Ealixir, Inc. 10-Q

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion should be read in conjunction with the attached financial statements and notes thereto. Except for the historical information contained herein, the matters discussed below are forward-looking statements that involve certain risks and uncertainties, including, among others, the risks and uncertainties discussed below. CRITICAL ACCOUNTING POLICIES We described our critical accounting policies in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of our Annual Report on Form 10-K for the year ended March 31, 2003. Our critical accounting policies are those that are most important to the portrayal of our financial condition and results of operations, and require our management's significant judgments and estimates and such consistent application fairly depicts our financial condition and results of operations for all periods presented. Critical accounting policies affecting us have not changed materially since March 31, 2003. However, in accordance with FAS 148, "Accounting for Stock-Based Compensation - Transition and Disclosure", the Company has made more detailed disclosure of the effect of the fair value method of accounting for stock options in its Notes to the Consolidated Financial Statements. See Note 5, "Stock Based Compensation Expense". OVERVIEW 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. As a result of the centralization and consolidation implementation, the net loss declined to $672,704 from $1,034,558 and to $0.03 per share from $0.06 per share in the three months ended June 30, 2003 versus 2002. Likewise, the overall cash decline was reduced to $230,760 from $709,056 in the three months ended June 30, 2003 versus 2002. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2003 AND 2002 REVENUES Revenues for the three months ended June 30, 2003 were $353,662, as compared to $614,094 for the three months ended June 30, 2002. The difference is largely due to the customer loyalty contract at WizShop, which was completed on March 31, 2003. The recorded revenue resulted from the amortization of deferred revenue and as such, had no impact on the cash position of the Company. Revenues from wireless and mobile enterprise software sales were approximately the same in the three months ended June 30, 2003 and 2002. COST OF REVENUES AND GROSS MARGIN The overall gross profit margin increased to 77% in the three months ended June 30, 2003 from 65% in the same period ended June 30, 2002. The increase is the result of continuing improvements in the reduction of costs for the mobile enterprise software products. Also, the customer loyalty contract at WizShop was included in the last fiscal year, which had lower margins than the mobile enterprise software products. The cost of sales consists mainly of network and airtime charges and data feed charges. OPERATING EXPENSES Operating expenses declined overall in the three month period ended June 30, 2003 versus the same period in the last fiscal year, due to the full amortization of the GMP asset and due to the Centralization and Consolidation Plan, which has significantly reduced operating expenses in all areas of the firm, including research and development, sales and marketing and general and administrative cost centers. The Company categorizes operating expenses into five major categories: research and development, sales and marketing, general and administrative, depreciation and amortization, and stock, option and warrant expense. The table below summarizes the changes in these five categories of operating expenses (unaudited): 10 Three Months Ended June 30, ------------------------- Description 2003 2002 --------------------------------- ---------- ---------- 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 $1,150,323 $1,397,655 ========== ========== Research and development expenses are expenses incurred in developing new products and product enhancements for current products. These expenditures are charged to expense as incurred. Much of the development work for the Global Market Pro, Equity Market Pro and HiplinkXS products has been completed which has reduced research and development expenses. Remaining engineering costs are production projects for the existing products and services. Sales and marketing expenses consist of costs incurred to develop and implement marketing and sales programs for the Company's product lines. These include costs required to staff the marketing department and develop a sales and marketing strategy, participation in trade shows, media development and advertising, and web site development and maintenance. These costs also include the expenses of hiring sales personnel and maintaining a customer support call center. These costs have declined principally due to the reduction in general advertising and non-sales supported marketing. There has also been a reduction in marketing personnel as the Company has shifted to emphasizing marketing and sales support for its existing products. General and administrative expenses include senior management, accounting, legal and consulting. This category also includes the costs associated with being a publicly traded company, including the costs of the AMEX listings, investor and public relations, rent, administrative personnel, and other overhead related costs. These costs declined during the three months ended June 30, 2003 as personnel and offices were reduced and operating functions were consolidated. Depreciation and amortization expense includes depreciation of computers and other related hardware and certain fixtures. The decline in this expense for the three months ended June 30, 2003 versus 2002 is as a result of the full amortization of the GMP asset, the reduced asset balances to be amortized from the discontinuance of the FiveStar, Wares and ADA operations, and from the decline in capital spending at Semotus. The non-cash charges for compensation consists mainly of grants of stock, options and warrants for services provided to the Company. Such services include financial, marketing and public relations consulting. Additionally, common stock was issued for certain accrued liabilities. The common stock issued was valued at its fair market value at the time of issuance, or in the instance of common stock purchase warrants, in accordance with the Black-Scholes pricing guidelines. Certain employee stock options, which have been repriced, are subject to the variable plan requirements of FIN No. 44, that requires the Company to record compensation expense for changes in the fair value of the Company's common