Ealixir, Inc. 10-Q

ITEM 1: FINANCIAL STATEMENTS SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (unaudited) ASSETS June 30 March 31 2003 2003 ------------ ------------ CURRENT ASSETS: Cash and cash equivalents $ 1,745,302 $ 1,976,062 Trade receivables (net of allowance for doubtful accounts of $6,090 at June 30, 2003 and $77,090 at March 31, 2003) 186,155 140,646 Prepaid expenses and other current assets 39,772 52,161 Current assets held for sale -- 298,200 ------------ ------------ Total current assets 1,971,229 2,467,069 Property and equipment, net 292,081 342,614 Goodwill, net 1,430,141 1,430,141 Non-current assets held for sale -- 408,732 ------------ ------------ Total assets $ 3,693,451 $ 4,648,556 ============ ============ LIABILITIES CURRENT LIABILITIES: Accounts payable $ 387,526 $ 392,826 Accrued vacation 64,889 69,808 Other accrued liabilities 52,690 79,999 Notes payable 37,925 56,224 Current portion of capital lease obligations 20,977 23,731 Deferred revenue 108,748 79,119 Current liabilities related to assets held for sale -- 300,717 ------------ ------------ Total current liabilities 672,755 1,002,424 Capital lease obligation, net of current portion 3,829 15,189 Non-current liabilities related to assets held for sale -- 321,216 ------------ ------------ Total liabilities 676,584 1,338,829 ------------ ------------ Commitments and contingencies (Note 8) ------------ ------------ COMMON SHAREHOLDERS' EQUITY Common stock: $0.01 par value; authorized: 50,000,000 shares; issued and outstanding: 20,100,997 at June 30, 2003 and 19,275,211 at March 31, 2003 201,010 192,752 Additional paid-in capital 66,501,024 66,163,351 Accumulated other comprehensive loss (78,333) (93,306) Notes receivable - related parties (72,341) (91,281) Accumulated deficit (63,534,493) (62,861,789) ------------ ------------ Total common shareholders' equity 3,016,867 3,309,727 ------------ ------------ Total liabilities and common shareholders' equity $ 3,693,451 $ 4,648,556 ============ ============ See accompanying notes to consolidated financial statements. 3 SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (unaudited) Three Months Ended June 30, 2003 2002 ------------ ------------ Revenues: $ 353,662 $ 614,094 Cost of sales: 82,388 215,951 ------------ ------------ Gross Profit 271,274 398,143 Operating expenses: Research and development 161,676 224,854 Sales and marketing 187,998 276,949 General and administrative 367,041 541,523 Depreciation and amortization 54,958 333,275 Stock, option and warrant expense 378,650 21,054 ------------ ------------ Total operating expenses 1,150,323 1,397,655 ------------ ------------ Operating loss from continuing operations (879,049) (999,512) Other income 206,345 104,841 ------------ ------------ Net loss from continuing operations (672,704) (894,671) Net loss from discontinued operations -- (139,887) ------------ ------------ Net loss (672,704) (1,034,558) Other comprehensive income - Translation adjustment 14,973 14,231 ------------ ------------ Comprehensive loss $ (657,731) $ (1,020,327) ============ ============ Net loss per common share: Basic $ (0.03) $ (0.06) Diluted $ (0.03) $ (0.06) Weighted average shares used in per share calculation, basic and diluted 19,730,808 17,382,241 ============ ============ See accompanying notes to consolidated financial statements. 4 SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Three Months Ended June 30, 2003 2002 ----------- ----------- Cash flows from operating activities: Net loss $ (672,704) $(1,034,558) Loss from discontinued operations -- 139,887 ----------- ----------- Net loss from continuing operations (672,704) (894,671) Foreign currency translation adjustment 14,973 14,231 Adjustments to reconcile net loss from continuing operations to net cash used in operating activities from continuing operations: Depreciation and amortization 54,958 333,275 Compensation expense related to stock and stock options issued for services 378,650 21,054 Net amortization of contract income -- (105,855) Amortization of advances on technology sales -- (71,302) Amortization of notes receivable 18,940 (82,230) Net gain from disposition of assets (3,618) -- Non-cash settlement of liabilities (5,543) 30,152 Changes in assets and liabilities net of acquired assets and liabilities due to acquisitions: Accounts and other receivables (45,509) (35,356) Prepaid expenses and other assets 12,388 19,616 Accounts payable (5,300) 66,625 Accrued liabilities (32,228) (151,062) Deferred revenue 29,629 (37,385) ----------- ----------- Net cash used in operating activities (255,364) (892,908) ----------- ----------- Cash flows from investing activities: Acquisition of property & equipment -- (17,937) ----------- ----------- Net cash used in investing activities -- (17,937) ----------- ----------- Cash flows from financing activities: Repayments of notes payable (18,299) -- Repayments of capital lease obligations (9,378) (22,119) Proceeds from exercise of options and warrants 52,281 -- ----------- ----------- Net cash provided by (used in) financing activities 24,604 (22,119) ----------- ----------- Net cash provided by discontinued operations -- 223,908 Net decrease in cash and cash equivalents (230,760) (709,056) Cash and cash equivalents, beginning of period 1,976,062 4,751,094 ----------- ----------- Cash and cash equivalents, end of period $ 1,745,302 $ 4,042,038 =========== =========== See accompanying notes to consolidated financial statements. 