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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: March 31, 2002
Commission file number: 1-15569
SEMOTUS SOLUTIONS, INC.
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(Exact name or Registrant as specified in its Charter)
Nevada 36-3574355
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1735 Technology Drive, Suite 790, San Jose, California 95110
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(Address of principal executive offices, including zip code)
(408) 367-1700
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(Registrant's telephone number)
Securities Registered Pursuant to Section 12(b) of the Act:
Common Stock, $0.01 Par Value
Securities Registered Pursuant to Section 12(g) of the Act: None.
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 [ ]
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
is not contained in this form, and no disclosure will be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The Registrant's revenues for its most recent fiscal year were $6,107,095.
As of June 20, 2002, 17,243,723 shares of the Registrant's Common Stock were
outstanding, and the aggregate market value of the shares held by non-affiliates
was approximately $5,680,000.
DOCUMENTS INCORPORATED BY REFERENCE: Proxy Statement for Annual Meeting of
Shareholders to be held on September 17, 2002.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
SEMOTUS SOLUTIONS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED MARCH 31, 2002
INDEX
PAGE
----
PART I
Item 1 Business.................................................... 2
Item 2 Properties.................................................. 15
Item 3 Legal Proceedings........................................... 16
Item 4 Submission of Matters to a Vote of Security Holders......... 16
PART II
Item 5 Market for the Company's Common Equity and Related Security
Holder Matters.............................................. 16
Item 6 Selected Financial Data..................................... 18
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 18
Item 7A Quantitative and Qualitative Disclosures About Market
Risk........................................................ 30
Item 8 Financial Statements and Supplementary Data................. 31
Item 9 Change In and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 31
PART III
Item 10 Directors and Executive Officers of the Registrant.......... 31
Item 11 Executive Compensation...................................... 31
Item 12 Security Ownership of Certain Beneficial Owners and
Management.................................................. 31
Item 13 Certain Relationships and Related Transactions.............. 31
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 31
THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. WHEN USED HEREIN, THE WORDS ANTICIPATE, BELIEVE,
ESTIMATE, INTEND, MAY, WILL, AND EXPECT AND SIMILAR EXPRESSIONS AS THEY RELATE
TO SEMOTUS SOLUTIONS, INC. (SEMOTUS OR COMPANY) OR ITS MANAGEMENT ARE INTENDED
TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY'S ACTUAL RESULTS,
PERFORMANCE OR ACHIEVEMENTS COULD DIFFER MATERIALLY FROM THE RESULTS EXPRESSED
IN, OR IMPLIED BY, THESE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE DISCUSSED IN MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND
BUSINESS. SEMOTUS UNDERTAKES NO OBLIGATION TO UPDATE OR REVISE ANY
FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE
EVENTS OR OTHERWISE.
PART 1
ITEM 1. DESCRIPTION OF BUSINESS.
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.
RECENT DEVELOPMENTS
Centralization and Consolidation Plan
At the end of this fiscal year 2002, Semotus determined that the economy would
continue in a weak recovery and that the market for technology products would
stay anemic. Accordingly, the Company has centralized and consolidated its
organization and its operations. The headcount has been reduced 51% from March
31, 2001 and as a result, engineering, sales and marketing and administrative
costs have been reduced and centralized. The overall Semotus organization has
eliminated redundant positions and functions while improving the sales effort
through utilizing existing customer relationships to shorten the sales cycle.
Semotus has organized its operations around two core lines of business, while
maintaining but de-emphasizing its other operations: i) financial services with
the Global Market Pro and Equity Market Pro products and services and ii)
workforce automation with the HiplinkXS family of products and services. These
products maintain high gross and operating margins and form the core of the
enterprise software marketing strategy with wireless and mobile features
available in the software.
Logistic systems, largely Application Design Associates, Inc.'s (ADA's) products
and services, continue as part of Semotus' wireless and mobile strategy. ADA
develops and licenses proprietary software that gives enterprises a total
solution for automation of customer call centers, dispatching, equipment
deployment, servicing and invoicing while interfacing with existing corporate
business functions and ERP solutions. This field force automation software
provides Semotus with a unique platform for its wireless productivity
enhancement tools such as Hiplink. In January 2002, Global Beverage Group (GBG),
a Canadian-based direct store delivery consortium, completed a strategic
investment in ADA and is now a 49% shareholder in ADA (see "Significant
Events").
As for Semotus' other segments, professional services and the enterprise and
commerce segment, certain of the operations have been further consolidated and
reduced through the elimination of unprofitable contracts and services. In
professional services, Simkin's Kinetidex 2.0 product was sold to the joint
developer and exclusive distributor of the product, Micromedex, Inc. Wireless
medical software products have been slow to penetrate the market and therefore
have been eliminated by Semotus. Simkin maintains modest amounts of business
through continuing software training and some replacement software sales.
Unprofitable professional service contracts at Wares On the Web have also been
eliminated. However, Wares continues one significant contract with a sports
product distributor that emphasizes web site development and online sales.
M-commerce initiatives have been reduced. The e-commerce economy has contracted
and m-commerce is not expected to make a significant contribution in the market
in the near future. Consequently, Semotus has reduced its e-commerce and
m-commerce business with the reduction of unprofitable products and services in
that segment. At Wares on the Web, one e-commerce customer remains and at
WizShop, while there is still some small monthly sponsorship and advertising
revenue, the operations have been largely consolidated into Semotus' other
divisions and subsidiaries. At the end of June, FiveStar's operations will be
closed as the market for e-fulfillment is currently unprofitable. So while
Semotus maintains a reduced m-commerce and e-commerce presence, it has
de-emphasized the e-fulfillment portion of that business. (See "Significant
Events".)
SIGNIFICANT EVENTS
Semotus acquired WizShop.com, Inc. on May 7, 2001. WizShop builds and maintains
outsourced e-commerce environments, as well as creates online sales and
merchandising programs for its clients through its sales and marketing
initiatives. As of the end of this fiscal year, the e-commerce market had
declined significantly and most of WizShop's operations have been absorbed and
consolidated. Semotus has decided to de-emphasize the e-commerce and m-commerce
business.
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On May 15, 2001, Semotus completed the acquisition of Application Design
Associates, Inc. (ADA). On January 18, 2002, GBG became a 49% investor in ADA.
In April 2003, GBG has the option to purchase Semotus' 51% ownership of ADA.
(See Note 25 to the Financial Statements, "Strategic Investment in ADA"). Global
Beverage Group's suite of products is designed to streamline the entire
order-to-cash cycle for wholesalers that provide direct delivery of products to
stores, offices and homes. GBG's solutions are designed to handle complex order
management, customer service and distribution logistics such as
direct-store-delivery, direct-home-delivery, mobile workforce and vendor managed
inventory.
In May 2002, the Board of Directors of Semotus determined that the Company
needed to focus its operations on its core enterprise software products. (See
"Centralization and Consolidation Plan"). Given the continued economic recession
and limited capital spending, as well as the reduced access to capital, the
Company must economically utilize its limited resources towards those products
with the best margins and cash flow generation. As part of that effort, Semotus
has decided to reduce its e-commerce operations and to close the FiveStar
business as of the end of June 2002. While maintaining a reduced m-commerce and
e-commerce presence, Semotus has de-emphasized the e-fulfillment portion of that
business as the e-fulfillment markets have declined dramatically over the past
year and are not expected to recover significantly in the near future.
Accordingly, Semotus is redirecting its human and capital resources towards more
profitable products and services.
DESCRIPTION OF BUSINESS
Except for the historical information contained herein, this report contains
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ materially from those discussed herein. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed in this section under "Description of Business", "Recent
Acquisitions" and "Risk Factors" as well as in the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
OVERVIEW
Semotus focuses its enterprise application software strategy in target markets
where there are significant growth opportunities and an existing strong customer
base that is adopting mobile and wireless technology. Customer penetration and
product acceptance are paramount to the Semotus formula. While the Company
continues to improve and maintain its market leading technology, Semotus molds
its products for market acceptance. Through strong customer relationships and
market knowledge, Semotus blends its technology into readily identifiable and
sellable products and services.
TARGET MARKETS
Enterprises are adopting mobile and wireless software solutions in order to
increase their employees' productivity and customer satisfaction. Semotus'
technology can service any enterprise in any market segment; however, the
Company has chosen to focus in two areas that the Company believes project the
greatest amount of growth potential and the strongest need for mobile and
wireless solutions. Those segments are: field and automation services and
financial services.
FIELD AND AUTOMATION SERVICES (WORKFORCE AUTOMATION): Semotus addresses the
needs of enterprises with large numbers of employees in the field by providing
complete solutions that assist field service organizations with routing and
dispatching, communications, order status, access to corporate databases and
customer billing. By having remote access to technical information, inventory
status and corporate databases, the field service worker's productivity
increases. Therefore mobile and wireless software solutions are becoming a
critical component of many enterprises today.
FINANCIAL SERVICES: Mobile and wireless software services, handheld devices, and
financial management applications are now standard on the floors of stock
exchanges. Wireless data delivery can put the individual traders one step ahead
of the market, increasing their transaction time and giving them a competitive
advantage. It is for this reason that Semotus developed Global Market Pro(TM)
with J.P. Morgan Chase. Global Market Pro is an advanced wireless application
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designed specifically for traders and financial professionals in the global
capital, derivative and foreign exchange markets. A new product, the Equity
Market Pro, was developed from the GMP platform and is designed for equity
traders and salesmen who have a real-time need for equity market information.
The Equity Market Pro is marketed to the same financial institutions as the
Global Market Pro.
SERVICES AND PRODUCTS
In fiscal year 2002, Semotus offered its services and products through its four
major lines of business: (i)enterprise application software, (ii) enterprise and
commerce sales (iii) professional and related services and (iv) logistic
systems. At the end of the fiscal year, Semotus determined to centralize and
consolidate its operations into the enterprise application software and logistic
systems businesses (See "Centralization and Consolidation Plan").
Enterprise Application Software
Enterprise application software connects employees to critical business systems,
information, and processes. It helps mobile employees make better and faster
decisions, increase customer satisfaction, and improve efficiencies in their
business processes for shorter sales and service cycles through the immediate
access to mission critical information in a mobile environment. The Company
creates mobile and wireless information products by customizing and delivering
actionable and time sensitive information whenever that information is most
valuable to the customer. Services and applications are device agnostic and
protocol independent, integrating seamlessly into every enterprise
infrastructure and working with every wireless carrier and all text messaging
devices. Semotus provides two different wireless solutions: (i) ASP-based, where
Semotus hosts and manages the information on its servers and (ii) premise based
where Semotus installs and engineers the software and information on the
customer's servers.
Global Market Pro
Global Market Pro(TM), is a wireless application designed for traders and
financial professionals in the global capital, derivative and foreign exchange
markets. Semotus developed Global Market Pro in cooperation with J.P. Morgan
Chase Manhattan Bank's Global Markets Data Division. The application is being
marketed to the trading and professional finance industry, where it is highly
adaptable to a variety of wireless platforms. In addition, Global Market Pro is
capable of advanced customization based on the unique preferences of each
individual.
Global Market Pro provides real-time financial data from leading news and
information sources, including Reuters, Market News International and GovPX.
This product has been engineered for all device platforms including, RIM
Interactive 957, two-way pagers, WAP phones and the Palm VII. The application
features a portfolio customization Web site interface, allowing users to set
event or time driven push alerts based on specific criteria or establish custom
portfolios for real-time on-demand data requests. Semotus is continuing to
expand the product's features and capabilities.
Equity Market Pro
Equity Market Pro is an enterprise application built for the institutional
equity trader using the Global Market Pro financial platform; Semotus developed
EMPro with the same customization capability and is deploying EMPro using its
new over-the-air-programming technology (OTAP). Equity Market Pro is designed
for the secure delivery of real-time financial information and news. EMPro
features Dow Jones News ServiceSM as its premier news source. Market data for
EMPro is sourced from Reuters and GovPX.
Equity Market Pro is targeted to the over 400,000 Institutional professionals
who use real-time equity data at a workstation and will be sold to institutions
for their employees. All data provided through EMPro is completely customizable
providing information specific to each trader's needs. Features included the
ability to create and track an unlimited number of watch lists for either push
or pull delivery, snap quotes, charts and graphs, corporate profiles, symbol
lookup, indices, and world composite data. EMPro monitors any security or market
indicator in real-time and sends out a wireless alert when pre-set values have
been reached.
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Hiplink
As part of its expanding enterprise application technology and product
offerings, Semotus launched a newly upgraded Hiplink product called HiplinkXS in
July of 2001. HiplinkXS is an enterprise messaging software solution that
enables delivery of critical message delivery to and from the field with the
customer's choice of carriers and devices. This innovative software solution
enables employees and customers to remain connected and capable of receiving
mission-critical business notifications, while improving employee accuracy and
reliability. Users can send messages and request a response back from the
receiver, with the ability to trigger server processes based on the response
from the two-way device. HipLinkXS supports virtually any wireless device for
secure, reliable, two-way communications via a single integration point,
providing turnkey access to wireless carriers around the world.
The HipLink solution supports both UNIX and NT and is scalable and configurable
to the specific requirements of the enterprise customer. The software functions
in the mission critical environment of enterprise messaging including wireless
applications for network management messaging and monitoring, field work force
communications, help desk operations and Internet messaging and monitoring.
Legacy Financial Consumer Products
Semotus continues to offer a suite of wireless financial consumer products.
These products allow customers to retrieve customized information from real-time
data feeds, receive and send messages and other information, as well as set
their own parameters for real-time data they wish to receive. Semotus' current
line of financial consumer products is mostly comprised of QuoteXpress(R), and
SplitXpress(TM)
Enterprise and Commerce Sales
Semotus' enterprise and commerce line of business provides online transactional
information and sales of products and services. The online services include web
site development and maintenance, sales, marketing, customer retention programs
and services, logistics, distribution, and tracking and reporting. In essence,
Semotus can take care of all of a customer's online requirements from building a
web presence to sales of products to collections and cash management. Semotus
uses the enterprise and commerce business to add-on wireless products such as
alerts to wireless devices, comparative data information and real time
messaging.
In May 2002, the Board of Directors of Semotus determined that the Company
needed to focus its operations on its core enterprise software products. (See
"Centralization and Consolidation Plan"). Given the continued economic recession
and limited capital spending, as well as the reduced access to capital, the
Company must economically utilize its limited resources towards those products
with the best margins and cash flow generation. As part of that effort, Semotus
has decided to reduce its e-commerce operations and to close the FiveStar
business as of the end of June 2002. While maintaining a reduced m-commerce and
e-commerce presence, Semotus has de-emphasized the e-fulfillment portion of that
business as the e-fulfillment markets have declined dramatically over the past
year and are not expected to recover significantly in the near future.
Accordingly, Semotus is redirecting its human and capital resources towards more
profitable products and services.
Professional and Related Services
Semotus' professional service line of business provides customers with online
and wireless information and operations consulting, software engineering, and
training. This line of business provides the software tools and management to
install and efficiently run online and wireless operations. Certain professional
service contracts at Wares have been discontinued that were becoming
unprofitable. As well, Semotus sold Simkin's Kinetidex 2.0 product to the joint
developer and exclusive distributor of the product, Micromedex, Inc. Wireless
medical software products have been slow to penetrate the market and therefore
have been eliminated by Semotus. Simkin maintains modest amounts of business
through continuing software training and some replacement software sales.
Unprofitable professional service contracts at Wares On the Web have also been
eliminated. However, Wares continues one significant contract with a sports
product distributor that emphasizes web site development and online sales.
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Profitable services and applications are being continued through the two core
lines of business of financial services and workforce automation.
Logistic Systems
Through Semotus' ADA subsidiary, the Company creates proprietary software and
integrates it with other hardware and software products to produce a complete
logistical solution for automation of customer call centers, dispatching,
equipment deployment, servicing and invoicing, while interfacing to existing
corporate business functions and existing ERP solutions.
As part of the system integration function, ADA resells Hiplink software and
services among other mobile products. ADA's largest customers are in the soft
drink beverage industry.
STRATEGIC RELATIONSHIPS
Semotus maintains strategic relationships with wireless and technology companies
in order to further develop its services and product offerings. Maintaining
market leading technology is a difficult task; however, Semotus believes that it
continues to produce new software and engineered products that are leading the
mobile and wireless market. The key relationships for Semotus are with carriers,
device manufacturers, software companies, computer companies, and content
providers.
The carriers include: BellSouth, AT&T, MCI WorldCom, Sprint PCS, Nextel, Cable &
Wireless, Arch Communications Pagenet and Skytel.
The device manufacturers include: Nokia, Ericsson, Motorola, RIM, Palm
Computing, and Handspring.
The software companies include: SAP America, Microsoft and Checkpoint.
The computer companies include: IBM, Hewlett Packard, Unisys and Sun
Microsystems.
The content providers include: Reuters, Dow Jones and GovPX.
CUSTOMERS
Semotus has a very diversified customer list. Although Semotus has many
customers utilizing its mobile and wireless services, the broadly diversified
base means there is no significant concentration in any industry. In the fiscal
year ended March 31, 2002, there were three customers accounting for over 5% of
the Company's revenues. One customer in the wireless services segment accounted
for 6% of revenues, one customer in the logistic systems segment accounted for
8% of revenues and one customer in the enterprise and commerce segment accounted
for 17% of revenues. None of these customers accounts for any significant
accounts receivable at March 31, 2002.
VENDORS
Semotus maintains strong relationships with all of the major telecommunications
carriers, content providers and hardware manufacturers for its wireless and
e-commerce products and services. The Company is not dependent upon any one
carrier, content provider or hardware manufacturer for its business, nor is its
business affected by any of the current financial problems experienced by
certain telecommunication equipment and service providers.
COMPETITION
Semotus is participating in the highly competitive businesses of enterprise
application software, mobile and wireless telecommunications, systems
integration and professional services. The competition is from a broad range of
both large and small domestic and international corporations. Some of the
Company's competitors have far greater financial, technical and marketing
resources than the Company.
The competitive factors important to Semotus are its technology, its engineering
expertise and its customer relationships. Business segment and industry
competitive factors include, but are not limited to, technology, engineering
capability, breadth and depth of strategic relationships, financial condition,
7
and marketing initiatives. The Company leverages the quality of its engineering
team, the depth and breadth of its customer relationships, and its ability to
respond quickly to change in order to be competitive and successful.
RESEARCH AND DEVELOPMENT
Semotus maintains its research and development operations in Vancouver, B.C. and
has engineering and development personnel in Englewood, Colorado at its ADA
subsidiary. As of March 31, 2002, Semotus employed 20 personnel in research and
development and engineering. The Company finds it advantageous to have its
research and development activities in Vancouver due to the abundance of
available, affordable and talented software engineers. Total costs incurred in
research and development amounted to $1,475,063, $1,228,139 and $600,957
respectively, in the years ended March 31, 2002, 2001 and 2000.
INTELLECTUAL PROPERTY
Semotus protects its significant intellectual property holdings with patents
related to its business, creating an entry barrier to any potential competition.
Additionally, Semotus relies on contractual restrictions, copyright, trademark,
and trade secret laws to protect its intellectual properties. Most competing
technologies lack the strong patent protection that Semotus has. The Company has
a total of eight issued patents as of March 31 2002, as follows:
Interactive Two-Way Pager System #5,838,252
Divisional Case #6,049,291
Pager Enhanced Keyboard and system #5,964,833
Divisional Case #6,085,232
System and Method for a Real-Time Data Stream
Analyzer and Alert System #5,872,921
Virtual Transcription System #5,875,436
Mail Alert System #6,035,104
Alphanumeric Paging System Operating on the
Internet #6,040,784
Semotus also has 7 patents pending. Semotus has had its intellectual property
reviewed by an outside consultant firm, and the Company believes that it has
additional significant intellectual property, giving it the ability to file for
at least another 15 patents.
EMPLOYEES
At March 31, 2002, the Company had 48 full-time employees and 3 part-time
employees, approximately 15 of who were engaged in sales and marketing, 16 in
finance and administration, and 20 in engineering. No employees of the Company
are covered by a collective bargaining agreement.
RISK FACTORS
Our business and the results of our operations are affected by a variety of risk
factors, including those described below.
RISKS PARTICULAR TO SEMOTUS
WE HAVE HISTORICALLY INCURRED LOSSES AND THESE LOSSES ARE EXPECTED TO CONTINUE
IN THE FUTURE.
We recorded a net loss for each year since our current business started in 1996
through our fiscal year ended March 31, 2002. As of March 31, 2002, we
had an accumulated deficit of approximately $59,429,439 million. Because we
expect to continue to incur significant sales and marketing, systems development
and administrative expenses, we will need to generate significant revenue to
become profitable and sustain profitability on a quarterly or annual basis. We
may not achieve or sustain our revenue or profit goals and our losses may
continue or grow in the future. As a result, we may not be able to increase
revenue or achieve profitability on a quarterly or annual basis.
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OUR FUTURE REVENUES AND OPERATING RESULTS ARE DEPENDENT TO A LARGE EXTENT UPON
GENERAL ECONOMIC CONDITIONS, CONDITIONS IN THE WIRELESS SERVICES MARKET AND
CONDITIONS IN OUR PRIMARY TARGET MARKETS.
Our future revenues and operating results are dependent to a large extent upon
general economic conditions, conditions in the wireless market and within that
market, our primary target markets of financial services and field and
automation services. As economic activity slowed in these markets during 2001,
our sales cycle began to lengthen significantly as existing and potential
customers began to reduce their spending commitments, deferring wireless
projects and reducing their willingness to make investments in new wireless
services. Moreover, adoption of wireless services has not proceeded as rapidly
as previously anticipated. As a result of these factors, our revenues began to
decline in 2001. If general economic conditions continue to be adverse, if the
economies in which our target customers are located suffer from a recession, or
if demand for our solutions does not expand, our ability to increase our
customer base may be limited, and our revenue may decrease.
OUR ACQUISITIONS MAY NOT DELIVER THE VALUE WE PAID OR WILL PAY FOR THEM.
Excessive expenses may result if we do not successfully integrate our
acquisitions, or if the costs and management resources we expend in connection
with the integrations exceed our expectations. We expect that our acquisitions
and any acquisitions we may pursue in the future will have a continuing,
significant impact on our business, financial condition and operating results.
Additionally, we cannot guarantee that we will realize the benefits or strategic
objectives we are seeking to obtain by acquiring these companies. The value of
the companies that we acquired may be less than the amount we paid if there is:
- a decline of their position in the respective markets they serve; or
- a decline in general of the markets they serve.
Our financial results may be adversely affected if:
- we fail to assimilate the acquired assets with our pre-existing
business;
- we lose key employees of these companies or of Semotus as a result of
the acquisitions;
- our management's attention is diverted by other business concerns; or
- we assume unanticipated liabilities related to the acquired assets.
WE MAY NOT BE ABLE TO RECOVER ANY OF THE VALUE OF GOODWILL RECORDED ON SOME OF
OUR ACQUISITIONS AND INVESTMENTS.
During 2002, 2001 and 2000, we recorded approximately $9,695,199 million in
goodwill and other intangibles related to our acquisitions. Consideration for
most of our acquisitions was partially or fully funded through the issuance of
shares of our common stock at a time when our stock price was at historically
high prices. Most of these companies were privately held and their fair values
are highly subjective and not readily determinable. Our policy is to review the
value of all our acquisitions for impairment whenever events or circumstances
indicate that the carrying amount may not be recoverable. At the time of our
acquisitions and investments, market valuations and the availability of capital
for such companies were at historically high levels. During the year ended March
31, 2002, stock prices and market valuations in our industry and in our vertical
markets have fallen substantially in response to a variety of factors, including
a general downturn in the economy, a curtailment in the availability of capital
and a general reduction in technology expenditures. The market valuations of
those companies in which we have invested and of other companies similar to
those we acquired have declined substantially. For the year ended March 31,
2002, we recorded impairment charges aggregating $4,773,870 million on these
acquisitions. If similar adverse market conditions develop in the future, we may
be required to take additional impairment charges.
