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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
COMMISSION FILE NUMBER: 1-15569
SEMOTUS SOLUTIONS, INC.
(Exact name of Registrant as specified in its charter)
Nevada 36-3574355
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No)
incorporation or organization)
16400 Lark Ave., Suite 230, Los Gatos, CA 95032
(Address of principal executive offices including zip code)
(408) 358-7100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [_] No [X]
There were 20,395,880 shares of the Registrant's Common Stock outstanding as of
November 10, 2003.
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SEMOTUS SOLUTIONS, INC.
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
a. Consolidated Balance Sheets as of September 30, 2003
and March 31, 2003 3
b. Consolidated Statements of Operations and
Comprehensive Loss for the three and six month periods
ended September 30, 2003 and 2002 4
c. Consolidated Statements of Cash Flows for the six months ended
September 30, 2003 and 2002 5
d. Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9
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 13
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 13
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
September 30 March 31
2003 2003
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 1,545,638 $ 1,969,910
Trade receivables (net of allowance for doubtful accounts of $6,090
at September 30, 2003 and $6,090 at March 31, 2003) 185,869 140,646
Prepaid expenses and other current assets 40,312 35,284
Current assets held for sale -- 298,200
Current assets from discontinued operations -- 23,029
------------ ------------
Total current assets 1,771,819 2,467,069
Property and equipment, net 238,239 342,614
Goodwill, net 1,430,141 1,430,141
Non-current assets held for sale -- 408,732
------------ ------------
Total assets $ 3,440,199 $ 4,648,556
============ ============
LIABILITIES and SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 221,533 $ 372,391
Accrued vacation 69,645 60,528
Other accrued liabilities 77,851 63,122
Notes payable 21,925 56,224
Current portion of capital lease obligations 19,458 17,609
Deferred revenue 109,066 79,119
Current liabilities related to assets held for sale -- 300,717
Current liabilities from discontinued operations -- 52,714
------------ ------------
Total current liabilities 519,478 1,002,424
Capital lease obligation, net of current portion 3,016 15,189
Non-current liabilities related to assets held for sale -- 321,216
------------ ------------
Total liabilities 522,494 1,338,829
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Commitments and contingencies (Note 8)
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SHAREHOLDERS' EQUITY
Common stock: $0.01 par value; authorized: 50,000,000 shares; issued
and outstanding: 20,390,256 at September 30, 2003 and 19,275,211 at
March 31, 2003 203,903 192,752
Additional paid-in capital 67,535,476 66,163,351
Accumulated other comprehensive loss (78,039) (93,306)
Notes receivable - related parties (53,068) (91,281)
Accumulated deficit (64,690,567) (62,861,789)
------------ ------------
Total shareholders' equity 2,917,705 3,309,727
------------ ------------
Total liabilities and shareholders' equity $ 3,440,199 $ 4,648,556
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See accompanying notes to consolidated financial statements.
3
SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(unaudited)
Three Months Ended Six Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenues: $ 373,172 $ 295,188 $ 726,834 $ 655,167
Cost of revenue: 63,124 108,644 145,512 180,354
------------ ------------ ------------ ------------
Gross profit 310,048 186,544 581,322 474,813
Operating expenses:
Research and development 150,955 155,909 312,632 380,763
Sales and marketing 159,000 218,889 346,288 492,629
General and administrative 200,325 1,033,693 453,931 1,548,314
Depreciation and amortization 53,308 331,754 108,266 665,029
Stock, option and warrant expense 914,727 1,867 1,293,377 22,921
------------ ------------ ------------ ------------
Total operating expenses 1,478,315 1,742,112 2,514,494 3,109,656
------------ ------------ ------------ ------------
Operating loss from continuing
operations (1,168,267) (1,555,568) (1,933,172) (2,634,843)
Other income (expense) 2,082 92,370 (1,447) 197,754
------------ ------------ ------------ ------------
Loss from continuing operations (1,166,185) (1,463,198) (1,934,619) (2,437,089)
Income from discontinued operations 10,108 234,047 105,834 173,381
------------ ------------ ------------ ------------
Net loss (1,156,077) (1,229,151) (1,828,785) (2,263,708)
Other comprehensive income (loss) -
Translation adjustment 294 (11,944) 15,267 2,287
------------ ------------ ------------ ------------
Comprehensive loss $ (1,155,783) $ (1,241,095) $ (1,813,518) $ (2,261,421)
============ ============ ============ ============
Net loss per common share:
Basic $ (0.06) $ (0.07) $ (0.09) $ (0.13)
