Related Services and
Logistics. Further, per SFAS 131, the corresponding information for the earlier
period presented has been restated to conform to the single segment.
In the last fiscal year, WizShop did have revenue and expenses from its customer
loyalty contract, which have been included in the restated single segment. For
the three months ended June 30, 2002,WizShop's revenue was $ 254,114 and the
operating expenses were $174,892, including $144,240 in cost of sales. In the
prior year this financial information was part of the Enterprise and Commerce
Sales segment.
9
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, 2003.
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, 2003. However, in accordance with FAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure", the Company has made more detailed
disclosure of the effect of the fair value method of accounting for stock
options in its Notes to the Consolidated Financial Statements. See Note 5,
"Stock Based Compensation Expense".
OVERVIEW
After the Consolidation and Centralization Plan was largely completed by March
31, 2003, the Company determined that its ongoing operations were in one
segment, wireless and mobile enterprise software. The Company's products consist
mainly of the Global Market Pro family of products and the Hiplink family of
products. Utilizing the definitions described in SFAS 131, "Disclosures about
Segments of an Enterprise and Related Information", the nature of the products
and services are all similar. Accordingly, starting in the current fiscal year,
Semotus will report the single line of business of wireless and mobile
enterprise software and will no longer report operations from three prior
segments: Enterprise and Commerce Sales, Professional and Related Services and
Logistics. Further, per SFAS 131, the corresponding information for the earlier
period presented has been restated to conform to the single segment.
As a result of the centralization and consolidation implementation, the net loss
declined to $672,704 from $1,034,558 and to $0.03 per share from $0.06 per share
in the three months ended June 30, 2003 versus 2002. Likewise, the overall cash
decline was reduced to $230,760 from $709,056 in the three months ended June 30,
2003 versus 2002.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2003 AND 2002
REVENUES
Revenues for the three months ended June 30, 2003 were $353,662, as compared to
$614,094 for the three months ended June 30, 2002.
The difference is largely due to the customer loyalty contract at WizShop, which
was completed on March 31, 2003. The recorded revenue resulted from the
amortization of deferred revenue and as such, had no impact on the cash position
of the Company. Revenues from wireless and mobile enterprise software sales were
approximately the same in the three months ended June 30, 2003 and 2002.
COST OF REVENUES AND GROSS MARGIN
The overall gross profit margin increased to 77% in the three months ended June
30, 2003 from 65% in the same period ended June 30, 2002. The increase is the
result of continuing improvements in the reduction of costs for the mobile
enterprise software products. Also, the customer loyalty contract at WizShop was
included in the last fiscal year, which had lower margins than the mobile
enterprise software products. The cost of sales consists mainly of network and
airtime charges and data feed charges.
OPERATING EXPENSES
Operating expenses declined overall in the three month period ended June 30,
2003 versus the same period in the last fiscal year, due to the full
amortization of the GMP asset and 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):
10
Three Months Ended
June 30,
-------------------------
Description 2003 2002
--------------------------------- ---------- ----------
Research and development $ 161,676 $ 224,854
Sales and marketing 187,998 276,949
General and administrative 367,041 541,523
Depreciation and amortization 54,958 333,275
Stock, option and warrant expense 378,650 21,054
---------- ----------
Total $1,150,323 $1,397,655
========== ==========
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.
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 ended June 30, 2003 as
personnel and offices were reduced and operating functions were consolidated.
Depreciation and amortization expense includes depreciation of computers and
other related hardware and certain fixtures. The decline in this expense for the
three months ended June 30, 2003 versus 2002 is as a result of the full
amortization of the GMP asset, the reduced asset balances to be amortized from
the discontinuance of the FiveStar, Wares and ADA operations, and from the
decline in capital spending at Semotus.
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 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. $347,835 in compensation expense was required to be
recognized in the three months ended June 30, 2003; No compensation expense for
variable stock options was required to be recognized in the three months ended
June 30, 2002. Expense will also be recognized in the future if the stock price
continues to be above the revised exercise price of the options. Therefore, the
increase in non-cash charges for compensation is due mainly to the compensation
expense recorded for the October 2002 repriced stock options and to a lesser
extent from the compensation expense for the settlement of the Merger Agreement
with the shareholder of Cross Communications, Inc.
