Ealixir, Inc. 10-Q

ITEM 1: FINANCIAL STATEMENTS SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS June 30, 2008 March 31, 2008 CURRENT ASSETS: (unaudited) Cash and cash equivalents $ 226,601 $ 222,384 Trade receivables (net of allowance for doubtful accounts of $7,035 at June 30, 2008 and March 31, 2008) 101,248 151,995 Prepaid expenses and other current assets 21,980 24,190 ------------ --------------- Total current assets 349,829 398,569 Goodwill, net 1,430,141 1,430,141 Receivable from Stockgroup asset sale (Note 7) 101,400 117,724 ------------ ----------------- Total assets $ 1,881,370 $ 1,946,434 LIABILITIES & SHAREHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable $ 63,439 $ 129,781 Accrued payroll 67,270 58,387 Other accrued liabilities 32,016 13,816 Deferred revenue 229,271 238,688 ------------ ---------------- Total current liabilities 391,995 440,672 ------------ ---------------- LONG TERM LIABILITIES : Convertible promissory note (Note 6) 200,000 -- Accrued interest on convertible promissory note 2,805 -- ------------ --------------- Total liabilities 594,801 440,672 ------------ --------------- SHAREHOLDERS’ EQUITY: Common stock: $0.01 par value; authorized: 50,000,000 shares; 2,249,164 issued and outstanding at June 30, 2008 and March 31, 2008 22,492 22,492 Additional paid-in capital 72,883,348 72,867,976 Accumulated deficit (71,619,271) (71,384,706) ------------------- ---------------- Total shareholders’ equity 1,286,569 1,505,762 ------------------ --------------- Total liabilities and shareholders’ equity $ 1,881,370 $ 1,946,434 See accompanying notes to condensed consolidated financial statements. SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) Three Months June Ended 30, 2008 2007 Revenues $ 230,735 $ 314,331 Cost of revenues 1,588 20,710 ------------ ------------ Gross profit 229,147 293,621 Operating expenses: (Exclusive of stock, option and warrant expense) Research and development 24,585 42,496 Sales and marketing 208,223 157,000 General and administrative 213,039 216,093 Stock, option and warrant expense: Research and development 3,360 12,367 Sales and marketing 2,731 5,097 General and administrative 9,281 40,138 ------------ ------------ 15,372 57,602 ------------ ------------ Total operating expenses 461,219 473,191 ------------ ------------ Operating loss (232,072) (179,570) Other income (expense) (2,493) 374,716 ------------ ------------ Net income (loss) $ (234,565) $ 195,146 =========== ========== Net income (loss) per common share: Basic $ (0.10) $ 0.11 Diluted $ (0.10) $ 0.09 =========== ========== Weighted average shares outstanding: Basic 2,249,164 1,778,374 Diluted 2,249,164 2,068,727 =========== ========== See accompanying notes to condensed consolidated financial statements. SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Three Months June Ended 30, 2008 2007 Cash flows from operating activities: Net income (loss) $ (234,565) $ 195,146 Adjustments to reconcile loss from continuing operations to net cash used in operating activities: Compensation expense related to stock, stock options and warrants issued for services 5,834 2,973 FAS123R expense 9,538 54,629 Amortization of debt discount and accrued interest on Notes Payable -- 25,989 (Gain) loss on Stockgroup asset sale (Note 7) -- (350,000) Changes in assets and liabilities: Accounts and other receivables 38,895 (9,677) Receivable from Stockgroup for transitional services (Note 7) 11,852 (37,684) Prepaid expenses and other assets 2,210 5,995 Accounts payable (66,342) (33,616) Accrued expenses and other current liabilities 29,888 1,027 Deferred revenue (9,417) 62,955 ----------- ----------- Net cash used in operating activities (212,107) (82,263) ----------- ------------ Cash flows from investing activities: Proceeds from Stockgroup asset sale (Note 7) -- 150,000 Proceeds on receivable from Stockgroup asset sale (Note 7) 16,324 15,025 ----------- ------------ Net cash provided by investing activities 16,324 165,025 ----------------- ---------------- Cash flows from financing activities: Equipment loan -- (375) Net proceeds from Flint note payable 200,000 -- ----------- ----------- Net cash provided by (used in) financing activities 200,000 (375) ----------- ----------- Net increase in cash and cash equivalents 4,217 82,387 Cash and cash equivalents, beginning of period 222,384 305,588 ----------- ------------ Cash and cash equivalents, end of period $ 226,601 $ 387,975 =========== ========== See accompanying notes to condensed