Ealixir, Inc. 10-Q

ITEM 1: FINANCIAL STATEMENTS SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (unaudited) ASSETS September 30 March 31 2003 2003 ------------ ------------ CURRENT ASSETS: Cash and cash equivalents $ 1,545,638 $ 1,969,910 Trade receivables (net of allowance for doubtful accounts of $6,090 at September 30, 2003 and $6,090 at March 31, 2003) 185,869 140,646 Prepaid expenses and other current assets 40,312 35,284 Current assets held for sale -- 298,200 Current assets from discontinued operations -- 23,029 ------------ ------------ Total current assets 1,771,819 2,467,069 Property and equipment, net 238,239 342,614 Goodwill, net 1,430,141 1,430,141 Non-current assets held for sale -- 408,732 ------------ ------------ Total assets $ 3,440,199 $ 4,648,556 ============ ============ LIABILITIES and SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 221,533 $ 372,391 Accrued vacation 69,645 60,528 Other accrued liabilities 77,851 63,122 Notes payable 21,925 56,224 Current portion of capital lease obligations 19,458 17,609 Deferred revenue 109,066 79,119 Current liabilities related to assets held for sale -- 300,717 Current liabilities from discontinued operations -- 52,714 ------------ ------------ Total current liabilities 519,478 1,002,424 Capital lease obligation, net of current portion 3,016 15,189 Non-current liabilities related to assets held for sale -- 321,216 ------------ ------------ Total liabilities 522,494 1,338,829 ------------ ------------ Commitments and contingencies (Note 8) ------------ ------------ SHAREHOLDERS' EQUITY Common stock: $0.01 par value; authorized: 50,000,000 shares; issued and outstanding: 20,390,256 at September 30, 2003 and 19,275,211 at March 31, 2003 203,903 192,752 Additional paid-in capital 67,535,476 66,163,351 Accumulated other comprehensive loss (78,039) (93,306) Notes receivable - related parties (53,068) (91,281) Accumulated deficit (64,690,567) (62,861,789) ------------ ------------ Total shareholders' equity 2,917,705 3,309,727 ------------ ------------ Total liabilities and shareholders' equity $ 3,440,199 $ 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 Six Months Ended September 30, September 30, --------------------------------- --------------------------------- 2003 2002 2003 2002 ------------ ------------ ------------ ------------ Revenues: $ 373,172 $ 295,188 $ 726,834 $ 655,167 Cost of revenue: 63,124 108,644 145,512 180,354 ------------ ------------ ------------ ------------ Gross profit 310,048 186,544 581,322 474,813 Operating expenses: Research and development 150,955 155,909 312,632 380,763 Sales and marketing 159,000 218,889 346,288 492,629 General and administrative 200,325 1,033,693 453,931 1,548,314 Depreciation and amortization 53,308 331,754 108,266 665,029 Stock, option and warrant expense 914,727 1,867 1,293,377 22,921 ------------ ------------ ------------ ------------ Total operating expenses 1,478,315 1,742,112 2,514,494 3,109,656 ------------ ------------ ------------ ------------ Operating loss from continuing operations (1,168,267) (1,555,568) (1,933,172) (2,634,843) Other income (expense) 2,082 92,370 (1,447) 197,754 ------------ ------------ ------------ ------------ Loss from continuing operations (1,166,185) (1,463,198) (1,934,619) (2,437,089) Income from discontinued operations 10,108 234,047 105,834 173,381 ------------ ------------ ------------ ------------ Net loss (1,156,077) (1,229,151) (1,828,785) (2,263,708) Other comprehensive income (loss) - Translation adjustment 294 (11,944) 15,267 2,287 ------------ ------------ ------------ ------------ Comprehensive loss $ (1,155,783) $ (1,241,095) $ (1,813,518) $ (2,261,421) ============ ============ ============ ============ Net loss per common share: Basic $ (0.06) $ (0.07) $ (0.09) $ (0.13) Diluted $ (0.06) $ (0.07) $ (0.09) $ (0.13) Weighted average shares used in per share calculation, basic and diluted 20,225,139 17,802,122 19,980,964 17,591,807 ============ ============ ============ ============ See accompanying notes to consolidated financial statements. 