WE MAY NOT ACHIEVE PROFITABILITY IF WE ARE UNABLE TO MAINTAIN, IMPROVE AND
DEVELOP THE WIRELESS DATA SERVICES WE OFFER.
9
We believe that our future business prospects depend in part on our ability to
maintain and improve our current services and to develop new ones on a timely
basis. Our services will have to achieve market acceptance, maintain
technological competitiveness and meet an expanding range of customer
requirements. As a result of the complexities inherent in our service offerings,
major new wireless data services and service enhancements require long
development and testing periods. We may experience difficulties that could delay
or prevent the successful development, introduction or marketing of new services
and service enhancements. Additionally, our new services and service
enhancements may not achieve market acceptance. If we cannot effectively
maintain, improve and develop services we may not be able to recover our fixed
costs or otherwise become profitable.
IF WE DO NOT RESPOND EFFECTIVELY AND ON A TIMELY BASIS TO RAPID TECHNOLOGICAL
CHANGE, OUR SERVICES MAY BECOME OBSOLETE AND WE MAY LOSE SALES.
The wireless and data communications industries are characterized by rapidly
changing technologies, industry standards, customer needs and competition, as
well as by frequent new product and service introductions. Our services are
integrated with wireless handheld devices and the computer systems of our
customers. Our services must also be compatible with the data networks of
wireless carriers. We must respond to technological changes affecting both our
customers and suppliers. We may not be successful in developing and marketing,
on a timely and cost-effective basis, new services that respond to technological
changes, evolving industry standards or changing customer requirements. Our
ability to grow and achieve profitability will depend, in part, on our ability
to accomplish all of the following in a timely and cost-effective manner:
- effectively use and integrate new wireless and data technologies;
- continue to develop our technical expertise;
- enhance our wireless data, engineering and system design services;
- develop applications for new wireless networks; and
- influence and respond to emerging industry standards and other
changes.
WE DEPEND UPON WIRELESS NETWORKS OWNED AND CONTROLLED BY OTHERS. IF WE DO NOT
HAVE CONTINUED ACCESS TO SUFFICIENT CAPACITY ON RELIABLE NETWORKS, WE MAY BE
UNABLE TO DELIVER SERVICES AND OUR SALES COULD DECREASE.
Our ability to grow and achieve profitability partly depends on our ability to
buy sufficient capacity on the networks of wireless carriers and on the
reliability and security of their systems. We depend on these companies to
provide uninterrupted and trouble free service and would not be able to satisfy
our customers' needs if they failed to provide the required capacity or needed
level of service. In addition, our expenses would increase and our profitability
could be materially adversely affected if wireless carriers were to increase the
prices of their services.
WE MAY FAIL TO SUPPORT OUR ANTICIPATED EVENTUAL GROWTH IN OPERATIONS WHICH COULD
REDUCE DEMAND FOR OUR SERVICES AND MATERIALLY ADVERSELY AFFECT OUR REVENUE.
Our business strategy is based on the assumption that the number of subscribers
to our services, the amount of information they want to receive and the number
of services we offer will all increase. We must continue to develop and expand
our systems and operations to accommodate this growth. The expansion and
adaptation of our customer service and network operations center requires
substantial financial, operational and management resources. We may be unable to
expand our operations for one or more of the following reasons:
- we may not be able to locate or hire at reasonable compensation rates
qualified engineers and other employees necessary to expand our
capacity;
- we may not be able to obtain the hardware necessary to expand our
capacity;
- we may not be able to expand our customer service, billing and other
related support systems; and
10
- we may not be able to obtain sufficient additional capacity from
wireless carriers.
Due to the limited deployment of our services to date, the ability of our
systems and operations to connect and manage a substantially larger number of
customers while maintaining superior performance is unknown. Any failure on our
part to develop and maintain our wireless data services as we experience growth
could significantly reduce demand for our services and materially adversely
affect our revenue. Further, the Company has implemented a Centralization and
Consolidation Plan which may limit growth in the short term.
AS WE IMPLEMENT OUR CENTRALIZATION AND CONSOLIDATION PLAN TO REDUCE OUR
OPERATING EXPENSES, WE MAY FAIL TO SUPPORT OUR OPERATIONS, WHICH COULD REDUCE
DEMAND FOR OUR SERVICES AND MATERIALLY ADVERSELY AFFECT OUR REVENUE.
Our business strategy is based on the assumption that the number of subscribers
to our services, the amount of information they want to receive and the number
of services we offer will all increase. We must continue to develop and expand
our systems and operations to accommodate this growth. The expansion and or
maintenance and adaptation of our customer service and network operations
centers require substantial financial, operations and management resources. At
the same time, we have implemented plans to reduce our operating expenses, which
entails a reduction in operational and management resources. While we believe
that our cost reductions are targeted at areas that are not necessary to
maintain and develop our ability to serve customers, there can be no assurance
that we will succeed in lowering costs while maintaining our ability to provide
service. If we fail to maintain or improve service levels, we may lose customers
and/or the opportunity to provide more services and products.
WE DEPEND ON RECRUITING AND RETAINING KEY MANAGEMENT AND TECHNICAL PERSONNEL
WITH WIRELESS DATA AND SOFTWARE EXPERIENCE AND WE MAY NOT BE ABLE TO DEVELOP NEW
PRODUCTS OR SUPPORT EXISTING PRODUCTS IF WE CANNOT HIRE OR RETAIN QUALIFIED
EMPLOYEES.
Because of the technical nature of our products and the dynamic market in which
we compete, our performance depends on attracting and retaining key employees.
Competition for qualified personnel in the wireless data and software industries
is intense and finding qualified personnel with experience in both industries is
even more difficult. We believe there are only a limited number of individuals
with the requisite skills in the field of wireless data communication, and it is
becoming increasingly difficult to hire and retain these persons. We have a
written employment agreement with Anthony N. LaPine, the Company's chairman, CEO
and president. We do not have employment agreements with any other officer. The
loss of Mr. LaPine or any other officer may have an adverse effect on our
business and prospects by depriving us of the management services necessary to
operate our business and achieve profitability.
WE MAY NEED TO RAISE ADDITIONAL FUNDS.
These funds may not be available to us. Alternatively, raising additional funds
may dilute your share ownership. We have met capital needs with private sales of
securities. However, we cannot assure you that we will not need additional
funds, that any needed funds will be available to us at all, or that any
available funds will be given on acceptable terms. If we need additional funds,
and are unable to raise them, we will not be able to continue our business
operations. If we raise funds by selling equity securities, those sales may
dilute your share ownership. If we raise funds by forming joint ventures with
other companies, we may have to give up some of our rights to certain
technologies, products or marketing territories.
OUR PATENTS MAY NOT PROTECT US FROM COMPETITORS.
Costs of prosecuting and defending patent infringement claims could hurt our
business. We currently own a number of patents related to our products, and have
applied for additional patents. We are not certain whether any new patents will
be granted in the future. Even if we receive additional patents, they may not
provide us with protection from competitors. Our failure to obtain patent
protection, or illegal use by others of any patents we have or may obtain could
adversely affect our business, financial condition and operating results. In
addition, the laws of certain foreign countries do not protect proprietary
rights to the same extent as the laws of the United States. Claims for damages
resulting from any such infringement may be asserted or prosecuted against us.
11
The validity of any patents we have or obtain could also be challenged. Any such
claims could be time consuming and costly to defend, diverting management's
attention and our resources.
OUR SALES CYCLE IS LONG, AND OUR STOCK PRICE COULD DECLINE IF SALES ARE DELAYED
OR CANCELLED.
Quarterly fluctuations in our operating performance are exacerbated by the
length of time between our first contact with a business customer and the first
revenue from sales of services to that customer or end users. Because our
services represent a significant investment for our business customers, we spend
a substantial amount of time educating them regarding the use and benefits of
our services and they, in turn, spend a substantial amount of time performing
internal reviews and obtaining capital expenditure approvals before purchasing
our services. As much as a year may elapse between the time we approach a
business customer and the time we begin to deliver services to a customer or end
user. Any delay in sales of our services could cause our quarterly operating
results to vary significantly from projected results, which could cause our
stock price to decline. In addition, we may spend a significant amount of time
and money on a potential customer that ultimately does not purchase our
services.
OUR SOFTWARE MAY CONTAIN DEFECTS OR ERRORS, AND OUR SALES COULD GO DOWN IF THIS
INJURES OUR REPUTATION OR DELAYS SHIPMENTS OR OUR SOFTWARE.
Our software products and platforms are complex and must meet the stringent
technical requirements of our customers. We must develop our services quickly to
keep pace with the rapidly changing software and telecommunications markets.
Software as complex as ours is likely to contain undetected errors or defects,
especially when first introduced or when new versions are released. Our software
may not be free from errors or defects after delivery to customers has begun,
which could result in the rejection of our software or services, damage to our
reputation, lost revenue, diverted development resources and increased service
and warranty costs.
WE MAY BE SUBJECT TO LIABILITY FOR TRANSMITTING INFORMATION, AND OUR INSURANCE
COVERAGE MAY BE INADEQUATE TO PROTECT US FROM THIS LIABILITY.
We may be subject to claims relating to information transmitted over systems we
develop or operate. These claims could take the form of lawsuits for defamation,
negligence, copyright or trademark infringement or other actions based on the
nature and content of the materials. Although we carry general liability
insurance, our insurance may not cover potential claims of this type or may not
be adequate to cover all costs incurred in defense of potential claims or to
indemnify us for all liability that may be imposed.
DISRUPTION OF OUR SERVICES DUE TO ACCIDENTAL OR INTENTIONAL SECURITY BREACHES
MAY HARM OUR REPUTATION CAUSING A LOSS OF SALES AND COULD INCREASE OUR EXPENSES.
A significant barrier to the growth of wireless data services or transactions on
the Internet or by other electronic means has been the need for secure
transmission of confidential information. Our systems could be disrupted by
unauthorized access, computer viruses and other accidental or intentional
actions. We may incur significant costs to protect against the threat of
security breaches or to alleviate problems caused by such breaches. If a
third-party were able to misappropriate our users' personal or proprietary
information or credit card information, we could be subject to claims,
litigation or other potential liabilities that could materially adversely impact
our revenue and may result in the loss of customers.
ANY TYPE OF SYSTEMS FAILURE COULD REDUCE SALES, OR INCREASE COSTS OR RESULT IN
CLAIMS OF LIABILITY.
Our existing wireless data services are dependent on real-time, continuous feeds
from outside third parties. The ability of our subscribers to obtain data or
make wireless transactions through our service requires timely and uninterrupted
connections with our wireless network carriers. Any significant disruption in
the feeds or wireless carriers could result in delays in our subscribers'
ability to receive information or execute wireless transactions. There can be no
assurance that our systems will operate appropriately if we experience a
hardware or software failure or if there is an earthquake, fire or other natural
disaster, a power or telecommunications failure, insurrection or an act of war.
12
A failure in our systems could cause delays in transmitting data, and as a
result we may lose customers or face litigation that could involve material
costs and distract management from operating our business.
AN INTERRUPTION IN THE SUPPLY OF PRODUCTS AND SERVICES THAT WE OBTAIN FROM THIRD
PARTIES COULD CAUSE A DECLINE IN SALES OF OUR SERVICES.
In designing, developing and supporting our wireless data services, we rely on
wireless carriers, wireless handheld device manufacturers, content providers and
software providers. These suppliers may experience difficulty in supplying us
products or services sufficient to meet our needs or they may terminate or fail
to renew contracts for supplying us these products or services on terms we find
acceptable. Any significant interruption in the supply of any of these products
or services could cause a decline in sales of our services unless and until we
are able to replace the functionality provided by these products and services.
We also depend on third parties to deliver and support reliable products,
enhance their current products, develop new products on a timely and
cost-effective basis and respond to emerging industry standards and other
technological changes. In addition, we rely on the ability of our content
providers to continue to provide us with uninterrupted access to the news and
financial information we provide to our customers. The failure of third parties
to meet these criteria, or their refusal or failure to deliver the information
for whatever reason, could materially harm our business.
RISK FACTORS RELATED TO OUR INDUSTRY
THERE IS NO ESTABLISHED MARKET FOR WIRELESS DATA SERVICES AND WE MAY NOT BE ABLE
TO SELL ENOUGH OF OUR SERVICES TO BECOME PROFITABLE.
The markets for wireless data services are still emerging and continued growth
in demand for and acceptance of these services remains uncertain. Current
barriers to market acceptance of these services include cost, reliability,
functionality and ease of use. We cannot be certain that these barriers will be
overcome. Our competitors may develop alternative wireless data communications
systems that gain broader market acceptance than our systems. If the market for
our services does not grow or grows more slowly than we currently anticipate, we
may not be able to attract customers for our services and our revenues would be
adversely affected.
THERE IS NO ASSURANCE THAT WE WILL BE ABLE TO EFFECTIVELY COMPETE AGAINST
CURRENT AND FUTURE COMPETITORS.
There are a number of competitors who are larger and have much greater resources
than we do. Many of our competitors have more experienced people and larger
facilities and budgets than we do. These competitors could use their resources
to conduct greater amounts of research and development and to offer services at
lower prices than we can. These factors may adversely affect our ability to
compete by decreasing the demand for our products and services.
OUR ABILITY TO SELL NEW AND EXISTING SERVICES AT A PROFIT COULD BE IMPAIRED BY
COMPETITORS.
Intense competition could develop in the market for services we offer. We
developed our software using standard industry development tools. Many of our
agreements with wireless carriers, wireless handheld device manufacturers and
data providers are non-exclusive. Our competitors could develop and use the same
products and services in competition with us. With time and capital, it would be
possible for competitors to replicate our services. Our potential competitors
could include: wireless network carriers such as Verizon Wireless, Cingular
Interactive, Sprint PCS, Voice Stream, Nextel and AT&T Wireless; wireless device
manufacturers, such as Palm, Handspring, Motorola and RIM; software developers
such as Microsoft Corporation; emerging wireless Internet service providers,
such as Aether Systems, i3Mobile, Go America, Wolf Tech, Avant Go and 724
Solutions and systems integrators such as IBM. Many of our potential competitors
have significantly greater resources than we do. Furthermore, competitors may
develop a different approach to marketing the services we provide in which
subscribers may not be required to pay for the information provided by our
services. Competition could reduce our market share or force us to lower prices
to unprofitable levels.
THE MARKET FOR OUR SERVICES IS NEW AND HIGHLY UNCERTAIN.
13
The market for wireless data services is still emerging and continued growth in
demand for and acceptance of these services remains uncertain. Current barriers
to market acceptance of these services include cost, reliability, functionality
and ease of use. We cannot be certain that these barriers will be overcome. If
the market for our services does not grow or grows slower than we currently
anticipate, our business, financial condition and operating results could be
adversely affected.
NEW LAWS AND REGULATIONS THAT IMPACT OUR INDUSTRY COULD ADVERSELY AFFECT OUR
BUSINESS.
We are not currently subject to direct regulation by the Federal Communications
Commission or any other governmental agency, other than regulations applicable
to businesses in general. However, in the future, we may become subject to
regulation by the FCC or another regulatory agency. In addition, the wireless
carriers who supply us airtime are subject to regulation by the FCC and
regulations that affect them could adversely affect our business, by, for
example, increasing our costs or reducing our ability to continue selling and
supporting our services. Our business could suffer depending on the extent to
which our activities or those of our customers or suppliers are regulated.
WE MAY FACE INTERRUPTION OF PRODUCTION AND SERVICES DUE TO INCREASED SECURITY
MEASURES IN RESPONSE TO TERRORISM.
Our business depends on the free flow of products and services through the
channels of commerce. Recently, in response to terrorists' activities and
threats aimed at the United States, transportation, mail, financial and other
services have been slowed or stopped altogether. Further delays or stoppages in
transportation, mail, financial or other services could have material adverse
effect on our business, results of operations and financial condition.
Furthermore, we may experience an increase in operating costs, such as costs for
transportation, insurance and security as a result of the activities and
potential activities. We may also experience delays in receiving payments from
payers that have been affected by the terrorist activities and potential
activities. The U.S. economy in general is being adversely affected by the
terrorist activities and potential activities and any economic downturn could
adversely impact our results of operations, impair our ability to raise capital
or otherwise adversely affect our ability to grow our business.
RISKS RELATED TO OUR STOCK PRICE
OUR STOCK PRICE, LIKE THAT OF MANY TECHNOLOGY COMPANIES, HAS BEEN AND MAY
CONTINUE TO BE VOLATILE.
We expect that the market price or our common stock will fluctuate as a result
of variations in our quarterly operating results and other factors beyond our
control. These fluctuations may be exaggerated if the trading volume of our
common stock is low. In addition, due to the technology-intensive and emerging
nature of our business, the market price of our common stock may rise and fall
in response to a variety of factors, including:
- announcements of technological or competitive developments;
- acquisitions or strategic alliances by us or our competitors;
- the gain or loss of a significant customer or order;
- changes in estimates of our financial performance or changes in
recommendations by securities analysts regarding us or our industry;
or
- general market or economic conditions.
This risk may be heightened because our industry is new and evolving,
characterized by rapid technological change and susceptible to the introduction
of new competing technologies or competitors.
In addition, equity securities of many technology companies have experienced
significant price and volume fluctuations. These price and volume fluctuations
often have been unrelated to the operating performance of the affected
14
companies. Volatility in the market price of our common stock could result in
securities class action litigation. This type of litigation, regardless of the
outcome, could result in substantial costs and a diversion of management's
attention and resources.
WE DO NOT PLAN TO PAY ANY DIVIDENDS.
Our shares should not be purchased by investors who need income from their
holdings. We intend to retain any future earnings to fund the operation and
expansion of our business. We do not anticipate paying cash dividends on our
shares in the future. As a result, our common stock is not a good investment for
people who need income from their holdings.
THE RESALES OF OUR COMMON STOCK RECENTLY REGISTERED COULD HAVE A DEPRESSIVE
EFFECT ON THE MARKET PRICE OF OUR SHARES.
We have recently registered 4,199,271 shares of common stock subject to resale
by certain of our security holders, and we have contractual obligations to
register an additional 463,131 shares. Up to 1,433,350 of those shares are
issuable upon the exercise of warrants and up to 938,462 of those shares are
issuable upon the conversion of Series B Convertible Preferred Stock. We are
unable to predict the effect that sales of these shares may have on the then
prevailing market price of our shares. It is likely that market sales of large
amounts of our shares (or the potential for those sales even if they do not
actually occur) will have the effect of depressing the market price of our
shares.
FORWARD-LOOKING STATEMENTS
This report, including the sections entitled "Description of Business", "Recent
Acquisitions" and "Risk Factors," contains forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934. Any statements in this report regarding Semotus' outlook
for its business and their respective markets, such as projections of future
performance, statements of management's plans and objectives, forecasts of
market trends and other matters, are forward-looking statements. These
statements relate to future events or our future financial and operating
performance and involve known and unknown risks, uncertainties and other factors
that may cause our or our industry's actual results, levels of activity,
performance or achievements to be materially different from that expressed or
implied by these forward-looking statements. These risks and other factors
include, among other things, those listed under "Risk Factors" and elsewhere in
this prospectus. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential," "continue," "our future
success depends," "seek to continue" or the negative of these terms or other
comparable terminology. These statements are only predictions. Actual events or
results may differ materially. In evaluating these statements, you should
specifically consider various factors, including the risks outlined under "Risk
Factors." These factors may cause our actual results to differ materially from
any forward-looking statement.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of these statements. We
do not intend to update any of the forward-looking statements after the date of
this prospectus to conform these statements to actual results except as required
by law.
ITEM 2. DESCRIPTION OF PROPERTY.
Our main headquarters are located in San Jose, California. The accounting and
legal, as well as a portion of our marketing, sales, and customer support
departments are housed at this location. The headquarters facility is
approximately 8,969 square feet, which is under a lease that partially expires
on August 14, 2002 and partially expires on October 21, 2002. The monthly rent
is $28,293.
Semotus' subsidiaries have facilities in various locations around the country.
Semotus Systems Corp., which houses the Company's engineering and Research and
Development group, is located in Vancouver, British Columbia, where it had
15
occupied a facility of approximately 6,036 square feet under a lease agreement
that expires in October 2005 with a monthly rent of $9,054 Canadian dollars
($5,898 US dollars). In May 2002, Semotus Systems cancelled this lease with no
penalty and signed a new lease for approximately 2,437 square feet with a
monthly rent payment of $2,640 Canadian dollars ($1,657 US dollars). This lease
expires on June 30, 2007. Application Design Associates has offices located in
Englewood, Colorado, of approximately 4,600 square feet under a lease that
expires on January 31, 2003 and with a monthly rent of $7,304. Five Star
Advantage had a facility located in Valencia, California with approximately
8,441 square feet of space under a lease that expired in March 2002.
Subsequently, FiveStar negotiated a new month-to-month lease for 6,295 square
feet at $4,850 a month. This lease will be cancelled without penalty on June 30,
2002, at the time of the closing of the Five Star operations.
In this fiscal year, Simkin, Wares and Cross all closed their leased facilities.
The total lease obligations of $184,687 were settled for a total of 49,074
shares of restricted common stock. These securities were issued in conjunction
with the respective acquisition transactions. The Company relied on Section 4(2)
of the Securities Act of 1933, as amended, to issue these shares.
We believe that the existing facilities will be sufficient to meet our current
needs. Should we need additional space to accommodate increased activities, we
believe we can secure additional space at comparable cost.
ITEM 3. LEGAL PROCEEDINGS.
Semotus is the defendant in one pending legal proceeding and one of Semotus'
wholly owned subsidiaries, Wizshop.com, Inc., is the plaintiff in one pending
legal proceeding. The suit in which Semotus is the defendant was filed by Brown
Simpson Partners I, Ltd. on March 7, 2002 in the Supreme Court of the State of
New York. This suit alleges four causes of action for breach of contract. The
Complaint claims that Semotus triggered the anti-dilution provisions in Brown
Simpson's Warrants and Series B Preferred Stock, thus obligating Semotus to
issue substantial numbers of additional shares upon conversion of the Preferred
Stock and exercise of the Warrants. Brown Simpson seeks an order granting
specific performance, money damages in excess of $25,000, and recovery of costs
and prejudgment interest. We believe the suit is without merit and intend to
vigorously contest the suit.
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
alleges 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 arises 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 is entitled to under the agreement. We are seeking monetary
damages for the above matter.
We are also a party to other legal proceedings in the normal course of business.
Based on evaluation of these matters and discussions with counsel, we believe
that liabilities arising from these matters will not have a material adverse
effect on our consolidated results of operations or financial position.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to the Company's stockholders for consideration during
the fiscal quarter ended March 31, 2002.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) MARKET INFORMATION. On December 29, 1999, trading in our common stock
moved to the American Stock Exchange ("AMEX"), under the symbol "DLK" from the
OTC Bulletin Board. On August 14, 2000 trading in our common stock moved to the
Nasdaq National Market ("Nasdaq"), under the symbol "XLNK" from the AMEX. On
December 18, 2000, trading in our common stock moved back to the AMEX under the
symbol "DLK" from the Nasdaq.
16
The following table sets forth the high and low closing sales prices of our
common stock as reported by the AMEX for the periods indicated:
High Close Low Close
---------- ---------
Quarter ended
June 30, 2000 $27.98 $ 8.12
September 30, 2000
(through August 11, 2000) $22.50 $13.31
The following table sets forth the high and low closing sales prices of our
common stock as reported by the Nasdaq for the periods indicated:
High Close Low Close
---------- ---------
August 14 to September 30, 2000 $17.13 $10.03
December 31, 2000
(through December 15, 2000) $10.00 $ 3.44
The following table sets forth the high and low closing sales prices of our
common stock as reported by the AMEX for the periods indicated:
High Close Low Close
---------- ---------
December 18 to December 31, 2000 $ 4.63 $ 2.00
Quarter ended
March 31, 2001 $ 5.69 $ 1.87
Quarter ended
June 30, 2001 $ 3.15 $ 1.46
Quarter ended
September 30, 2001 $ 1.75 $ 0.66
Quarter ended
December 31, 2001 $ 1.05 $ 0.53
Quarter ended
March 31, 2002 $ 0.94 $ 0.60
A 2 for 1 forward stock split became effective on April 27, 2000. Share prices
have been adjusted to reflect this split.