NON-OPERATING INCOME AND EXPENSES
Non-operating income and expense for the three months ended June 30, 2003 are
primarily interest income from invested cash, interest expense from notes
payable, and the legal settlement with WizShop (see Note 4, "Other Income"). For
the three months ended June 30, 2002 non-operating income and expense also
included interest income and expense as well as 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, 2003.
Net interest income declined as less cash was available for investment during
the three month periods ended June 30, 2003 versus 2002 as Semotus continues
with operating losses. The overall increase in non-operating income was due to
the WizShop settlement offset somewhat by the decline in the amortization of
technology advances income. Semotus determined that as of March 31, 2003, the
technology transactions were completed and therefore the contracts were
terminated (see Note 10, "Advances on Technology Sale" in our Annual Report on
Form 10-K for the year ended March 31, 2003).
COMPREHENSIVE LOSS
The comprehensive loss of $657,731 or $0.03 per share for the three months ended
June 30, 2003, compared to $1,020,327 or $0.06 per share
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for the three months ended June 30, 2002, 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.
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 products although a
cash management and cost reduction program has been implemented and has reduced
the overall cash loss by 67% for the three month period ended June 30, 2003
versus 2002. The sources and uses of cash are summarized as follows (unaudited):
THREE MONTHS ENDED
JUNE 30,
2003 2002
--------- ---------
Cash used in operating activities $(255,364) $(892,908)
Cash used in investing activities -- (17,937)
Cash provided by (used in) financing activities 24,604 (22,119)
Net cash provided by discontinued operations -- 223,908
--------- ---------
Net decrease in cash and cash equivalents $(230,760) $(709,056)
========= =========
Cash used in operating activities from continuing operations consisted
principally of a net loss of $672,704 offset by $378,650 of stock based
compensation, and somewhat offset by non-cash charges of $54,958 of depreciation
and amortization, and $18,940 of amortization of notes receivable. Other
operating activities that contributed to the use of cash were $41,020 in the net
change of current assets and current liabilities. This largely resulted from
decreases in accrued liabilities and accounts payable of $32,228 and $5,300
respectively and increases in accounts receivable of $45,509, offset somewhat by
increases in deferred revenue of $29,629.
There was no cash used in investing activities for the three months ended June
30, 2003. Cash used in investing activities for the three months ended June 30,
2002 consisted principally of the acquisition of property and equipment.
Cash flows from financing activities produced a net increase in cash of $24,604,
which resulted primarily from the exercise of stock options, offset slightly
from repayments on notes payable and capital leases.
As of June 30, 2003, the Company had cash and cash equivalents amounting to
$1,745,302, a decrease of $230,760 from the balance at March 31, 2003. Working
capital decreased to $1,298,474 at June 30, 2003 from $1,464,645 at the fiscal
2003 year end. The decrease in working capital is from the resources used in the
operations of Semotus as explained above. The Company has not yet generated
sufficient revenues to cover the costs of continued product development and
support, sales and marketing efforts and general and administrative expenses.
There are no material commitments for capital expenditures at June 30, 2003.
Management believes that it has adequate working capital for the next 12 months.
RECENT PRONOUNCEMENTS:
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.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51." This
interpretation addresses the consolidation by business enterprises of variable
interest entities as defined in the interpretation. The interpretation applies
immediately to variable interests in variable interest entities created or
obtained after January 31, 2003. The interpretation is applied to the enterprise
no later than the end of the first reporting period beginning after June 15,
2003. The application of this interpretation is not expected to have a material
effect on the Company's financial statements. The interpretation requires
certain disclosures in financial statements issued after January 31, 2003 if it
is reasonably possible that the Company will consolidate or disclose information
about variable interest entities when the interpretation becomes effective. As
of June 20, 2003, the Company does not have any variable interest entities.
