Ealixir, Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The financial statements and supplementary data of the Company and the report of independent auditors thereon are listed in Item 16 of this Report and are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. BDO Seidman, LLP served as our independent auditors from September 3, 1998 to July 15, 2002. We had determined to change our independent auditors for fiscal year 2003, and we dismissed BDO Seidman LLP on July 5, 2002. The decision to change independent auditors was recommended by the Company's Management and the Audit Committee of the Board of Directors, and approved by a unanimous vote of the full Board of Directors. Our decision to change our independent auditors did not occur due to any existing or previous accounting disagreements with BDO Seidman LLP, and BDO Seidman LLP has expressed no disclaimer of opinion, adverse opinion, qualification or limitation as to uncertainty, audit scope, or accounting principles regarding our financial statements or the audit process, for the fiscal years ended March 31, 2002 or 2001. Neither have there been any accounting disagreements or reportable events within the meaning of Item 304(a)(1)(iv) and Item 304(a)(1)(v) of SEC Regulation S-K for those periods or for the interim period from April 1, 2002 up to and including July 15, 2002. BDO Seidman LLP had stated in its letter addressed to the SEC its concurrence with the foregoing statements in this paragraph. On July 15, 2002, we engaged Burr, Pilger & Mayer LLP to serve as our independent auditors for the fiscal year ending March 31, 2003. The decision to engage Burr, Pilger & Mayer LLP was recommended by the Company's management team and the Audit Committee of the Board of Directors, and unanimously approved by the full Board of Directors. We did not seek the advice of Burr, Pilger & Mayer LLP on specific audit issues relating to the application of accounting principles to a specified transaction, either completed or proposed, the type of audit opinion that might be rendered on our financial statements, or any matter that was a reportable event prior to engagement of this firm. PART III We have omitted certain information from this Report that is required by Part III. We intend to file a definitive proxy statement pursuant to Regulation 14A with the Securities and Exchange Commission relating to our annual meeting of stockholders not later than 120 days after the end of the fiscal year covered by this Report, and such information is incorporated by reference herein. 27 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 2003 Annual Meeting of Shareholders 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, 2003, and is incorporated by reference into this Item. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item will be included in the Company's Proxy Statement for the 2003 Annual Meeting of Shareholders 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, 2003, and is incorporated by reference into this Item. 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 2003 Annual Meeting of Shareholders 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, 2003, and is incorporated by reference into this Item. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this Item will be included in the Company's Proxy Statement for the 2003 Annual Meeting of Shareholders 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, 2003, and is incorporated by reference into this Item. ITEM 14. CONTROLS AND PROCEDURES. Within 90 days prior to the date of this report, we carried out an evaluation, under the supervision of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. First, it should be noted that the design of any system of controls is based in part upon certain assumptions, and there can be no assurance that any design will succeed in achieving its stated goals. Further, in designing and evaluating the disclosure controls and procedures, Semotus and its management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Based upon our evaluation, our CEO and CFO concluded that our disclosure controls and procedures are effective in bringing to their attention on a timely basis, information required to be disclosed in the reports the Company files under the Exchange Act. The CEO and CFO note that, since our last evaluation of internal controls, there have been no significant changes in internal controls or in other factors that could significantly affect internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses. PART IV ITEM 15. PRINCIPAL ACCOUNTANT FEES AND SERVICES. The information required by this Item will be included in the Company's Proxy Statement for the 2003 Annual Meeting of Shareholders under the caption "Principal Accountant Fees and Services" 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, 2003, and is incorporated by reference into this Item. ITEM 16. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a)(1) FINANCIAL STATEMENTS The following financial statements required by this item are submitted in a separate section beginning on page 35 of this report. Independent Auditors Reports Consolidated Balance Sheets for the years ended March 31, 2003 and 2002 Consolidated Statements of Operations and Comprehensive Loss for the years ended March 31, 2003, 2002 and 2001 Consolidated Statements of Common Shareholders' Equity for the years ended March 31, 2003, 2002 and 2001 28 Consolidated Statements of Cash Flows for the years ended March 31, 2003, 2002 and 2001 Notes to Consolidated Financial Statements (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 29 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. 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 Preferred Buy Back and Mutual Incorporated by reference to Release Agreement by and Exhibit 2.1 to the Registrant's among Semotus Solutions, Inc. Form 8-K filed January 13, 2003. and Brown Simpson Partners I, Ltd. dated December 31, 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. 30 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. 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. 4.8 Warrant to purchase up to 846,154 Incorporated by reference to shares of common stock issued to Exhibit 4.1 to the Registrant's Brown Simpson Partners, I, Ltd. Form 8-K filed January 13, 2003. dated December 31, 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. 31 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. 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 Incorporated by reference to Anthony LaPine dated March 29, Exhibit 10.13 to the Registrant's 2002. Form 10K filed July 1, 2002. 16.1 Letter from BDO Seidman, LLP Incorporated by reference to dated July 17, 2002. Exhibit 16.1 to the Registrant's Form 8-K filed on July 22, 2002. 16.2 Letter from BDO Seidman, LLP Incorporated by reference to dated August 26, 2002. Exhibit 16.1 to the Registrant's Form 8-K filed August 26, 2002. 21 Subsidiaries of the Registrant. Filed electronically herewith. 23.1 Consent of Burr, Pilger & Mayer, Filed electronically herewith. LLP. 23.2 Consent of BDO Seidman, LLP. Filed electronically herewith. 32 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. 99.4 Consent of Anthony LaPine Filed electronically herewith. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.5 Consent of Charles, K. Dargan, II Filed electronically herewith. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ---------- * 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 two Current Reports on Form 8-K during the fourth quarter ended March 31, 2003. An 8-K was filed on January 13, 2003 with respect to the repurchase by Semotus from Brown Simpson of all of the outstanding shares of the Company's Series B Convertible Preferred Stock and the settlement and mutual release related to Brown Simpson's anti-dilution claim. An 8-K was filed on February 14, 2003 with respect to its financial results for the third quarter ended December 31, 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). 33 INDEX TO FINANCIAL STATEMENTS PAGE(S) Reports of Independent Certified Public Accountants ...................... 35 Consolidated Financial Statements: Consolidated Balance Sheets, March 31, 2003 and 2002 ................ 37 Consolidated Statements of Operations and Comprehensive Loss for the years ended March 31, 2003, 2002 and 2001 .............. 38 Consolidated Statements of Common Shareholders' Equity for the years ended March 31, 2003, 2002 and 2001 ................... 39 Consolidated Statements of Cash Flows for the years ended March 31, 2003, 2002 and 2001 ................................. 41 Notes to Consolidated Financial Statements .......................... 43 34 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors and Shareholders of Semotus Solutions, Inc.: We have audited the accompanying consolidated balance sheet of Semotus Solutions, Inc., and subsidiaries as of March 31, 2003, and the related consolidated statements of operations and comprehensive loss, shareholders' equity and cash flows for the year then ended. 