5 SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (unaudited) Three Months Ended June 30, 2003 2002 ---------- ---------- SUPPLEMENTAL CASH FLOW DISCLOSURE: Cash paid for interest $ 5,473 $ 9,329 ========== ========== Cash paid for income taxes $ -- $ 5,981 ========== ========== SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Additional non-cash purchase consideration paid to shareholder of Cross Communications, Inc. pursuant to the third year share price guarantee and settlement of the Merger Agreement $ 30,815 $ -- ========== ========== Non-cash compensation expense due to variable accounting for repriced stock options $ 347,835 $ -- ========== ========== Common stock issued for services $ -- $ 21,054 ========== ========== Common stock issued for liabilities $ -- $ 16,235 ========== ========== See accompanying notes to consolidated financial statements. 6 SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. FORMATION AND BUSINESS OF THE COMPANY: Semotus(TM) Solutions, Inc. ("Semotus" or the "Company"), changed its name from Datalink.net, Inc. as of January 11, 2001. The Company, originally Datalink Systems Corporation, was formed under the laws of the State of Nevada on June 18, 1996. On June 27, 1996, the Company went public through an acquisition of a public corporation, Datalink Communications Corporation ("DCC"), which was previously Lord Abbott, Inc., a Colorado corporation formed in 1986. As a part of the transaction, the Company also acquired a Canadian corporation, DSC Datalink Systems Corporation, incorporated in Vancouver, British Columbia, now named Semotus Systems Corp. Semotus is a leading provider of enterprise application software connecting employees to critical business systems, information, and processes. Semotus helps mobile employees make better and faster decisions, increase customer satisfaction, and improve efficiencies in their business processes for shorter sales and service cycles. The Company's products serve such vertical markets as workforce automation and financial services. Semotus' enterprise application software provides mobility, convenience, efficiency and improves profitability. For more information please go to our website at http://www.semotus.com. 2. BASIS OF PRESENTATION The accompanying consolidated financial statements include the accounts of Semotus Solutions, Inc. and its subsidiaries. The consolidated balance sheet as of June 30, 2003, the consolidated statements of operations and comprehensive loss for the three-month periods ended June 30, 2003 and 2002, and the consolidated statements of cash flows for the three months ended June 30, 2003 and 2002 have been prepared by the Company, without audit and in accordance with the instructions to Form 10-Q and Regulation S-K. In the opinion of management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended June 30, 2003 are not necessarily indicative of the results that may be expected for the year ending March 31, 2004. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The Company believes that the disclosures provided are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the year ended March 31, 2003. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries: Semotus Systems Corporation (Canadian subsidiary), Cross Communications, Inc., Simkin, Inc., Wares on the Web, Inc., Five Star Advantage, Inc., WizShop.com, Inc. and Application Design Associates, Inc. (ADA). All significant intercompany transactions and balances have been eliminated in consolidation. Operations of the Canadian subsidiary consist mainly of research and development and engineering on behalf of the parent company. Five Star's and Wares on the Web's operations have been discontinued as of June 28, 2002 and August 19, 2002, respectively. ADA has been sold as of May 6, 2003. WizShop's remaining contract for customer loyalty software expired on March 31, 2003 and currently the subsidiary has no further contracts in process. All other subsidiaries generate revenues from the sales of products and services. The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. 