consolidated financial statements. SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (unaudited) Three Months June Ended 30, 2008 2007 SUPPLEMENTAL CASH FLOW DISCLOSURE: Cash paid for interest $ -- $ 351 =========== =========== Cash paid for income taxes $ -- $ 131 =========== =========== SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES: Deferred tax asset related to stock option grants $ -- $ 4,686 =========== =========== Non cash settlement of liabilities $ -- $ 25,989 =========== =========== Receivable assumed from Stockgroup asset sale (Note 7) $ -- $ 200,000 =========== =========== See accompanying notes to condensed consolidated financial statements. SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. FORMATION AND BUSINESS OF THE COMPANY: Semotus® Solutions, Inc. ("We" or “Our”), changed our name from Datalink.net, Inc. as of January 11, 2001. We were originally named Datalink Systems Corporation, and we were formed under the laws of the State of Nevada on June 18, 1996. On June 27, 1996, we 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, we issued 3,293,064 shares of our $0.01 par value Common Stock to the holders of 100% of the outstanding Common Stock of DCC, and DCC became our wholly owned subsidiary. As a part of the transaction, we acquired a Canadian corporation, DSC Datalink Systems Corporation, incorporated in Vancouver, British Columbia, which changed its name to Semotus Systems Corporation. We are a leading provider of enterprise application software connecting individuals wirelessly to critical business systems, urgent information and key processes. We help mobile employees make better and faster decisions, increase customer satisfaction, and improve efficiencies in business processes for shorter sales and service cycles. Our wireless software products and professional services are all included in the HipLink family of software, which provide immediate mobile access and control of business-critical software applications, databases, networks and servers. In the year ended March 31, 2008 we substantially scaled back the operations of Clickmarks and sold our Global Market Pro wireless financial data software and services to Stockgroup Systems Ltd. In the year ended March 31, 2007, we closed the operations of Expand Beyond and transferred our research and development activities from Vancouver, Canada to Pakistan. 2. BASIS OF PRESENTATION AND FUTURE PROSPECTS The accompanying condensed consolidated financial statements include the accounts of Semotus Solutions, Inc. and its subsidiaries. The condensed consolidated balance sheet as of June 30, 2008, the condensed consolidated statements of operations for the three months ended June 30, 2008 and 2007, and the condensed consolidated statements of cash flows for the three months ended June 30, 2008 and 2007 have been prepared by us, without audit and in accordance with the instructions to Form 10-Q and Regulation S-K. In the opinion of our management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended June 30, 2008 are not necessarily indicative of the results that may be expected for the year ending March 31, 2009. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. We believe that the disclosures provided are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-KSB for the year ended March 31, 2008. The preparation of condensed consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. The condensed consolidated financial statements include the accounts of Semotus Solutions, Inc. and our wholly owned subsidiary, Clickmarks. All significant intercompany transactions and balances have been eliminated in consolidation. Our management believes, after discontinuing all operations that were unprofitable, that the remaining continuing operations are sustainable and that we will have enough cash to maintain our operations over the next twelve months. Although those operations range from slightly cash positive to cash negative on a monthly basis, the overall trend toward positive cash flow is continuing. Further, with the trend toward increased acceptance of the need for wireless solutions, our operations should be augmented in the current fiscal year. Our continued operation is dependant on increasing sales and achieving profitability and/or obtaining sufficient long-term financing. 