Ealixir, Inc. 10-K

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 At the end of the fiscal year 2002 and continuing through fiscal year 2003, 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 continued to centralize and consolidate its organization and its operations. The headcount has been reduced 50% since March 31, 2002 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, comprised largely of ADA's products and services, has been sold as of May 6, 2003 and is presented in discontinued operations. This is due to Global Beverage Group (GBG), a Canadian-based direct store delivery consortium and a 49% shareholder in ADA, exercising its option to purchase the remaining 51% of ADA from Semotus. In January 2002, GBG completed a strategic investment in ADA and became a 49% shareholder in ADA (see "Significant Events" and see Note 26 to the Financial Statements, "Strategic Investment in ADA"). ADA develops and licenses proprietary software that gives enterprises a total solution for automation 17 of customer call centers, dispatching, equipment deployment, servicing and invoicing while interfacing with existing corporate business functions and ERP solutions. 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 eliminated and Wares was closed in August 2002. 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 closure of the Wares' and Five Star businesses, and elimination of unprofitable products and services in that segment. At WizShop, the operations have been largely consolidated into Semotus' other divisions and subsidiaries. At the end of June, FiveStar's operations were closed as the market for e-fulfillment is currently unprofitable, and in August, Wares' operations were closed. (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. Subsequently, as the technology economy has declined since January 2001, Semotus has centralized and consolidated its operations and has closed Five Star and Wares, sold ADA, and consolidated Simkin and WizShop. 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 As part of the Company's previous growth strategy, Semotus acquired six companies: Cross, Simkin, Wares, Five Star, WizShop and ADA. For specific information concerning the acquired companies see Note 4 to the Financial Statements, "Acquisitions". Each provided revenues and a significant customer base to allow the Company to add to its technology, expand its product offerings and penetrate targeted vertical markets. However, due to the continued economic recession and limited capital spending, the Company began and is currently continuing with its Centralization and Consolidation Plan. As part of that effort, Semotus decided to reduce its e-commerce operations, to close the FiveStar business as of the end of June 2002 and to close the Wares' business as of August 2002. Both Simkin's and WizShop's operations have been consolidated, and as of May 6, 2003, ADA has been sold. 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 and to close the Wares' business as of August 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. Additionally, the remaining 51% of ADA was purchased by GBG on May 6, 2003. 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 142, "Goodwill and Other Intangible Assets". Based on quantitative and qualitative measures, 18 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 7, "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 $7 million for the fiscal year ended March 31, 2002. See Notes 6 and 7 to the Financial Statements, "Impairment of Long-Lived Assets and Goodwill" and "Sale of Technology and Net Impairment of Goodwill" respectively. No further impairment charges in continuing operations have been taken in fiscal year ended March 31, 2003, although a net loss from discontinued operations of $799,090 was taken for the operations of Five Star, Wares and ADA, mostly comprised of an impairment to goodwill of $635,724 at ADA. Management has determined that the remaining goodwill of $1,430,141 (net of accumulated amortization of $727,058) is fairly valued using the impairment tests as described in SFAS 144 and SFAS 142, which includes discounted cash flow analysis and comparable company analysis. This remaining amount of goodwill consists entirely of one of the Company's wireless enterprise application software product lines, the HipLink family of software products, which is generating current revenue and cash flow. 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. 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. 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. 144 and SFAS 142. Based on quantitative and qualitative measures, the Company assesses 19 the need to record impairment losses on long-lived assets used in operations when impairment indicators are present. In accordance with SFAS No. 144 and SFAS 142, 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 determines 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 no longer amortizes intangible assets with an indefinite useful life and will begin assessing potential future impairments of such intangible assets, but performs impairments tests on a quarterly basis to analyze the current fair market value of the intangible assets in relation to the carrying value of the assets. In prior years, Semotus had capitalized the fair value of contracts acquired in business combinations as required by APB 16 "Business Combinations". Fair value was 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 was amortized into cost of revenue as revenues were recognized. For other accounting policies see Note 3 to the Financial Statements, "Summary of Significant Accounting Policies". RESULTS OF OPERATIONS All financial