3. RECENT PRONOUNCEMENTS In 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 June 30, 2003, the Company does not have any variable interest entities. In November 2002, the Emerging Issues Task Force issued its final consensus on Revenue Arrangements with Multiple Deliverables. This guidance is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003 or alternatively, entities may elect to report the change in accounting as a cumulative-effect adjustment. EITF 00-21 discusses criteria necessary to determine when an arrangement 7 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. At June 30, 2003, Semotus does not have any contracts with multiple deliverables. In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities". This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instrument embedded in other contracts, and for hedging activities under SFAS 133, "Accounting for Derivative Instruments and Hedging Activities". The Statement clarifies and creates more consistent reporting of contracts as either derivatives or hybrid financial instruments. The Statement is effective for contracts entered into or modified after June 30, 2003. The Company historically has not used derivatives or hedging instruments. Currently, the Company does have a small exposure to the Canadian - U.S. dollar exchange rate, but has not deemed it necessary to hedge this exposure. In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity and is effective for financial instruments entered into or modified after May 31, 2003. The Company adopted SFAS No. 150 on June 1, 2003 and does not expect the adoption to have a material impact on the Company's results of operations or financial condition 4. OTHER INCOME Other income is substantially comprised of the $210,194 litigation settlement with Earthlink offset somewhat by miscellaneous expenses. 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 alleged 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 arose 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 was entitled to under the agreement.. 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. 5. STOCK-BASED COMPENSATION EXPENSE The Company accounts for employee stock-based compensation plans using the intrinsic value method of recognition and measurement principles as delineated in APB Opinion 25, "Accounting for Stock Issued to Employees" and related interpretations. No stock based employee compensation cost is reflected in the statement of operations upon granting of stock options, as all options granted under the Company's Stock Option Plan had an exercise price equal to the market value of the underlying common stock on the day of grant. However, since certain employee stock options were repriced in October 2002, the Company accounted for those options under the variable accounting requirements of APB Opinion 25 and FIN 44, and accordingly, compensation expense was recorded since the current market price of the underlying stock exceeded the exercise price on the date the grant was repriced. The following is a summary of the effect on net income (loss) and per share impacts if the Company had applied a fair value method prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation" to account for stock-based compensation for the periods indicated: THREE MONTHS ENDED JUNE 30, 2003 2002 ----------- ----------- Net loss, as reported $ (672,704) $(1,034,558) Add: Total stock-based employee compensation expense determined under intrinsic value based method for all awards 347,835 -- Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards (31,139) (5,964) Pro forma net loss (356,008) (1,040,522) Net income (loss) per share: Basic - as reported $ (0.03) $ (0.06) Basic - pro forma $ (0.02) $ (0.06) Diluted - as reported $ (0.03) $ (0.06) Diluted - pro forma $ (0.02) $ (0.06) These pro forma amounts may not be representative of the effects for future years as options vest over several years and additional awards are generally made each year. 8 6. EARNINGS PER SHARE (EPS) DISCLOSURES: In accordance with SFAS No. 128 "Earnings Per Share " (EPS), the Company reports Basic and Diluted EPS as follows: Basic EPS is computed as net income (loss) divided by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock options, warrants and other convertible securities. Common equivalent shares are excluded from the computation of net loss per share if their effect is anti-dilutive. For the three months ended June 30, 2003 and 2002, 4,456,157 potential shares and 7,517,303 potential shares, respectively, were excluded from the shares used to calculate diluted EPS as their effect is anti-dilutive. 