Diluted $ (0.06) $ (0.07) $ (0.09) $ (0.13)
Weighted average shares used in per
share calculation, basic and diluted 20,225,139 17,802,122 19,980,964 17,591,807
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
4
SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended
September 30,
---------------------------------
2003 2002
------------ ------------
Cash flows from operating activities:
Net loss $ (1,828,785) $ (2,263,708)
(Income) from discontinued operations (105,834) (173,381)
------------ ------------
Loss from continuing operations (1,934,619) (2,437,089)
Foreign currency translation adjustment 15,267 2,287
Adjustments to reconcile net loss from continuing operations to
net cash used in operating activities from continuing operations:
Depreciation and amortization 108,266 665,029
Compensation expense related to stock and stock options issued
for services 1,293,377 22,921
Amortization of advances on technology sales -- (140,244)
Amortization of notes receivable 38,213 556,357
Net gain from disposition of assets (3,616) --
Non-cash settlement of liabilities 44,580 41,780
Changes in assets and liabilities:
Accounts and other receivables (45,223) 5,474
Prepaid expenses and other assets (5,027) 62,587
Accounts payable (151,239) 148,545
Accrued liabilities 24,227 (99,805)
Deferred revenue 29,947 (49,606)
Advances on technology sales -- 6,882
------------ ------------
Net cash used in operating activities (585,847) (1,214,882)
------------ ------------
Cash flows from investing activities:
Acquisition of property & equipment -- (16,358)
------------ ------------
Net cash used in investing activities -- (16,358)
------------ ------------
Cash flows from financing activities:
Repayments of notes payable (34,299) (11,881)
Repayments of capital lease obligations (6,476) (8,497)
Proceeds from exercise of options and warrants 124,778 --
------------ ------------
Net cash provided by (used in) financing activities 84,003 (20,378)
------------ ------------
Net cash provided by (used in) discontinued operations 77,572 (41,515)
Net decrease in cash and cash equivalents (424,272) (1,293,133)
Cash and cash equivalents, beginning of period 1,969,910 4,070,642
------------ ------------
Cash and cash equivalents, end of period $ 1,545,638 $ 2,777,509
============ ============
See accompanying notes to consolidated financial statements.
5
SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(unaudited)
Six Months Ended
September 30,
------------------------------
2003 2002
------------ ------------
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest $ 7,296 $ 19,394
============ ============
Cash paid for income taxes $ -- $ 1,981
============ ============
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 $ 1,262,562 $ --
============ ============
Common stock issued for services $ -- $ 22,921
============ ============
Common stock issued for liabilities $ 44,580 $ 41,780
============ ============
See accompanying notes to consolidated financial statements.
6
SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BUSINESS OF THE COMPANY:
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 and efficiency and improves
profitability.
For more information please go to our website at http://www.semotus.com.
2. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Semotus Solutions, Inc. and its subsidiaries. The consolidated balance sheet as
of September 30, 2003, the consolidated statements of operations and
comprehensive loss for the three and six month periods ended September 30, 2003
and 2002, and the consolidated statements of cash flows for the six months ended
September 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 and six month periods ended September 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 operations have also been discontinued as of September 30,
2003. 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 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 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.Adoption of EITF 00-21 did not have a material impact 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 has not had 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 September 30, 2003, the Company does not have any variable interest entities.
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 instruments 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
7
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 and otherwise is effective as of the beginning of the first
interim period beginning after June 15, 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. As of September 30,
2003, the adoption of SFAS No. 150 has not had a material impact on the
Company's results of operations or financial condition.
4. OTHER INCOME
In the three and six months ended September 30, 2002 Other income is
substantially comprised of 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. For the three and six months ended September 30, 2003, other
income and expense is primarily the net of interest income and interest expense.