results for the fiscal years ended March 31, 2003, 2002 and 2001 have been restated for the discontinued operations of Five Star, Wares and ADA. REVENUES Revenues for the years ended March 31, 2003, 2002 and 2001 were $2,344,251, $2,531,418 and $1,910,194, respectively. The 7% decrease in overall revenues for the fiscal year ended March 31, 2003 versus 2002 was due to the continuation of the technology recession as the enterprise and commerce sales and the professional services segments had declines with fewer new customers and contracts. Wireless Services generally maintained its level of revenues. The overall increase in revenues at March 31, 2002 from March 31, 2001 is due to the revenues associated with a significant contract at the WizShop subsidiary in the enterprise and commerce segment, which was started in April 2002. Further, there was some small growth in the professional services business. This was offset somewhat by the decline in sales in the wireless segment as corporations reduced their capital spending at the onset of the recession. WIRELESS SERVICES The revenues in this segment were essentially the same in the years ended March 31, 2003 versus 2002. While there has been some variability in the number of customers, the overall revenue level has not changed as corporate capital spending has stabilized although it is at a modest level of spending. 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 was an approximate 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. The Company has emphasized its enterprise products, which continue to sell well in the economic recession. 20 ENTERPRISE AND COMMERCE SALES The 10% decline in revenues from March 31, 2002 to March 31, 2003 is due to the smaller amortization into revenue of the WizShop customer loyalty contract. The contract is completely amortized as of March 31, 2003. The increase in revenues from March 31, 2001 to March 31, 2002 is due to the revenues associated with the WizShop customer loyalty contract, which began in April 2002. PROFESSIONAL AND RELATED SERVICES The 59% decrease in revenues from March 31, 2002 to March 31, 2003 is due to the decline in new professional services contracts, mainly from the Simkin subsidiary. Wireless medical software products have been slow to penetrate the market and therefore have been eliminated by Semotus. Other unprofitable professional service contracts have also been eliminated. The 37% decrease in revenues from March 31, 2001 to 2002 is largely the result of the decline in new professional services contracts, mainly from the Simkin subsidiary. COST OF REVENUES AND GROSS MARGIN The overall gross profit margin increased by 7% in March 31, 2003 to 60%, due largely to the higher margin wireless services segment which is a larger component of the overall revenue mix and from the improved margins with the Centralization and Consolidation Plan implementation. The overall gross profit margin increased by 7% to 53% in the fiscal year ended March 31, 2002. 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. Further , the addition of the WizShop contract, in the enterprise and commerce segment, with a higher margin added to the increase in the overall company gross profit margin. WIRELESS SERVICES The 73% gross profit margin for the wireless segment for the fiscal year ended March 31, 2003 is the result of Semotus is selling more of the enterprise application software, which carries higher gross margins than the consumer financial software. Further, through the Centralization and Consolidation Plan, Semotus has become more efficient in all of its business which has improved gross and operating margins. 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. 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 The gross profit margin in this segment increased to 43% in the fiscal year ended March 31, 2003 as the initial costs associated with the WizShop contract were absorbed in fiscal year 2002; the contract began in April 2001. The gross profit margin in this segment was 41% in the fiscal year ended March 31, 2002. PROFESSIONAL AND RELATED SERVICES The gross profit margin increased to 89% in the fiscal year ended March 31, 2003 due to the elimination of unprofitable contracts and services. As the professional services business has declined, the remaining contracts have the highest margins. The gross profit margin slightly increased by 2% to 74% in the fiscal year ended March 31, 2002, which is largely due to the mix of contracts serviced in the year. Many of the unprofitable contracts with lower margins in this segment were eliminated through the Centralization and Consolidation Plan. 21 OPERATING EXPENSES Operating expenses decreased in the fiscal year ended March 31, 2003, due to the continued reduction in overall expenses through the Centralization and Consolidation Plan. Further, there were not any impairment charges taken in the fiscal year ended March 31, 2003. 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. 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. For the fiscal year ended March 31, 2002, there are two categories of impairment charges: goodwill and intangible assets. For the fiscal year ended March 31, 2003, there were not any impairment charges from continuing operations. The table below summarizes the changes in these categories of operating expenses: YEAR ENDED MARCH 31, ---------------------------------------------------- DESCRIPTION 2003 2002 2001 ----------- ---- ---- ---- Research and development $ 719,965 $ 1,010,720 $ 1,187,348 Sales and marketing 1,027,366 1,849,582 4,098,228 General and administrative 2,238,825 3,203,131 4,218,224 Impairment of goodwill -- 3,617,283 -- Impairment of intangible assets -- 3,420,000 -- Depreciation and amortization 1,313,596 3,080,063 1,786,514 Stock, option and warrant expense 52,455 496,181 601,932 Totals $ 5,352,207 $ 16,676,960 $ 11,892,246 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. These costs are due principally for the development of updates to existing products and new products, such as Futures Market Pro, Equity Market Pro, Global Market Pro, and the new release of the Company's enterprise application products, HiplinkXS, OpenLink, IQLink, RemLink. 