(b) HOLDERS. As of March 31, 2002 the Company had 411 shareholders of
record. The Company believes that in excess of 15,000 beneficial owners hold
shares of the Company's common stock in depository or nominee form.
(c) DIVIDENDS. The Company has never paid a cash dividend on its common
stock and does not expect to pay a cash dividend in the foreseeable future.
(d) RECENT SALES OF UNREGISTERED SECURITIES. During the Quarter ended March
31, 2002 the Company issued securities which were not registered under the
Securities Act of 1933, as amended as follows: The Company issued a total of
57,307 shares of its common stock to suppliers of services to the Company. 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.
17
ITEM 6. SELECTED FINANCIAL DATA
Year Ended March 31,
2002 2001 2000 1999 1998
------------ ------------ ----------- ----------- -----------
Consolidated Statement
of Operations Data: (Unaudited) (Unaudited)
Revenues
Wireless $1,305,347 $1,731,948 $1,459,920 $ 2,128,438 $ 962,461
Enterprise 2,630,369 3,193,433 6,151,238 17,881,844 14,595,490
Professional Service 559,955 622,582 -- -- --
Logistics 1,611,424 -- -- -- --
----------- ---------- ---------- ---------- ----------
Total 6,107,095 5,547,963 7,611,158 20,010,282 15,557,951
Cost of Sales
Wireless 520,834 985,305 775,324 822,636 530,545
Enterprise 2,088,881 2,829,642 3,961,668 15,083,446 12,873,362
Professional Service 277,073 281,138 -- -- --
Logistics 808,644 -- -- -- --
----------- ---------- ---------- ---------- ----------
Total 3,695,432 4,096,085 4,736,992 15,906,082 13,403,907
Gross Profit 2,411,663 1,451,878 2,874,166 4,104,200 2,154,044
Research and
Development 1,475,063 1,228,139 600,957 798,549 755,080
Sales and Marketing 2,281,316 4,630,355 1,849,597 3,115,572 2,202,306
General and
Administrative 4,902,982 5,330,211 4,291,085 4,995,755 4,322,784
Impairment of goodwill 4,773,870 -- -- -- --
Impairment of intangible
assets 3,541,017 -- -- -- --
Depreciation and
amortization 3,975,001 2,010,395 264,427 235,486 149,269
Stock, option and
Warrant expense 496,181 601,932 1,060,487 -- --
Operating loss (19,033,767) (12,349,154) (5,192,387) (4,801,184) (4,572,076)
Net loss $(18,444,478) $(11,293,381) $(4,756,926) $(3,984,806) $(3,704,647)
Net loss per share
basic and diluted $ (1.09) $ (0.74) $ (0.61) $ (1.51) $ (1.49)
Weighted average
shares 16,975,660 15,199,895 7,763,715 2,643,687 2,508,622
Consolidated balance
sheet data:
Cash and cash
equivalents (including
restricted cash) $ 4,869,578 $ 8,538,264 $16,360,776 $4,775,680 $ 8,178,192
Working capital 2,064,396 7,780,783 15,753,980 3,070,989 6,789,451
Total assets 10,337,063 21,769,961 18,490,480 7,582,542 12,078,327
Long-term liabilities 618,947 898,617 1,362,590 2,215,227 2,612,749
Preferred shareholders'
equity 5,682,456 5,682,456 9,315,501 -- --
Common shareholders'
equity 294,481 13,182,551 5,804,468 3,484,261 2,327,433
* Information related to FiveStar Advantage, Inc. for the years 1999 and 1998 is
unaudited. FiveStar was acquired under the pooling method of accounting in
December 2000. As such, Semotus restated its financial statements in the years
2000, 2001 and 2002, which are audited and included the Financial Statement
Section of this 10K. In connection with the preparation of the Selected
Financial Data above, Semotus has restated its 1998 and 1999 financial data on
an unaudited basis. Management has determined that the time and cost of auditing
the restated 1998 and 1999 financial data is unduly onerous.
ITEM 7. 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.
OVERVIEW
18
At the end of this fiscal year 2002, Semotus determined that the economy would
continue in a weak recovery and that the market for technology products would
stay anemic. Accordingly, the Company has centralized and consolidated its
organization and its operations. The headcount has been reduced 51% since March
31, 2001 and as a result, engineering, sales and marketing and administrative
costs have been reduced and centralized. The overall Semotus organization has
eliminated redundant positions and functions while improving the sales effort
through utilizing existing customer relationships to shorten the sales cycle.
Semotus has organized its operations around two core lines of businesses, while
maintaining but de-emphasizing its other operations: i) financial services with
the Global Market Pro and Equity Market Pro products and services and ii)
workforce automation with the HiplinkXS family of products and services. These
products maintain high gross and operating margins and form the core of the
enterprise software marketing strategy with wireless and mobile features
available in the software.
Logistic systems, largely ADA's products and services, continue as part of
Semotus' wireless and mobile strategy. ADA develops and licenses proprietary
software that gives enterprises a total solution for automation of customer call
centers, dispatching, equipment deployment, servicing and invoicing while
interfacing with existing corporate business functions and ERP solutions. This
field force automation software provides Semotus with a unique platform for its
wireless productivity enhancement tools such as Hiplink. In January 2002, Global
Beverage Group, a Canadian-based direct store delivery consortium, completed a
strategic investment in ADA and is now a 49% shareholder in ADA (see Note 25 to
the Financial Statements, "Strategic Investment in ADA").
Certain professional services have been de-emphasized. In this fiscal year,
Simkin's Kinetidex 2.0 product was sold to the joint developer and exclusive
distributor of the product, Micromedex, Inc. Wireless medical software products
have been slow to penetrate the market and therefore have been eliminated by
Semotus. Other unprofitable professional service contracts at Wares On the Web
have been reduced.
M-commerce initiatives have been reduced. The e-commerce economy has contracted
and m-commerce is not expected to make a significant contribution in the market
in the near future. Consequently, Semotus has reduced its e-commerce and
m-commerce presence with the elimination of unprofitable products and services
in that segment. At Wares on the Web, one e-commerce customer remains and at
WizShop, while there is still some small monthly sponsorship and advertising
revenue, the operations have been largely consolidated into Semotus' other
divisions and subsidiaries. At the end of June, FiveStar's operations will be
closed as the market for e-fulfillment is currently unprofitable. (See
"Significant Events".)
FACTORS AFFECTING COMPARABILITY
Semotus has transitioned its business from consumer driven wireless products and
services to enterprise-based application software products and services with
emphasis in the mobile and wireless software markets. This transition has mostly
taken place since March 2000. As part of the transition, Semotus acquired six
companies. Further, as the technology economy has declined since January 2001,
Semotus has centralized and consolidated its operations.
Strategic Repositioning
In FY 2000, the Company announced a strategic repositioning as an enterprise
application software company emphasizing mobile and wireless solutions that
deliver end-to-end wireless data solutions to enterprises and custom data
applications to their customers utilizing its patented Xpresslink(TM)
application server. This repositioning involved major infrastructure changes,
which continued throughout FY 2001.
Semotus is concentrating on providing consulting and engineering services and
turnkey applications for enterprise application software. Further, with its
recently acquired subsidiaries, Semotus provides software and consulting
products and services and marketing, sales, customer service and logistics
management to existing customers in the targeted vertical markets. Semotus then
provides additional service through wirelessly enabling those customers.
Acquisitions
19
As part of the Company's growth strategy, Semotus has acquired six companies:
Cross, Simkin, Wares, Five Star, WizShop and ADA. Each provides revenues and a
significant customer base to allow the Company to add to its technology, expand
its product offerings and penetrate targeted vertical markets.
Semotus intends to continue to acquire companies that provide strategic growth
for the Company through their technology, customer base or industry or vertical
market presence. For specific information concerning the acquired companies see
Note 3 to the Financial Statements, "Acquisitions".
Centralization and Consolidation Plan
In May 2002, the Board of Directors of Semotus determined that the Company
needed to focus its operations on its core enterprise software products. (See
"Centralization and Consolidation Plan"). Given the continued economic recession
and limited capital spending, as well as the reduced access to capital, the
Company must economically utilize its limited resources towards those products
with the best margins and cash flow generation. As part of that effort, Semotus
has decided to reduce its e-commerce operations and to close the FiveStar
business as of the end of June 2002. While maintaining a reduced m-commerce and
e-commerce presence, Semotus has de-emphasized the e-fulfillment portion of that
business as the e-fulfillment markets have declined dramatically over the past
year and are not expected to recover significantly in the near future.
Accordingly, Semotus is redirecting its human and capital resources towards more
profitable products and services.
Impairment of Long-lived Assets and Goodwill
Semotus' management performs an on-going analysis of the recoverability of its
goodwill and other intangibles and the value of its investments in accordance
with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and For
Long-Lived Assets to be Disposed Of". Based on quantitative and qualitative
measures, the Company assesses the need to record impairment losses on
long-lived assets used in operations when impairment indicators are present.
A number of factors indicated that impairment may have arisen in the period
ended March 31, 2002 for certain amounts of goodwill related to the acquisitions
of Simkin, Wares and WizShop. Also, an impairment may have arisen with the
recorded asset value of the Company's Global Market Pro intellectual property.
For Simkin, the analysis was to determine if a further reduction in goodwill was
necessary. Semotus had previously taken a $650,000 net impairment charge in the
quarter ended June 30, 2001. See Note 5, "Sale of Technology and Net Impairment
of Goodwill". For Wares and WizShop, Semotus analyzed the current carrying value
of the goodwill related to both acquisitions.
The result of this analysis has necessitated charges to income of certain
intangible assets which include goodwill, GMP intellectual property and acquired
software. Those charges total approximately $8.3 million for the fiscal year
ended March 31, 2002. See Notes 4 and 5 to the Financial Statements, "Impairment
of Long-Lived Assets and Goodwill" and "Sale of Technology and Net Impairment of
Goodwill" respectively.
CRITICAL ACCOUNTING POLICIES
The critical accounting policies are revenue recognition, cost allocation to
revenue and valuation of intangible assets.
Revenue Recognition
The Company recognizes revenues in each of its lines of business based upon
contract terms and completion of the sales process.
Wireless services: revenue is generated from wireless services provided to
enterprises and consumers. The revenue is from recurring monthly charges based
on utilization fees, transaction fees, and maintenance and service charges. In
the financial consumer business, the Company also receives a small revenue
stream from pager rentals. Revenues are recognized over the service period and
any revenue that relates to more than one service period is recognized ratably
over those service periods. In the premise-based business, wireless software is
delivered to the customer and revenue is recognized upon shipment, assuming no
significant obligations remain.
Enterprise and commerce sales and service: revenue is generated from online
sales, advertising, sponsorships and hosting fees and other services. Revenue is
recognized upon a completed sale and shipment of a product and for advertising
and sponsorships, revenue is recognized when payment is received. Hosting fees
and other services, such as licensing, are recognized ratably over the service
period.
Professional and related services: revenue is generated from software
engineering and sales and from training and consultation. Revenue is recognized
when the engineering, training or consultation work has been performed in
accordance with the contract.
Logistic systems sales: revenue is generated from logistic software sales,
computer equipment sales and system installation and consulting services.
Revenue is recognized when the system installation is completed and/or
consulting work has been performed in accordance with the contract. For
multi-
20
period contracts, usually for maintenance or licensing, revenue is recognized
ratably over these service periods.
Cost of Revenue
The cost of revenue for the wireless services line of business principally
includes costs to obtain data feeds from various exchanges, costs of engineering
development directed to specifically identified products, costs of servicing and
hosting customer products, costs for pager rental or depreciation and pager
airtime for those customers without their own pagers, and certain telephone,
computer and other direct operational costs.
The cost of revenue for the enterprise and commerce sales and service line of
business includes the purchase cost of the products, advertising, costs of
servicing and hosting and shipping. Any engineering costs directly related to
the products offered are also included as a cost of revenue.
The cost of revenue for professional and related services is primarily personnel
costs for engineering, training and consulting.
The cost of revenue for the logistic system sales segment is the cost of the
production of the software, purchased equipment costs and the cost of the
personnel for engineering, installation and consulting.
Valuation of Long-Lived Assets
Semotus' management performs an on-going analysis of the recoverability of its
goodwill and other intangibles and the value of its investments in accordance
with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and For
Long-Lived Assets to be Disposed Of". Based on quantitative and qualitative
measures, the Company assesses the need to record impairment losses on
long-lived assets used in operations when impairment indicators are present.
In accordance with SFAS No. 121, the Company performs an undiscounted cash flow
analysis of its acquisition to determine whether an impairment existed. When the
undiscounted cash flows are less than the carrying value of the net assets,
management determins a range of fair values using a combination of valuation
methodologies. The methodologies include:
- - Discounted cash flow analysis, which is based upon converting expected future
cash flows to present value.
- - Changes in market value since the date of acquisition relative to the
following:
- - The Company's stock price;
- - Comparable companies;
- - Contribution to the Company's market valuation and overall business prospects.
Long-term assets, such as intellectual property rights and goodwill are
amortized on a straight-line basis over the economic life of the assets. The
expected useful life of those assets is currently five years. The Company
adopted SFAS 141 "Business Combinations" and SFAS 142 "Goodwill and Other
Intangible Assets" as of April 1, 2002. Accordingly, Semotus will no longer
amortize intangible assets with an indefinite useful life and will begin
assessing potential future impairments of such intangible assets.
Semotus capitalizes the fair value of contracts acquired in business
combinations as required by APB 16 "Business Combinations". Fair value is
determined by estimating the cost expected to be incurred in order to perform
the obligations under the contract plus adding a reasonable profit associated
with the performance effort. The capitalized cost is amortized into cost of
revenue as revenues are recognized.
For other accounting policies see Note 2 to the Financial Statements, "Summary
of Significant Accounting Policies".
RESULTS OF OPERATIONS
21
All financial results for the fiscal year ended March 31, 2000 have been
restated for the acquisition of FiveStar under the pooling of interests method
of accounting. The acquisition was completed in December 2000. See Note 3
"Acquisitions - FiveStar Advantage, Inc. and Tech-ni-comm, Inc." and see the
Datalink.net, Inc. Form 10-KSB for the fiscal year ended March 31, 2000 for
information concerning the prior filing.
REVENUES
Revenues for the years ended March 31, 2002, 2001 and 2000 were $6,107,095,
$5,547,963 and $7,611,158, respectively.
The 10% increase in overall revenues for the fiscal year ended March 31, 2002
versus 2001 was due to two factors: the addition of system integration sales at
ADA and increased sales in the enterprise application software business. This
has occurred notwithstanding the decline in economic activity and the weakening
of capital and consumer spending for technology products and services. The
increase in sales has been somewhat offset by the decline in sales of financial
consumer products and the decline in sales in the e-commerce segment.
The overall decrease in revenues at March 31, 2001 from March 31, 2000 is due to
the decline in sales at one of Semotus' subsidiaries, Five Star Advantage.
FiveStar's revenue decline is due to the loss of one major customer and the
large drop in sales from another customer who had decided to fulfill its on-line
sales in-house. This has been offset somewhat by the increase in revenues in the
enterprise application software business.
These two customers accounted for 30% and 25% of the revenues of the enterprise
and commerce segment in the fiscal year ended March 31, 2000. These disruptions
in customer sales occurred concurrently and extended the overall length of time
that Five Star has experienced declining revenues.
Wireless services
The 25% decline in revenues from March 31, 2001 to 2002 is the result of two
opposite trends that have continued from the year ended March 31, 2000. First,
there has been an approximated 14% increase in revenues in the enterprise
application software business from the sales of HiplinkXS and GMP and EMP
financial products. This has been more than offset by the 66% decline in the
Company's financial consumer software products. For the short term future, these
trends will continue. The Company has emphasized its enterprise products which
continue to sell well in the economic recession.
The 19% increase in revenues from March 31, 2000 to March 31, 2001 in this
segment is the result of two distinct trends: (i) the addition of new enterprise
application software products and services and (ii) the planned decline in the
legacy consumer software products business. Semotus has added significant new
customers and new products in the enterprise market, which has generated new
revenues. This has been somewhat offset by the 43% decline in the consumer
revenues for which the Company had planned as it transitioned into the
enterprise marketplace.
Enterprise and Commerce Sales
The 18% decline in revenues from March 31, 2001 to March 31, 2002 is due to the
declining sales in all areas of the m-commerce and e-commerce business.
FiveStar's revenues continued to decline as the e-commerce economy has stagnated
and has been slow to rebound. In May 2002, Semotus determined that the Company
needed to focus its operations on its core enterprise software products, (see
"Centralization and Consolidation Plan"). As part of that effort, Semotus has
decided to reduce its e-commerce operations and to close the FiveStar business
as of the end of June 2002.
The 48% decline in revenues in this segment from March 31, 2000 to March 31,
2001 is due to the above mentioned customer losses at FiveStar. A portion of
Wares business, its e-commerce business, is included in this category, which
helped offset the overall decline in this segment's revenues.
Professional and related services
22
The 10% decline in revenues from March 31, 2001 to 2002 is largely the result of
completing professional service contracts at Wares and not signing new contracts
with existing customers or with new customers. During this economic recession,
most companies have been determined to keep engineering and consulting projects
in-house. A second factor in the decline is the reduced business presence of
Simkin after the sale of its Kinetidex 2.0 product in June 2001. Wireless
medical software products have been slow to penetrate the market and therefore
have been eliminated by Semotus. Other unprofitable professional service
contracts at Wares have also been eliminated.
In the fiscal year ended March 31, 2001, this was a new business segment for
Semotus and therefore there is no comparison to the fiscal year ended March 31,
2000.
Logistic System Sales
This is a new segment for Semotus in the fiscal year ended March 31, 2002, which
is made up of the revenue from ADA and focuses on the sales of system
integration contracts which include proprietary software and hardware systems
that manage the logistics and tracking of assets.
COST OF REVENUES AND GROSS MARGIN
The overall gross profit margin increased to a more historical level of 39% in
the fiscal year ended March 31, 2002. The gross profit margin improved due to
the addition of the logistics system business that had a gross profit margin of
50%. As well, the wireless services business gross profit margin improved to 60%
as more of the enterprise application software was sold versus the consumer
financial software, which has a lower margin. Finally, the enterprise and
commerce segment did have the large inventory write-downs that occurred in the
fiscal year ended March 31, 2001.
The overall gross profit margin declined to 26% in March 31, 2001 from 38% in
March 31, 2000 and accordingly, the cost of revenue as a percentage of overall
revenue increased in percentage terms, but not in absolute dollar amount, due to
the decline in revenues at Five Star and a $251,400 inventory expense for the
slow sales of certain products and a price adjustment at Five Star. Again, this
was caused by the loss of one major customer and a large drop in sales from
another customer. The lost Five Star product sales carried significant gross
profit margins and consequently the remaining revenue had lower gross profit
margins and a higher cost of revenue.
Wireless services
The 60% gross profit margin for the wireless segment for the fiscal year ended
March 31, 2002 is the result of the continuing trends in this business. Semotus
is selling more of the enterprise application software, which carries higher
gross margins than the consumer financial software. Further, the consumer
business is continuing to decline as a percentage of wireless revenues, as fewer
individuals maintain their subscriptions.
The 43% gross profit margin for this segment for the fiscal year ended March 31,
2001 as compared to 47% in the prior year, is comprised of an enterprise
application software business gross margin of 50% and a legacy business gross
margin of 36%. The consumer business margin has declined from 47% in fiscal year
2000 to 36% in fiscal year 2001. This is a direct result of the decline in
revenues since many of the direct costs for wireless products, mostly data feeds
and transmission costs, have minimum charges. As the enterprise products
continue to increase their percentage of the segment's services and products,
the gross profit margin should increase and be maintained at higher levels than
in past fiscal years.
Cost of revenues in this segment principally includes costs to obtain data feeds
from various exchanges, costs of engineering development directed to
specifically identified products, costs of servicing and hosting customer
products, costs for pager rental or depreciation and pager airtime for those
customers without their own pagers, and certain telephone, computer and other
direct operational costs.
Enterprise and commerce sales
23
The gross profit margin in this segment rebounded somewhat to 21% in the fiscal
year ended March 31, 2002 as inventory write-downs declined and software
products and services from WizShop were included which have higher gross
margins. WizShop's largest contract is for customer loyalty and tracking
software, which has gross profit margins of approximately 50%.
The gross profit margin for this segment declined from 36% in fiscal year 2000
to 11% in fiscal year 2001, substantially due to the decline in revenues and the
inventory expense at FiveStar.
Professional and related services
The gross profit margin declined minimally to 51% in the fiscal year ended March
31, 2002, which is largely due to the mix of contracts serviced in the year.
Further, the reduction in Simkin's business from the sale of the Kinetidex
product also contributed to a lower margin.
The gross profit margin for this segment was 55% for the fiscal year ended March
31, 2001. The cost of revenue was principally personnel costs related to
providing consulting and training services.
Logistic System Sales
The gross profit margin for this segment was 50% for the fiscal year ended March
31, 2002. The cost of revenue is principally personnel costs related to software
programming, consultation and installation of the systems. Also included in the
cost of revenue is the computer hardware costs related to each system
installation.
OPERATING EXPENSES
Although operating expenses increased in the fiscal year ended March 31, 2002,
this was substantially all the result of impairment charges to goodwill and
intangible assets and to increased depreciation and amortization expense. Sales
and marketing expenses and general and administrative expenses declined in the
fiscal year as Semotus installed a corporate-wide cost reduction and cash
management program, which has significantly reduced these expenses.
Operating expenses increased during the year ended March 31, 2001 from the year
ended March 31, 2000 as part of the growth plan of Semotus, which was in place
through December 2000. This plan included expansion of personnel in the key
categories of engineering, sales and marketing. Further, some overhead expenses
increased in order to integrate and manage the four acquisitions completed in
fiscal year 2001.
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. Additionally, for the
fiscal year ended March 31, 2002, there are two categories of impairment
charges: goodwill and intangible assets. The table below summarizes the changes
in these categories of operating expenses:
Year Ended March 31,
Description 2002 2001 2000
- -------------- ------------ ------------- -----------
Research and
development $1,475,063 $1,228,139 $ 600,957
Sales and
marketing 2,281,316 4,630,355 1,849,597
General and
administrative 4,902,982 5,330,211 4,291,085
Impairment of goodwill 4,773,870 -- --
Impairment of intangible
Assets 3,541,017 -- --
Depreciation and
amortization 3,975,001 2,010,395 264,427
24
Stock, option and
warrant expense 496,181 601,932 1,060,487
------------ ------------- -----------
Totals $ 21,445,430 $13,801,032 $8,066,553
============ ============= ===========
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. The increase in these costs is due principally
to hiring engineering personnel, for the development of updates to existing
products and new products, such as the Equity Market Pro, Global Market Pro(TM),
and the new release of the Company's enterprise application product, HiplinkXS.
Much of the development work for these products has been completed and
currently, research and development expenses have been reduced as part of the
Centralization and Consolidation Plan.
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.
In the fiscal year ended March 31, 2002, these costs have declined principally
due to the reduction in general advertising and non-sales supported marketing.
There has been a reduction in marketing personnel as the Company has shifted to
emphasizing marketing and sales support for its existing products.
These costs increased in the fiscal year ended March 31, 2001 due principally to
the addition of new salespeople and new marketing personnel, in addition to
increased participation in wireless data forums and trade shows. New marketing
programs have also been developed and are in the process of being implemented
for new wireless products such as the Global Market Pro and Mobile Reach.
Semotus is also updating existing marketing materials for existing products such
as HipLink and Dose Assist.
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 Nasdaq and AMEX listings,
investor and public relations, rent, administrative personnel, and other
overhead related costs.
These costs declined during the fiscal year ended March 31, 2002 as personnel
and offices were reduced and operating functions were consolidated. This trend
should continue as Semotus implements its Centralization and Consolidation Plan.