3. RECENT ACCOUNTING PRONOUNCEMENTS In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (FIN 48). FIN 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. We do not believe that the adoption of FIN 48 currently has a material impact on our financial statements. In September 2006, the FASB issued FASB Statement No. 157, Fair Value Measurements (SFAS 157). The standard provides guidance for using fair value to measure assets and liabilities. The standard also responds to investors’ requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. The standard applies whenever other standards require or permit assets or liabilities to be measured at fair value. The standard does not expand the use of fair value in any new circumstances. SFAS 157 must be adopted prospectively as of the beginning of the year it is initially applied. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We do not believe that the adoption of SFAS 157 currently has a material impact on our financial statements. 4. STOCK-BASED COMPENSATION On April 1, 2006, we adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), “Share-Based Payment,” requiring us to recognize expense related to the fair value of its employee stock option awards. We recognize the cost of all share-based awards on a straight line vesting basis over the vesting period of the award. Total stock compensation expense recognized by us during the three months ended June 30, 2008 and 2007 was $15,372 and $57,602, respectively. We have estimated the fair value of our option awards granted after April 1, 2006 using the Black-Scholes option valuation model that uses the assumptions noted in the following table. Expected volatilities are based on the historical volatility of our stock. We use actual data to estimate option exercises, forfeitures and cancellations within the valuation model. The expected term of options granted represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Three Months Ended June 30, Black-Scholes -Based Option Valuation Assumptions 2008 2007 Fair value of options granted during the period $ 0.26 $ 0.148 Expected term (in years) 6.23 years 4 years Expected volatility 100.34% 95.68% Weighted average volatility 100.34% 95.68% Expected dividend yield -- -- Risk-free rate 3.10% 4.94% The following table summarizes the stock option transactions for the quarter ended June 30, 2008 based upon a closing stock price of $0.65 per share as of June 30, 2008: Stock Options Shares (#) Weighted Average Exercise Price ($) Aggregate Intrinsic Value ($) Outstanding at April 1, 2008 1,109,486 1.15 -- Granted 110,000 0.32 36,300 Exercised -- -- -- Forfeited 82,411 4.68 -- Expired 2,213 4.42 -- Outstanding at June 30, 2008 1,134,862 0.78 -- Exercisable at June 30, 2008 1,010,087 0.84 -- The aggregate intrinsic value of options is calculated as the difference between the exercise price of the underlying options and the market price of our common stock for the shares that had exercise prices that were lower than the $0.65 market price of our common stock at June 30, 2008. No options were exercised during the three months ended June 30, 2008. 5. EARNINGS PER SHARE (EPS) DISCLOSURES In accordance with SFAS No. 128 "Earnings per Share" (EPS), we report Basic and Diluted EPS as follows: Basic EPS is computed as net income (loss) divided by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock options, warrants and other convertible securities. Common equivalent shares are excluded from the computation of net loss per share if their effect is anti-dilutive. For the three months ended June 30, 2008, 2,136,398 potential shares were not included in the shares used to calculate diluted EPS, as no potential shares currently have the effect of being dilutive. For the three months ended June 30, 2007, 290,353 potential shares were included in the shares used to calculate diluted EPS, as their effect is dilutive, and 522,671 potential shares were not included in the shares used to calculate diluted EPS, as their effect is not dilutive due to the fact that the exercise prices of all of our options and warrants were greater than the average market price of our stock over the three months ended June 30, 2007. 