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 audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform our audit 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 audit provides 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, 2003 and the consolidated results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 3 to the consolidated financial statements, effective April 1, 2002, the Company changed its method of accounting for goodwill in accordance with Statement of Financial Accounting Standards, No. 142, "Goodwill and Other Intangible Assets." /s/ Burr, Pilger & Mayer LLP Burr, Pilger & Mayer LLP Palo Alto, California June 2, 2003 35 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS THE BOARD OF DIRECTORS AND SHAREHOLDERS OF SEMOTUS SOLUTIONS, INC.: We have audited the accompanying consolidated balance sheet of Semotus Solutions, Inc. and subsidiaries as of March 31, 2002, and the related consolidated statements of operations and comprehensive loss, common shareholders' equity and cash flows for each of the years in the two-year period ended March 31, 2002. These 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 financial position of Semotus Solutions, lnc. and subsidiaries as of March 3l, 2002, and the results of their operations and their cash flows for each of the years in the two-year period ended March 31, 2002, in conformity with accounting principles generally accepted in the United States of America. /s/ BDO Seidman, LLP BDO Seidman, LLP San Jose, California June 3, 2002 36 SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS March 31 March 31 ASSETS 2003 2002 ------------ ------------ CURRENT ASSETS: Cash and cash equivalents (including restricted cash of $693,286 at March 31, 2002) $ 1,976,062 $ 4,751,094 Trade receivables (net of allowance for doubtful accounts of $77,090 at March 31, 2003 and $66,000 at March 31, 2002) 140,646 159,018 Income and GST tax receivable -- 3,823 Other receivables -- 60,395 Prepaid expenses 52,161 132,622 Current assets of discontinued operations -- 345,755 Current assets held for sale 298,200 150,340 ------------ ------------ Total current assets 2,467,069 5,603,047 Property and equipment, net 342,614 622,671 Capitalized contract, net -- 576,958 GMP intellectual property, net -- 1,000,000 Goodwill, net 1,430,141 1,430,141 Non-current assets of discontinued operations -- 34,383 Non-current assets held for sale 408,732 1,069,863 ------------ ------------ Total assets $ 4,648,556 $ 10,337,063 ============ ============ LIABILITIES: CURRENT LIABILITIES: Accounts payable $ 392,826 $ 582,834 Accrued vacation 69,808 91,768 Other accrued liabilities 79,999 188,771 Notes payable 56,224 693,286 Current portion of capital lease obligations 23,731 53,428 Current portion of advances on technology sales -- 269,109 Current portion of deferred revenue 79,119 1,105,597 Current liabilities of discontinued operations -- 300,977 Current liabilities related to assets held for sale 300,717 252,881 ------------ ------------ Total current liabilities 1,002,424 3,538,651 Capital lease obligation, net of current portion 15,189 40,310 Advances on technology sales, net of current portion -- 566,542 Non-current liabilities related to assets held for sale 321,216 214,623 ------------ ------------ Total liabilities 1,338,829 4,360,126 ------------ ------------ Commitments and contingencies (Notes 20 and 22) PREFERRED SHAREHOLDERS' EQUITY: Convertible preferred stock, Series B: $0.001 par value; $13.00 liquidation value; authorized: 5,000,000 shares; issued and outstanding: none at March 31, 2003 and 469,231 at March 31, 2002 (Note 13) -- 469 Additional paid-in capital -- 5,681,987 ------------ ------------ Total preferred shareholders' equity -- 5,682,456 ------------ ------------ COMMON SHAREHOLDERS' EQUITY Common stock: $0.01 par value; authorized: 50,000,000 shares; issued and outstanding: 19,275,211 at March 31, 2003 and 17,200,784 at March 31, 2002 192,752 172,008 Additional paid-in capital 66,163,351 60,396,089 Accumulated other comprehensive loss (93,306) (142,360) Notes receivable - related parties (91,281) (701,817) Accumulated deficit (62,861,789) (59,429,439) ------------ ------------ Total common shareholders' equity 3,309,727 294,481 ------------ ------------ Total liabilities, preferred and common shareholders' equity $ 4,648,556 $ 10,337,063 ============ ============ See accompanying notes to consolidated financial statements. 37 SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS Year Ended March 31, -------------------- 2003 2002 2001 ------------ ------------ ------------ Revenues: Wireless services $ 1,293,801 $ 1,305,347 $ 1,731,948 Enterprise and commerce sales 1,005,060 1,114,481 -- Professional and related services 45,390 111,590 178,246 ------------ ------------ ------------ Total revenues 2,344,251 2,531,418 1,910,194 ------------ ------------ ------------ Cost of sales: Wireless services 347,312 511,837 985,305 Enterprise and commerce sales 576,959 654,885 -- Professional and related services 4,972 28,556 49,298 ------------ ------------ ------------ Total cost of sales 929,243 1,195,278 1,034,603 ------------ ------------ ------------ Gross profit 1,415,008 1,336,140 875,591 Operating expenses: (Exclusive of depreciation and amortization and stock, option and warrant expense) 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: Research and development 75,516 127,975 97,606 General and administrative 1,238,080 2,952,088 1,688,908 ------------ ------------ ------------ 1,313,596 3,080,063 1,786,514 Stock, option and warrant expense: Sales and marketing -- 88,000 78,750 General and administrative 52,455 408,181 523,182 ------------ ------------ ------------ 52,455 496,181 601,932 Total operating expenses 5,352,207 16,676,960 11,892,246 ------------ ------------ ------------ Operating loss from continuing operations (3,937,199) (15,340,820) (11,016,655) Net interest income 52,301 269,210 671,915 Other income 1,123,056 289,685 431,525 ------------ ------------ ------------ Total interest and other income 1,175,357 558,895 1,103,440 ------------ ------------ ------------ Net loss from continuing operations (2,761,842) (14,781,925) (9,913,215) Net loss from discontinued operations (Note 5) (799,090) (3,662,553) (1,380,166) Gain from disposal of discontinued operations 128,582 -- -- ------------ ------------ ------------ Net loss (3,432,350) (18,444,478) (11,293,381) Other comprehensive income (loss) - Translation adjustment 49,054 (39,824) (21,136) ------------ ------------ ------------ Comprehensive loss $ (3,383,296) $(18,484,302) $(11,314,517) ============ ============ ============ Net loss per common share from continuing operations: Basic $ (0.15) $ (0.87) $ (0.65) Diluted $ (0.15) $ (0.87) $ (0.65) Net loss per common share from discontinued operations: Basic $ (0.04) $ (0.22) $ (0.09) Diluted $ (0.04) $ (0.22) $ (0.09) Net loss per common share: Basic $ (0.19) $ (1.09) $ (0.74) Diluted $ (0.19) $ (1.09) $ (0.74) Weighted average shares used in per share calculation, basic and diluted 18,039,262 16,975,660 15,199,895 ============ ============ ============ See accompanying notes to consolidated financial statements. 38 SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY Common Stock Additional ------------------------------ Paid-In Shares Amount Capital ------------ ------------ ------------ 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 Issuance of stock for price guarantee under merger agreement 863,403 8,634 (8,634) Issuance of stock for liability settlement 57,178 572 21,124 Issuance of stock due to exercise of warrants 1,153,846 11,538 -- Repurchase of series B preferred stock -- -- 5,582,456 Reprice of warrants due to lawsuit settlement -- -- 119,862 Amortization and forgiveness of note receivable -- -- -- Foreign currency translation adjustment -- -- -- Amortization of deferred compensation -- -- 52,454 Net loss -- -- -- Balances at March 31, 2003 19,275,211 $ 192,752 $ 66,163,351 See accompanying notes to consolidated financial statements. 39 SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY (CONTINUED) Accumulated Other Comprehensive Notes Accumulated Loss Receivable Deficit Total ------------ ------------ ------------ ------------ 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 Issuance of stock for price guarantee under merger agreement -- -- -- -- Issuance of stock for liability settlement -- -- -- 21,696 Issuance of stock due to exercise of warrants -- -- -- 11,538 Repurchase of series B preferred stock -- -- -- 5,582,456 Reprice of warrant due to lawsuit settlement -- -- -- 119,862 Amortization and forgiveness of note receivable -- 610,536 -- 610,536 Foreign currency translation adjustment 49,054 -- -- 49,054 Amortization of deferred compensation -- -- -- 52,454 Net loss -- -- (3,432,350) (3,432,350) Balances at March 31, 2003 $ (93,306) $ (91,281) $(62,861,789) $ 3,309,727 See accompanying notes to consolidated financial statements. 