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. 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. 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 and March 31, 2003 as personnel and offices were reduced and operating functions were consolidated. This trend should continue as Semotus continues to implement its Centralization and Consolidation Plan. In the prior year, Semotus' management performed 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," and in accordance with SFAS 142, goodwill and other intangible assets. Based on quantitative and qualitative measures, the Company assessed the need to record impairment losses on long-lived assets used in operations when impairment indicators were 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 $3,617,283 was taken comprised of an impairment charge to Simkin's goodwill of $909,272 and $2,708,011 for WizShop's goodwill in fiscal year 2002. Furthermore, Semotus took an impairment charge of $3,420,000 for GMP in the quarter ended March 31, 2002. See Notes 6 and 7, "Impairment of Long-Lived Assets and Goodwill" and "Sale of Technology and Net Impairment of Goodwill" respectively, to the Financial Statements in this 10K. There were no impairment charges from continuing operations in the fiscal year ended March 31, 2003, although an impairment 22 charge of $635,724 was taken in the discontinued operations of ADA. Management has determined that the remaining goodwill of $1,430,141 (net of accumulated amortization of $727,058) is fairly valued using the impairment tests as described in SFAS 144 and SFAS 142, which includes discounted cash flow analysis and comparable company analysis. This remaining amount of goodwill consists entirely of one of the Company's wireless enterprise application software product lines, the HipLink family of software products, which is generating current revenue and cash flow. In accordance with SFAS 144, Semotus has presented the operations of FiveStar, Wares and ADA as discontinued operations. In the net loss from discontinued operations for 2002 and 2003, impairment charges were taken against the goodwill of both Wares (fiscal year 2002) and ADA (fiscal year2003). As discussed in Note 6, "Impairment of Long-Lived Assets and Goodwill," Semotus performed the impairment tests and determined that impairment charges were required. The impairment expense for the Wares goodwill was $1,156,587 and for the ADA goodwill was $635,724. 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 from March 31, 2001 to 2002 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 decline in this expense through fiscal 2003 is as a result of the impairment charges in fiscal 2002 which reduced the asset balances to be amortized and from the decline in capital spending at Semotus. The non-cash charges for compensation consists mainly of grants of stock, options and warrants for services provided to the Company. Such services include financial, marketing and public relations consulting. Additionally, common stock was issued for certain accrued liabilities. The 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, 2003 and 2002. 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 2003, FY2002 or FY 2001, 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 2003 2002 2001 ----------- ---- ---- ---- Net interest income $ 52,301 $ 269,210 $ 671,915 Owners fee sales of technology (1,176,750) (1,569,000) (1,569,000) Interest on note from sales of technology 1,176,750 1,569,000 1,569,000 Amortization of technology advances 206,723 306,908 371,052 Gain from cancellation of sales of 628,927 -- -- technology contracts Miscellaneous income (expenses) 287,406 (17,223) 60,473 ------------ ------------ ------------ $ 1,175,357 $ 558,895 $ 1,103,440 ============ ============ ============ Non-operating income, net of expenses, increased in the fiscal year ended March 31, 2003 versus 2002, due to the cancellation of the technology sales contracts, of which the remaining deferred balances were recognized as income. This was offset somewhat due to less cash available for investment during the year resulting from the operating losses and the 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, decreased in the year ended March 31, 2002 from the year ended March 31, 2001, due primarily to a decline in interest income resulting from less cash during the year that was available for investment. The two major sources of cash in fiscal year 2001 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. 