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 or greater
than 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, "Accounting for Certain Transactions Involving
Stock Compensation", and accordingly, compensation expense was recorded in the
three and six months ended September 30, 2003, 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 loss and per share 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 SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
2003 2002 2003 2002
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Net loss, as reported $ (1,156,077) $ (1,229,151) $ (1,828,785) $ (2,263,708)
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Add: Total stock-based employee compensation expense
determined under intrinsic value based method for all
awards and variable accounting for repriced options 914,727 -- 1,262,562 --
-------------------------------------------------------------------------------------------------------------------------------
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards (95,103) (7,700) (126,242) (13,664)
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Pro forma net loss (336,453) (1,236,850) (692,465) (2,277,372)
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Net loss per share:
Basic - as reported $ (0.06) $ (0.07) $ (0.09) $ (0.13)
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Basic - pro forma $ (0.02) $ (0.07) $ (0.03) $ (0.13)
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Diluted - as reported $ (0.06) $ (0.07) $ (0.09) $ (0.13)
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Diluted - pro forma $ (0.02) $ (0.07) $ (0.03) $ (0.13)
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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.
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 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 and six months ended September 30, 2003 and 2002, 4,357,479
potential shares and 7,174,563 potential shares, respectively, were excluded
from the shares used to calculate diluted EPS as their effect is anti-dilutive.
8
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.
WizShop's operations were also discontinued as of September 30, 2003, as it was
not expected to make a significant contribution to the Company's future
profitability since WizShop does not have any additional contracts for its
online software marketing business, the last of which was completed as of March
31, 2003.
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 event
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, ADA and WizShop have been
recorded as discontinued operations in the three and six month periods ended
September 30, 2003 and 2002. In the 2003 fiscal year, the net income from
discontinued operations of $10,108 and $105,834 in the three and six months
ended September 30, 2003 is comprised solely of the operations of WizShop.
Substantially all of the income was from a legal settlement. The net income from
discontinued operations of $234,047 and $173,381 for the three and six months
ended September 30, 2002 consisted of a net loss from operations in the three
and six months ended September 30, 2002 of $4,935 and $127,770 respectively at
Five Star, net income from operations of $ 2,225 and $7,004 respectively at
Wares, a net loss from operations of $543 and $22,375 respectively at ADA and
net income of $237,300 and $316,522 respectively at WizShop. A net gain upon
disposition of the assets and liabilities of Five Star and Wares of $128,582 was
recognized at March 31, 2003.
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. In light of the reductions in work force and salary reductions, the
Board of Directors deemed it advisable to reprice the options to provide a
retention incentive for the remaining 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 $914,727 and $1,262,562 was required to be
recognized in the three months and six months ended September 30, 2003
respectively, and expense will be recognized in the future if the stock price
continues to be above the revised exercise price of the options.
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.
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.
9
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 $1,156,077 from $1,229,151 and to $0.06 per share from $0.07 per
share in the three months ended September 30, 2003 versus 2002. Also, the net
loss declined to $1,828,785 or $0.09 per share from $2,263,708 or $0.13 per
share for the six months ended September 30, 2003 versus 2002. Likewise, the
overall cash decline was reduced to $424,272 from $1,293,133 in the six months
ended September 30, 2003 versus 2002.
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2003 AND
2002
REVENUES
Revenues for the three and six months ended September 30, 2003 were $373,172 and
$726,834, respectively, as compared to $295,188 and $655,167, respectively, for
the three and six months ended September 30, 2002.
The 26% and 11% increase in revenue for the three and six months ended September
30, 2003 as compared to 2002 is largely due to moderate increases in sales of
Semotus' wireless products and services: the Global Market Pro family of
products and the HipLink family of products. Semotus has experienced some sales
increases as corporate capital spending is recovering in calendar 2003.
COST OF REVENUES AND GROSS MARGIN
The overall gross profit margin increased to 83% and 80% in the three and six
months ended September 30, 2003 from 63% and 72% in the same periods ended
September 30, 2002. The increase is the result of continuing improvements in the
reduction of costs and low variable costs for the wireless and mobile enterprise
software products. The cost of sales consists mainly of network, airtime and
data feed charges.