40 SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended March 31, -------------------- 2003 2002 2001 ------------ ------------ ------------ Cash flows from operating activities: Net loss $ (3,432,350) $(18,444,478) $(11,293,381) Loss from discontinued operations 799,090 3,662,553 1,380,166 Gain from disposition of discontinued operations (128,582) -- -- Net loss from continuing operations (2,761,842) (14,781,925) (9,913,215) Foreign currency translation adjustment 49,054 (39,824) (21,136) Adjustments to reconcile net loss from continuing operations to net cash used in operating activities of continuing operations: Depreciation and amortization 1,313,596 3,080,063 1,786,514 Compensation expense related to stock issued for services -- 371,027 208,655 ------------ Compensation expense related to options/warrants issued for services 52,455 100,154 393,277 Net amortization of contract income (423,414) (606,586) -- Amortization of advances on technology sales (206,723) (306,908) (371,052) Gain on disposition of technology advances (628,927) -- -- Amortization and forgiveness of notes receivable, net 593,259 315,799 242,135 Impairment of goodwill -- 3,617,283 -- Impairment of GMP & software -- 3,420,000 Net loss from sale of assets 719 29,010 -- Non-cash settlement of liabilities 173,669 14,642 -- Non-cash compensation for services -- -- (151,000) Changes in assets and liabilities net of acquired assets and liabilities due to acquisitions: Accounts and other receivables 82,500 358,073 (75,423) Prepaid expenses and other assets 80,462 2,634 61,512 Accounts payable (190,008) (86,816) (489,764) Accrued expenses and other current liabilities (130,361) (32,425) (87,199) Deferred revenue (26,104) 162,651 (90,737) Advances on technology sales -- 50,681 -- ------------ ------------ ------------ Net cash used in operating activities of continuing operations (2,021,665) (4,332,467) (8,507,433) ------------ ------------ ------------ Cash flows from investing activities: Acquisition of property and equipment (16,949) (24,588) (426,439) Cost of the applicable fiscal year's acquisitions, net of cash acquired -- (132,502) Sale of property and equipment 1,060 -- -- Cash received from applicable fiscal year's acquisitions, net -- 1,063,571 -- Sale of Kinetidex technology -- 350,000 -- ------------ ------------ ------------ Net cash provided by (used in) investing activities of continuing operations (15,889) 1,388,983 (558,941) ------------ ------------ ------------ Cash flows from financing activities: Repayments of notes payable (78,869) (154,398) (50,830) Repayments of capital lease obligations (43,610) (52,720) (15,624) Proceeds from exercise of options and warrants 11,538 11,668 2,040,438 Repurchase of preferred stock (Note 13) (100,000) -- -- Restricted cash for note payable -- -- (694,222) ------------ ------------ ------------ Net cash provided by (used in) financing activities of continuing operations (210,941) (195,450) 1,279,762 ------------ ------------ ------------ Net cash provided by (used in) discontinued operations 166,749 (134,007) (1,243,415) Net decrease in cash and cash equivalents (2,081,746) (3,272,941) (9,030,027) Cash and cash equivalents, beginning of year 4,057,808 7,330,749 16,360,776 ------------ ------------ ------------ Cash and cash equivalents, end of year $ 1,976,062 $ 4,057,808 $ 7,330,749 ============ ============ ============ See accompanying notes to consolidated financial statements. 41 SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) Year Ended March 31, -------------------- 2003 2002 2001 ------------ ------------ ------------ SUPPLEMENTAL CASH FLOW DISCLOSURE: Cash paid for interest $ 25,809 $ 68,130 $ 19,071 ============ ============ ============ Cash paid for income taxes $ 4,341 $ 9,015 $ 10,557 ============ ============ ============ SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Non-cash purchase consideration for the acquisition of ISS, Inc. through the issuance of common stock $ -- $ -- $ 1,671,750 ============ ============ ============ Non-cash purchase consideration for the 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.com, 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 liabilities $ 162,783 $ 101,036 $ -- ============ ============ ============ Preferred stock converted to common stock $ -- $ -- $ 3,633,045 ============ ============ ============ Cashless exercise of warrants $ -- $ -- $ 392 ============ ============ ============ Consideration in connection with 40,000 common stock warrants to obtain option to repurchase 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 ============ ============ ============ Warrants issued as part of the consideration for repurchase of series B preferred stock $ 90,497 $ -- $ -- ============ ============ ============ Reclassification of accounts payable to notes payable $ 135,093 $ -- $ -- ============ ============ ============ See accompanying notes to consolidated financial statements. 42 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, 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. In the June 27, 1996 acquisition of DCC, the Company issued 3,293,064 shares of its $0.01 par value Common Stock 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, and efficiency and improves profitability. 2. BASIS OF PRESENTATION AND FUTURE PROSPECTS: The accompanying consolidated financial statements include the accounts of Semotus Solutions, Inc. and its subsidiaries. The consolidated balance sheets as of March 31, 2003 and 2002, the consolidated statements of operations and comprehensive loss for the years ended March 31, 2003, 2002 and 2001, the consolidated statements of common shareholders' equity for the years ended March 31, 2003, 2002 and 2001, and the consolidated statements of cash flows for the years ended March 31, 2003, 2002 and 2001, have been prepared by the Company, with an audit and in accordance with the instructions to Form 10-K and Regulation S-K. In the opinion of management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included. The Company believes that the disclosures provided are adequate to make the information presented not misleading. Management believes, after discontinuing all operations that were unprofitable, that the remaining continuing operations are sustainable and that the Company will have enough cash to maintain its 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 an economic recovery, the Company's operations should be augmented in the current fiscal year. The continued operation of the Company is dependant on increasing sales and achieving profitability and/or obtaining sufficient long-term financing. 3. 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. and WizShop, Inc. The other subsidiaries have been closed or sold and are now in discontinued operations: Wares on the Web, Inc. (Wares), Five Star Advantage, Inc. (Five Star) and Application Design Associates, Inc. (ADA). All significant intercompany transactions and balances have been eliminated in consolidation. Operations of the Canadian subsidiary consist mainly of research and development and engineering on behalf of the parent. All other operating subsidiaries generate revenues from the sales of products and services. USE OF ESTIMATES: The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America 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. 43 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, estimates the collectibility and creates an allowance for doubtful accounts. The Company does not require cash collateral or other security to support customer receivables. Provision is made for estimated losses on uncollectible accounts. We estimate our allowance for doubtful accounts by applying estimated loss percentages against our aging of accounts receivable balances. The estimated loss percentages are updated periodically and are based on our historical write-off experience, net of recoveries. Changes to allowances may be required if the financial condition of our customers improves or deteriorates or if we adjust our credit standards for new customers, thereby resulting in write-off patterns that differ from historical experience. Historically, changes to our estimated loss percentages have not been material. 