These costs increased in the fiscal year ended March 31, 2001 due to increases
in administrative personnel, costs associated with providing investor
information, as well as an expansion of office space in San Jose, Ca., Vancouver
B.C., Woodbury, N.J. and Downers Grove, Ill. Additional unusual general and
administrative cost increases have resulted from the acquisitions of Cross,
Simkin, Wares and Five Star.
Semotus' management performs an on-going analysis of the recoverability of its
goodwill and other intangibles and the value of its investments in accordance
with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and For
Long-Lived Assets to be Disposed Of". Based on quantitative and qualitative
measures, the Company assesses the need to record impairment losses on
long-lived assets used in operations when impairment indicators are present.
As a result of Semotus' review, management determined that the carrying value of
goodwill and recorded asset value were not fully recoverable and an impairment
charge of $4,773,870 was taken comprised of an impairment charge to Simkin's
goodwill of $909,272 (of which $650,000 was recorded in the quarter ended June
30, 2001, see Note 5 "Sale of Technology and Net Impairment of Goodwill"),
$1,156,587 for Wares' goodwill and $2,708,011 for WizShop's goodwill.
Furthermore, Semotus took an impairment charge of $3,420,000 for GMP in the
quarter ended March 31, 2002 and a $121,017 impairment charge for software
development costs at Wares. See Notes 4 and 5, "Impairment of Goodwill and
Long-Lived Assets" and "Sale of Technology and Net Impairment of Goodwill"
respectively, to the Financial Statements in this 10K.
25
Depreciation and amortization expense includes depreciation of computers and
other related hardware and certain fixtures. Amortization includes goodwill
costs and certain intellectual property costs. The increase in this expense is
primarily the result of the amortization of goodwill from the Company's
acquisitions and the amortization associated with the warrants awarded to Chase
in connection with Global Market Pro (GMP).
The non-cash charges for compensation consists mainly of grants of stock,
options and warrants for services provided to the Company. Such services include
financial, marketing and public relations consulting. Additionally, common stock
was issued for certain accrued liabilities. The decline in non-cash charges for
compensation is due mainly to the termination of contracts with service
providers, which called for stock or warrant compensation, as well as the
decline in the stock and option grants to service providers, in the fiscal years
ended March 31, 2002 and 2001.
The common stock issued was valued at the fair market value of stock issued, or
in the instance of common stock purchase warrants, in accordance with the
Black-Scholes pricing guidelines. Certain employee stock options, which have
been repriced, are subject to the variable plan requirements of APB No. 25, that
requires the Company to record compensation expense for changes in the fair
value of the Company's common stock. While no compensation expense was required
to be recognized in FY 2002, FY2001 or FY 2000, expense will be recognized in
the future if the stock price increases above the exercise price of the options.
NON-OPERATING INCOME AND EXPENSES
Non-operating income and expenses are primarily made up of interest income
from invested cash, interest expense from a note payable and retired bank lines
of credit, 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. The following tables reflect the changes in other
income (expense).
YEAR ENDED MARCH 31,
DESCRIPTION 2002 2001 2000
- ----------- ------------ -------------- -------------
Net interest income $ 264,060 $ 639,993 $ 141,257
Owners fee sales
of technology (1,569,000) (1,569,000) (1,570,000)
Interest on note from
sales of technology 1,569,000 1,569,000 1,570,000
Amortization of
technology advances 306,908 371,052 432,021
Other Interest income 50,207 132,792 129,290
Miscellaneous
Expense (77,070) (88,064) (267,107)
----------- --------------- --------------
Total non-operating
income $ 544,105 $1,055,773 $ 435,461
=========== =============== ===============
Non-operating income, net of expenses declined in the fiscal year ended March
31, 2002, as less cash was available for investment during the year resulting
from the operating losses. Amortization of technology advances decreased
somewhat due to the application of the effective interest method of amortization
on the balances.
Non-operating income, net of expenses, increased in the year ended March 31,
2001 from the prior year, due primarily to an increase in interest income
resulting from more cash during the year that was available for investment. The
two major sources of cash were the private placement of Series B Convertible
Preferred Stock completed in February 2000 and the exercise of common stock
warrants. Amortization of technology advances decreased somewhat, due to the
application of the effective interest method of amortization on the balances.
26
Miscellaneous expenses declined due to a write-off of an investment in two new
products at Five Star, which was incurred in fiscal year 2000.
COMPREHENSIVE LOSS
The increase in the comprehensive loss for the fiscal year ended March 31, 2002
to $18,484,302 or $(1.09) per share was due principally to a 511% increase in
non-cash charges to income from impairments of goodwill and intangible assets
and the amortization of intangible assets. Additionally, research and
development expense increased 20% with the upgrading and launch of new and
improved products. These costs were offset somewhat with a 66% increase in gross
profit dollars and reductions in sales and marketing expenses and general and
administrative expenses.
The comprehensive loss of $11,314,517 or $(0.74) per share for the fiscal year
ended March 31, 2001 compared to $4,756,324 or $(0.61) per share for the fiscal
year ended March 31, 2000 was due principally to three factors: (i) a 97%
increase in non-cash charges from acquisitions and amortization of intellectual
property, (ii) a substantial decline in the revenues and gross margin of
Semotus' FiveStar subsidiary, and (iii) an increase in engineering, sales and
marketing and administrative personnel for the growth of Semotus.
SEGMENT RESULTS
Due to additional businesses resulting from the acquisitions, Semotus began
reporting segment information in the fourth quarter of the fiscal year ended
March 31, 2001. The Company has restated the fiscal year ended March 31, 2000
for comparison purposes, although Semotus did not have separate segments at that
time.
Semotus' business has evolved into four segments: wireless services, enterprise
and commerce sales, professional and related services and logistic system sales.
See "Business Description - Services and Products" for further information about
each of the segments.
Specific results of the segments are discussed under "Revenues" and "Cost of
Revenues and Gross Margin" in this section titled "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
Professional Logistic
Wireless Enterprise and and related system Corporate
Services commerce sales services sales and other Total
---------- -------------- ------------ ---------- ---------- ---------
As of and for the
Year Ended March 31,
2002
Revenue $ 1,305,347 2,630,368 559,956 1,611,424 -- $ 6,107,095
Gross Profit $ 784,513 541,488 282,882 802,780 -- $ 2,411,663
Operating loss* $ (837,442) (1,005,843) (563,100) (149,766) (16,477,615) $(19,033,767)
Depreciation and
Amortization $ 340,482 113,899 265,661 29,613 3,225,346 $ 3,975,001
Capital Expenditures $ 18,873 -- -- 5,715 -- $ 24,588
Total Assets, March
31, 2002* $ 7,133,204 1,616,479 282,808 1,056,540 248,032 $ 10,337,063
As of and for the
Year Ended March
31, 2001
Revenue $ 1,731,948 3,193,433 622,582 -- -- $ 5,547,963
Gross Profit $ 746,643 363,791 341,444 -- -- $ 1,451,878
Operating loss* $(1,113,291) (974,759) (171,367) -- (10,089,737) $(12,349,154)
Depreciation and
Amortization $ (223,149) (37,535) (77,812) -- (1,671,899) $ (2,010,395)
Capital Expenditures $ 223,231 22,490 11,747 -- 280,968 $ 538,436
Total Assets, March
31, 2001* $13,127,832 1,302,984 2,578,399 -- 4,760,746 $ 21,769,961
As of and for the
Year Ended March
31, 2000
Revenues $ 1,459,920 6,151,238 -- -- -- $ 7,611,158
Gross Profit $ 684,596 2,189,570 -- -- -- $ 2,874,166
Operating loss* $ (923,460) (189,531) -- -- (4,079,396) $ (5,192,387)
Depreciation and
Amortization $ 244,077 20,350 -- -- -- $ 264,427
Capital Expenditure $ 96,723 1,135 -- -- 24,437 $ 122,295
Total Assets, March
31, 2000* $16,597,406 1,893,074 -- -- -- $ 18,490,480
27
* Certain corporate marketing, research and development and general and
administrative costs have not been allocated to the segments and have been
included in "Corporate and other". The $248,032 and the $4,760,476 of assets at
March 31, 2002 and 2001 respectively under "Corporate and other" is comprised of
the GMP Intellectual Property, Semotus' Global Market Pro wireless financial
product and all allocations of certain corporate assets and liabilities not
appropriately categorized in any segment.
LIQUIDITY AND CAPITAL RESOURCES
The overall decrease in the cash position of Semotus at March 31, 2002 is due to
the continued operating losses at the Company. Cash continued to be spent on
operating resources and upgrading wireless products although a cash management
and cost reduction program has been implemented and has reduced the overall cash
loss by 57%. Semotus believes the cash loss will continue to be reduced through
its Centralization and Consolidation Plan.
The overall decrease in the cash position of Semotus at March 31, 2001 is due to
the expansion of the Company to grow both internally through its new and
upgraded products and services and externally through acquisitions. Cash was
spent on operating resources, especially personnel, and computer and
telecommunications equipment. Further, four acquisitions produced unusual
charges. In the fiscal year ended March 31, 2001 warrants and options were
converted to common stock, which provided some cash. In the fiscal year ended
March 31, 2000, Semotus completed a private placement of Series B Convertible
Preferred Stock which contributed $9,315,501 to cash, in addition to the
conversion of warrant and options to common stock which produced $7,089,852 of
cash. The sources and uses of cash are summarized as follows:
YEAR ENDED MARCH 31,
2002 2001 2000
------------ ------------ -------------
Cash used in
operating activities $(5,141,459) $(9,219,730) $(4,271,193)
Cash provided by (used in)
investing activities 1,669,791 (576,766) (84,077)
Cash provided by (used in)
financing activities (196,082) 1,279,762 16,213,158
------------ ------------ -------------
Net increase (decrease) in
cash and cash equivalents $(3,667,750) $(8,516,734) $11,857,888
============ ============ =============
Cash used in operating activities at March 31, 2002 consisted principally of a
net loss of $18,444,478 offset somewhat by non-cash charges of $8,314,887 of
impairment charges, depreciation and amortization of $3,975,001 and stock based
compensation of $496,181. Other operating activities that provided cash were
reductions in accounts receivable and inventory of $532,953 and $209,376
respectively, and increases in accrued liabilities and deferred revenue of
$181,242 and $168,091, respectively.
Cash used in operating activities at March 31, 2001 consisted principally of a
net loss of $11,293,381 offset somewhat by non-cash charges of $2,010,395 of
depreciation and amortization and $601,932 of stock, option and warrant based
compensation. Other operating activities that contributed to the use of cash
were $237,625 in the net change of current assets and current liabilities. This
largely resulted from reductions in accounts payable offset by reductions in
inventory and accounts receivable.
Cash provided from investing activities of $1,669,791 at March 31, 2002 resulted
principally from $1,096,472 of cash received, net of assets acquired from the
two companies acquired in the fiscal year, $350,000 from the sale of the
Kinetidex technology and $247,907 net cash received from a minority investment
in the Company's ADA subsidiary.
28
Cash used in investing activities of $576,766 at March 31, 2001 resulted
principally from $538,436 of purchased equipment, mainly computers and wireless
equipment.
Cash flows from financing activities produced a net decrease in cash of $196,082
which resulted from $207,752 of repayments on notes payable and capital leases
offset slightly by $11,670 in cash received from the exercise of stock options.
Cash flows provided by financing activities of $1,279,762 at March 31, 2001
resulted from $2,040,438 of proceeds from the exercise of options and warrants
offset slightly by payments of $15,624 on capital leases and $50,830 on notes
payable. Additionally, the Company has $694,222 in a certificate of deposit that
has been used to secure a note payable.
As of March 31, 2002, the Company had cash and cash equivalents of $4,176,292 a
decrease of $3,667,750 from the prior year. Working capital decreased to
$2,064,396 from the fiscal year ended March 31, 2001.
As of March 31, 2001, the Company had cash and cash equivalents amounting to
$7,844,042, a decrease of $8,516,734 from the balance at March 31,2000. Working
capital decreased to $7,780,783 from $15,753,980 at the prior year-end.
The continued decrease in working capital is from the resources used in the
operations of Semotus as explained above, somewhat offset by cash produced by
the conversion of warrants and options into common stock. 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 March 31, 2002. Primary commitments in FY2003 are repayment of
notes payable ($693,286), capital lease obligations ($93,922) and operating
lease obligation ($441,176).
At March 31, 2002 and 2001, the Company had a deferred tax asset of
approximately $11,753,500 and $9,592,500, principally arising from net operating
loss carryforwards available to offset future taxable income. As management
cannot determine that it is more likely than not that the Company will realize
the benefit of this asset, a 100% valuation allowance has been established.
Management believes that it has adequate working capital for the next 12 months.
RECENT PRONOUNCEMENTS:
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes accounting and reporting
standards for derivative instruments and for hedging activities. The Company
does not currently or intend to engage in any derivative or hedging activities.
As such, the accounting and disclosure prescribed by SFAS No. 133 are not
expected to have a material impact on the Company.
In December 1999, the SEC staff released Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 provides
interpretive guidance on the recognition, presentation and disclosure of revenue
in the financial statements. SAB 101 must be applied to the financial statements
no later than the quarter ending September 30, 2000. The adoption of SAB 101 did
not have a material effect on the Company's financial results in the fiscal year
ended March 31, 2001.
In March 2000, the Financial Accounting Standards Board issued Interpretation
No. 44 ("FIN 44") Accounting for Certain Transactions Involving Stock
Compensation, an Interpretation of APB Opinion No. 25. FIN 44 clarifies the
application of Opinion No. 25 for (a) the definition of employee for purposes of
applying Opinion No. 25, (b) the criteria for determining whether a plan
qualifies as a non-compensatory plan, (c) the accounting consequences of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 2, 2000, but certain conclusions cover
specific events that occur after either December 15, 1998, or January 12, 2000.
Due to the repricing of options in December 2000, Fin 44 may have a material
effect on the Company's financial position and results of operations in the
future. For the fiscal years ended March 31, 2002, 2001 and 2000, the effect was
immaterial.
In June 2001, the FASB finalized FASB Statements No. 141, "Business
Combinations" (SFAS 141), and No. 142, "Goodwill and Other Intangible Assets"
29
(SFAS 142). SFAS 141 requires the use of the purchase method of accounting and
prohibits the use of the pooling-of-interests method of accounting for business
combinations initiated after June 30, 2001. SFAS 141 also requires that the
Company recognize acquired intangible assets apart from goodwill if the acquired
intangible assets meet certain criteria. SFAS 141 applies to all business
combinations initiated after June 30,2001 and for purchase business combinations
completed on or after July 1, 2001. It also requires, upon adoption of SFAS 142,
that the Company reclassify the carrying amounts of intangible assets and
goodwill based on the criteria in SFAS 141.
SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. SFAS 142 requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption. The Company is
also required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142.
The Company's previous business combinations were accounted for using both the
pooling-of-interests and purchase methods. The pooling-of-interests method does
not result in the recognition of acquired goodwill or other intangible assets.
As a result, the adoption of SFAS 141 and 142 will not affect the results of
past transactions accounted for under the pooling-of-interests method. However,
all future business combinations will be accounted for under the purchase
method, which may result in the recognition of goodwill and other intangible
assets, some of which will be recognized through operations, either by
amortization or impairment charges, in the future. For purchase business
combinations completed prior to March 31, 2002, the net carrying amount of
goodwill is $2,474,597 and other intangible assets is $576,958. Amortization
expense for goodwill fiscal year ended March 31, 2002 was $1,855,407. Further,
the Company determined that goodwill had been impaired as of March 31, 2002, and
charged against income $4,773,870 of goodwill. The Company intends to complete
the transitional goodwill impairment test within six months from the date of
adoption. The impact of the adoption of SFAS 141 and SFAS 142 on the Company's
financial position and results of operations could be material.
In August 2001, the FASB issued SFAS No. 143 (SFAS 143) "Accounting for
Obligations Associated with the Retirement of Long-Lived Assets". SFAS 143
addresses financial accounting and reporting for the retirement obligation of an
asset. SFAS 143 states that companies should recognize the asset retirement
cost, at its fair value, as part of the cost of the asset and classify the
accrued amount as a liability in the balance sheet. The asset retirement
liability is then accreted to the ultimate payout as interest expense. The
initial measurement of the liability would be subsequently updated for revised
estimates of the discounted cash outflows. SFAS 143 will be effective for fiscal
years beginning after June 15, 2002. At this time, the Company does not expect
that the implementation of SFAS 143 will have any material impact on its
financial position, results of operations, or cash flows.
In October 2001, the FASB issued SFAS No. 144 (SFAS 144) "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS 144 supersedes the SFAS No.
121 by requiring that one accounting model be used for long-lived assets to be
disposed of by sale, whether previously held and used or newly acquired, and by
broadening the presentation of discontinued operations to include more disposal
transactions. SFAS 144 will be effective for fiscal years beginning after
December 15, 2001. The impact of adopting SFAS 144 on the Company's financial
position and result of operations could be material.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have limited exposure to financial market risks, including changes in
interest rates. At March 31, 2002, we had cash and cash equivalents of
$4,176,292 and restricted cash of $693,286. Cash and cash equivalents consisted
of demand deposits and money market accounts. Because of the cash equivalency of
30
the money market accounts and the liquidity thereof, there is no material
exposure to interest rates for these accounts.
The Company also has short-term notes payable in the amount of $693,286, at
March 31, 2002. These notes are due and payable in six months. 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 March 31, 2002.
Semotus has a permanent engineering operation in Vancouver, B.C., Canada and
therefore has an exposure to the Canadian and U.S. dollar exchange rate. The
Company, in the ordinary course of its business, transfers funds to the Canadian
company and records the translation at the current exchange rate. The Company
records translation gains and losses in Comprehensive Income. At March 31, 2002,
the cumulative translation loss was $142,360. Given the relative stability of
the Canadian and U.S. dollar exchange rate, the Company has not deemed it
necessary to hedge this exposure.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements are set forth on pages F-1 through F-39 hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
No response required.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item will be included in the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held on September 17,
2002 under the caption "Directors and Executive Officers" which will be filed
with the Securities and Exchange Commission no later than 120 days after the
close of the fiscal year ended March 31, 2002, and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item will be included in the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held on September 17,
2002 under the caption "Executive Compensation" which will be filed with the
Securities and Exchange Commission no later than 120 days after the close of the
fiscal year ended March 31, 2002, and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item will be included in the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held on September 17,
2002 under the caption "Security Ownership of Certain Beneficial Owners and
Management" which will be filed with the Securities and Exchange Commission no
later than 120 days after the close of the fiscal year ended March 31, 2002, and
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item will be included in the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held on September 17,
2002 under the caption "Certain Relationships and Related Transactions" which
will be filed with the Securities and Exchange Commission no later than 120 days
after the close of the fiscal year ended March 31, 2002, and is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) FINANCIAL STATEMENTS
The financial statements required by this item are submitted in a separate
section beginning on page F-1 of this report.
31
(a)(2) FINANCIAL STATEMENT SCHEDULES
All financial statement schedules are omitted because they are not applicable or
the required information is shown in the Consolidated Financial Statements or
the notes thereto.
(a)(3) EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION LOCATION
- ------- ----------- --------
2.1 Agreement of Merger by and among Incorporated by reference to
Datalink.net, Inc., Acquisition Exhibit 2.1 to the Registrant's
Wireless, Inc., Cross Form 10QSB filed September 30,
Communications, Inc., and 2000.
Kathleen M. Wold made effective
as of July 20, 2000.
2.2 Agreement of Merger by and among Incorporated by reference to
Datalink.net, Inc., Medical Exhibit 2.2 to the Registrant's
Acquisition Wireless, Inc. Form 10QSB filed September 30,
Simkin Inc. and J. Daniel 2000.
Robinson made effective as
of September 12, 2000.
2.3 Agreement of Merger by and among Incorporated by reference to
Datalink.net, Inc., Wares Exhbit 2.3 to the Registrant's
Acquisition, Inc., ISS, Inc. Form 10QSB filed September 30,
and Stephen J. Casey made 2000.
effective as of October 10, 2000.
2.4 Agreement of Merger by and among Incorporated by reference to
Datalink.net, Inc., Five Star Exhibit 2.1 to the Registrant's
Advantage, Inc., Five Form 8-K filed January 12, 2001
Acquisition Inc. and Jeff
Gleckman dated December 8, 2000.
2.5 First Amendment to Merger Incorporated by reference to
Agreement by and among Exhibit 2.2 to the Registrant's
Datalink.net, Inc. Five Form 10QSB filed January 12,
Acquisition, Inc., Five Star 2001.
Advantage, Inc. and Jeff
Gleckman, dated as of December
28, 2000.
2.6 Merger Agreement by and among Incorporated by reference to
Datalink.net, Inc., Five Exhibit 2.3 to the Registrant's
Acquisition, Inc., Tehc-ni-comm, Form 10QSB filed January 12,
Inc., and Jeff Gleckman, dated 2001.
as of December 8, 2000.
2.7 First Amendment to Merger Incorporated by reference to
Agreement by and among Exhibit 2.4 to the Registrant's
Datalink.net, Inc., Five Form 10QSB filed January 12,
Acquisition, Inc., Tech-ni-comm, 2001.
Inc., and Jeff Gleckman, dated
as of December 28, 2000.
2.8 Merger Agreement by and among Incorporated by reference to
Semotus Solutions, Inc., Exhibit 2.1 to the Registrant's
WizShop.com, Inc. and Wiz Form 8-K filed May 17, 2001.
Acquisition, Inc.
2.9 Merger Agreement by and among Incorporated by reference to
Semotus Solutions, Inc., ADA Exhibit 2.1 to the Registrant's
Acquisition, Inc., Application Form 8-K filed May 30, 2001.
Design Associates, Inc. and John
Hibben.
32
2.10 Common Stock Purchase Agreement Incorporated by reference to
by and among Application Design Exhibit 2.1 to the Registrant's
Associates, Inc., John Hibben Form 10Q filed February 14, 2002.
and 2007978 Ontario, Inc. dated
January 18, 2002.
2.11 Agreement to Amend the Merger Incorporated by reference to
Agreement and Employment Exhibit 2.2 to the Registrant's
Agreement by and among Semotus Form 10Q filed February 14, 2002.
Solutions, Inc., Application
Design Associates, Inc. and John
Hibben dated January 18, 2002.
**2.12 Agreement to Amend the Stock Incorporated by reference to
Purchase Agreement and Terminate Exhibit 2.1 to the Registrant's
the Warrant by and among Form 8-K filed February 28, 2002.
Application Design Associates,
Inc., Semotus Solutions, Inc.
and 2007978 Ontario, Inc. dated
February 15, 2002.
2.13 Joint Venture Agreement by and Filed electronically herewith.
among Semotus Solutions, Inc.
and Outercurve Technologies,
Inc. dated February 20, 2002.
3.1 Articles of Incorporation. Incorporated by reference to
Exhibit No. 2 to the Registrant's
Form 8-A filed on July 22, 1996
(No. 0-21069).
3.2 Bylaws of the Company. Incorporated by reference to
Exhibit No. 3 to the Registrant's
Form 8-A filed on July 22, 1996
(No. 0-21069).
3.3 Amended and Restated Bylaws Incorporated by reference to
of the Company dated January Exhibit 3.1 to the Registrant's
24, 2000. Form 8-K Filed on February 17,
2000.
3.4 Certificate of Amendment to Incorporated by reference to
the Articles of Incorporation Exhibit 3.2 to the Registrant's
dated February 17, 1998. Form 10-KSB for the year ended
March 31, 1998.
3.5 Certificate of Amendment to Incorporated by reference to
Articles of Incorporation Exhibit 3.4 to the Registrant's
dated July 6, 1999. Form 8-A12B filed on
December 21, 1999.
3.6 Certificate of Amendment to Incorporated by reference to
Articles of Incorporation Exhibit 3.5 to the Registrant's
Dated January 12, 2001. Form 10-KSB for the year ended
March 31, 2001.