In November 2002, the Emerging Issues Task Force issued its final consensus on
Revenue Arrangements with Multiple Deliverables. This guidance is effective for
revenue arrangements entered into in fiscal periods beginning after June 15,
2003 or alternatively, entities may elect to
12
report the change in accounting as a cumulative-effect adjustment. EITF 00-21
discusses criteria necessary to determine when an arrangement may be viewed to
have separate units of accounting (and thus revenue) and when an arrangement
should be viewed as a single unit of accounting. The Company is currently
reviewing how this might affect revenue recognition for arrangements the Company
could enter into that have multiple deliverables. At June 30, 2003, Semotus does
not have any contracts with multiple deliverables.
In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instrument embedded in other contracts, and for
hedging activities under SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities". The Statement clarifies and creates more consistent
reporting of contracts as either derivatives or hybrid financial instruments.
The Statement is effective for contracts entered into or modified after June 30,
2003. The Company historically has not used derivatives or hedging instruments.
Currently, the Company does have a small exposure to the Canadian - U.S. dollar
exchange rate, but has not deemed it necessary to hedge this exposure.
In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity and is
effective for financial instruments entered into or modified after May 31, 2003.
The Company adopted SFAS No. 150 on June 1, 2003 and does not expect the
adoption to have a material impact on the Company's results of operations or
financial condition
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 and WizShop, 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, 2003. Semotus Solutions claims the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE REGARDING MARKET RISK
We have limited exposure to financial market risks, including changes in
interest rates. At June 30, 2003, we had cash and cash equivalents of
$1,745,302. 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 $37,925, at June
30, 2003. These notes are due and payable within one year. Because of the
short-term nature of the notes and the fixed rate on the notes, there is no
material exposure to changes in interest rates for these accounts. The Company
does not have any derivative or hedge instruments at June 30, 2003.
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 Loss. At June 30, 2003,
the cumulative translation loss was $78,333. Given the relative stability of the
Canadian and U.S. dollar exchange rate, the Company has not deemed it necessary
to hedge this exposure. The Company does actively monitor the situation and as
of June 30, 2003 there has been a small but trending decline in the U.S. dollar
against the Canadian dollar. Should the trend continue, the Company would seek
to limit or hedge the 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 the end of the three month period ended June 30, 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 June 30, 2003.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Earthlink lawsuit as previously reported in the Company's Form 10K for the
year ended March 31, 2003 has been settled. On May 19, 2003, the parties reached
a settlement and signed a settlement and mutual general release agreement, in
which Earthlink agreed to pay to
13
WizShop a total sum of $210,000.
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 any potential liabilities arising from these matters will not have a
material adverse effect on our consolidated results of operations or financial
position.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company issued securities, which were not registered under the Securities
Act of 1933, as amended, as follows:
During the Quarter ended June 30, 2003, the Company did not issue any shares of
its common stock to suppliers of services to the Company. However, the Company
did issue 187,500 shares of common stock to Kathleen Wold on May 21, 2003
pursuant to an Amendment to the Agreement of Merger between Semotus, Acquisition
Wireless, Inc., Cross Communications and Kathleen Wold in which the share price
guarantee provision of the Merger Agreement was accelerated, and each party was
released of any and all other remaining obligations.
On May 1, 2003, Brown Simpson exercised 846,154 warrants by remitting $8,461.54
to Semotus, and Brown Simpson was issued 846,154 shares of common stock.
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
31.1 Certifications
31.2 Certifications
32.1 Certification Pursuant To 18 U.S.C. ss.1350
32.2 Certification Pursuant To 18 U.S.C. ss.1350
b) Reports on Form 8-K:
The Company filed two Current Reports on Form 8-K during this quarter. On May 7,
2003 a Form 8-K was filed with respect to the exercise of an option to purchase
the remaining 51% of Application Design Associates from Semotus.
On May 28, 2003 a Form 8-K was filed with respect to a Settlement and Mutual
Release Agreement signed by and among Semotus, WizShop and Earthlink.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
SEMOTUS SOLUTIONS, INC.
DATE: AUGUST 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)
15