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. Amortization on capital leases is over two years and is incorporated in depreciation and amortization expense in the statement of operations. The carrying value of property and equipment is assessed annually or when factors indicating an impairment are present. In accordance with SFAS No. 144, we review our property, plant, and equipment for impairment whenever events or circumstances indicate that their carrying amount may not be recoverable. Impairment reviews require a comparison of the estimated future undiscounted cash flows to the carrying value of the asset. If the total of the undiscounted cash flows is less than the carrying value, an impairment charge is recorded for the difference between the estimated fair value and the carrying value of the asset. LONG-TERM ASSETS / GOODWILL Historically, long-term assets, such as intellectual property rights and goodwill were amortized on a straight-line basis over the expected economic life of the assets. The expected useful life of those assets was five years, and was adjusted to one year as of April 1, 2002. The Company has adopted Statement of Financial Accounting Standards (SFAS) 141 "Business Combinations" and SFAS 142 "Goodwill and Other Intangible Assets" as of April 1, 2002. Accordingly, Semotus no longer amortizes goodwill and intangible assets with an indefinite useful life and instead assesses potential impairments of such intangible assets and goodwill. The effect of the adoption of SFAS 142 resulted in the net loss for the fiscal year ended March 31, 2003 being smaller by $432,541 due to not amortizing goodwill. Management has determined that the remaining goodwill of $1,430,141 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. The following table presents the impact of SFAS 142 on net loss and net loss per share had SFAS 142 been applicable for the fiscal years ended March 31, 2002 and 2001. FISCAL YEARS ENDED ------------------------------------------------ 2003 2002 2001 ------------ ------------ ------------ Reported net loss $ (3,432,350) $(18,444,478) $(11,293,381) Amortization of goodwill -- 1,855,407 591,326 ------------ ------------ ------------ Adjusted net loss (3,432,350) (16,589,071) (10,702,055) ============ ============ ============ Reported net loss per share - basic and diluted $ (0.19) $ (1.09) $ (0.74) Adjusted net loss per share - basic and diluted $ (0.19) $ (0.98) $ (0.70) 44 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. CAPITALIZED CONTRACT In prior years, Semotus capitalized the fair value of contracts acquired in business combinations as required by Accounting Principles Board Opinion (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 over the length of the contract, two years, and was fully amortized at March 31, 2003. 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 SFAS No. 123, "Accounting for Stock-Based Compensation" and SFAS 148, "Accounting for Stock-Based Compensation, Transition and Disclosure." 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 APB No. 25, "Accounting for Stock Issued to Employees," but are required to disclose pro forma net loss, stock compensation cost 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. 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 options. Had compensation expense been determined based 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 fiscal years ended March 31, 2003, 2002 and 2001 would have been adjusted to the pro forma amounts indicated below: 2003 2002 2001 ------------ ------------ ------------ Net loss as reported $ (3,432,350) $(18,444,478) $(11,293,381) Compensation Expense (48,253) (1,649,416) (522,296) Net loss Pro forma (3,480,603) (20,093,894) (11,815,677) Net loss per share As reported, basic and diluted (0.19) (1.09) (0.74) Pro forma net loss, basic and diluted (0.19) (1.18) (0.78) The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants under the Plan in 2003, 2002 and 2001: 2003 2002 2001 ------------ ------------ ------------ Expected dividend $ -- $ -- $ -- Expected life of option 4 years 4 years 4 years Risk-free interest rate 3.46% 3.71% - 4.63% 5.0% - 6.5% Expected volatility 102% - 204% 87% - 108% 70% - 295% The above pro forma disclosures are not likely to be representative of the effects on reported net income (loss) for future years. 45 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. 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, and costs of servicing and hosting. 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. 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 and 2003 there were no capitalized software development costs as the Company expensed the remaining amounts at fiscal year end 2002. DISCONTINUED OPERATIONS In April 2002, Semotus adopted SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which requires 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. This statement requires that those long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. The Company evaluates long-lived assets, 46 excluding goodwill and identifiable intangible assets with indefinite useful lives, for impairment in accordance with SFAS 144 whenever events or changes in circumstances indicate that the carrying value of an asset my not be recoverable. Accordingly, for the fiscal year ended March 31, 2003, the operations of Five Star, Wares and ADA have been recorded in discontinued operations. Five Star and Wares were part of the Enterprise and Commerce Sales segment. ADA was the logistics segment. The amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset. Fair value is determined generally based on discounted cash flows. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to sell. The assets from the discontinued operations including those assets held for sale have been recorded at their fair market value prior to disposition. 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, if dilutive, 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) (See Note 19, "Earnings Per Share (EPS) Disclosures"). 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. COMPREHENSIVE INCOME (LOSS): The Company's policy in reporting comprehensive income is as defined in SFAS 130, "Reporting Comprehensive Income" and includes all changes in equity (net assets) during a period from non-owner sources. The Company excludes from net income (loss) foreign currency translation adjustments, which are included in comprehensive income. For the periods presented in this Form 10K, foreign currency translation adjustments is the only item which affects the Company's comprehensive income. RECENT ACCOUNTING 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 Emerging Issues Task Force issued its final consensus on EITF 00-21, "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. In November 2002, the FASB issued FASB Interpretation NO. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure 47 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 Company will consolidate or disclose information about variable interest entities when the interpretation becomes effective. As of March 31, 2003, the Company does not have any variable interest entities. 4. ACQUISITIONS 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 or goodwill and instead assesses potential impairments of such intangible assets and goodwill. See Note 3, "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 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 year 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 was August 2002. At that time, the Company's common stock had not closed at $10.00 per share or above; therefore, 613,403 additional shares were issued to the original WizShop stockholders still holding the original shares issued. 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, "Accounting for Contingency Arrangements based on Security Prices in a Purchase Business Combination". 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. 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 two years if certain revenue targets are met. Semotus had also agreed to issue additional shares if Semotus' common stock does not trade at or above $5.00 per share by the end of 48 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. On April 30, 2002 Semotus' common stock had not traded at or above $5.00 per share; therefore, Semotus issued 250,000 additional shares. However, in May of 2003, GBG, currently a 49% shareholder in ADA, exercised its option to purchase the remaining 51% of ADA. See Note 5, "Discontinued Operations". As consideration for this option to purchase, GBG returned the 500,000 total Semotus restricted common shares issued as part of the ADA acquisition to Semotus. Any remaining obligations under the merger agreement were terminated upon GBG's exercise of its purchase option. 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 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 year should revenue targets be met. As of March 31, 2002, Semotus had issued an additional 64,947 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. In May of 2003, the parties entered a settlement agreement in which a total of 187,500 additional shares were issued in lieu of any additional earn out or price guarantee obligations, and each party released the other from all remaining obligations (see Note 28, "Subsequent Events"). 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 year should revenue targets be met. As of March 31, 2003, no additional shares have been issued. 