OPERATING EXPENSES
Operating expenses declined overall in the three and six month periods ended
September 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):
Three Months Ended Six Months Ended
September 30, September 30,
----------------------------------------------------------------------------------------------
Description 2003 2002 2003 2002
---------- ---------- ---------- ----------
Research and development $ 150,955 $ 155,909 $ 312,632 $ 380,763
----------------------------------------------------------------------------------------------
Sales and marketing 159,000 218,889 346,288 492,629
----------------------------------------------------------------------------------------------
General and administrative 200,325 1,033,693 453,931 1,548,314
----------------------------------------------------------------------------------------------
Depreciation and amortization 53,308 331,754 108,266 665,029
----------------------------------------------------------------------------------------------
Stock, option and warrant expense 914,727 1,867 1,293,377 22,921
---------- ---------- ---------- ----------
Total $1,478,315 $1,742,112 $2,514,494 $3,109,656
----------------------------------------------------------------------------------------------
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 and HiplinkXS product lines have 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
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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, business development consulting, rent, administrative personnel, and
other overhead related costs. This category also includes the costs associated
with being a publicly traded company, including the costs of the AMEX listings,
SEC filings, investor and public relations. These costs declined substantially
during the three and six months ended September 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 and six months ended September 30, 2003 versus 2002 is as a result of the
full amortization of the GMP asset in fiscal year 2003, and from the decline in
capital spending on depreciable assets 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, legal and business development 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. 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
increases in the fair value of the Company's common stock. $914,727 and
$1,262,562, respectively, in compensation expense was required to be recognized
in the three and six months ended September 30, 2003; no compensation expense
for variable stock options was required to be recognized in the three and six
months ended September 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 and six months ended September
30, 2003 are primarily interest income from invested cash and interest expense
from notes payable (see Note 4, "Other Income"). For the three and six months
ended September 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 and six month periods ended September 30, 2003 versus 2002 as Semotus
continues with operating losses. The interest expense from notes payable
resulted in a net expense for the six months ended September 30, 2003. Another
factor was 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 decrease in comprehensive loss of $1,155,783 or $0.06 per share, and
$1,813,518 or $0.09 per share for the three and six months ended September 30,
2003, respectively, compared to $1,241,095 or $0.07 per share, and $2,261,421 or
$0.13 per share for the three months ended September 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 six month period ended September 30, 2003,
versus 2002. The sources and uses of cash are summarized as follows (unaudited):
SIX MONTHS ENDED
SEPTEMBER 30,
-----------------------------------------------------------------------------------------------
2003 2002
------------ ------------
Cash used in operating activities $ (585,847) $ (1,214,882)
Cash used in investing activities -- (16,358)
Cash provided by (used in) financing activities 84,003 (20,378)
Net cash provided by (used in) discontinued operations 77,572 (41,515)
------------ ------------
Net decrease in cash and cash equivalents $ (424,272) $ (1,293,133)
============ ============
-----------------------------------------------------------------------------------------------
11
Cash used in operating activities consisted principally of a net loss of
$1,828,785 offset by $1,293,377 of stock based compensation, and somewhat offset
by non-cash charges of $108,266 of depreciation and amortization, and $38,213 of
amortization of notes receivable. Additional non-cash income of $105,834 was
contributed by discontinued operations. Other operating activities that
contributed to the use of cash were $147,315 in the net change of current assets
and current liabilities. This largely resulted from decreases in accounts
payable $151,239 offset somewhat by increases in accrued liabilities and
deferred revenue of $24,227 and $29,947 respectively, and an increase in
accounts receivable of $45,223.
There was no cash used in investing activities for the six months ended
September 30, 2003. Cash used in investing activities for the six months ended
September 30, 2002 consisted principally of the acquisition of property and
equipment.
Cash flows from financing activities produced a net increase in cash of $84,003,
which resulted primarily from the exercise of stock options, offset slightly
from repayments on notes payable and capital leases.
Net cash provided by discontinued operations of $77,572 is primarily from the
operations of WizShop, Inc.
As of September 30, 2003, the Company had cash and cash equivalents amounting to
$1,545,638, a decrease of $424,272 from the balance at March 31, 2003. Working
capital decreased to $1,252,341 at September 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 September 30, 2003.
Management believes that it has adequate working capital for the next 12 months.