23 COMPREHENSIVE LOSS The decrease in the comprehensive loss for the fiscal year ended March 31, 2003 to $3,383,296 or $(0.19) per share was due to an improvement in the overall operating efficiency of the Company as the consolidation and Centralization Plan has been implemented. The gross profit margin improved and the operating costs were reduced. Further, there were no impairment charges in the year ended March 31, 2003. The Company also disposed of the operations of Five Star, Wares and ADA. The increase in the comprehensive loss for the fiscal year ended March 31, 2002 to $18,484,302 or $(1.09) per share compared to $11,314,517 or $(0.74) per share for the fiscal year ended March 31, 2001 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. These costs were offset somewhat with a 53% increase in gross profit dollars and reductions in sales and marketing expenses and general and administrative expenses. SEGMENT RESULTS Semotus' business has evolved into three segments: wireless services, enterprise and commerce sales, and professional and related services. See "Business Description - Services and Products" for further information about each of the segments. As Semotus continues to centralize and consolidate its business, the nature and structure of the business segments may change. The Company intends to consolidate all of its segments beginning in the first quarter of fiscal year 2004. 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". Enterprise and Professional Wireless commerce and related Corporate and Services sales services other Total ------------ ------------ ------------ ------------ ------------ As of and for the Year Ended March 31, 2003: Revenue from continuing operations $ 1,293,801 $ 1,005,060 $ 45,390 -- $ 2,344,251 Gross profit from continuing operations $ 946,489 $ 428,101 $ 40,418 -- $ 1,415,008 Operating loss from continuing operations* $ (1,254,049) $ 308,775 $ 21,846 $ (3,013,771) $ (3,937,199) Net loss from discontinued operations -- -- -- $ (799,090) $ (799,090) Depreciation and amortization from continuing $ 251,262 $ 60,454 $ 1,880 $ 1,000,000 $ 1,313,596 operations Capital expenditures $ 16,949 -- -- -- $ 16,949 Total assets from discontinued operations -- -- -- $ 706,932 $ 706,932 Total assets, March 31, 2003 $ 3,027,947 $ 482,237 $ 265,613 $ 872,759 $ 4,648,556 As of and for the Year Ended March 31, 2002: Revenue from continuing operations $ 1,305,347 $ 1,114,481 $ 111,590 -- $ 2,531,418 Gross profit from continuing operations $ 793,510 $ 459,595 $ 83,035 -- $ 1,336,140 Operating loss from continuing operations* $ (837,442) $ (75,944) $ (113,520) $(14,313,914) $(15,340,820) Net loss from discontinued operations $ -- -- -- $ (3,662,553) $ (3,662,553) Depreciation and amortization from continuing operations $ 340,482 $ 42,291 $ 25,005 $ 2,672,285 $ 3,080,063 Capital expenditures $ 24,588 -- -- -- $ 24,588 Total assets from discontinued operations -- -- -- $ 1,600,341 $ 1,600,341 Total assets, March 31, 2002 $ 7,133,204 $ 1,272,567 $ 246,597 $ 1,684,695 $ 10,337,063 As of and for the Year Ended March 31, 2001: Revenue from continuing operations $ 1,731,948 -- $ 178,246 -- $ 1,910,194 Gross profit from continuing operations $ 746,643 -- $ 128,948 -- $ 875,591 Operating loss from continuing operations* $ (3,016,513) -- $ (265,616) $ (7,734,526) $(11,016,655) Net loss from discontinued operations -- -- -- $ (1,380,166) $ (1,380,166) Depreciation and amortization from continuing $ 282,832 -- $ 9,208 $ 1,494,474 $ 1,786,514 operations Capital expenditures $ 223,231 -- -- $ 203,208 $ 426,439 Total assets from discontinued operations -- -- -- $ 2,419,982 $ 2,419,982 Total assets, March 31, 2001 $ 8,894,324 -- $ 1,461,401 $ 11,414,236 $ 21,769,961 24 * 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". LIQUIDITY AND CAPITAL RESOURCES Although the cash position of Semotus has decreased at March 31, 2003 due to the continued operating losses at the Company, this cash loss has been reduced through the Company's Centralization and Consolidation Plan. 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, 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%. The sources and uses of cash are summarized as follows: YEAR ENDED MARCH 31, -------------------- 2003 2002 2001 ---- ---- ---- Net cash used in operating activities of continuing operations $(2,021,665) $(4,332,467) $(8,507,433) Net cash provided by (used in) investing activities (15,889) 1,388,983 (558,941) Net cash provided by (used in) financing activities (210,941) (195,450) 1,279,762 Net cash provided by (used in) discontinued operations 166,749 (134,007) (1,243,415) Net increase (decrease) in cash and cash equivalents (2,081,746) (3,272,941) (9,030,027) Cash used in operating activities at March 31, 2003 consisted principally of a net loss of $3,432,350 offset somewhat by non-cash charges of $1,313,596 for depreciation and amortization, $593,259 for the amortization of a note receivable, and $119,862 for a non-cash legal settlement. Further there was a non-cash charge for the net loss from discontinued operations of $799,090 and a gain on the cancellation of technology contracts of $628,927. Other operating activities that used cash were reductions in accounts payable and accrued liabilities of $190,008 and $130,361, respectively. 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 $7,037,283 of impairment charges, depreciation and amortization of $3,080,063 and stock based compensation of $471,181. Other operating activities that provided cash were a reduction in accounts receivable of $358,073, and an increase in deferred revenue of $162,651 offset by a reduction in accounts payable of $86,816. Cash used in the investing activities of $15,889 at March 31, 2003 resulted principally from $16,949 of capital expenditures offset somewhat by $1,060 from the sale of assets. Cash provided from investing activities in 2003 of $1,388,983 at March 31, 2002 resulted principally from $1,063,571 of cash received, net of assets acquired from the two companies acquired in the fiscal year, and $350,000 from the sale of the Kinetidex technology. Cash flows from financing activities produce a net decrease in cash of $210,941. This resulted from the repurchase of preferred stock for $100,000 and from the $122,479 of repayments of notes payable and capital leases offset slightly by $11,538 in cash received from the exercise of warrants. Cash flows provided by financing activities at March 31, 2002 produced a net decrease in cash of $195,450 which resulted from $207,118 of repayments on notes payable and capital leases offset slightly by $11,668 in cash received from the exercise of stock options. As of March 31, 2003, the Company had cash and cash equivalents of $1,976,062 a decrease of $2,081,746 from the prior year. Working capital decreased to $1,464,645 from the fiscal year ended March 31, 2002. As of March 31, 2002, the Company had cash and cash equivalents of $4,057,808 (exclusive of restricted cash of $693,286), a decrease of $3,272,941 from the prior year. Working capital decreased to $2,064,396 from the fiscal year ended March 31, 2001. 