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 had a right to contingent purchase consideration based upon operating performance for which an additional 2,250,000 shares of Semotus common stock would be issued over the next two years if revenue targets had been met. The contingent consideration required a substantial growth in revenues, which was not achieved. In August, 2002, Wares filed for bankruptcy and its operations were discontinued. See Note 5, "Discontinued Operations". Wares was an established turnkey provider of e-commerce solutions to leading retailers, distributors and manufacturers. 49 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 was an e-marketing and e-fulfillment company that provided a start to finish turnkey operation for online sales, marketing, logistics, fulfillment and customer service for its clients. In June, 2002, Five Star filed for bankruptcy and its operations were discontinued. See Note 5, "Discontinued Operations". 5. DISCONTINUED OPERATIONS. As part of Semotus' Centralization and Consolidation Plan, Semotus reduced its e-commerce and m-commerce presence with the elimination of unprofitable products and services from that segment. Five Star was not expected to make a significant contribution to the Company's future profitability as its operations were unprofitable. Therefore, Semotus decided to close the facilities and cease the operations as of the end of June 2002. Furthermore, Five Star filed for liquidation under Chapter 7 of the U.S. Bankruptcy Code on June 28, 2002. In continuing with the reduced e-commerce and m-commerce presence and the elimination of unprofitable products and services, Semotus decided to discontinue the operations of Wares on the Web in August, 2002. The Wares on the Web operations were unprofitable. Furthermore, Wares on the Web filed for liquidation under Chapter 7 of the U.S. Bankruptcy Code on August 19, 2002. In accordance with SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", the operations of Five Star Advantage, Inc. have been recorded as discontinued operations in the year ended March 31, 2003. Five Star was part of the Enterprise and Commerce Sales segment. The disposal of the assets and liabilities is now under the control of the U.S. Bankruptcy Court. In the same manner, Wares on the Web's operations have been recorded as discontinued in the year ended March 31, 2003. It also was part of the Enterprise and Commerce Sales segment. The disposal of the assets and liabilities is now under the control of the U.S. Bankruptcy Court. A net loss from discontinued operations for Five Star and Wares of $122,021 was recorded at March 31, 2003. Further, a net gain upon disposition of the assets and liabilities of Five Star and Wares of $128,582 was recognized at March 31, 2003. On January 18, 2002 the Global Beverage Group, "GBG", a Canadian-based direct store delivery consortium, completed a strategic investment in Semotus' ADA subsidiary by acquiring a 49% share in ADA. For its 49% stock purchase, GBG paid Semotus $250,000 in cash and agreed to invest $1 million in ADA over the next 15 months in order to help with the development of the next generation of ADA asset tracking and management software. 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 had 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 had 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. The purchase agreement also carried a price guaranty, for which Semotus issued an additional 250,000 shares (see Note 4, "Acquisitions - Application Design Associates, Inc."). On May 6, 2003, GBG purchased the remaining 51% of ADA for the return of 500,000 shares of Semotus' common stock. This decision resulted in the discontinuation of ADA's operations in fiscal year 2003. In accordance with SFAS 144, ADA's assets and liabilities are classified as held for sale in the accompanying balance sheet as of March 31, 2003. ADA's operations have also been recorded as discontinued in the year ended March 31, 2003. ADA was the logistic systems segment. A net loss from discontinued operations of $677,069 was recorded as of March 31, 2003, mostly comprised of an impairment to goodwill of $635,724 (which is included in the Statement of operations and comprehensive loss in the line "net loss from discontinued operations"). Management performed the impairment tests as described in Note 6, "Impairment of Long Lived Assets and Goodwill" and as defined in SFAS 144 and SFAS 142 to determine the impairment expense. The major classes of assets and liabilities included as part of the disposal group of assets held for sale are as follows: at March 31, 2003, cash of $62,965, accounts receivable of $147,649, inventory of $41,069, goodwill of $408,000, accounts payable of $44,432 and deferred revenue of $199,700. Further, Semotus classified the $321,216 of minority interest in ADA as a long-term liability from discontinued operations. At March 31, 2003, there was inventory of $178,171 and payables of $166,394, as well as $71,989 in cash and $54,346 in accounts receivable related to the other discontinued operations. Revenue from Five Star recorded in the year ended March 31, 2003, 2002 and 2001 was $$152,992, $1,427,482 and $3,088,980, respectively. Revenue from Wares recorded in the year ended March 31, 2003, 2002 and 2001 was $26,570, $536,771 and $548,789, respectively. Revenue from ADA recorded for the years ended March 31, 2003 and 2002 was $1,137,339 and $1,611,424 respectively. 50 6. IMPAIRMENT OF LONG-LIVED ASSETS AND GOODWILL 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 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 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 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 WizShop, Semotus analyzed the current carrying value of the goodwill related to the acquisition. 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 was 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 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 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. 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 8, "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 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: o Discounted cash flow analysis, which is based upon converting expected future cash flows to present value. o Changes in market value since the date of acquisition relative to the following: o The Company's stock price; o Comparable companies; o 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, 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 $3,617,283 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 7 "Sale of Technology and Net Impairment of Goodwill") and $2,708,011 for WizShop's goodwill. Furthermore, Semotus took an impairment charge of $3,420,000 for the GMP intellectual property asset in the quarter ended March 31, 2002. 51 This year, 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 this Note 6, 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. At March 31, 2003, the Company determined that the carrying value of its remaining goodwill and other intangibles from continuing operations are recoverable. 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 121, SFAS 142 and SFAS 144, 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. 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. 7. 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 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". 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 are present. 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: o Discounted cash flow analysis, which is based upon converting expected future cash flows to present value. o Changes in market value since the date of acquisition relative to the following: o the Company's stock price; o comparable companies; o 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. 52 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. 8. 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 was originally being amortized to expense over a five year period. This amount was recorded in intellectual property with a corresponding increase to additional paid-in capital. For the fiscal years ended March 31, 2003, 2002 and 2001, amortization amounted to $1,000,000, $1,360,000 and $1,020,000, respectively. Further, Semotus determined that an impairment charge to the GMP intellectual property asset, as well as an adjustment to its useful life, was necessary as of March 31, 2002, which amounted to $3,420,000 and brought the recorded value to $1,000,000 at March 31, 2002. This value has since been completely amortized as of March 31, 2003. 9. PROPERTY AND EQUIPMENT Property and equipment is comprised of the following: March 31, --------- 2003 2002 ----------- ----------- Furniture and fixtures .................................... $ 308,777 $ 308,676 Computers, and other office equipment ..................... 1,083,960 1,090,226 Capitalized equipment leases .............................. 74,370 77,149 Leasehold improvements .................................... 