4.1 Specimen Stock Certificate. Incorporated by reference to
Exhibit 4.1 to the Registrant's
Form 8-A-12B filed on
December 21,1999.
4.2 Certificate of Designation Incorporated by reference to
of the Series B Convertible Exhibit 4.1 to the Registrant's
Preferred Stock. Form 8-K filed February 17, 2000.
4.3 Warrant to purchase up to Incorporated by reference to
375,000 shares of common stock Exhibit 4.2 to the Registrant's
issued to Brown Simpson Strategic Form 8-K filed February 17,
Fund, Ltd., dated February 9, 2000.
2000.
33
4.4 Warrant to purchase up to Incorporated by reference to
201,923 shares of common stock Exhibit 4.3 to the Registrant's
issued to Brown Simpson Form 8-K filed February 17,
Strategic Fund, L.P., dated 2000.
February 9, 2000.
4.5 Warrant to purchase up to Incorporated by reference to
76,923 shares of common stock Exhibit 4.4 to the Registrant's
issued to H.C. Wainwright & Co., Form 8-K filed February 17,
Inc., dated February 14, 2000. 2000.
4.6 Warrant to purchase up to Incorporated by reference to
150,000 shares of common stock Exhibit 4.2 to the Registrant's
issued to Anthony N. LaPine, Form S-3 filed on April 21,
dated December 1, 1999. 2000.
**4.7 Warrant to Purchase 150,000 Incorporated by reference to
shares of Semotus' common stock Exhibit 4.1 to the Registrant's
issued to 2007978 Ontario, Inc. Form 10Q filed February 14, 2002.
Dated January 18, 2002.
10.1 Agreement Concerning the Incorporated by reference to
Exchange of Common Stock Exhibit No. 10 to the Regis-
Between Datalink Systems trant's Form 8-K dated June 27,
Corporation and Datalink 1996.
Communications Corporation.
10.2 Application Software Purchase Incorporated by reference to
Agreement between Datalink Exhibit No. 10.1 to the Regis-
Systems Corporation and trant's Form 8-K dated August
Shalcor Investments. 26, 1996.
10.3 Management and Marketing Incorporated by reference to
Agreement between Datalink Exhibit No. 10.2 to the Regis-
Systems Corporation and trant's Form 8-K dated August
Shalcor Investments. 26, 1996.
10.4 8% Secured Term Note. Incorporated by reference to
Exhibit No. 10.3 to the Regis-
trant's Form 8-K dated August
26, 1996.
*10.5 Employment Agreement with Anthony Incorporated by reference to
LaPine dated May 1, 1996. Exhibit 10.6 to the Regis-
trant's Form 10-KSB for the
year ended March 31, 1997.
10.6 Application Software Purchase Incorporated by reference to
Agreement between Datalink Exhibit 10.1 to the Regis-
Systems Corporation and 605285 trant's Form 8-K dated May 6,
Ontario Inc. 1997.
10.7 Management and Marketing Incorporated by reference to
Agreement between Datalink Exhibit 10.2 to the Regis-
Systems Corporation and 605285 trant's Form 8-K dated May 6,
Ontario. 1997.
10.8 6% Secured Term Note. Incorporated by reference to
Exhibit No. 10.3 to the
Registrant's Form 8-K dated
May 6, 1997.
*10.9 Loan Forgiveness Agreement with Incorporated by reference to
Anthony LaPine dated January 19, Exhibit 10.20 to the Registrant's
2000. Form 10KSB filed June 29, 2000.
10.10 Secured Promissory Note with Incorporated by reference to
Anthony LaPine dated Exhibit 10.19 to the Registrant's
February 29, 2000. Form 10KSB filed June 29, 2000.
34
10.11 Option to Repurchase Technology Incorporated by reference to
Agreement with 605285 Ontario Exhibit 10.21 to the Registrant's
Inc. dated June 14, 2000. Form 10KSB filed June 29, 2000.
10.12 Termination and Sale Agreement Incorporated by reference to
by and among Micromedix, Inc. Exhibit 99.1 to the Registrant's
Semotus Solutions, Inc. and Form 10Q filed August 15, 2001.
Simkin, Inc. dated May 31, 2001.
10.13 Loan Forgiveness Agreement with Filed electronically herewith.
Anthony LaPine dated March 29,
2002.
21 Subsidiaries of the Registrant. Filed electronically herewith.
23 Consent of BDO Seidman, LLP. Filed electronically herewith.
99.1 Securities Purchase Agreement, Incorporated by reference to
dated as of February 9, 2000, Exhibit 99.1 to the Regis-
by and among the Company, Brown trant's 8-K Filed on February
Simpson Strategic Growth Fund, 17, 2000.
Ltd. and Brown Simpson Strategic
Growth Fund.
99.2 Registration Rights Agreement, Incorporated by reference to
dated as of February 9, 2000, Exhibit 99.2 to the Regis-
by and among the Company, Brown trant's 8-K Filed on February
Simpson Strategic Growth Fund, 17, 2000.
Ltd. and Brown Simpson Strategic
Growth Fund, L.P.
99.3 Registration Rights and Lock-Up Incorporated by reference to
Agreement by and among Semotus Exhibit 2.2 to the Registrant's
Solutions, Inc. and John Hibben. Form 8-K filed May 30, 2001.
- ----------
* Management contract or compensatory plan or arrangement.
** This Warrant was cancelled, ab initio, and effectively replaced with 150,000
common stock options under the Company's 1996 Stock Option Plan.
(b) REPORTS ON FORM 8-K. The Company filed a Current Report on Form 8-K on
February 28, 2002 with respect to the amendment entered into by and among
Application Design Associates, Semotus Solutions, Inc., and 2007978 Ontario,
Inc. that canceled, ab initio, the Warrant to purchase 150,000 shares of
Registrant's common stock dated January 18, 2002.
(c) EXHIBITS. The exhibits required by this Item are listed under Item 14(a)(3).
(d) FINANCIAL STATEMENTS SCHEDULES. The financial statement schedules required
by this Item are listed under Item 14(a)(2).
35
INDEX TO FINANCIAL STATEMENTS
PAGE(S)
Report of Independent Certified Public Accountants . . . . . F-2
Consolidated Financial Statements:
Consolidated Balance Sheets, March 31, 2002 and 2001 . . F-3
Consolidated Statements of Operations and Comprehensive
Loss for the years ended March 31, 2002, 2001 and 2000. . F-4
Consolidated Statements of Common Shareholders' Equity
for the years ended March 31, 2002, 2001 and 2000. . . . F-5 - F-6
Consolidated Statements of Cash Flows for the years
ended March 31, 2002, 2001 and 2000. . . . . . . . . . . F-7 - F-8
Notes to Consolidated Financial Statements. . . . . . . F-9 - F-39
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders of Semotus Solutions, Inc.:
We have audited the accompanying consolidated balance sheets of Semotus
Solutions, Inc. and subsidiaries as of March 31, 2002 and 2001, and the related
consolidated statements of operations and comprehensive loss, common
shareholders' equity and cash flows for each of the three years in the period
ended March 31, 2002. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform our audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Semotus
Solutions, Inc. and subsidiaries as of March 31, 2002 and 2001, and the results
of their operations and their cash flows for each of the three years in the
period ended March 31, 2002, in conformity with accounting principles generally
accepted in the United States of America.
/s/ BDO Seidman, LLP
San Jose, California
June 3, 2002
F-2
SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS March 31 March 31
2002 2001
CURRENT ASSETS: ----------- ------------
Cash and cash equivalents (including restricted cash of
$693,286 in 2002 and $694,222 in 2001) (Note 9) $ 4,869,578 $ 8,538,264
Trade receivables (net of allowance for doubtful accounts
of $67,000 in 2002, $62,887 in 2001) 320,566 462,368
Income and GST tax receivable 3,823 127,266
Other receivables 60,395 115,716
Inventory, (net of reserve of $40,900 in 2002
and $188,500 in 2001) (Note 2) 178,171 387,547
Prepaid expenses 170,514 155,959
----------- -----------
Total current assets 5,603,047 9,787,120
Property and equipment, net (Note 7) 682,461 977,678
Capitalized contract, net (Note 2) 576,958
Investments -- 151,000
GMP intellectual property, net (Notes 4 and 6) 1,000,000 5,780,000
Goodwill, net (Notes 3,4 and 5) 2,474,597 4,760,746
Other assets -- 313,417
----------- ------------
Total assets $10,337,063 $21,769,961
=========== ============
LIABILITIES
Current liabilities:
Accounts payable $ 799,385 $ 626,830
Accrued expenses and other current liabilities 359,091 228,340
Note payable (Note 9) 693,286 694,222
Current portion of capital lease obligation (Note 10) 93,922 38,222
Current portion of advances on technology sales (Note 8) 269,109 307,390
Deferred revenue 1,323,858 111,333
----------- ------------
Total current liabilities 3,538,651 2,006,337
Capital lease obligation, net of current portion (Note 10) 52,405 63,447
Advances on technology sales, net of current portion (Note 8) 566,542 835,170
----------- ------------
Total liabilities 4,157,598 2,904,954
----------- ------------
Minority Interest (Note 25) 202,528 --
Commitments and contingencies (Notes 9,10 and 20)
PREFERRED SHAREHOLDERS' EQUITY (Note 11):
Convertible preferred stock, Series B: $0.001 par value; $13.00
liquidation value; authorized: 5,000,000 shares; issued and
outstanding:469,231 in 2002 and 2001 469 469
Additional paid-in capital 5,681,987 5,681,987
----------- -----------
Total preferred shareholders' equity 5,682,456 5,682,456
----------- -----------
COMMON SHAREHOLDERS' EQUITY (Note 12):
Common stock: $0.01 par value; authorized: 50,000,000 shares;
issued and outstanding: 17,200,784 in 2002 and
15,903,368 in 2001 172,008 159,034
Additional paid-in capital 60,396,089 55,217,626
Accumulated other comprehensive loss (142,360) (102,536)
Notes receivable - related parties (701,817) (1,106,612)
Accumulated deficit (59,429,439) (40,984,961)
----------- ------------
Total common shareholders' equity 294,481 13,182,551
----------- ------------
Total liabilities, minority interest,
preferred and common shareholders' equity $10,337,063 $21,769,961
=========== ============
See accompanying notes to consolidated financial statements.
F-3
SEMOTUS SOLUTIONS,INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Year Ended March 31,
2002 2001 2000
----------- ----------- -----------
Revenues:
Wireless Services $ 1,305,347 $ 1,731,948 $ 1,459,920
Enterprise and commerce sales 2,630,369 3,193,433 6,151,238
Professional and related services 559,955 622,582 --
Logistics 1,611,424 -- --
----------- ----------- -----------
Total Revenue 6,107,095 5,547,963 7,611,158
Cost of Sales:
Wireless Services 520,834 985,305 775,324
Enterprise and commerce sales 2,088,881 2,829,642 3,961,668
Professional and related services 277,073 281,138 --
Logistics 808,644 -- --
----------- ----------- -----------
Total Cost of revenue 3,695,432 4,096,085 4,736,992
----------- ----------- -----------
Gross Profit 2,411,663 1,451,878 2,874,166
Operating Expenses:
(Exclusive of depreciation and amortization and
stock, option and warrant expense)
Research and development 1,475,063 1,228,139 600,957
Sales and marketing 2,281,316 4,630,355 1,849,597
General and administrative 4,902,982 5,330,211 4,291,085
Impairment of goodwill 4,773,870 -- --
Impairment of intangible assets 3,541,017 -- --
Depreciation and amortization:
Research and development 127,976 97,606 63,874
General and administrative 3,847,025 1,912,789 200,553
----------- ----------- -----------
3,975,001 2,010,395 264,427
Stock option and warrant expense:
Sales and marketing 88,000 78,750 --
General and administrative 408,181 523,182 1,060,487
----------- ----------- -----------
496,181 601,932 1,060,487
----------- ----------- -----------
Total Operating expenses 21,445,430 13,801,032 8,066,553
Operating loss (19,033,767) (12,349,154) (5,192,387)
Net interest income 264,060 639,993 141,257
Other income (Note 12) 280,045 415,780 294,204
----------- ----------- -----------
Total interest and other income 544,105 1,055,773 435,461
----------- ----------- -----------
Net loss before minority interest (18,489,662) (11,293,381) (4,756,926)
Minority interest (45,184) -- --
----------- ----------- -----------
Net loss (18,444,478) (11,293,381) (4,756,926)
Other comprehensive income
(loss) - Translation adjustment (39,824) (21,136) 602
----------- ----------- -----------
Comprehensive loss $(18,484,302) $(11,314,517) $(4,756,324)
=========== =========== ===========
Net loss per share:
Basic $ (1.09) $ (0.74) $ (0.61)
Diluted $ (1.09) $ (0.74) $ (0.61)
Weighted average shares used in per
Share calculation, basic and diluted 16,975,660 15,199,895 7,763,715
============ =========== ===========
See accompanying notes to consolidated financial statements.
F-4
SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
COMMON STOCK ADDITIONAL
--------------------- PAID-IN
SHARES AMOUNT CAPITAL
---------- --------- -----------
Balances at March 31, 1999 $5,378,614 $ 53,786 $28,652,544
Common stock issued for:
Options exercised 223,856 2,238 246,353
Services rendered 114,296 1,144 225,343
Exercise of warrants for cash and notes
receivable 2,955,664 29,556 6,881,231
Cashless exercise of warrants 282,278 2,822 (2,822)
Compensation associated with stock options
And warrants granted for services -- -- 834,000
Conversion of preferred, series A to
common stock 4,731,080 47,312 (47,312)
Translation adjustment -- -- --
Amortization of notes receivable, net
of accrued interest due -- -- --
Net loss -- -- --
----------- --------- -----------
Balances at March 31, 2000 13,685,788 136,858 36,789,337
Common stock issued for:
Options exercised 133,788 1,338 187,754
Services rendered 128,808 1,288 207,367
Exercise of warrants for cash 903,282 9,033 1,842,313
Cashless exercise of warrants 39,204 392 (392)
Conversion of series B preferred to
common stock 600,000 6,000 3,627,045
Issuance of stock for acquisitions 412,498 4,125 5,153,925
Warrants issued for jointly developed
technology-GMP -- -- 6,800,000
Warrants issued for option to repurchase
technology -- -- 217,000
Compensation associated with stock options
and warrants granted for services -- -- 393,277
Amortization of notes receivable, net -- -- --
Translation adjustment -- -- --
Net loss -- -- --
----------- --------- -----------
Balances at March 31, 2001 15,903,368 159,034 55,217,626
Issuance of stock for acquisitions 964,940 9,649 4,673,937
Issuance of stock for services rendered 473,936 4,739 391,288
Issuance of stock due to exercise of
options 8,540 86 11,584
Compensation associated with stock options
and warrants granted for services -- -- 100,154
Redeemed stock due to contract
cancellations (150,000) (1,500) 1,500
Amortization of note receivable, net -- -- --
Foreign currency translation adjustment -- -- --
Net loss -- -- --
------------- ----------- ------------
Balances at March 31, 2002 $ 17,200,784 $ 172,008 $60,396,089
============= =========== ============
See accompanying notes to consolidated financial statements.
F-5
SEMOTUS SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY (CONTINUED)
ACCUMULATED
OTHER
COMPREHENSIVE NOTES ACCUMULATED
LOSS RECEIVABLE DEFICIT TOTAL
------------ ------------ ------------ ----------
Balances at March 31, 1999 $(82,002) $(1,261,675) $(24,934,654) $2,427,999
Common stock issued for:
Options exercised -- -- -- 248,591
Services rendered -- -- -- 226,487
Exercise of warrants for cash and
notes receivable -- (100,000) -- 6,810,787
Cashless exercise of warrants -- -- -- 0
Compensation associated with stock
options and warrants granted for
services -- -- -- 834,000
Conversion of preferred, Series A to
common stock -- -- -- 0
Translation adjustment 602 -- -- 602
Amortization of note receivable net
of accrued interest due -- 12,928 -- 12,928
Net loss -- -- (4,756,926) (4,756,926)
--------- ----------- ------------ -----------
Balances at March 31, 2000 (81,400) (1,348,747) (29,691,580) 5,804,468
Common stock issued for:
Options exercised -- -- -- 189,092
Services rendered -- -- -- 208,655
Exercise of warrants for cash -- -- -- 1,851,346
Cashless exercise of warrants -- -- -- --
Conversion of series B preferred to
common stock -- -- -- 3,633,045
Issuance of stock for acquisitions -- -- -- 5,158,050
Warrants issued for jointly developed
technology - GMP -- -- -- 6,800,000
Warrants issued for option to repurchase
technology -- -- -- 217,000
Compensation associated with stock options
and warrants granted for services -- -- -- 393,277
Amortization of notes receivable, net -- 242,135 -- 242,135
Translation adjustment (21,136) -- -- (21,136)
Net loss -- -- (11,293,381) (11,293,381)
--------- ------------ ------------ -----------
Balances at March 31, 2001 (102,536) (1,106,612) (40,984,961) 13,182,551
Issuance of stock for acquisitions -- -- -- 4,683,586
Issuance of stock for services rendered -- -- -- 396,027
Issuance of stock due to exercise of
options -- -- -- 11,670
Compensation associated with stock options
and warrants granted for services -- -- -- 100,154
Redeemed stock due to contract
cancellations -- -- -- --
Amortization of note receivable, net -- 404,795 -- 404,795
Foreign currency translation adjustment (39,824) -- -- (39,824)
Net loss -- -- (18,444,478) (18,444,478)
--------- ----------- ------------ ------------
Balances at March 31, 2002 $(142,360) $ (701,817) $(59,429,439) $ 294,481
========= =========== ============ ============
See accompanying notes to consolidated financial statements.
F-6
SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended
March 31,
2002 2001 2000
------------ -------------- ------------
Cash flows from operating activities:
Net loss $(18,444,478) $(11,293,381) $(4,756,926)
Foreign currency translation adjustment (39,824) (21,136) 602
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 3,975,001 2,010,395 264,427
Compensation expense related to stock
issued for services 396,027 208,655 226,487
Compensation for expenses relating to
options/warrants issued for services 100,154 393,277 834,000
Net amortization of contract income (606,585) -- --
Amortization of technology advances (306,908) (371,050) (432,022)
Amortization of notes receivable 315,799 242,135 12,928
Impairment of goodwill 4,773,870 -- --
Impairment of intangible assets 3,541,017 -- --
Non-cash compensation received for service -- (151,000) --
Non-cash settlements of liabilities 26,230 -- --
Net loss on asset sales 29,910 -- --
Changes in assets and liabilities net of acquired
assets and liabilities due to acquisitions:
Accounts and other receivables 532,953 130,147 1,081,790
Inventory 209,376 223,728 (63,513)
Prepaid expenses and other assets 4,003 61,433 (175,330)
Accounts payable (48,018) (477,165) (1,106,577)
Accrued liabilities 181,242 (85,032) (26,916)
Advances on technology sales 50,681 -- --
Deferred revenue 168,091 (90,736) (130,143)
----------- ----------- -----------
Net cash used in operating activities (5,141,459) (9,219,730) (4,271,193)
----------- ----------- -----------
Cash flows from investing activities:
Acquisition of property and equipment (24,588) (538,436) (122,295)
Investments -- (232,789)
Cash received from FY 2002 acquisitions, net 1,096,472 -- --
Cost of FY 2001 acquisitions, net of cash
acquired (132,502) --
Sale of Kinetidex technology 350,000 -- --
Minority investment in subsidiary 247,907 -- --
Other assets -- 94,172 271,007
----------- ----------- -----------
Net cash provided by (used in) investing
activities 1,669,791 (576,766) (84,077)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from note payable to bank -- -- 1,000,000
Repayments of note payable to bank (154,400) (50,830) (1,000,000)
Repayments of capital lease obligations (53,352) (15,624) (15,201)
Proceeds from line of credit -- -- 264,049
Redemption of capital stock -- -- (441,043)
Proceeds from issuance of preferred stock -- -- 9,315,501
Proceeds from exercise of options and warrants 11,670 2,040,438 7,089,852
Restricted cash for note payable -- (694,222) --
----------- ----------- -----------
Net cash (used in) provided by financing
activities (196,082) 1,279,762 16,213,158
----------- ----------- -----------
Net (decrease) increase in cash and cash
equivalents (3,667,750) (8,516,734) 11,857,888
Cash and cash equivalents, beginning of year 7,844,042 16,360,776 4,502,888
----------- ----------- -----------
Cash and cash equivalents, end of year $ 4,176,292 $ 7,844,042 $16,360,776
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-7
SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Year Ended March 31,
2002 2001 2000
------------ ------------ -----------
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest $ 68,130 $ 19,071 $ 42,400
============ ============ ===========
Cash paid for income taxes $ 9,015 $ 10,557 $ 800
============ ============ ===========
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Non-cash purchase consideration from
acquisition of ISS, Inc. through the
issuance of common stock $ -- $1,671,750 $ --
============ =========== ===========
Non-cash purchase consideration from
acquisition of Cross Communications, Inc.
and Simkin, Inc. through the issuance
of common stock $ -- $2,753,900 $ --
============ =========== ===========
Non-cash purchase consideration for the
acquisition of Wizshop, Inc. and
Application Design Associates, Inc.
through the issuance of common stock $4,665,500 $ -- $ --
============ =========== ===========
Additional non-cash purchase consideration
paid to shareholder of Cross
Communications, Inc. pursuant to the
first year performance criteria of the
merger agreement $ 18,086 $ -- $ --
============ ============ ===========
Common stock issued for services $ 396,027 $ 208,655 $ 226,487
============ ============ ===========
Common stock issued for liabilities $ 101,036 $ -- $ --
============ ============ ===========
Preferred stock converted to common
stock $ -- $3,633,045 $ 2,366
============ ============ ===========
Cashless exercise of warrants $ -- $ 392 $ 2,822
============ ============ ===========
Consideration in connection with
40,000 common stock warrants to
obtain option to repurchase license
technology $ -- $ 217,000 $ --
=========== ========== ===========
Issuance of 800,000 common stock warrants
to obtain GMP Intellectual Property $ -- $6,800,000 $ --
=========== ========== ===========
Property and equipment purchased through
the issuance of capital leases $ 110,119 $ 43,539 $ --
=========== ========== ===========
See accompanying notes to consolidated financial statements.
F-8
SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. FORMATION AND BUSINESS OF THE COMPANY:
Semotus(TM) Solutions, Inc. ("Semotus " or the "Company"), changed its named
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, 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. In the June 27, 1996
acquisition of DCC, the Company issued 3,293,064 shares of its $0.01 par value
Common Stock (as adjusted for the 1 for 10 reverse split effective on February
9, 1998 and a 2 for 1 forward split effective April 27, 2000) to the holders of
100% of the outstanding Common Stock of DCC, and DCC became a wholly owned
subsidiary of the Company. As a part of the transaction, the Company 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The following summary of significant accounting policies is presented to assist
the reader in understanding and evaluating the consolidated financial
statements. These policies are in conformity with generally accepted accounting
principles and have been applied consistently in all material respects.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries:, Semotus Systems Corporation (Canadian
subsidiary), Cross Communications, Inc., Simkin, Inc., Wares on the Web, Inc.,
FiveStar Advantage, Inc., WizShop, Inc. and Application Design Associates, Inc.
All significant intercompany transactions and balances have been eliminated in
consolidation. Operations of the Canadian subsidiary consist mainly of research
and development and engineering on behalf of the parent. All other subsidiaries
generate revenues from the sales of products and services.
USE OF ESTIMATES:
The preparation of the 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 date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-9
CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid investments with original maturities of
three months or less or money market funds from substantial financial
institutions to be cash equivalents. The Company places substantially all of its
cash and cash equivalents in interest bearing demand deposit accounts with one
financial institution.
CONCENTRATIONS OF CREDIT RISK:
Financial instruments which potentially subject the Company to concentrations of
risk consist principally of trade and other receivables.