6. FLINT INVESTMENT, CONVERTIBLE PROMISSORY NOTE AND POTENTIAL ACQUISITION TRANSACTION We signed an investment agreement dated April 23, 2008 with Flint Telecom Limited (the “Flint Parent”), relating to an investment of $200,000 into Semotus (the “Investment Agreement”). The investment was taken in the form of a convertible promissory note (the “Note”) which may be converted by Flint Parent at its discretion at any time into restricted common shares of Semotus at a conversion price of $0.275 per share, for an aggregate of 727,272 shares (subject to adjustment for any accrued interest, and subject to adjustment for anti-dilution). The unpaid principal shall accrue interest at 8% per annum and all unconverted principal and interest is due and payable on April 23, 2010. We did not incur any placement agent fees or expenses for this $200,000 investment. These funds will be used to increase our sales and marketing efforts and for other general working capital purposes. Simultaneously, we entered into a contribution agreement with Flint Telecom, Inc. (“Flint”) and the Flint Parent, pursuant to which we will acquire the majority of Flint’s assets and liabilities in exchange for shares of our restricted common stock, subject to certain closing conditions, including the completion by Flint of a financing transaction and the completion of an audit of Flint (the “Transaction”). Upon the closing of this transaction (the “Close”), we expect to issue approximately 28.5 million common shares of Semotus to Flint and approximately 2 million common shares to Mr. LaPine. On a fully diluted basis, taking into consideration our outstanding stock, the stock issuance to Mr. LaPine, and assuming the exercise of Flint’s convertible promissory notes (which will result in the issuance of a maximum potential total of approximately 14,000,000 additional shares) and our outstanding stock options and warrants, there will be a total of approximately 49,000,000 shares outstanding, which will result in Flint owning approximately 90% of the common stock of the Company, Mr. LaPine owning 5% of the Company and the existing Semotus shareholders owning 5%. However, there are still some outstanding closing conditions that have not yet been met as of the date of this filing. 7. STOCKGROUP ASSET SALE We entered into a definitive Asset Purchase Agreement and Transition Services Agreement on May 8, 2007 with Stockgroup Systems, Ltd. (“Stockgroup”), relating to the sale of our wireless financial information assets (the “Agreement”). As part of the Agreement, we agreed to sell our financial data wireless distribution technology and intellectual property, and the related wireless financial data services, including the Global Market Pro family of software and services. The purchase price for this asset sale consists of up to $350,000; $150,000 was paid on the closing date, May 9, 2007, and the remaining $200,000 is be paid through a monthly revenue share of 30%, until $200,000 has been paid to us or two years have passed from the date of Closing or gross revenue falls below $15,000 per month, whichever occurs first In accordance with the Transition Services Agreement, we continue to provide certain transition services to Stockgroup, including certain accounting, administrative and technical services related to the financial data products. As of June 30, 2008, Stockgroup owed us a total of $118,525, comprising the unpaid balance of $101,400 from the original $200,000 purchase price, and $17,125 for transitional services provided by Semotus to date. 8. RELATED PARTY TRANSACTIONS Effective May 1, 1996, we entered into a three year employment agreement with our Chief Executive Officer. This agreement was extended to May 1, 2007 and automatically renewed for one-year terms unless notice is provided by either party. Effective July 15, 2007, the Compensation Committee agreed that we should terminate the existing employment agreement with Mr. LaPine and enter into a new employment agreement with Mr. LaPine for a term of three years. Under this new employment agreement, Mr. LaPine is entitled to a base salary of $240,000 per year, plus discretionary increases in accordance with our standard review procedure. However, Mr. LaPine’s previous voluntary decrease of $24,000 annually in compensation will continue with the same voluntary decrease in his annual salary under the new employment agreement so that Mr. LaPine will continue to be compensated at an annual salary of $216,000. Mr. LaPine also receives a car allowance in the amount of $1,000 per month. Mr. LaPine is eligible for an annual bonus, with the actual amount of bonus paid to be determined by the Committee in its sole discretion, based upon such factors and performance goals as the Committee deems appropriate. If Mr. LaPine’s employment is terminated by the Company without cause or by Mr. LaPine for good reason as provided in the Agreement, or if the Company is acquired or dissolves and a new employment agreement satisfactory to Mr. LaPine cannot be reached, all stock and stock options of the Company then owned by Mr. LaPine which are unvested shall become immediately fully vested, and the Company shall pay to Mr. LaPine severance pay equal to the remaining years and/or months of his then current base salary that are due, based on a three year agreement term . 