120,059 95,920 Purchased software ........................................ 321,742 358,705 ----------- ----------- 1,908,908 1,930,676 Less accumulated depreciation and amortization ............ (1,566,294) (1,308,005) ----------- ----------- $ 342,614 $ 622,671 =========== =========== 10. ADVANCES ON TECHNOLOGY SALE: 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, had 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 were reflected under the balance sheet caption "Advances on technology sales", andwere 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 had not been recorded, as it was 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 principal and interest payments due Semotus. If the notes receivable due to the Company were not repaid, as presently projected, 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 expired in June 2002. The Company recorded the value of these warrants as a reduction of the technology advances. 53 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. The products related to these agreements are obsolete and are not generating any revenue. The Company has fulfilled all obligations under these agreements and therefore the Company has amortized the remaining balance of the advances on technology sales liability into income as of March 31, 2003. 11. NOTE PAYABLE During the fiscal year ended March 31, 2003, the Company entered into three notes payable to settle certain existing contractual obligations to third parties amounting to a total of $135,093 in notes payable. $78,869 was paid on these notes in fiscal year 2003. The total future payments on these notes is $56,224, which will be fully paid off in the fiscal year ending March 31, 2004. 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 became due September 2002. The Company repaid the note in full in September 2002. The note payable had an interest rate of 7.2% in fiscal year 2003, which was the same as in the previous year. The interest was payable monthly, with the principal due and payable at maturity in September 2002. The note was secured by cash in the form of a certificate of deposit in the amount of $693,286 for the fiscal year ended March 31, 2002. The certificate of deposit mirrored the note payable in term and carried an interest rate of 2.0% in the past year. 12. CAPITAL LEASE: In the fiscal year ended March 31, 2003, the Company did not sign or settle any capital leases. In the fiscal year ended March 31, 2002, the Company and its subsidiaries signed leases amounting to $110,119. Accumulated depreciation on capitalized lease assets was $45,222 and $22,265 at March 31, 2003 and 2002 respectively. The combined principal and interest portions due under our capital leases for the next five years are as follows: YEAR ENDED MARCH 31, -------------------- 2004 ......................................... $ 26,265 2005 ......................................... 15,546 2006 ......................................... 2,166 2007 ......................................... -- 2008 ......................................... -- -------- 43,977 Less imputed interest ......................... (5,057) -------- Total ......................................... $ 38,920 ======== 13. 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 shares have been designated as Series A preferred stock, of which no shares are outstanding as of March 31, 2003, and 769,231 has been designated as Series B preferred stock, of which no shares are outstanding as of March 31, 2003. Repurchase Of Preferred Stock: On December 31, 2002, Semotus Solutions, Inc. and Brown Simpson Partners I, Ltd. (successors-in-interest to Brown Simpson Strategic Growth Fund, Ltd. and Brown Simpson Strategic Growth Fund, L.P.) entered into a Preferred Stock Buy Back and Mutual Release Agreement. As part of the Agreement, Semotus repurchased from Brown Simpson all of the outstanding shares of the Company's Series B Convertible Preferred Stock. The Series B Convertible Preferred Stock was reflected on Semotus' balance sheet as $5.7 million in Preferred Shareholder Equity. In consideration of the aforesaid purchase of the Shares, Semotus paid one hundred thousand dollars ($100,000.00) and issued to Brown Simpson 846,154 warrants to purchase shares of Common Stock of Semotus, exercisable at $0.01 per share, such price was a negotiated price. In addition, in consideration for Brown Simpson agreeing to enter into a settlement and mutual release related to its anti- 54 dilution claim, the Company repriced Brown Simpson's existing 1,153,846 warrants to provide for an exercise price of $0.01 per share. The value of the warrants repriced as determined by the Black-Scholes method, has been charged to operations, while the value of the additional warrants issued has been charged to equity. On January 24, 2003, Brown Simpson exercised 1,153,846 warrants by remitting $11,538.46 to Semotus, and Brown Simpson was issued 1,153,846 shares of common stock. On May 1, 2003, Brown Simpson exercised 846,154 warrants exercisable at $0.01 per share by remitting $8,461.54 to Semotus, and Brown Simpson was issued 846,154 shares of common stock. 14. 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 19,275,211 and 17,200,784 was issued and outstanding as of March 31, 2003 and 2002 respectively. During the fiscal year ended March 31, 2003, in August, 2002, in connection with the fiscal year 2002 acquisition of WizShop, the Company issued 613,403 common shares as additional purchase consideration (see Note 4, "Acquisitions - WizShop.com, Inc."). In April of 2002, in connection with the fiscal year 2002 acquisition of Application Design Associates, the Company issued 250,000 common shares as additional purchase consideration. However, on May 6, 2003 these 250,000 shares, as well as the original 250,000 shares issued to ADA, were returned to the Company as part of GBG's option to purchase ADA, which was closed on May 6, 2003. (See Note 4, "Acquisitions - Application Design Associates, Inc."). Additionally, during the fiscal year ended March 31, 2003, the Company issued 57,178 shares to settle certain liabilities of the Company or the Company's subsidiaries. During the fiscal year ended March 31, 2002, in connection with the acquisition of Cross, the Company issued 64,947 common shares as additional purchase consideration (see Note 4, "Acquisitions - Cross Communications, Inc."). In May, 2001, in connection with the acquisition of WizShop, the Company issued 699,993 common shares (see Note 4, "Acquisitions - WizShop.com, Inc."). Also in May, 2001, in connection with the acquisition of ADA, the Company issued 250,000 common shares (see Note 4, "Acquisitions - 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 4, "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 4, "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 4, "Acquisitions - Simkin, Inc.") On August 15, 2000, 54,342 warrants were cashless exercised and 33,865 shares of common stock were issued. 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 8, "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 4, "Acquisitions - Cross Communications, Inc."). 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 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 a warrant to purchase up to 153,846 shares of common stock, at an exercise price of $6.50 per share, to its 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 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 were outstanding, and as of March 31, 2003, no shares of Series B convertible preferred are outstanding. (See Note 13, "Convertible Preferred Stock"). 55 Warrants: As of March 31, 2003, a total of 2,225,658 warrants to purchase shares of Semotus' common stock remain outstanding. 846,154 of those were exercisable at $0.01 per share, and were subsequently exercised on May 1, 2003 (See Note 28 "Subsequent Events"). 800,000 are currently exercisable at $30.00 per share and expire on July 7, 2005. 300,000 are currently exercisable at $2.375 per share and expire on December 1, 2004. 99,504 are currently exercisable at $6.5 per share and expire on February 8, 2005. 150,000 are currently exercisable at $1.01 per share and expire on December 27, 2003. 30,000 are currently exercisable at $18.00 per share and expire on August 2, 2005. 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. On September 17, 2002 the Company's shareholders approved an increase in the number of shares of Common Stock issuable under the Plan from 4,345,000 to 5,200,000. 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, 2003, no stock appreciation rights have been granted under the Plan. 