In the ordinary course of business trade receivables are with a large number of
customers, dispersed across a wide North American geographic base. The Company
extends credit to its customers in the ordinary course of business and
periodically reviews the credit levels extended to customers. The Company does
not require cash collateral or other security to support customer receivables.
Provision is made for estimated losses on uncollectible accounts.
INVENTORY:
Inventory is stated at the lower of cost (using the weighted-average method) or
market and consisted only of finished goods.
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost, net of accumulated depreciation and
amortization. Depreciation is provided on the straight-line method over the
estimated useful lives of the related assets, generally three to seven years.
The carrying value of property and equipment is assessed annually or when
factors indicating an impairment are present. The Company determines such
impairment by measuring undiscounted future cash flows. If an impairment is
present, the assets are reported at fair value.
LONG-TERM ASSETS
Long-term assets, such as intellectual property rights and goodwill are
amortized on a straight-line basis over the economic life of the assets. The
expected useful life of those assets is currently five years. The Company
adopted SFAS 141 "Business Combinations" and SFAS 142 "Goodwill and Other
Intangible Assets" as of April 1, 2002. Accordingly, Semotus will no longer
amortize goodwill and intangible assets with an indefinite useful life and will
begin assessing potential future impairments of such intangible assets.
CAPITALIZED CONTRACT
Semotus capitalizes the fair value of contracts acquired in business
combinations as required by APB 16 "Business Combinations". Fair value is
determined by estimating the cost expected to be incurred in order to perform
the obligations under the contract plus adding a reasonable profit associated
with the performance effort. The capitalized cost is amortized into cost of
revenue as revenues are recognized over the length of the contract.
F-10
FOREIGN CURRENCY TRANSLATION:
Exchange adjustments resulting from foreign currency transactions are generally
recognized in operations. Adjustments resulting from translation of financial
statements are reflected as a separate component of shareholders' equity. Net
foreign currency transaction gains or losses are not material in any of the
years presented.
STOCK BASED COMPENSATION:
The Company has adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation." Under this
standard, companies are encouraged, but not required, to adopt the fair value
method of accounting for employee stock-based transactions. The fair value
method is required for all stock-based compensation issued to non-employees,
including consultants and advisors. Under the fair value method, compensation
cost relating to issuances of stock options, warrants and appreciation rights is
measured at the grant date based on the fair value of the award and is
recognized over the service period, which is usually the vesting period.
Companies are permitted to continue to account for employee stock-based
transactions under Accounting Principles Board Opinion (APB) No. 25, "Accounting
for Stock Issued to Employees," but are required to disclose pro forma net
income and earnings per share as if the fair value method has been adopted. The
Company has elected to continue to account for stock based compensation under
APB No. 25. Certain options, which have been repriced, are subject to the
variable plan requirements of APB No. 25, that requires the Company to record
compensation expense for changes in the fair value of the Company's common
stock.
INCOME TAXES:
Deferred income taxes have been recorded for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts using enacted tax laws and statutory tax rates
applicable to the periods in which the differences are expected to affect
taxable income. A 100% valuation allowance has been provided as management is
unable to determine that it is more likely than not that the deferred tax assets
will be realized.
REVENUE RECOGNITION:
The Company recognizes revenues in each of its lines of business based upon
contract terms and completion of the sales process.
Wireless services: revenue is generated from wireless services provided to
enterprises and consumers. The revenue is from recurring monthly charges based
on utilization fees, transaction fees, and maintenance and service charges. In
the financial consumer business, the Company also receives a small revenue
stream from pager rentals. Revenues are recognized over the service period and
any revenue that relates to more than one service period is recognized ratably
over those service periods. In the work force automation business, wireless
software is delivered to the customer and revenue is recognized upon delivery,
assuming no significant obligations remain.
Enterprise and commerce sales and service: revenue is generated from online
sales, advertising, sponsorships and hosting fees and other services. Revenue is
recognized upon a completed sale and shipment of a product (e-fulfillment
transaction) and for online advertising and sponsorships, revenue is recognized
when payment is received. Hosting fees and other services, such as licensing,
are recognized ratably over the service period.
F-11
Professional and related services: revenue is generated from software
engineering and sales and from training and consultation. Revenue is recognized
when the engineering, training or consultation work has been performed in
accordance with the contract.
Logistic systems sales: revenue is generated from logistic software sales,
computer equipment sales and system installation and consulting services.
Revenue is recognized when the system installation is completed and/or
consulting work has been performed in accordance with the contract. For
multi-period contracts, usually for maintenance or licensing, revenue is
recognized ratably over these service periods.
COST OF REVENUE:
The cost of revenue for the wireless services line of business principally
includes costs to obtain data feeds from various exchanges, costs of engineering
development directed to specifically identified products, costs of servicing and
hosting customer products, costs for pager rental or depreciation and pager
airtime for those customers without their own pagers, and certain telephone,
computer and other direct operational costs.
The cost of revenue for the enterprise and commerce sales and service line of
business includes the purchase cost of the products, advertising, costs of
servicing and hosting and shipping. Any engineering costs directly related to
the products offered are also included as a cost of revenue.
The cost of revenue for professional and related services is primarily personnel
costs for engineering, training and consulting.
The cost of revenue for the logistic system sales segment is the cost of the
production of the software, purchased equipment costs and the cost of the
personnel for engineering, installation and consulting.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amount of cash and cash equivalents, receivables and payables are
reasonable estimates of their fair value due to their short-term nature.
RESEARCH AND DEVELOPMENT EXPENDITURES:
Expenditures related to research, design and development of products and
services are charged to product development and engineering expenses as
incurred. Software development costs are capitalized beginning when a product's
technological feasibility has been established and ending when a product is
available for general release to customers. At March 31, 2002 there were no
capitalized software development costs as the Company expensed the remaining
amounts at year end. At March 31, 2001, there were capitalized software
development costs of $313,417 relating to the development of Wares on the Web's
B2Bware and B2Cware. At March 31, 2000 there were no capitalized software
development costs since the period between technological feasibility and
availability had coincided and products under development had not yet achieved
technological feasibility.
F-12
ADVERTISING EXPENDITURES:
Advertising expenditures including production costs of certain marketing
materials, of $258,562, $960,480 and $1,571,964 in 2002, 2001 and 2000
respectively, were charged to operations as incurred.
BASIC AND DILUTED NET LOSS PER SHARE:
Basic net loss per share is computed using the weighted average number of common
shares outstanding during the period. Diluted net loss per share is computed
using the weighted average number of common and common equivalent shares
outstanding during the period. Common equivalent shares consist of the
incremental common shares issuable upon conversion of convertible preferred
stock (using the if-converted method) and shares issuable upon the exercise of
stock options and warrants (using the treasury stock method).
Outstanding common shares and per share amounts have been adjusted for a 2 for 1
stock split, which was effective April 27, 2000.
RECLASSIFICATIONS:
Certain reclassifications have been made to the prior year financial statements
to conform to the current year presentation.
PURCHASE ACQUISITIONS:
Acquisitions which have been accounted for under the purchase method of
accounting include the results of operations of the acquired business from the
date of acquisition. Net assets of the companies acquired are recorded at their
fair value to the Company at the date of acquisition. Goodwill is amortized over
the economic life of the asset. The expected useful life is currently five
years.
The Company adopted SFAS 141 "Business Combinations" and SFAS 142 "Goodwill and
Other Intangible Assets" as of April 1, 2002. Accordingly, Semotus will no
longer amortize intangible assets with an indefinite useful life and will begin
assessing potential future impairments of such intangible assets.
POOLING RESTATEMENT:
On December 28, 2000, Semotus acquired all of the issued and outstanding stock
of FiveStar Advantage, Inc. which was accounted for using the pooling of
interest method. Consequently, the financial statements for the year ended March
31, 2000 are restated for the inclusion of the operations of FiveStar. (See Note
3, "Acquisitions" for the separate financial information of FiveStar for the
year ended March 31, 2000).
COMPREHENSIVE INCOME (LOSS):
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income",
which was adopted by the Company in the third quarter of fiscal 1999. SFAS 130
establishes standards for reporting comprehensive income and its components in a
financial statement. Comprehensive income as defined includes all changes in
equity (net assets) during a period from non-owner sources. Items to be
included, which are excluded from net income (loss) include foreign currency
translation adjustments.
F-13
RECENT ACCOUNTING PRONOUNCEMENTS:
In March 2000, the Emerging Issues Task Force (EITF) of the Financial Accounting
Standards Board (FASB) published their consensus on EITF Issue No 00-3,
Application of AICPA Statement of Position (SOP) 97-2, Software Revenue
Recognition, to Arrangements that Include the Right to Use Software Stored on
Another's Entity's Hardware. The EITF consensus gives guidance on accounting for
hosting arrangements. The Company does not expect the adoption of EITF Issue No.
00-3 to have a material effect on its consolidated results of operations or
financial position.
In March 2000, the FASB issued Interpretation No. 44 (FIN 44), Accounting for
Certain Transactions involving Stock Compensation, an interpretation of APB
Opinion No. 25. Interpretation No. 44 clarifies the application of Opinion 25
for the following issues: (1) the definition of employee for purposes of
applying Opinion 25, (2) the criteria for determining whether a plan qualifies
as a noncompensatory plan, (3) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (4)
the accounting for an exchange of stock compensation awards in a business
combination. This Interpretation is effective July 1, 2000. Due to the repricing
of employee stock options in December 2000, the adoption of Interpretation No.
44 may have a material effect on the Company's financial position and results of
operations in the future. For the fiscal years ended March 31, 2002, 2001 and
2000, the effect was immaterial.
In June 2001, the FASB finalized FASB Statements No. 141, "Business
Combinations" (SFAS 141), and No. 142, "Goodwill and Other Intangible Assets"
(SFAS 142). SFAS 141 requires the use of the purchase method of accounting and
prohibits the use of the pooling-of-interests method of accounting for business
combinations initiated after June 30, 2001. SFAS 141 also requires that the
Company recognize acquired intangible assets apart from goodwill if the acquired
intangible assets meet certain criteria. SFAS 141 applies to all business
combinations initiated after June 30,2001 and for purchase business combinations
completed on or after July 1, 2001. It also requires, upon adoption of SFAS 142,
that the Company reclassify the carrying amounts of intangible assets and
goodwill based on the criteria in SFAS 141.
SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. SFAS 142 requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption. The Company is
also required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142.
The Company's previous business combinations were accounted for using both the
pooling-of-interests and purchase methods. The pooling-of-interests method does
not result in the recognition of acquired goodwill or other intangible assets.
F-14
As a result, the adoption of SFAS 141 and 142 will not affect the results of
past transactions accounted for under the pooling-of-interests method. However,
all future business combinations will be accounted for under the purchase
method, which may result in the recognition of goodwill and other intangible
assets, some of which will be recognized through operations, either by
amortization or impairment charges, in the future. For purchase business
combinations completed prior to March 31, 2002, the net carrying amount of
goodwill is $2,474,597 and other intangible assets is $576,958. Amortization
expense for goodwill during the fiscal year ended March 31, 2002 was $1,855,407.
Further, the Company determined that goodwill had been impaired as of March 31,
2002, and charged against income $4,773,870 of goodwill. The Company intends to
complete the transitional goodwill impairment test within six months from the
date of adoption. The impact of the adoption of SFAS 141 and SFAS 142 on the
Company's financial position and results of operations could be material.
In August 2001, the FASB issued SFAS No. 143 (SFAS 143) "Accounting for
Obligations Associated with the Retirement of Long-Lived Assets". SFAS 143
addresses financial accounting and reporting for the retirement obligation of an
asset. SFAS 143 states that companies should recognize the asset retirement
cost, at its fair value, as part of the cost of the asset and classify the
accrued amount as a liability in the balance sheet. The asset retirement
liability is then accreted to the ultimate payout as interest expense. The
initial measurement of the liability would be subsequently updated for revised
estimates of the discounted cash outflows. SFAS 143 will be effective for fiscal
years beginning after June 15, 2002. At this time, the Company does not expect
that the implementation of SFAS 143 will have any material impact on its
financial position, results of operations, or cash flows.
In October 2001, the FASB issued SFAS No. 144 (SFAS 144) "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS 144 supersedes SFAS No. 121
by requiring that one accounting model be used for long-lived assets to be
disposed of by sale, whether previously held and used or newly acquired, and by
broadening the presentation of discontinued operations to include more disposal
transactions. SFAS 144 will be effective for fiscal years beginning after
December 15, 2001. The impact of adopting SFAS 144 on the Company's financial
position and result of operations could be material.
3. ACQUISITIONS
All acquisitions accounted for under the purchase method of accounting have
their results of operations included in the financial statements as of the date
of acquisition. Goodwill is amortized on a straight line basis over the economic
life of the asset. The current estimated life is five years. The Company adopted
SFAS 141 "Business Combinations" and SFAS 142 "Goodwill and Other Intangible
Assets" as of April 1, 2002. Accordingly, Semotus will no longer amortize
intangible assets with an indefinite useful life and will begin assessing
potential future impairments of such intangible assets. See Note 2, "Summary of
Significant Accounting Policies".
Acquisitions in the fiscal year ended March 31, 2002
WizShop.com, Inc. ("WizShop")
On April 6, 2001 WizShop's shareholders approved a merger transaction with
Semotus. On May 7, Semotus acquired all the outstanding stock of WizShop and the
transaction officially closed. The acquisition was accounted for under the
purchase method of accounting. The value of common stock issued for the
F-15
acquisition was approximately $3.4 million. Semotus recorded $3.4 million of
goodwill. Semotus issued 699,993 shares of common stock and may issue up to
another 750,000 shares over the next two years if certain revenue targets are
met. Semotus has also agreed to issue additional shares if Semotus' common stock
does not trade at or above $10.00 per share by the end of each year after such
shares are issued. The maximum number of additional shares that can be issued is
twice the initial shares and earnout shares that have not been sold by the
original WizShop stockholders. The first of the measurement dates is August
2002. At that time, if the Company's common stock has not closed at $10.00 per
share or above, additional shares will be issued to the original WizShop
stockholders still holding the Semotus common stock.
The effect of issuing any additional shares if certain revenue targets are met
will be accounted for as additional purchase price consideration. The effect of
issuing any additional shares if certain per share trading prices are not met
has been accounted for in the Company's financial statements at the date of
acquisition in accordance with EITF 97-15.
WizShop builds and maintains outsourced e-commerce environments for Internet
portal companies and also creates online sales and merchandising programs for
its clients through merchandizing and marketing initiatives. (See Note 24,
"WizShop.com", for further information concerning WizShop.)
Application Design Associates, Inc.
On April 30, 2001, Semotus and Application Design Associates, Inc. ("ADA")
signed a merger agreement. On May 15, 2001 Semotus acquired all the outstanding
stock of ADA and the transaction officially closed. The acquisition was
accounted for under the purchase method of accounting. The value of common stock
issued for the acquisition was approximately $1.25 million. Semotus recorded
$1.3 million of goodwill. Semotus issued 250,000 shares of the Company's common
stock and may issue up to another 750,000 shares of common stock over the next
three years if certain revenue targets are met. Semotus has also agreed to issue
additional shares if Semotus' common stock does not trade at or above $5.00 per
share by the end of each year after such shares are issued. The maximum number
of additional shares that could be issued would be twice the initial shares and
earn out shares, or 2 million shares.
The effect of issuing any additional shares if certain revenue targets are met
will be accounted for as additional purchase price consideration. The effect of
issuing any additional shares if certain per share trading prices are not met
has been accounted for in the Company's financial statements at the date of
acquisition in accordance with EITF 97-15.
ADA creates proprietary software that is a complete logistical solution for
automation of customer call centers, dispatching, equipment deployment,
servicing and invoicing, while interfacing to existing corporate business
functions and existing ERP solutions.
Acquisitions in the fiscal year ended March 31, 2001
Cross Communications, Inc.
In July 2000, the Company acquired all of the assets and assumed selected
liabilities of Cross Communications, Inc. ("Cross") for $100,000 in cash and
62,500 shares of Semotus common stock accounted for under the purchase method.
The purchase price was approximately $2.0 million. Goodwill was also
F-16
approximately $2.0 million, since Cross had a deminimus number of assets. The
sole shareholder of Cross has a right to contingent purchase consideration based
upon operating performance for which an additional 187,500 shares of Semotus
common stock may be issued over the next three years should revenue targets be
met. As of March 31, 2002, Semotus had issued an additional 14,947 shares of
additional purchase consideration. Further, up to a maximum of 250,000 shares
may be issued if by the end of the third year, the Semotus common stock price
has not reached $20 per share.
Cross, established in 1995, is a wireless communications company that provides a
premise based messaging platform under the brand name "HipLink"(TM). The HipLink
solution supports both UNIX and NT and is scalable and configurable to the
specific requirements of the enterprise customer.
Simkin, Inc.
In September 2000, the Company acquired all of the issued and outstanding
capital stock of Simkin, Inc. ("Simkin") for $160,000 in cash and 100,000 shares
of Semotus common stock accounted for under the purchase method. The purchase
price was approximately $1.6 million. Goodwill was approximately $1.6 million.
The sole shareholder of Simkin has a right to contingent purchase consideration
based upon operating performance for which an additional 212,500 shares of
Semotus common stock may be issued over the next three years should revenue
targets be met.
Simkin, established in 1982, is a producer of pharmaceutical and medical
software tools in addition to providing on-site and computer-assisted
pharmaceutical training programs. Simkin's core software is a proprietary drug
dosing product which also provides the foundation for a prototype wireless
solution which allows healthcare professionals to improve a patient's drug
therapy.
ISS, Inc. dba WaresOnTheWeb.com
In November 2000, the Company acquired all of the issued and outstanding capital
stock of ISS, Inc. dba WaresOnTheWeb.com ("Wares") for 250,000 shares of Semotus
common stock accounted for under the purchase method. The purchase price was
approximately $1.7 million. Goodwill was approximately $1.6 million. The
shareholders of Wares have a right to contingent purchase consideration based
upon operating performance for which an additional 2,250,000 shares of Semotus
common stock may be issued over the next three years should revenue targets be
met. The contingent consideration requires a substantial growth in revenues.
Wares is an established turnkey provider of e-commerce solutions to leading
retailers, distributors and manufacturers. Wares solutions enable customers to
rapidly create highly functional commerce based internet/intranet and/or
extranet solutions that integrate seamlessly with legacy and ERP systems.
Pro forma results
The following summary, prepared on a pro forma basis, presents the results of
the Company's operations (unaudited) as if the acquisitions of ADA and Wizshop
had been completed as of April 1, 2000:
F-17
Fiscal Year Ended
March 31, 2002 March 31, 2001
-------------- --------------
Revenue: $ 6,245,944 $ 8,169,631
Net loss: $(18,433,624) $(14,920,350)
Net loss per
share- basic and
diluted $ (1.03) $ (0.92)
The unaudited pro forma results of operations are not necessarily indicative of
what actually would have occurred if the acquisitions had taken place as of
April 1, 2000, nor is it a projection of the Company's results of operations for
any future period.
Five Star Advantage, Inc. and Tech-ni-comm, Inc.
In December 2000, the Company acquired all of the issued and outstanding stock
of Five Star Advantage, Inc. and Tech-ni-comm, Inc (together, "Five Star"). Both
companies were controlled by a common 100% owner and were performing a common
business. Semotus issued 550,000 shares to the owner and accounted for the
transaction using the pooling of interest method.
Five Star is an e-marketing and e-fulfillment company that provides a start to
finish turnkey operation for online sales, marketing, logistics, fulfillment and
customer service for its clients.
Revenue, net loss, and net loss per share of the combining companies, after
giving retroactive effect to the pooling of interest transaction, are as
follows:
Fiscal Year Ended
Description March 31, 2000
-----------------
Revenue:
Semotus, as previously reported $ 1,459,920
Five Star $ 6,151,238
-----------------
Semotus, as restated $ 7,611,158
Net Loss:
Semotus, as previously reported $(4,246,949)
Five Star $ (509,977)
-----------------
Semotus, as restated $(4,756,926)
Net loss per share:
As previously reported*
Basic and diluted $ (0.59)
As restated
Basic and diluted $ (0.61)
*Per share loss is adjusted for the two for one stock split that occurred on
April 27, 2000.
F-18
4. IMPAIRMENT OF LONG-LIVED ASSETS AND GOODWILL
Semotus' management performs an on-going analysis of the recoverability of its
goodwill and other intangibles and the value of its investments in accordance
with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and For
Long-Lived Assets to be Disposed Of". Based on quantitative and qualitative
measures, the Company assesses the need to record impairment losses on
long-lived assets used in operations when impairment indicators are present.
A number of factors indicated that impairment may have arisen in the period
ended March 31, 2002 for certain amounts of goodwill related to the acquisitions
of Simkin, Wares and WizShop. Also, an impairment may have arisen with the
recorded asset value of the Company's Global Market Pro intellectual property.
For Simkin, the analysis was to determine if a further reduction in goodwill was
necessary. Semotus had previously taken a $650,000 net impairment charge in the
quarter ended June 30, 2001. See Note 5, "Sale of Technology and Net Impairment
of Goodwill". For Wares and WizShop, Semotus analyzed the current carrying value
of the goodwill related to both acquisitions.
The analysis focused on the future prospects for the businesses given the
current state of the economy and the technology market. Additionally, a critical
factor was that the consideration paid by Semotus for those companies in the
form of the issuance of shares of the Company's common stock at a time when its
stock price was much higher than at March 31, 2002. The Company's stock price
was approximately $14.375 at the time of the acquisition of Simkin,
approximately $8.938 at the time of the acquisition of Wares and approximately
$2.15 at the time of the acquisition of WizShop. At March 31, 2002, the
Company's stock price was $0.67. Finally, all of these companies were privately
held at the time of the acquisition and their fair value was and is subjective
and not readily determinable. At the time of the acquisition, market valuations
for such companies were at substantially higher levels. Since the end of the
calendar year 2001, stock prices and market valuations in Simkin's, Wares' and
WizShop's industry and similar industries have fallen substantially in response
to a variety of factors, including a general downturn in the economy, a
curtailment in the availability of capital and a general reduction in technology
expenditures.
For the asset value related to the Global Market Pro intellectual property, the
future prospects for the business derived from the Global Market Pro and Equity
Market Pro products and the financial services division was examined. As well,
the analysis focused on the consideration paid for the intellectual property in
the form of 800,000 warrants of Semotus common stock. The exercise price of
those warrants, $30.00 per common share, is significantly higher than the market
price of the stock, $0.67, at March 31, 2002. See Note 6, "GMP Intellectual
Property and J.P. Morgan Chase Manhattan Warrants". Further, the financial
services industry has declined dramatically in response to the general economic
recession and to the terrorist events of September 11, 2001.
Based on the factors described above, the Company determined that the goodwill
in its Simkin, Wares and WizShop subsidiaries and the asset value of the GMP
Intellectual Property may have become impaired. In accordance with SFAS No. 121,
the Company performed an undiscounted cash flow analysis of its acquisition to
determine whether an impairment existed. When the undiscounted cash flows were
less than the carrying value of the net assets, management determined a range of
fair values using a combination of valuation methodologies. The methodologies
included:
F-19
- - Discounted cash flow analysis, which is based upon converting expected future
cash flows to present value.
- - Changes in market value since the date of acquisition relative to the
following:
- - the Company's stock price;
- - comparable companies;
- - Contribution to the Company's market valuation and overall business prospects.
The methodologies used were consistent with the specific valuation methods used
when the original purchase price and asset value were determined. The Company's
best estimate of the fair value of Simkin, Wares, WizShop and the GMP
Intellectual Property was determined from the range of possible values after
considering the relative performance, future prospects and risk profile of those
companies and GMP.
As a result of Semotus' review, management determined that the carrying value of
goodwill and recorded asset value were not fully recoverable and an impairment
charge of $4,773,870 was taken for goodwill comprised of an impairment charge to
Simkin's goodwill of $909,272 (of which $650,000 was recorded in the quarter
ended June 30, 2001, see Note 5 "Sale of Technology and Net Impairment of
Goodwill"), $1,156,587 for Wares' goodwill and $2,708,011 for WizShop's
goodwill. Furthermore, Semotus took an impairment charge of $3,420,000 for GMP
in the quarter ended March 31, 2002 and a $121,017 impairment charge for
solftware development costs at Wares.