stock. $347,835 in compensation expense was required to be recognized in the three months ended June 30, 2003; No compensation expense for variable stock options was required to be recognized in the three months ended June 30, 2002. Expense will also be recognized in the future if the stock price continues to be above the revised exercise price of the options. Therefore, the increase in non-cash charges for compensation is due mainly to the compensation expense recorded for the October 2002 repriced stock options and to a lesser extent from the compensation expense for the settlement of the Merger Agreement with the shareholder of Cross Communications, Inc. NON-OPERATING INCOME AND EXPENSES Non-operating income and expense for the three months ended June 30, 2003 are primarily interest income from invested cash, interest expense from notes payable, and the legal settlement with WizShop (see Note 4, "Other Income"). For the three months ended June 30, 2002 non-operating income and expense also included interest income and expense as well as amortization of advances from technology sales received in previous periods, and the owner's fees and offsetting interest income recognized, related to the technology sales. See the Consolidated Statement of Operations and Comprehensive Loss and Notes to the Financial Statements in our Annual Report on Form 10-K for the year ended March 31, 2003. Net interest income declined as less cash was available for investment during the three month periods ended June 30, 2003 versus 2002 as Semotus continues with operating losses. The overall increase in non-operating income was due to the WizShop settlement offset somewhat by the decline in the amortization of technology advances income. Semotus determined that as of March 31, 2003, the technology transactions were completed and therefore the contracts were terminated (see Note 10, "Advances on Technology Sale" in our Annual Report on Form 10-K for the year ended March 31, 2003). COMPREHENSIVE LOSS The comprehensive loss of $657,731 or $0.03 per share for the three months ended June 30, 2003, compared to $1,020,327 or $0.06 per share 11 for the three months ended June 30, 2002, respectively, is a direct result of the implementation of cost reduction programs which have consolidated and centralized Semotus' operating units and the elimination of unprofitable products and services. LIQUIDITY AND CAPITAL RESOURCES The overall decrease in the cash position of Semotus is due to the continued operating losses at the Company. Cash continued to be spent on operating resources and upgrading and maintaining certain wireless products although a cash management and cost reduction program has been implemented and has reduced the overall cash loss by 67% for the three month period ended June 30, 2003 versus 2002. The sources and uses of cash are summarized as follows (unaudited): THREE MONTHS ENDED JUNE 30, 2003 2002 --------- --------- Cash used in operating activities $(255,364) $(892,908) Cash used in investing activities -- (17,937) 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 used in operating activities from continuing operations consisted principally of a net loss of $672,704 offset by $378,650 of stock based compensation, and somewhat offset by non-cash charges of $54,958 of depreciation and amortization, and $18,940 of amortization of notes receivable. Other operating activities that contributed to the use of cash were $41,020 in the net change of current assets and current liabilities. This largely resulted from decreases in accrued liabilities and accounts payable of $32,228 and $5,300 respectively and increases in accounts receivable of $45,509, offset somewhat by increases in deferred revenue of $29,629. There was no cash used in investing activities for the three months ended June 30, 2003. Cash used in investing activities for the three months ended June 30, 2002 consisted principally of the acquisition of property and equipment. Cash flows from financing activities produced a net increase in cash of $24,604, which resulted primarily from the exercise of stock options, offset slightly from repayments on notes payable and capital leases. As of June 30, 2003, the Company had cash and cash equivalents amounting to $1,745,302, a decrease of $230,760 from the balance at March 31, 2003. Working capital decreased to $1,298,474 at June 30, 2003 from $1,464,645 at the fiscal 2003 year end. The decrease in working capital is from the resources used in the operations of Semotus as explained above. The Company has not yet generated sufficient revenues to cover the costs of continued product development and support, sales and marketing efforts and general and administrative expenses. There are no material commitments for capital expenditures at June 30, 2003. Management believes that it has adequate working capital for the next 12 months. 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 20, 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 12 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. 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 FORWARD LOOKING STATEMENTS AND RISK FACTORS This report includes forward-looking statements relating to, among other things, projections of future results of operations, our plans, objectives and expectations regarding our future services and operations and our acquisitions of Cross, Simkin and WizShop, and general industry and business conditions applicable to us. We have based these forward-looking statements on our current expectations and projections about future events. You can find many of these forward-looking statements by looking for words such as "may", "should", "believes", "expects", "anticipates", "estimates", "intends", "projects", "goals", "objectives", or similar expressions in this document or in documents incorporated herein. These forward-looking statements are subject to a number of risks, uncertainties and assumptions about us that could cause actual results to differ materially from those in such forward-looking statements. Such risks, uncertainties and assumptions include, but are not limited to, our limited operating history, our historical losses, the infancy of the wireless data industry where there is no established market for our products and services, our ability to adapt to rapid technological changes, our dependence on wireless networks owned and controlled by others, and the other factors that we describe in the section entitled "Risk Factors" in the Form 10K for the year ended March 31, 2003. Semotus Solutions claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.