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 those employees' outstanding stock options under the Company's 1996 Stock Option Plan to $0.43 per share, and $0.47 per share for Anthony LaPine and Pamela LaPine (which equals 110% of the amended exercise price). Exercise prices ranged from $0.76 to $0.84 per share. Additionally, these employees received an additional grant equal to 10% of their total options granted under the Stock Option Plan to date. Effective October 23, 2002 the Board of Directors of the Company approved the repricing of all of the options held by almost all of the employees (including executive officers) of the Company. Exercise prices ranged from $0.22 to $0.47 per share. The Board of Directors determined such a repricing to be appropriate in order to sustain the incentivization of its employees. Employees' existing option grants were repriced on October 23, 2002 to an exercise price of $0.15 per share (the current fair market value of the Company's common stock as of the reprice date) and an exercise price of $0.17 per share (110% of the fair market value at the date of reprice) for those persons owning more than 10% of the voting power of all classes of stock (Anthony LaPine and Pamela LaPine). All grants maintained their existing vesting schedules. These are deemed to be a repricing under FIN 44 and will result in variable plan accounting. While no compensation expense was required to be recognized in the fiscal year ended March 31, 2003, expense will be recognized in the future if the stock price increases above the revised exercise price of the options. Activity for stock options under the 1996 Stock Option Incentive Plan through March 31, 2003 is as follows: Shares Weighted Available for Average Grant Number of Options Price Per Share Exercise Price -------------- -------------- -------------- -------------- Balances, March 31, 2000* (852,342) 1,579,938 $0.50 - $20.00 $ 4.64 Authorized .............. 2,500,000 -- -- -- Granted ................. (3,529,000) 3,529,000 $0.50 - 28.77 $ 5.74 Canceled ................ 1,933,933 (1,933,933) $0.50 - $28.77 $ 9.42 Exercised ............... -- (131,288) $0.50 - $2.53 $ 1.33 -------------- -------------- -------------- -------------- Balances, March 31, 2001* 52,591 3,043,717 $0.56 - $20.00 $ 3.02 Authorized .............. 845,000 -- -- -- 56 Granted ................. (4,543,680) 4,543,680 $0.67 - $7.00 $ 1.02 Canceled ................ 4,016,441 (4,016,441) $0.56 - $20.00 $ 2.68 Exercised ............... -- (8,302) $1.28 - $1.63 $ 1.40 -------------- -------------- -------------- -------------- Balances, March 31, 2002* 370,352 3,562,654 $0.67 - $5.44 $ 0.86 Authorized .............. 855,000 -- -- -- Granted ................. (4,957,530) 4,957,530 $0.14 - $0.66 $ 0.25 Canceled ................ 5,397,941 (5,397,941) $0.15 - $5.44 $ 0.55 Exercised ............... -- -- -- -- -------------- -------------- -------------- -------------- Balances, March 31, 2003 1,665,763 3,122,243 $0.14 - $2.01 $ 0.31 *The balances as of March 31, 2002, 2001 and 2000 reported in this Form 10K differ slightly from the balances as of March 31, 2002, 2001 and 2000 as reported in the Company's Form 10K 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 for the current Form 10K filing year. Management does 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. The weighted average fair value of those options granted during the years ended March 31, 2003, 2002 and 2001 was $0.29, $1.09 and $1.98, respectively. The weighted average fair value of those options that were repriced on October 23, 2002 was $0.08. Options to purchase 1,962,864, 1,268,477 and 568,570 shares were exercisable with a weighted average exercise price of $0.30, $0.80 and $3.06 at March 31, 2003, 2002 and 2001, respectively. The following table summarizes the stock options outstanding at March 31, 2003: OPTIONS OUTSTANDING CURRENTLY EXERCISABLE ---------------------------------------------------------------------- ------------------------------------- WEIGHTED NUMBER AVERAGE OUTSTANDING REMAINING WEIGHTED NUMBER WEIGHTED RANGE OF AT MARCH 31, CONTRACTUAL AVERAGE EXERCISABLE AT AVERAGE EXERCISE PRICE 2003 LIFE EXERCISE PRICE MARCH 31, 2003 EXERCISE PRICE -------------- --------------- ------------------ ----------------- ------------------ ----------------- $0.00 - $0.15 1,404,638 7.5 $0.15 695,357 $0.15 $0.16 - $0.20 1,286,000 7.0 $0.17 980,974 $0.17 $0.21 - $1.00 259,605 8.4 $0.75 207,705 $0.75 $1.01 - $5.00 172,000 8.1 $2.01 78,828 $2.01 --------------- ------------------ ----------------- ------------------ ----------------- 3,122,243 7.4 $0.31 1,962,864 $0.30 =============== ================== ================= ================== ================= 15. REVENUE The Company derives revenue from its customers as discussed in Note 3, "Summary of Significant Accounting Policies: Revenue Recognition". From Semotus' wireless services segment, two customers accounted for 23% of the Company's revenues for the fiscal year ended March 31, 2003. One customer in the wireless services segment accounted for 17% of revenues, and a second customer in the wireless services segment accounted for 6% of revenues. None of these customers account for any significant accounts receivable at March 31, 2003. From Semotus' wireless services segment, one customer accounted for 6% of the Company's revenues for the fiscal year ended March 31, 2002. 16. 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. 57 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, 2003, interest rates used are the appropriate Treasury rate of 3.46%. The expected volatility ranged from 102% to 204%. The expense is recognized over the term of the agreement or when the services have been performed. 17. OTHER INCOME: Other income (expense) consists of the following items: YEAR ENDED MARCH 31, -------------------- DESCRIPTION 2003 2002 2001 ----------- ---- ---- ---- 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 Cancellation of sales of technology contracts 628,927 -- -- Miscellaneous income (expense) 287,406 (17,223) 60,473 ----------- ----------- ----------- Total other income $ 1,123,056 $ 289,685 $ 431,525 =========== =========== =========== 18. 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 as of March 31, 2003: ----------------------------------------- -------------------------------------- FEDERAL STATE ----------------------------------------- -------------------------------------- BALANCE EXPIRATION BALANCE EXPIRATION ----------------- --------------------- ------------------ ------------------ $ 2,729,703 2012 $ 1,640,034 2004 3,219,423 2013 1,453,582 2005 4,429,411 2019 4,298,379 2011 3,684,281 2020 3,294,278 2012 9,313,338 2021 1,761,956 2013 -------------- 8,036,642 2022 $ 12,448,229 2,171,022 2023 ============== ----------------- $ 33,583,820 ================= At March 31, 2003, the Company has approximately $2,168,853 in Canadian net operating loss carryforwards that expire from 2004 through 2008. 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, 2003 and 2002, the Company had net deferred tax assets of approximately $13,862,275 and $11,753,500, 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 will not be realized. The total valuation allowance changed during this fiscal year by $2,108,775 and by $2,161,000 in fiscal year 2002, and $3,592,500 in fiscal year 2001. 58 19. EARNINGS PER SHARE (EPS) DISCLOSURES: NET LOSS PER SHARE: 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. 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, ------------------------------------------------ 2003 2002 2001 ------------ ------------ ------------ Basic EPS: Net loss $ (3,432,350) $(18,444,478) $(11,293,381) ============ ============ ============ Weighted average common shares outstanding 18,039,262 16,975,660 15,199,895 ============ ============ ============ Basic EPS $ (0.19) $ (1.09) $ (0.74) ============ ============ ============ Diluted EPS: Net loss $ (3,432,350) $(18,444,478) $(11,293,381) ============ ============ ============ Weighted average common shares outstanding 18,039,262 16,975,660 15,199,895 Convertible preferred -- -- -- Warrants -- -- -- Stock options -- -- -- Total shares 18,039,262 16,975,660 15,199,895 ------------ ------------ ------------ Diluted EPS $ (0.19) $ (1.09) $ (0.74) ============ ============ ============ In 2003, 2002 and 2001, 5,347,901 potential shares, 7,557,135 potential shares and 7,053,854 potential shares respectively were excluded from the shares used to calculate diluted EPS as their effect is anti-dilutive. 20. OPERATING LEASES: In the fiscal year ended March 31, 2003, Semotus moved at the end of its lease from its office in San Jose, California to an office in Los Gatos, California. Semotus closed down its office for its Five Star operation in Valencia, California, concurrent with the closing of the Five Star operations. Semotus continued to sublease its office space in Sherman Oaks, California, where WizShop resided, as those operations have been absorbed into the rest of the Company; this sublease ended in April of 2003. Semotus continues to rent office space in Vancouver, Canada for its R&D facilities. Rental expense for all of these facilities was $187,388 in fiscal 2003, $548,354 in 2002 and $613,456 in 2001. The Company currently leases space for its operations in Los Gatos, California and Vancouver, British Columbia. The lease for the California office expires in September 2004, with an option to terminate one year earlier without penalty, and the lease for the office located in British Columbia expires in June 2007. The terms and conditions of the leases are normal and customary. Future minimum lease payments due under these agreements are as follows for the years ending March 31: 2004 ..................... $ 77,683 2005 ..................... 