7. DISCONTINUED OPERATIONS. As part of Semotus' Centralization and Consolidation Plan, which is further described in the Company's March 31, 2003 Form 10-K, Semotus reduced its e-commerce and m-commerce presence with the elimination of unprofitable products and services in that segment. FiveStar was not expected to make a significant contribution to the Company's future profitability as its operations were unprofitable. Therefore, Semotus decided to close the facilities and cease the operations as of the end of June 2002. Furthermore, Five Star filed for liquidation under Chapter 7 of the U.S. Bankruptcy Code on June 28, 2002. In continuing with the reduced e-commerce and m-commerce presence and the elimination of unprofitable products and services, Semotus decided to discontinue the operations of Wares on the Web in August, 2002. The Wares on the Web operations were unprofitable. Furthermore, Wares on the Web filed for liquidation under Chapter 7 of the U.S. Bankruptcy Code on August 19, 2002. On January 18, 2002 the Global Beverage Group, "GBG", a Canadian-based direct store delivery consortium, completed a strategic investment in Semotus' ADA subsidiary by acquiring a 49% share in ADA. For its 49% stock purchase, GBG paid Semotus $250,000 in cash and agreed to invest $1 million in ADA over the next 15 months in order to help with the development of the next generation of ADA asset tracking and management software. In May, 2003, GBG purchased the remaining 51% of ADA for the return of 500,000 shares of Semotus' common stock. This decision resulted in the discontinuation of ADA's operations in fiscal year 2003. In accordance with FAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", the operations of FiveStar, Wares and ADA have been recorded as discontinued operations in the three month period ended June 30, 2002. The net loss from discontinued operations of $139,887 consisted of a net loss from operations of $122,835 at Five Star, net income from operations of $4,779 at Wares and a net loss from operations of $21,831 at ADA for the three months ended June 30, 2002. A net gain upon disposition of the assets and liabilities of Five Star and Wares of $128,582 was recognized at March 31, 2003. No gain or loss was recorded upon the disposition of the assets and liabilities of ADA, however, 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. 8. COMMITMENTS AND CONTINGENCIES: Effective October 23, 2002 the Board of Directors of the Company approved the repricing of most of the options under the Company's 1996 Stock Option Plan, as amended, with exercise prices ranging from $0.22 to $0.84 per share held by most of the employees (including executive officers) and Board members of the Company. The Board of Directors determined such a reprice to be appropriate in order to sustain the incentivization of its employees. The option grants were repriced to an exercise price of $0.15 per share (the current fair market value of the Company's common stock as of the reprice date) and an exercise price of $0.17 per share (110% of the fair market value at the date of reprice) for those persons owning more than 10% of the voting power of all classes of stock. All grants maintained their existing vesting schedule. This is deemed to be a repricing under FIN 44 and will result in variable plan accounting. A compensation expense in the amount of $347,835 was required to be recognized in the three months ended June 30, 2003, and expense will be recognized in the future if the stock price continues to be above the revised exercise price of the options. The Company continues to be a party to certain commitments and contingencies, as previously reported in Note 22 and Part I, Item 3 of Registrant's Form 10K for the year ended March 31, 2003. Please also refer to Part II, Item 1 of this report for any additional litigation contingencies. 9. SEGMENT INFORMATION After the Consolidation and Centralization Plan was largely completed by March 31, 2003, the Company determined that its ongoing operations were in one segment, wireless and mobile enterprise software. The Company's products consist mainly of the Global Market Pro family of products and the Hiplink family of products. Utilizing the definitions described in SFAS 131, "Disclosures about Segments of an Enterprise and Related Information", the nature of the products and services are all similar. Accordingly, starting in the current fiscal year, Semotus will report the single line of business of wireless and mobile enterprise software and will no longer report operations from three prior segments: Enterprise and Commerce Sales, Professional and Related Services and Logistics. Further, per SFAS 131, the corresponding information for the earlier period presented has been restated to conform to the single segment. In the last fiscal year, WizShop did have revenue and expenses from its customer loyalty contract, which have been included in the restated single segment. For the three months ended June 30, 2002,WizShop's revenue was $ 254,114 and the operating expenses were $174,892, including $144,240 in cost of sales. In the prior year this financial information was part of the Enterprise and Commerce Sales segment. 9