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, 2003. Primary commitments in FY2004 are 25 repayment of notes payable ($56,224), capital lease obligations ($23,731) and operating lease obligation ($87,697). At March 31, 2003 and 2002, the Company had a deferred tax asset of approximately $13,862,275 and $11,753,500, respectively, 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. The following table discloses the Company's contractual commitments for future periods. Long term commitments are comprised solely of operating leases and capital leases (See Notes 12 and 20). YEAR ENDING MARCH 31, --------------------- 2004 $ 103,948 2005 64,899 2006 25,350 2007 24,426 2008 6,210 ---------- $ 224,833 ========== Management believes that it has adequate working capital for the next 12 months. RECENT PRONOUNCEMENTS: In April 2002, the FASB issued SFAS No. 145, " Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 rescinded FASB No. 4 and 64 in relation to reporting gains and losses from extinguishment of debt. The Statement amended SFAS No. 4 and 64 and requires gains and losses from extinguishment of debt to be classified as extraordinary items only if they meet the criteria in Opinion 30. Applying the provisions of Opinion 30 differentiates between normal recurring operations of a company and transactions that are unusual or infrequent in nature. SFAS No. 145 also amended Statement No. 13, to the effect that sale-leaseback accounting for certain lease modifications should be accounted for in the same manner as sale-leaseback transactions. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 addresses significant issues regarding the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for under EITF No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit and Activity (including Certain Costs Incurred in a Restructuring)." The scope of SFAS 146 also includes costs related to terminating a contract that is not a capital lease and termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. SFAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The Company's adoption of SFAS 146 on January 1, 2003 had no impact on the Company's financial position or results of operations. In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"), "GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS, AN INTERPRETATION OF FASB STATEMENTS NO. 5, 57, AND 107 AND RESCISSION OF FASB INTERPRETATION NO. 34." FIN 45 clarifies the requirements of FASB Statement No. 5, "ACCOUNTING FOR Contingencies" relating to the guarantor's accounting for, and disclosure of the issuance of certain types of guarantees. The disclosure provisions of the Interpretation are effective for financial statements of interim or annual reports that end after December 15, 2002, irrespective of the guarantor's year-end. The Company's adoption of FIN 45 did not have a material impact in the Company's financial position or results of operations. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation, Transition and Disclosure." SFAS No. 148 amends SFAS No. 123 and requires prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 is effective for fiscal years ending after December 15, 2002 and is effective for interim periods beginning after December 15, 2002. The Company's adoption of SFAS NO. 148 on January 1, 2003 did not have a material effect on the Company's financial position or results of operations. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities, an interpretation of ARB No. 51." This interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the interpretation. The interpretation applies immediately to variable interests in variable interest entities created or obtained after January 31, 2003. The interpretation is applied to the enterprise no later than the end of the first reporting period beginning after June 15, 2003. The application of this interpretation is not expected to have a material effect on the Company's financial statements. The interpretation requires certain disclosures in financial statements issued after January 31, 2003 if it is reasonably possible that the 26 Company will consolidate or disclose information about variable interest entities when the interpretation becomes effective. In November 2002, the Emerging Issues Task Force issued its final consensus on Revenue Arrangements with Multiple Deliverables. This guidance is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003 or alternatively, entities may elect to report the change in accounting as a cumulative-effect adjustment. EITF 00-21 discusses criteria necessary to determine when an arrangement may be viewed to have separate units of accounting (and thus revenue) and when an arrangement should be viewed as a single unit of accounting. The Company is currently reviewing how this might affect revenue recognition for arrangements the Company could enter into that have multiple deliverables.