49,353 2006 ..................... 23,184 2007 ..................... 24,426 2008 ..................... 6,210 --------- $ 180,856 ========= 21. RELATED PARTY TRANSACTIONS: Effective May 1, 1996, the Company entered into a three year employment agreement with the Company's Chief Executive 59 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 300,000 shares of common stock at $2.375 per share, 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 560,000 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. Additionally, the warrants to purchase 280,000 shares at $2.50 per share have terminated. 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, 2003 expense of $631,435 has been recorded as employment compensation. On July 26, 2002, the Board of Directors approved the reduction in the purchase price of the 560,000 shares of this corporation's Common Stock from $3.75 per share to $0.25 per share (representing the current fair market value of the shares); consequently, $480,049 was forgiven, and the $1,050,000 promissory note was canceled in exchange for a new promissory note in the principal amount of $140,200 and otherwise containing the same terms and conditions as the surrendered promissory note. Consequently, the loan amortization schedule was accelerated in the amount of $480,049 due to the re-valuation of the loan amount from $1,050,000 to $140,200. In 2001, WizShop.com, Inc., one of the Company's subsidiaries, entered into an employment agreement with Steve McAllister, providing, among other things, an annual salary of $150,000. As of March 27, 2003, Mr. McAllister resigned and the employment agreement by and among Mr. McAllister and WizShop was terminated. 22. COMMITMENTS AND CONTINGENCIES: 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. On May 19, 2003, the parties reached a settlement and signed a settlement and mutual general release agreement, in which Earthlink agreed to pay to WizShop a total sum of $210,000. Semotus and WizShop were dismissed with prejudice on March 7, 2003 from a class action lawsuit brought by the California Teachers' Retirement System in November of 2002. We are also a party to other legal proceedings in the normal course of business. Based on evaluation of these matters and discussions with counsel, we believe that any potential liabilities arising from these matters will not have a material adverse effect on our consolidated results of operations or financial position. 23. 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 2003, 2002 or 2001. 24. SEGMENT INFORMATION Semotus' business has evolved into three segments: wireless services, enterprise and commerce sales, and professional and related services. 60 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. As Semotus continues to centralize and consolidate its business, the nature and structure of the business segments may change. Enterprise and Wireless commerce Professional and Corporate and Services sales related 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 income (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 $ 340,482 $ 42,291 $ 25,005 $ 2,672,285 $ 3,080,063 operations 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 61 * 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". 25. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) QUARTER QUARTER QUARTER ENDED ENDED QUARTER YEAR ENDED ENDED JUNE SEPTEMBER 30, DECEMBER 31, ENDED MARCH MARCH 31, 30, 2002 2002 2002 31, 2003 2003 ----------- ----------- ----------- ----------- ----------- Revenue from continuing operations $ 614,094 $ 545,937 $ 600,657 $ 583,563 $ 2,344,251 Gross profit (loss) from continuing operations 394,308 288,412 385,670 346,618 1,415,008 Net loss (1,034,557) (1,229,151) (571,944) (596,698) (3,432,350) Net loss per common share basic and diluted $ (0.06) $ (0.07) $ (0.03) $ (0.03) $ (0.19) QUARTER QUARTER QUARTER ENDED ENDED QUARTER YEAR ENDED ENDED JUNE SEPTEMBER 30, DECEMBER 31, ENDED MARCH MARCH 31, 30, 2001 2001 2001 31, 2001 2001 ----------- ----------- ----------- ----------- ----------- Revenue from continuing operations $ 436,620 $ 922,506 $ 619,313 $ 552,979 $ 2,531,418 Gross profit (loss) from continuing operations 202,410 472,550 353,519 307,661 1,336,140 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) Due to the discontinuation of ADA in the fourth quarter of fiscal year 2003, the amounts listed above will differ from the amounts previously reported in the Company's Form 10-Qs. (See Note 5, "Discontinued Operations".) 26. 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 by acquiring a 49% share in ADA. For its 49% stock purchase, GBG paid Semotus $250,000 in cash and agreed to invest $1 million in ADA over the next 15 months in order to help with the development of the next generation of ADA asset tracking and management software. 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 had 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. The purchase agreement also carried a price guaranty, for which Semotus issued an additional 250,000 shares (see Note 4, "Acquisitions - Application Design Associates, Inc."). On May 6, 2003, GBG purchased the remaining 51% of ADA for the return of 500,000 shares of Semotus' common stock. This decision resulted in the discontinuation of ADA's operations in fiscal year 2003. 27. VALUATION AND QUALIFYING ACCOUNTS REDUCTION AGAINST BALANCE AT CHARGED TO CHARGED TO BALANCE BALANCE AT MARCH 31, ACQUIRED COST OF OPERATING SHEET MARCH 31, 2000 BALANCES GOODS SOLD EXPENSES ACCOUNT 2001 --------- --------- --------- --------- --------- --------- Allowance for doubtful accounts $ 337 $ 1,059 $ -- $ 76,385 $ (41,814) $ 35,967 REDUCTION AGAINST BALANCE AT CHARGED TO CHARGED TO BALANCE BALANCE AT MARCH 31, ACQUIRED COST OF OPERATING SHEET MARCH 31, 2001 BALANCES GOODS SOLD EXPENSES ACCOUNT 2002 --------- --------- --------- --------- --------- --------- Allowance for doubtful accounts $ 35,967 $ -- $ -- $ 169,852 $(139,819) $ 66,000 62 REDUCTION AGAINST BALANCE AT CHARGED TO CHARGED TO BALANCE BALANCE AT MARCH 31, ACQUIRED COST OF OPERATING SHEET MARCH 31, 2003 BALANCES GOODS SOLD EXPENSES ACCOUNT 2003 --------- --------- --------- --------- --------- --------- Allowance for doubtful accounts $ 66,000 -- -- $ 15,590 $ (4,500) $ 77,090 28. SUBSEQUENT EVENTS On May 1, 2003, Brown Simpson exercised 846,154 warrants by remitting $8,461.54 to Semotus, and Brown Simpson was issued 846,154 shares of common stock. On May 6, 2003, GBG exercised its option to purchase the remaining 51% of ADA from Semotus. (See Note 26 - "Strategic Investment in ADA"). As a result, the ADA operations have been discontinued in fiscal year 2003. On May 15, 2003, Semotus, Cross Communications, Inc. and Kathleen Wold executed an Amendment to the Agreement of Merger dated July 10, 2000, whereby Semotus agreed to issue 187,500 restricted common shares in exchange for the termination and full settlement of all remaining obligations under the Merger Agreement. On May 19, 2003, WizShop, Semotus and Earthlink entered into a settlement and mutual general release agreement, whereby Earthlink shall pay to WizShop a sum of $210,000. (See Part I, Item 3, "Legal Proceedings") 63 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 30, 2003 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 30, 2003 ANTHONY N. LAPINE AND CHAIRMAN OF THE BOARD /S/ CHARLES K. DARGAN II ------------------------ CHIEF FINANCIAL OFFICER, JUNE 30, 2003 CHARLES K. DARGAN II TREASURER /S/ MARK WILLIAMS ------------------------ DIRECTOR JUNE 30, 2003 MARK WILLIAMS /S/ LAURENCE MURRAY ------------------------ DIRECTOR JUNE 30, 2003 LAURENCE MURRAY /S/ ROBERT LANZ ------------------------ DIRECTOR AND CHAIRMAN JUNE 30, 2003 ROBERT LANZ OF THE AUDIT COMMITTEE 64 CERTIFICATIONS I, Anthony N. LaPine, President and Chief Executive Officer of the Company, certify that: 1. I have reviewed this annual report on Form 10K of Semotus Solutions, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: June 30, 2003 /S/ ANTHONY N. LAPINE ---------------------------- ANTHONY N. LAPINE PRESIDENT AND CHIEF EXECUTIVE OFFICER 65 I, Charles K. Dargan, II, Chief Financial Officer of the Company, certify that: 1. I have reviewed this annual report on Form 10K of Semotus Solutions, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: June 30, 2003 /S/ CHARLES K. DARGAN, II -------------------------------- CHARLES K. DARGAN, II CHIEF FINANCIAL OFFICER