9. CONCENTRATIONS OF CREDIT RISK: Three customers accounted for a total of 28% of our revenue in the three months ended June 30, 2008, representing 5%, 8% and 15% each. Four customers accounted for 46% of our accounts receivable at June 30, 2008, representing 17%, 11%, 9% and 9% each. Two customers accounted for a total of 37% of our revenue in the three months ended June 30, 2007, representing 22% and 15%, respectively. Two customers accounted for 20% each of our accounts receivable at June 30, 2007, and one customer accounted for 30% of our accounts receivable at June 30, 2007, for a combined total of three customers accounting for 70% of our accounts receivable at June 30, 2007. 10. INNOFONE TRANSACTION On July 23, 2007, we entered into a Software License Agreement and Stock Issuance and Registration Rights Agreement with Innofone.com Incorporated (“Innofone”), relating to a royalty free license of our HipLinkXS and Clickmarks software applications (the “Agreement”). The consideration for this software license consisted of $3.75 million worth of Innofone’s restricted common stock at a price we calculated as $0.19 per share, which equals 19,736,842 shares, with demand and piggyback registration rights. We also granted Innofone an option to buy certain assets, including the Hiplinkxs and Clickmarks software application products, the complete terms and conditions of which were not fully defined or agreed upon (“Asset Sale”). At a minimum, this Asset Sale would require a payment by Innofone of $250,000 and a convertible note due from Innofone in favor of us for $500,000. Additionally, there was a post-closing purchase price adjustment on the Innofone stock, should the stock fall below $3.75 million in aggregate value, in order for Stockgroup to retain its option to purchase certain assets of Semotus. Pursuant to the post-closing purchase price adjustment provision in the Agreement, Innofone issued to us 26,888,158 additional shares of Innofone restricted common stock during the second quarter ended September 30, 2007, for a total of 46,625,000 shares of Innofone’s restricted common stock. As of September 30, 2007 we owned approximately 35% of Innofone, and, accordingly, the investment was accounted for on the equity method. Innofone is currently delinquent in its SEC filings and working with its auditors to find a cost effective way to become current. Innofone’s last quarterly report was filed with the SEC on May 21, 2007 for the three and nine months ended March 31, 2007, in which it reported total assets of $53,523,822, total liabilities of $39,256,222 and a net loss for the three and nine months ended March 31, 2007 of $17,156,434 and $33,601,375, respectively. Since September 30, 2007, Innofone’s common stock has declined. We initially generated $3.75 million of other income from the sale of a software license to Innofone. However, due to the continuing operating losses and the uncertainty of Innofone’s business, as of March 31, 2008, Semotus reduced the value of its investment to $0 and thereby recorded a $366,250 loss for the fourth quarter and a $3,730,000 loss for the year ended March 31, 2008. As of the contractual deadline of October 22, 2007, Innofone had not paid us $250,000, and therefore its option to buy certain assets expired. Innofone’s right of first refusal to merge with us has also therefore expired. On April 30, 2008 we entered into a Termination Agreement with Innofone, whereby we returned all of the shares of Innofone common stock received under the License Agreement in exchange for the complete termination of the software license granted to Innofone thereunder. 11. SUBSEQUENT EVENTS On July 22, 2008, Flint Telecom, Ltd. (“Flint”) converted 100% of its convertible promissory note issued on April 23, 2008, which included the entire outstanding principal amount of $200,000 and all accrued interest up to and including July 22, 2008, which comes to a total of $204,000, into restricted common shares of Semotus Solutions, Inc. at a conversion price equal to $0.275 per share, which equals a total of 741,818 shares of our restricted common stock. See Note 6 for more details on the convertible promissory note.