RECENT PRONOUNCEMENTS:
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 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. Adoption of EITF 00-21 did not have a material impact 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 has not had 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 September 30, 2003, the Company does not have any variable interest entities.
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 instruments 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. As of September 30, 2003, the adoption of SFAS No. 150 has
not had 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 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
12
statements. Such risks, uncertainties and assumptions include, but are not
limited to, our limited operating history, our historical losses, our reduced
capital resources, 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 September 30, 2003, we had cash and cash equivalents of
$1,545,638. 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 $21,925, at
September 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 September 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 September 30,
2003, the cumulative translation loss was $78,039. 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 September 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 may seek to limit or hedge the exposure.
ITEM 4. CONTROLS AND PROCEDURES
a) Evaluation of disclosure controls and procedures. As of the end of the
Company's most recently completed fiscal quarter covered by this report, the
Company carried out an evaluation, with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the Company's disclosure controls and
procedures pursuant to Securities Exchange Act Rule 13a-15. Based upon that
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective in
ensuring that information required to be disclosed by the Company in the reports
that it files or submits under the Securities Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the
SEC's rules and forms.
b) Changes in internal controls. There have been no changes in the Company's
internal controls over financial reporting that occurred during the Company's
last fiscal quarter to which this report relates that have materially affected,
or are reasonably likely to materially affect, the Company's internal control
over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company issued securities, which were not registered under the Securities
Act of 1933, as amended, as follows:
During the Quarter ended September 30, 2003, the Company issued 89,282 shares of
common stock to two third-party vendors in order to settle certain outstanding
payables.
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.
We held our Annual Meeting of Stockholders on September 25, 2003, for the
purpose of (1) electing four directors, and (2) ratifying the appointment of
Burr, Pilger & Mayer LLP as the Company's independent accountants for the fiscal
year ending March 31, 2004. The following summarizes the voting results:
13
ITEM (1). Stockholders elected Anthony N. LaPine, Robert Lanz, Mark Williams and
Laurence Murray each until the next Annual Meeting of Stockholders or until
their successors have been duly elected and qualified. The vote for each
director was as follows:
------------------------------------ ---------------------- ------------------------ ------------------------
DIRECTORS VOTES FOR % OF SHARES VOTED VOTES WITHHELD
------------------------------------ ---------------------- ------------------------ ------------------------
Anthony N. LaPine 16,818,857 99.3% 117,129
------------------------------------ ---------------------- ------------------------ ------------------------
Robert Lanz 16,801,907 99.2% 134,079
------------------------------------ ---------------------- ------------------------ ------------------------
Mark Williams 16,801,867 99.2% 134,119
------------------------------------ ---------------------- ------------------------ ------------------------
Laurence Murray 16,791,472 99.1% 144,514
------------------------------------ ---------------------- ------------------------ ------------------------
ITEM (2). The appointment of Burr, Pilger & Mayer LLP as the Company's
independent accountants for the fiscal year ending March 31, 2004 was approved.
------------------------ ---------------------------------------- ------------------ ------------------------
VOTES FOR % OF SHARES VOTED VOTES AGAINST VOTES ABSTAINED
------------------------ ---------------------------------------- ------------------ ------------------------
16,854,040 99.5% 29,529 52,417
------------------------ ---------------------------------------- ------------------ ------------------------
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits
31.1 Certification pursuant to 17 C.F.R. ss.240.15d-14(a) for Anthony N.
LaPine.
31.2 Certification pursuant to 17 C.F.R. ss.240.15d-14(a) for Charles K.
Dargan, II.
32.1 Certification pursuant to 18 U.S.C. ss.1350 for Anthony N. LaPine.
32.2 Certification pursuant to 18 U.S.C. ss.1350 for Charles K. Dargan, II.
b) Reports on Form 8-K:
The Company filed two Current Reports on Form 8-K during this quarter. On July
1, 2003 a Form 8-K was filed pursuant to Item 7 and Item 9 with respect to the
Company's financial results for the fiscal year ended March 31, 2003. On August
15, 2003 a Form 8-K was filed pursuant to Item 7 and Item 9 with respect to the
Company's financial results for the first quarter ended June 30, 2003.
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: NOVEMBER 14, 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