At March 31, 2002, the Company determined that the carrying value of its
remaining goodwill and other intangibles are recoverable. The Company will
continue to analyze the recoverability of its long-lived assets and assess the
need to record impairment losses when impairment indicators are present.
5. SALE OF TECHNOLOGY AND NET IMPAIRMENT OF GOODWILL
The reduction in goodwill for Simkin in June 2001 of $1,000,000 is comprised of
two components: (i) the sale of Simkin's Kinetidex technology for $350,000 and
(ii) an impairment charge to goodwill related to Simkin for $650,000.
In June 2001, Semotus announced the sale by Simkin of a software program called
Kinetidex 2.0 to Micromedex, Inc., the joint developer and exclusive distributor
of the product. Kinetidex is a drug dosing software program that was jointly
developed by the Company's Simkin subsidiary and Micromedex. Semotus received
$350,000 from Micromedex for the sale of the product and all future royalty
rights. Additionally, Simkin agreed to discontinue the sale of the product
Kinetidex replaced, Capcil. Semotus' management performs an on-going analysis of
the recoverability of its goodwill and other intangibles and the value of its
investments in accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and For Long-Lived Assets to be Disposed Of". Based on
quantitative and qualitative measures, the Company assesses the need to record
impairment losses on long-lived assets used in operations when impairment
indicators are present.
F-20
A number of factors indicated that impairment may have arisen in the period
ended June 30, 2001, specifically for Semotus' Simkin subsidiary. The above
mentioned sale of the Kinetidex technology for $350,000 was one factor
considered. Future prospects for the business was another factor considered.
Additionally, a third critical factor was that the consideration paid by Semotus
for Simkin was in the form of the issuance of shares of the Company's common
stock at a time when its stock price was much higher than at June 30, 2001. The
Company's stock price was approximately $14.375 at the time of the acquisition.
At June 30, 2001, the Company's stock price was $1.59. Finally, Simkin was
privately held at the time of the acquisition and its fair value was and is
subjective and not readily determinable. At the time of the acquisition, market
valuations for such a company were at historically high levels. Since the end of
the calendar year 2000, stock prices and market valuations in Simkin's industry
and similar industries have fallen substantially in response to a variety of
factors, including a general downturn in the economy, a curtailment in the
availability of capital and a general reduction in technology expenditures.
Based on the factors described above, the Company determined that the goodwill
in its Simkin subsidiary may have become impaired. In accordance with SFAS No.
121, the Company performed an undiscounted cash flow analysis of its acquisition
to determine whether an impairment existed. When the undiscounted cash flows
were less than the carrying value of the net assets, management determined a
range of fair values using a combination of valuation methodologies. The
methodologies included:
- - Discounted cash flow analysis, which is based upon converting expected future
cash flows to present value.
- - Changes in market value since the date of acquisition relative to the
following:
- - the Company's stock price;
- - comparable companies;
- - Contribution to the Company's market valuation and overall business prospects.
The methodologies used were consistent with the specific valuation methods used
when the original purchase price was determined. The Company's best estimate of
the fair value of Simkin was determined from the range of possible values after
considering the relative performance, future prospects and risk profile of
Simkin.
As a result of Semotus' review, management determined that the carrying value of
goodwill was not fully recoverable and an impairment charge of $650,000 was
taken in the quarter ended June 30, 2001.
6. GMP INTELLECTUAL PROPERTY AND J.P. MORGAN CHASE MANHATTAN WARRANTS
On July 7, 2000 the Company granted an affiliate of J.P. Morgan Chase & Co.
common stock warrants to purchase up to 800,000 shares of Semotus common stock
at a price of $30.00 per common share. These warrants have a five year life, are
non-callable, and were granted in exchange for all royalty and intellectual
property rights associated with the Global Market Pro ("GMP") product, including
all copyrights, patents and trade secrets. The value of these warrants as
calculated on the date of grant using the Black-Scholes pricing model amounted
to $6,800,000 and is being amortized to expense over a five year period. This
F-21
amount was recorded in intellectual property with a corresponding increase to
additional paid-in capital. For the fiscal years ended March 31, 2002 and 2001,
amortization amounted to $1,360,000 and $1,020,000.
Further, Semotus determined that an impairment charge to GMP was necessary as of
March 31, 2002, which amounted to $3,420,000 and has brought the current
recorded value to $1,000,000.
7. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
MARCH 31,
2002 2001
----------- ----------
Furniture and fixtures $ 355,818 $ 349,058
Computers, and other
office equipment 1,296,104 1,176,246
Capitalized equipment leases 110,119 125,179
Leasehold improvements 99,806 102,001
Purchased software 363,840 278,525
---------- ----------
2,225,687 2,031,009
Less accumulated depreciation
And amortization (1,543,226) (1,053,331)
---------- ----------
$ 682,461 $ 977,678
========== ==========
8. ADVANCES ON TECHNOLOGY SALES:
During fiscal year 1997, the Company entered into two separate transactions
involving the sale of rights to its technologies underlying two products,
QuoteXpress and MailXpress. The transactions occurred with two separate Canadian
companies and were nearly identical in nature in that they involved the receipt
of cash and notes receivable from the buyers, with the notes receivable being
collateralized by the intellectual properties being sold. Concurrent with the
sales, Semotus and the buyers entered into "Management and Marketing Agreements"
with the buyers giving the Company exclusive worldwide rights to use, modify and
sub license the source code for the technologies and providing for fees to be
paid to the buyers under certain conditions. Any payments between parties are
contingent upon each other, and are structured in such a way to minimize the
possibility that either party will ever make payments to the other. At this
time, no money has been paid to the buyers and based upon current projections,
it is anticipated that no moneys will be paid under the remainder of the terms.
The cash payments received up front, amounting to $2,190,000 and $2,900,000
respectively, have been accounted for under the provisions of the "Emerging
Issues Task Force 88-18: Sales of Future Revenues" (EITF 88-18) and as such,
were deferred and are reflected under the balance sheet caption "Advances on
technology sales", and are being amortized to income using the interest method
over the terms of the agreements. The notes receivable due to the Company
resulting from the sales have not been recorded, as it is expected that any fees
or revenue share that otherwise might accrue to the buyers of the technologies
as a result of the management and marketing agreements would not be sufficient
to service the note receivable principle and interest payments due Semotus. If
the notes receivable due to the Company are not repaid, as presently projected,
F-22
the ownership of the intellectual properties will revert back to the Company at
the end of the agreements. On June 14, 2000, the Company entered into an
agreement with the buyers for an option to repurchase the QuoteXpress product
for $4 million. As consideration, Semotus extended the term of existing warrants
issued to the buyers for another two years, until June 2002 and issued 10,000
new options with an exercise price of $11.50 which expire in June 2002. The
Company recorded the value of these warrants as a reduction of the technology
advances.
Interest income on the notes has been recognized to the extent of the amounts
due to buyers under the "Owners fee" provisions of the sales agreements, with
both the interest income and the "Owners fee" reflected in other income, along
with the amortization of the technology advances.
9. NOTE PAYABLE
Semotus entered into a one-year note payable with its primary banking
institution in March 2001. The note was extended for six months in March 2002
and becomes due September 2002. The note replaced three notes payable at Simkin,
Wares and FiveStar. The transaction occurred as part of the acquisition
agreements to remove the Presidents of those subsidiaries from personal
guaranties. There is not any net additional debt incurred. The note payable has
an interest rate of 7.2% currently, which is the same as in the past year. The
interest is payable monthly, with the principal due and payable at maturity in
September 2002. The note is secured by cash in the form of a certificate of
deposit in the amount of $693,286 and $694,222 for the fiscal years ended March
31, 2002 and 2001 respectively. The certificate of deposit mirrors the note
payable in term and carries a current interest rate of 2.0% and 5.2% in the past
year.
10. CAPITAL LEASE:
In the fiscal year ended March 31, 2002, the Company and its subsidiaries signed
leases amounting to $110,119.
Also, in the fiscal year ended March 31, 2002, Semotus settled 4 leases at its
Wares and WizShop subsidiaries for $9,625.
In the fiscal year ended March 31, 2001, Semotus through its Cross
Communications and Wares subsidiaries, signed three new capital leases for
equipment in fiscal year 2001. Two of the assets will be amortized over
approximately three years and the principal of the leases totals $32,043. The
other asset is amortized over five years and the lease principal totals $11,496.
For the fiscal year ended March 31, 2001, the amortization is immaterial since
these leases were signed in February and March of 2001. The Company assumed
computer leases amounting to $21,357, as part of its acquisition of Wares. These
leases are being amortized over two years.
Accumulated depreciation on capitalized lease assets was $33,267 and $55,787 at
March 31, 2002 and at March 31, 2001 respectively.
Effective October 1997, the Company entered into a leasing agreement for certain
equipment used in the operation of the Company. The lease has been classified as
a capital lease, and is for a five year term, with payments due monthly with
interest at 10.45% per annum. Payments, in the initial three years of the lease
are approximately $2,000 per month. During the last two years of the lease the
payments are reduced to approximately $1,300 per month. The lease is
F-23
collateralized by the underlying equipment included in property and equipment
with an original capitalized value of $81,640.
The combined principal and interest portions being recognized under the capital
lease for the next five years are as follows:
Year ended March 31,
2003 $ 93,922
2004 40,472
2005 21,267
2006 6,924
2007 --
---------
162,585
Less imputed interest (16,258)
---------
Total $146,327
=========
11. CONVERTIBLE PREFERRED STOCK:
Under the Company's Articles of Incorporation, as amended in February 1998, the
Company is authorized to issue 5,000,000 shares of preferred stock. 2,740,000
has been designated as Series A preferred stock, of which, no shares are
outstanding, and 769,231 has been designated as Series B preferred stock, of
which 469,231 shares are outstanding.
As of February 14, 2000, Semotus consummated a private placement to two
investment funds of (i) 769,231 shares of Series B Convertible preferred
stock (post split each share of Series B preferred stock is convertible into two
shares of common stock) and (ii) five-year warrants to purchase up to an
aggregate of 1,153,846 shares of common stock at an exercise price of $8.75 per
share. The Company also issued to H.C. Wainwright & Co., Inc. a warrant to
purchase up to 153,846 shares of common stock, at an exercise price of $6.50 per
share, for its services as placement agent with respect to the private
placement. For further information on the warrants, see Note 12, "Common
Shareholders' Equity". The Company received $9,315,501 in cash, net of expenses
and commissions of $684,499.
On April 26, 2000, 300,000 shares of Series B convertible preferred stock were
converted into 600,000 shares of common stock. As of March 31, 2002, 469,231
shares of Series B convertible preferred remain outstanding.
Series B Convertible Preferred Stock Provisions
DIVIDENDS: The holders of shares of Series B preferred stock shall be entitled
to receive dividends, out of any assets legally available therefor, ratably with
any declaration or payment of any dividend with holders of the common stock or
other junior securities of this Corporation, when as and if declared by the
Board of Directors, based on the number of shares of common stock into which
each share of its Series B Convertible preferred stock is then convertible. As
of March 31, 2002, no dividends have been declared.
LIQUIDATION: In the event of any liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary, the holders of record of the shares
F-24
of the Series B preferred stock shall be entitled to receive, before and in
preference to any distribution or payment of assets of the Company or the
proceeds thereof may be made or set apart for the holders of common stock or any
other security junior to the Series B preferred stock in respect of
distributions upon liquidation out of the assets of the Corporation legally
available for distribution to its stockholders, in an amount in cash equal to
$13.00 per share. If, upon such liquidation, the assets of the Corporation
available for distribution to the holders of the Series B preferred stock and
any other series of preferred stock then outstanding ranking on parity with the
Series B preferred stock upon liquidation ("Parity stock") shall be insufficient
to permit payment in full to the holders of the Series B preferred stock and
parity stock, then the entire assets and funds of the Company legally available
for distribution to such holders and the holders of the parity stock then
outstanding shall be distributed ratably among the holders of the Series B
preferred stock and parity stock based upon the proportion which the total
amount distributable on each share upon liquidation bears to the aggregate
amount available for distribution on all shares of the Series B preferred stock
and such parity stock, if any.
CHANGE IN OWNERSHIP: In the event of a sale, conveyance, lease, transfer or
disposition of all or substantially all of the assets of the Company, or the
consummation by the Company of a transaction or series of related transactions
in which more than 50% of the voting power of the Company is disposed of, or a
consolidation or merger of the Company with or into any other company or
companies, the holders of record of the shares of the Series B preferred stock
shall have the right to convert the shares of Series B Preferred for shares of
stock and other securities, cash and property following such Event, and the
Holders shall be entitled upon such Event to receive such amount of shares of
stock and other securities, cash or property as the shares of the Common Stock
of the Company into which the shares of Series B Preferred could have been
converted immediately prior to such Event would have been entitled; or such an
event may be deemed to be a Liquidation of the Company entitling such Holder to
receive the Liquidation Value with respect to such Holder's shares of Series B
Preferred.
CONVERSION: Each share of preferred stock, at the option of the holder, is
convertible into two fully paid and non-assessable shares of common stock.
REDEMPTION: The Series B preferred stock is not redeemable, unless there is a
change in ownership, see Note 11, "Change in Ownership".
VOTING RIGHTS: The holders of Series B preferred stock are not entitled to
voting rights.
ANTI-DILUTION: The holders of shares of Series B preferred stock have certain
anti-dilution protection upon the happening of certain events.
12. COMMON SHAREHOLDERS' EQUITY:
Under the Company's Articles of Incorporation, as amended in June 1999, Semotus
is authorized to issue 50,000,000 shares of common stock, of which 17,200,784
and 15,903,368 was issued and outstanding as of March 31, 2002 and 2001
respectively.
During the fiscal year ended March 31, 2002, in connection with the acquisition
of Cross, the Company issued 14,947 common shares as additional purchase
consideration (see Note 3, "Acquisitions - Cross Communications, Inc."). In May,
2001, in connection with the acquisition of WizShop, the Company issued 699,993
common shares (see Note 3, "Acquisitions - WizShop.com, Inc."). Also in May,
2001, in connection with the acquisition of ADA, the Company issued 250,000
common shares (see Note 3, "Acquisitions -
F-25
Application Design Associates, Inc."). In addition, during the fiscal year ended
March 31, 2002, the Company issued a total of 198,093 shares to various
suppliers of services, and a total of 75,073 shares to settle certain
liabilities of the Company or the Company's subsidiaries.
In December 2000, in connection with the acquisition of Five Star, the Company
issued 550,000 shares of common stock (see Note 3, "Acquisitions - Five Star
Advantage, Inc. and Tech-ni-comm, Inc.") In November 2000, in connection with
the acquisition of Wares, the Company issued 249,998 shares of common stock (see
Note 3, "Acquisitions - ISS, Inc. dba WaresOnTheWeb.com"). On October 9, 2000,
the Board of Directors approved a buy back program, whereby up to one million
shares of the Company's outstanding stock may be bought in the open market over
the next year. As of October 9, 2001, when the buy back program terminated, the
Company had not bought back any shares of its common stock. In addition, during
the fiscal year ended March 31, 2001, the Company issued a total of 29,345
shares to various suppliers of services, and a total of 87,420 shares to settle
certain liabilities of the Company or the Company's subsidiaries.
In August 2000, in connection with the acquisition of Simkin, the Company issued
100,000 shares of common stock (see Note 3, "Acquisitions - Simkin, Inc.") On
August 15, 2000, 54,342 H.C. Wainwright warrants were cashless exercised and
33,865 shares of common stock were issued. As of March 31, 2002, 99,504 H.C.
Wainwright warrants to purchase up to 99,504 shares of common stock remain
outstanding. In July, 2000, the Company issued a warrant to purchase 800,000
shares of common stock at an exercise price of $30.00 per share to an affiliate
of J.P. Morgan Chase & Co. in exchange for all royalty and intellectual property
rights associated with the GMP product (see Note 6, "GMP Intellectual Property
and J.P. Morgan Chase Warrants"). In July, 2000 the Company also issued 62,500
shares of common stock in connection with the acquisition of Cross (See Note 3,
"Acquisitions - Cross Communications, Inc."). In addition, during the fiscal
year ended March 31, 2000, the Company issued a total of 9,484 shares of common
stock to various suppliers of services.
On March 13, 2000 the Board of Directors of the Company approved a 2 for 1 stock
split. The 2 for 1 stock split was effected on April 27, 2000 and applied to all
holders of common stock of record. As a result of the split the number of shares
of common stock into which the preferred stock could be converted was increased
to 1,538,462 from 769,231. All financial data and share data in this Form 10- K
give retroactive effect to this split, unless otherwise indicated.
As of March 1, 2000, the remaining 772,060 Series A convertible preferred shares
were automatically converted into 1,544,120 shares of common stock. On March 2,
2000, the holders of the remaining $2.50 common stock purchase warrants issued
in conjunction with the Series A convertible preferred shares were provided a
notice of redemption. Of the 1,059,946 warrants outstanding on March 2, 2000,
894,600 had been exercised by March 31, 2000, and the remaining 165,346 were
exercised by April 3, 2000.
As of February 14, 2000, Semotus consummated a private placement to two
investment funds of (i) 769,231 shares of Series B Convertible preferred stock
(post split each share of Series B preferred stock is convertible into two
shares of common stock) and (ii) five-year warrants to purchase up to an
aggregate of 1,153,846 shares of common stock at an exercise price of $8.75 per
share. The Company also issued to H.C. Wainwright & Co., Inc. a warrant to
purchase up to 153,846 shares of common stock, at an exercise price of $6.50 per
share, for its services as placement agent with respect to the private
placement. The Company received $9,315,501 in cash, net of expenses and
commissions of $684,499. On April 26, 2000, 300,000 shares of Series B
F-26
convertible preferred stock were converted into 600,000 shares of common stock.
As of March 31, 2002, 469,231 shares of Series B convertible preferred remain
outstanding. (See Note 11, "Convertible Preferred Stock").
STOCK OPTION PLAN:
In June 1996, the Company adopted the 1996 Stock Option Incentive Plan (the
"Plan"). The "Plan" provides for the granting of stock options to acquire common
stock and/or the granting of stock appreciation rights to obtain, in cash or
shares of common stock, the benefit of the appreciation of the value of shares
of common stock after the grant date. The Company is currently authorized to
issue up to 4,345,000 shares of common stock under the Plan, and intends to seek
Shareholder approval to issue additional shares. The Plan expires ten years
after its adoption.
Under the Plan, the Board of Directors may grant incentive stock options to
purchase shares of the Company's common stock only to employees, and the Board
of Directors may grant non-qualified stock options to purchase shares of the
Company's common stock to directors, officers, consultants and advisers of the
Company. The Board of Directors may grant options to purchase shares of the
Company's common stock at prices not less than fair market value, as defined
under the Plan, at the date of grant for all stock options. The Board of
Directors also has the authority to set exercise dates (no longer than ten years
from the date of grant), payment terms and other provisions for each grant. In
addition, incentive options may be granted to persons owning more than 10% of
the voting power of all classes of stock, at a price no lower than 110% of the
fair market value at the date of grant, as determined by the Board of Directors.
Options granted under the Plan generally vest over four years at a rate of 25%
after year one and then equally on a monthly basis over the next three years
from the date of grant. As of March 31, 2002, no stock appreciation rights have
been granted under the Plan.
Effective November 6, 2001 the Board of Directors of the Company approved the
repricing of most of the options with exercise prices ranging from $0.78 to
$20.00 per share held by most of the employees (including executive officers) of
the Company. The Board of Directors determined such a reprice to be appropriate
in order to sustain the incentivization of its employees. Employees' existing
option grants were repriced to an exercise price of $0.76 per share (the current
fair market value of the Company's common stock as of the reprice date) and an
exercise price of $0.84 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. Due to the decrease in the Company's stock price there has been no
additional compensation expense in fiscal year ended March 31, 2002.
Activity for stock options under the 1996 Stock Option Incentive Plan through
March 31, 2002 is as follows:
F-27
WEIGHTED
SHARES NUMBER AVERAGE
AVAILABLE OF PRICE PER EXERCISE
FOR GRANT OPTIONS SHARE PRICE
----------- --------- ------------- --------
Balances,
March 31, 1999 392 951,060 $ 0.38-$10.00 $ 1.61
Authorized -- -- -- --
Granted (1,634,756) 1,634,756 $ 1.25-$20.00 4.66
Canceled 765,230 (765,230) $ 0.38-$15.31 2.00
Exercised -- (223,856) $ 0.50-$ 2.35 1.11
----------- ---------- ------------- -------
Balances,
March 31, 2000 (869,134) 1,596,730 $ 0.50-$20.00 $ 4.61
Authorized 2,500,000 -- -- --
Granted (3,509,000) 3,509,000 $ 0.50-$28.77 $ 5.76
Canceled 1,947,733 (1,947,733) $ 0.50-$28.77 $ 9.22
Exercised -- (133,788) $ 0.50-$ 2.53 $ 1.33
=========== ========== ============= =======
Balances,
March 31, 2001* 47,591 3,048,717 $ 0.56-$20.00 $ 3.02
Authorized 845,000 -- -- --
Granted (4,502,021) 4,502,021 $ 0.67-$ 7.00 $ 1.03
Canceled 3,958,322 (3,958,084) $ 0.56-$20.00 $ 2.70
Exercised -- (8,540) $ 1.28-$ 1.63 $ 1.40
=========== =========== ============= =======
Balances,
March 31, 2002 348,892 3,584,114 $ 0.67-$ 2.01 $ 0.88
*The Balances as of March 31, 2001 reported in this 10K differ slightly from the
Balances as of March 31, 2001 as reported in the Company's 10KSB filed last
year; this is due to a small number of stock option activities, such as grants,
cancellations and exercises, not having been reported by the time this table was
drafted last year. We do not feel that these numbers are significant, as the
difference between these numbers is only approximately 25,000 shares, or less
than 1% of the total outstanding.
On September 13, 2001 the Company's shareholders approved an increase in the
number of shares of Common Stock issuable upon the exercise of options, from
3,500,000 to 4,345,000.
The Company plans to request shareholder approval for an increase in the number
of shares of Common Stock issuable upon the exercise of options at its next
meeting of shareholders to be held during the second quarter of FY 2003.
The weighted average fair value of those options granted during the years ended
March 31, 2002, 2001 and 2000 was $1.09, $1.98 and $3.18, respectively. The
weighted average fair value of those options that were repriced on November 6,
2001 was $0.53. Options to purchase 1,268,477, 568,570 and 287,796 shares were
exercisable with a weighted average exercise price of $0.80, $3.06 and $2.25 at
March 31, 2002, 2001 and 2000 respectively.
F-28
PRO FORMA STOCK-BASED COMPENSATION:
The Company has adopted the disclosure only provisions of Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), Accounting for Stock Based
Compensation. Accordingly, no compensation expense has been recognized for these
plans. Had compensation expense been determined on the fair value at the grant
dates for awards under these plans consistent with the method of SFAS 123, the
Company's net loss in 2002, 2001 and 2000 would have been adjusted to the pro
forma amounts indicated below:
2002 2001 2000
Net loss available to ------------- ------------- ------------
common shareholders
As reported $(18,444,478) $(11,293,381) $(4,756,926)
Pro forma (20,093,894) (11,815,677) (5,375,583)
Net loss per share
As reported, basic
and diluted (1.09) (0.74) (0.61)
Pro forma net loss,
basic and diluted (1.18) (0.78) (0.69)
The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants under the Plan in 2002, 2001 and 2000:
2002 2001 2000
----------- ---------- -----------
Expected dividend $ -- $ -- $ --
Expected life of option 4 years 4 years 1-4 years
Risk-free interest rate 3.71%-4.63% 5.0%-6.5% 4.61%-5.75%
Expected volatility 87%-108% 70%-295% 244.3%
The above pro forma disclosures are not likely to be representative of the
effects on reported net income for future years.
The following table summarizes the stock options outstanding at March 31, 2002:
OPTIONS OUTSTANDING CURRENTLY EXERCISABLE
- ----------------------------------------------------- ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ----------- ----------- ------------- --------- ------------ --------
MARCH 31, 2002
$ 0.00-$ 0.76 1,879,614 8.4 $ 0.76 593,343 $ 0.75
$ 0.77-$ 1.00 1,456,000 8.2 $ 0.84 675,134 $ 0.84
$ 1.01-$ 2.01 248,500 9.1 $ 2.01 0 $ 0.00
--------- --- ------ ---------- -------
3,584,114 8.4 $ 0.88 1,268,477 $ 0.80
========= === ====== ========== =======
F-29
13. REVENUE
The Company derives revenue from its customers as discussed in Note 2, "Summary
of Significant Accounting Policies: Revenue Recognition". From Semotus' wireless
services segment, one customer accounted for 6% of the Company's revenues for
the fiscal year ended March 31, 2002. From the enterprise and commerce segment
one customer accounted for 17% of the Company's revenues in the fiscal year
ended March 31, 2002. From the logistic systems segment, one customer accounted
for 8% of the Company's revenue for the fiscal year ended March 31, 2002. None
of these customers accounts for significant accounts receivable at March 31,
2002.
From Semotus' enterprise and commerce segment revenues, one customer accounted
for approximately 28% of the Company's revenues for the fiscal year ended March
31, 2001. For Semotus' enterprise and commerce segment subsidiary revenues in
the fiscal year ended March 31, 2000, two customers accounted for approximately
30% and 25% of the Company's revenues. Since then, both customers' contribution
as a percentage of total revenues has declined in actual contribution and as
more enterprise customers have been added.
14. STOCK, OPTION AND WARRANT EXPENSE
The stock, option and warrant expense is a non-cash expense related to the
issuance of equity and equity-related securities for services performed for the
company by outside third party contractors. The accounting for the expense is in
accordance with SFAS 123, "Accounting for Stock-Based Compensation".
Stock issued for services and as payment for liabilities is priced using the
closing price of the Company's stock on the date the shares are issued. The
expense is recognized over the term of the agreement or when the services have
been performed.
The fair value of options and warrants issued for services is estimated using
the Black Scholes option pricing model. The pricing model's variables are
measured on the date of grant, or if there are contingencies related to the
services and vesting, the variables are measured on the date the contingencies
are satisfied. The exercise price is set equal to the closing price of the stock
on the measurement date. The term of the options and warrants ranges from one to
five years. For the fiscal year ended March 31, 2002, interest rates used are
the appropriate Treasury rates ranging from 3.71% to 4.63%. The expected
volatility ranged from 87% to 108%. (See Note 12, "Common Shareholders Equity").
The expense has been recognized over the term of the agreement or when the
services have been performed.
15. OTHER INCOME:
Other income (expense) consists of the following items:
YEAR ENDED
DESCRIPTION 2002 2001 2000
--------------------- ------------ ----------- ------------
Owners fee sales
of technology $(1,569,000) $(1,569,000) (1,570,000)
Interest on note from
sales of technology 1,569,000 1,569,000 1,570,000
F-30
Amortization of
technology advances 306,908 371,052 432,021
Other interest income 50,207 132,792 129,290
Miscellaneous (77,070) (88,064) (267,107)
------------- ------------ -----------
Total other income $ 280,045 $ 415,780 $ 294,204
============= ============ ===========
16. INCOME TAXES:
Deferred tax benefits arising from net operating loss carryforwards were
determined using the applicable statutory rates. The net operating loss
carryforward balances vary from the applicable percentages of net loss due to
expenses recognized under generally accepted accounting principles, but not
deductible for tax purposes.
Net operating loss carryforwards available for the Company for U.S. tax purposes
are as follows:
FEDERAL STATE
-------------------------- -------------------------
BALANCE EXPIRATION BALANCE EXPIRATION
----------- ---------- ----------- ----------
$ 2,729,703 2012 $ 2,632,479 2003
3,219,423 2013 1,960,131 2004
4,443,579 2019 1,598,148 2005
3,684,281 2020 4,474,624 2011
9,313,338 2021 2,262,734 2012
3,895,301 2022
----------- -----------
$27,285,625 $12,928,116
=========== ===========
At March 31, 2002, the Company has approximately $1,748,000 in Canadian net
operating loss carryforwards that expire from 2003 through 2007.
The utilization of the net operating losses to offset future taxable income may
be limited under U.S. tax laws.
For federal and state tax purposes, at March 31, 2002 and 2001, the Company had
net deferred tax assets of approximately $11,753,500 and $9,592,500,
respectively, which were fully offset by valuation allowances. These net
deferred tax assets principally arise due to the Company's net operating loss
carryforwards.
In accordance with generally accepted accounting principles, a valuation
allowance must be established for a deferred tax asset if it is uncertain that a
tax benefit may be realized from the asset in the future. The Company has
established a valuation allowance to the extent of its deferred tax assets since
it is more likely than not that the benefit cannot be realized in the future.
17. EARNINGS PER SHARE (EPS) DISCLOSURES:
NET LOSS PER SHARE:
The Company has adopted Financial Accounting Standards Board No. 128 "Earnings
Per Share " (EPS) and accordingly all prior periods have been restated. Basic
F-31
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.
The following is a reconciliation of the numerator (net loss) and denominator
(number of shares) used in the basic and diluted EPS calculation:
MARCH 31,
2002 2001 2000
------------- ------------- -------------
Basic EPS:
Net loss $(18,444,478) $(11,293,381) $ (4,756,926)
============= ============= =============
Average common shares
outstanding 16,975,660 15,199,895 7,763,715
============= ============= =============
Basic EPS $ (1.09) $ (0.74) $ (0.61)
============= ============= =============
Diluted EPS:
Net loss $(18,444,478) $(11,293,381) $ (4,756,926)
============ ============= =============
Average common shares
outstanding 16,975,660 15,199,895 7,763,715
Convertible preferred -- -- --
Warrants -- -- --
Stock options -- -- --
------------ ------------- -------------
Total shares 16,975,660 15,199,895 7,763,715
------------ ------------- -------------
Diluted EPS $ (1.09) $ (0.74) $ (0.61)
============ ============= =============
In 2002, 2001 and 2000, 7,557,135 potential shares, 7,053,854 potential shares
and 6,467,088 potential shares respectively were excluded from the shares used
to calculate diluted EPS as their effect is anti-dilutive.
18. OPERATING LEASES:
In the fiscal year ended March 31, 2002, Semotus closed offices in Downer's
Grove, Illinois, Gainesville, Florida and Woodbury, N.J. Semotus also subleased
its office space in Sherman Oaks, California, where WizShop resided and those
operations have been absorbed into the rest of the Company. Semotus added one
new office in Englewood, Colorado with its acquisition of ADA. The terms and
conditions of this lease are normal and customary. Rental expense for all of
these facilities was $548,354 in fiscal 2002.
The Company leases space for its operations in San Jose and Valencia,
California; Vancouver, British Columbia; Downer's Grove, Illinois; Gainesville,
Florida, and Woodbury, N.J. The leases expire starting in March 2002 through
October 2005. The terms and conditions of the leases are normal and customary.
Rental expense for these leases totaled approximately $613,456 in 2001 and
$279,909 in 2000. In fiscal 2000, the Company leased office space only in San
Jose, California and Vancouver, British Columbia.
F-32
Future minimum lease payments due under these agreements are as follows for the
years ending March 31:
2003 $441,176
2004 19,859
2005 21,004
2006 21,385
2007 22,532
----------
$525,956
==========
19. RELATED PARTY TRANSACTIONS:
Effective May 1, 1996, the Company entered into a three year employment
agreement with the Company's Chief Executive Officer. This agreement was
extended to May 1, 2004. The agreement automatically renews for one year terms
unless notice is provided by either party. On December 1, 1999, the Board of
Directors granted the Chief Executive Officer a warrant to purchase 150,000
shares of common stock at $4.75 per share (300,000 @ $2.375 post split), as part
of his compensation package.
In conjunction with the private placement dated November 5, 1997 the Chief
Executive Officer of the Company entered into a stock purchase agreement. Under
the terms of the agreement, the Chief Executive Officer received 280,000 shares
of preferred stock with detachable warrants to purchase 280,000 shares of the
Company's common stock at $2.50 per share, in exchange for a note receivable in
the amount of $1,050,000. The note is collateralized by certain assets of the
officer and bears interest at a rate of 7%. This note was for the purchase of
stock and did not result in the Company lending cash to Mr. LaPine. Mr. LaPine
has not sold any of the stock purchased with this note and has not received any
cash income related to this transaction.
On January 15, 2000, the Company entered into a Loan Forgiveness Agreement with
the Chief Executive Officer which provided that the $1,050,000 promissory note
would be forgiven if he continues to serve as the Company's Chief Executive
Officer through May 1, 2004, and there are no uncured defaults by him under his
Employment Agreement on May 1, 2004. The note, together with interest accrued
thereon has been presented as contra-equity in the balance sheet. The note plus
interest is being amortized over the period of the contract of employment.
Consequently, in the year ended March 31, 2002 expense of $404,795 has been
recorded as employment compensation.
On February 29, 2000, the Company entered into a secured recourse promissory
note with the Chief Executive Officer, in the amount of $100,000 to cover the
cost of the Chief Executive Officer's exercise of 40,000 warrants, that would
otherwise be redeemed by the corporation on April 3, 2000, pursuant to the
Company's automatic redemption rights against all holders of the Company's $2.50
warrants. On March 29, 2002, the Company entered into a Loan Forgiveness
Agreement with the Chief Executive Officer, which provided that the $100,000
promissory note be forgiven as of March 29, 2002. This note was for the purchase
of stock and did not result in the Company lending cash to Mr. LaPine. Mr.
LaPine has not sold any of the stock purchased with this note and has not
received any cash income related to this transaction.
F-33
In 2001, the Company's subsidiaries, Wares on the Web, Wizshop, and ADA entered
into employment agreements with Stephen J. Casey, Steve McAllister and John
Hibben, respectively, providing, among other things, an annual salary of
$150,000 each, as well as annual bonuses from $37,500 to $75,000, contingent
upon the applicable subsidiary companies reaching certain revenue targets. As of
June 19, 2001, Mr. Casey resigned and the employment agreement by and among Mr.
Casey and Wares on the Web was terminated. On January 18, 2002, the employment
agreement by and among ADA and John Hibben was terminated and a new but
substantially similar agreement was signed by and among ADA, John Hibben and
2007978 Ontario, Inc.
20. COMMITMENTS AND CONTINGENCIES:
Semotus is the defendant in one pending legal proceeding and one of Semotus'
wholly owned subsidiaries, Wizshop.com, Inc., is the plaintiff in one pending
legal proceeding. The suit in which Semotus is the defendant was filed by Brown
Simpson Partners I, Ltd. on March 7, 2002 in the Supreme Court of the State of
New York. This suit alleges four causes of action for breach of contract. The
Complaint claims that Semotus triggered the anti-dilution provisions in Brown
Simpson's Warrants and Series B Preferred Stock, thus obligating Semotus to
issue substantial numbers of additional shares upon conversion of the Preferred
Stock and exercise of the Warrants. Brown Simpson seeks an order granting
specific performance, money damages in excess of $25,000, and recovery of costs
and prejudgment interest. We believe the suit is without merit and intend to
vigorously contest the suit.
Wizshop.com, Inc., one of our wholly-owned subsidiaries, filed a lawsuit against
Earthlink Network, Inc. and Earthlink Operations, Inc. (collectively
"Earthlink") on April 2, 2002 in the California Superior Court. This suit
alleges 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 arises 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 is entitled to under the agreement. We are seeking monetary
damages for the above matter.
We are also a party to other legal proceedings in the normal course of business.
Based on evaluation of these matters and discussions with counsel, we believe
that liabilities arising from these matters will not have a material adverse
effect on our consolidated results of operations or financial position.
F-34
21. EMPLOYEE BENEFIT PLAN:
During 1998, the Company established a plan (the "Plan") which is qualified
under Section 401(k) of the Internal Revenue Code of 1986. Eligible employees
may make voluntary contributions to the Plan of up to 20% of their annual
compensation, not to exceed the statutory amount, and the Company may make
matching contributions. The Company made no contributions in 2001 or 2000.
22. SEGMENT INFORMATION
Due to additional businesses resulting from the acquisitions, Semotus began
reporting segment information in the fourth quarter of the fiscal year ended
March 31, 2001. The Company has restated the fiscal year ended March 31, 2000
for comparison purposes, although Semotus did not have separate segments at that
time.
Semotus' business has evolved into four segments: wireless services, enterprise
and commerce sales, professional and related services and logistic system sales.
Semotus' wireless services segment focuses in three areas: Company hosted
solutions, client hosted (premise-based) solutions, and financial consumer
solutions. The Company creates wireless information products by customizing and
delivering actionable and time sensitive information whenever that information
is most valuable to the customer. Services and applications are device agnostic
and protocol independent, integrating seamlessly into every enterprise
infrastructure and working with every wireless carrier and all text messaging
devices. Semotus provides two different wireless solutions: (i) Company-hosted
where Semotus hosts and manages the information on its servers and (ii) premise
based where Semotus installs and engineers the software and information on the
customer's servers.
Semotus' enterprise and commerce line of business provides online transactional
information and sales of products and services. This line of business also
serves as the platform for the Company's m-commerce initiatives. The online
services include website development and maintenance, sales, marketing, customer
retention programs and services, logistics, distribution, and tracking and
reporting.
Semotus uses the enterprise and commerce business to add-on wireless products
such as alerts to wireless devices, comparative data information and real time
messaging.
Semotus' professional service line of business provides customers with online
and wireless information and operations consulting, software engineering, and
training. This line of business provides the software tools and management to
install and efficiently run online and wireless operations. The professional and
related services business provides Semotus with access to customers who have
wireless requirements that can be met with Semotus' wireless solutions.
The logistic system sales line of business provides proprietary software with
complementary hardware and consulting to satisfy a customer's complete
logistical needs. These system installations provide automated logistical
solutions for equipment deployment, call centers, dispatching and servicing.
As Semotus continues to acquire companies, the nature and structure of the
business segments may change.
F-35
Professional Logistic
Wireless Enterprise and and related system Corporate
services commerce sales services sales and other Total
---------- -------------- ------------ ---------- ---------- ---------
As of and for the
year ended March 31,
2002
Revenue $ 1,305,347 2,630,368 559,956 1,611,424 -- $ 6,107,095
Gross profit $ 784,513 541,488 282,882 802,780 -- $ 2,411,663
Operating loss* $ (837,442) (1,005,843) (563,100) (149,766) (16,477,615) $(19,033,767)
Depreciation and
amortization $ 340,482 113,899 265,661 29,613 3,225,346 $ 3,975,001
Capital expenditures $ 18,873 -- -- 5,715 -- $ 24,588
Total assets, March
31, 2002* $ 7,133,204 1,616,479 282,808 1,056,540 248,032 $ 10,337,063
As of and for the
year ended March
31, 2001
Revenue $ 1,731,948 3,193,433 622,582 -- -- $ 5,547,963
Gross profit $ 746,643 363,791 341,444 -- -- $ 1,451,878
Operating loss* $(1,113,291) (974,759) (171,367) -- (10,089,737) $(12,349,154)
Depreciation and
amortization $ (223,149) (37,535) (77,812) -- (1,671,899) $ (2,010,395)
Capital expenditures $ 223,231 22,490 11,747 -- 280,968 $ 538,436
Total assets, March
31, 2001* $13,127,832 1,302,984 2,578,399 -- 4,760,746 $ 21,769,961
As of and for the
year ended March
31, 2000
Revenues $ 1,459,920 6,151,238 -- -- -- $ 7,611,158
Gross profit $ 684,596 2,189,570 -- -- -- $ 2,874,166
Operating loss* $ (923,460) (189,531) -- -- (4,079,396) $ (5,192,387)
Depreciation and
amortization $ 244,077 20,350 -- -- -- $ 264,427
Capital expenditure $ 96,723 1,135 -- -- 24,437 $ 122,295
Total assets, March
31, 2000* $16,597,406 1,893,074 -- -- -- $ 18,490,480
* Certain corporate marketing, research and development and general and
administrative costs have not been allocated to the segments and have been
included in "Corporate and other". The $248,032 and the $4,760,476 of assets at
March 31, 2002 and 2001 respectively under "Corporate and other" is comprised of
the GMP Intellectual Property, Semotus' Global Market Pro wireless financial
product and allocations of certain corporate assets and liabilities not
appropriately categorized in any segment.
23. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
QUARTER ENDED QUARTER ENDED QUARTER ENDED QUARTER ENDED YEAR ENDED
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, MARCH 31,
2001 2001 2001 2002 2002
------------- ------------- ------------- ------------- -------------
Revenue $ 1,594,285 $ 1,851,045 $ 1,423,593 $ 1,238,172 $ 6,107,095
Gross profit
(loss) 591,897 661,550 689,801 468,415 2,411,663
Net loss (3,929,818) (2,676,913) (1,970,399) (9,867,348) (18,444,478)
Net loss per
common share
basic and
diluted (0.24) (0.16) (0.11) (0.58) (1.09)
F-36
QUARTER ENDED QUARTER ENDED QUARTER ENDED QUARTER ENDED YEAR ENDED
JUNE 30, SEPTEMBER 30, DECEMBER 31, March 31, MARCH 31,
2000 2000 2000 2001 2001
------------- ------------- ------------- ------------- -------------
Revenue $ 1,217,273 $ 1,747,085 $ 1,374,693 $ 1,208,912 $ 5,547,963
Gross profit 364,034 723,633 652,318 (288,107) 1,451,878
Net loss (1,845,765) (2,476,417) (3,390,972) (3,580,227) (11,293,381)
Net loss per
common share--
basic and
diluted (0.13) (0.16) (0.22) (0.23) (0.74)
24. WIZSHOP.COM
The WizShop relationship started in June 2000 with the negotiation and execution
of an agreement for Semotus to build and host an m-commerce wireless platform
for WizShop's proprietary online shopping mall. The wireless platform's
functionality included wireless alerts, comparison pricing and transaction
purchases. The contract was valued at $1 million. In November 2000, as the
web-based, online business market weakened, WizShop discontinued the online
shopping mall project and refocused its efforts on its core business; building
and private labeling online shopping malls for large portals.
Semotus recognized $350,000 of revenues for the engineering work performed in
the quarter ended September 30, 2000. The Company also recognized $200,000 in
cost of goods sold, and $150,000 in gross profit. Semotus was compensated as
follows: (i) 1% of WizShop's equity in the form of common stock, valued at
$150,000 and (ii) engineering services, including a shopping website for
Semotus' B2C wireless products, which is linked to Semotus' website and to
WizShop's large portal customer's shopping websites, valued at the standard
engineering costs for WizShop portal customers. Semotus will not recognize the
balance of the contract since the project has been discontinued. Semotus
maintains the rights to the wireless applications developed for WizShop.
In February 2001, with the continued decline in online shopping and the decline
in the economy, the board of directors of WizShop decided to sell the company.
In late February, WizShop contacted Semotus, among others, to inquire about
acquiring WizShop. A definitive purchase agreement was signed March 13, 2001 and
the transaction was approved by WizShop shareholders on April 6, 2001.
25. STRATEGIC INVESTMENT IN ADA
On January 18, 2002 the Global Beverage Group "GBG", a Canadian-based direct
store delivery consortium, completed a strategic investment in Semotus' ADA
subsidiary. GBG is now a 49% shareholder 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. Additionally, as part of the transaction, GBG assumed a personal loan
of the President of ADA and received the 250,000 shares of Semotus stock
securing the loan. GBG has also received common stock options exercisable into
150,000 shares of Semotus stock at $0.75 per share.
At the end of 15 months, GBG has the option to purchase Semotus' 51% ownership
of ADA for either (i) $2.5 million in cash or (ii) return of the 250,000 shares
of common stock received for assuming the personal loan. These shares also carry
a price guaranty, for which Semotus could issue up to an additional 250,000
shares (see Note 3, "Acquisitions - Application Design Associates, Inc.")
F-37
Global Beverage Group's suite of products are designed to streamline the entire
order-to-cash cycle for wholesalers that provide direct delivery of products to
stores, offices and homes. The company's solutions are designed to handle
complex order management, customer service and distribution logistics such as
direct-store-delivery, direct-home-delivery, mobile workforces and vendor
managed inventory.
26. VALUATION AND QUALIFYING ACCOUNTS
Reduction
Charged to Against
Balance at Acquired Charged to cost Operating Balance Balance at
March 31, 2000 Balances of Goods Sold Expenses Sheet Account March 31, 2001
-------------- -------- --------------- ------------- -------------- ---------------
Allowance for
doubtful
accounts $ 21,337 $ 26,906 $ -- $ 92,989 $(78,345) $ 62,887
Allowance for
iventory
reserve -- -- 251,400 -- (62,900) 188,500
Reduction
Charged to Against
Balance at Acquired Charged to cost Operating Balance Balance at
March 31, 2001 Balances of Goods Sold Expenses Sheet Account March 31, 2002
-------------- -------- --------------- ------------ -------------- ---------------
Allowance for
doubtful
accounts $ 62,887 $ -- $ -- $284,660 $(280,547) $ 67,000
Allowance for
inventory
reserve 188,500 -- 194,180 -- (341,780) 40,900
27. SUBSEQUENT EVENTS
On May 1, 2002, all employees with a fifty thousand dollar annual salary or
greater took a ten percent salary reduction. In exchange, on May 16, 2002, the
Board of Directors approved the repricing of all of these employees' outstanding
stock options under the Company's 1996 Stock Option Plan to $0.43 per share, and
$0.47 per share for Tony and Pamela LaPine (which equals 110% of the amended
exercise price). Additionally, each employee received an additional grant equal
to 10% of their total options granted under the Stock Option Plan to date.
In May 2002, the Board of Directors of Semotus determined that the Company
needed to focus its operations on its core enterprise software products. (See
"Centralization and Consolidation Plan"). Given the continued economic recession
and limited capital spending, as well as the reduced access to capital, the
Company must economically utilize its limited resources towards those products
with the best margins and cash flow generation. As part of that effort, Semotus
has decided to reduce its e-commerce operations and to close the FiveStar
business as of the end of June 2002. While maintaining a reduced m-commerce and
F-38
e-commerce presence, Semotus has de-emphasized the e-fulfillment portion of that
business as the e-fulfillment markets have declined dramatically over the past
year and are not expected to recover significantly in the near future.
Accordingly, Semotus is redirecting its human and capital resources towards more
profitable products and services. Management has not quantified the effect of
these actions on the financial results of the Company for the first quarter of
fiscal 2003. However, management does not expect that the effect of these
actions will be material.
F-39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: June 28, 2002 Semotus Solutions, Inc.
By: /S/ ANTHONY N. LAPINE
-----------------------------
Anthony N. LaPine
Chief Executive Officer
and Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/S/ ANTHONY N. LAPINE
- ------------------------ Chief Executive Officer June 28, 2002
Anthony N. LaPine and Chairman of the Board
/S/ CHARLES K. DARGAN II
- ------------------------ Chief Financial Officer, June 28, 2002
Charles K. Dargan II Treasurer and Director
/S/ FREDERICK M. HOAR
- ------------------------ Director June 28, 2002
Frederick M. Hoar
/S/ JASON PAVONA
- ------------------------ Director June 28, 2002
Jason Pavona
/S/ ROBERT LANZ
- ------------------------ Director and Chairman June 28, 2002
Robert Lanz of the Audit Committee
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (Sec File No. 333-15399) and the Registration Statements
on Form S-3 (SEC File Nos. 333-67490, 333-63938, and 333-57772) of our report
dated June 3, 2002, relating to the consolidated financial statements of
Semotus Solutions, Inc. and Subsidiaries, which appears in this Annual Report on
Form 10K.
/S/ BDO Seidman, LLP
BDO Seidman, LLP
San Jose, California
June 28, 2002