4 SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Six Months Ended September 30, --------------------------------- 2003 2002 ------------ ------------ Cash flows from operating activities: Net loss $ (1,828,785) $ (2,263,708) (Income) from discontinued operations (105,834) (173,381) ------------ ------------ Loss from continuing operations (1,934,619) (2,437,089) Foreign currency translation adjustment 15,267 2,287 Adjustments to reconcile net loss from continuing operations to net cash used in operating activities from continuing operations: Depreciation and amortization 108,266 665,029 Compensation expense related to stock and stock options issued for services 1,293,377 22,921 Amortization of advances on technology sales -- (140,244) Amortization of notes receivable 38,213 556,357 Net gain from disposition of assets (3,616) -- Non-cash settlement of liabilities 44,580 41,780 Changes in assets and liabilities: Accounts and other receivables (45,223) 5,474 Prepaid expenses and other assets (5,027) 62,587 Accounts payable (151,239) 148,545 Accrued liabilities 24,227 (99,805) Deferred revenue 29,947 (49,606) Advances on technology sales -- 6,882 ------------ ------------ Net cash used in operating activities (585,847) (1,214,882) ------------ ------------ Cash flows from investing activities: Acquisition of property & equipment -- (16,358) ------------ ------------ Net cash used in investing activities -- (16,358) ------------ ------------ Cash flows from financing activities: Repayments of notes payable (34,299) (11,881) Repayments of capital lease obligations (6,476) (8,497) Proceeds from exercise of options and warrants 124,778 -- ------------ ------------ Net cash provided by (used in) financing activities 84,003 (20,378) ------------ ------------ Net cash provided by (used in) discontinued operations 77,572 (41,515) Net decrease in cash and cash equivalents (424,272) (1,293,133) Cash and cash equivalents, beginning of period 1,969,910 4,070,642 ------------ ------------ Cash and cash equivalents, end of period $ 1,545,638 $ 2,777,509 ============ ============ See accompanying notes to consolidated financial statements. 5 SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (unaudited) Six Months Ended September 30, ------------------------------ 2003 2002 ------------ ------------ SUPPLEMENTAL CASH FLOW DISCLOSURE: Cash paid for interest $ 7,296 $ 19,394 ============ ============ Cash paid for income taxes $ -- $ 1,981 ============ ============ 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 $ 1,262,562 $ -- ============ ============ Common stock issued for services $ -- $ 22,921 ============ ============ Common stock issued for liabilities $ 44,580 $ 41,780 ============ ============ See accompanying notes to consolidated financial statements. 6 SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BUSINESS OF THE COMPANY: 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. 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 September 30, 2003, the consolidated statements of operations and comprehensive loss for the three and six month periods ended September 30, 2003 and 2002, and the consolidated statements of cash flows for the six months ended September 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 and six month periods ended September 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 operations have also been discontinued as of September 30, 2003. 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 November 2002, the Emerging Issues Task Force issued its final consensus on Revenue Arrangements with Multiple Deliverables. This guidance is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003 or alternatively, entities may elect to report the change in accounting as a cumulative-effect adjustment. EITF 00-21 discusses criteria necessary to determine when an arrangement may be viewed to have separate units of accounting (and thus revenue) and when an arrangement should be viewed as a single unit of accounting.Adoption of EITF 00-21 did not have a material impact 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 has not had 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 September 30, 2003, the Company does not have any variable interest entities. 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 instruments 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 7 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 and otherwise is effective as of the beginning of the first interim period beginning after June 15, 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. As of September 30, 2003, the adoption of SFAS No. 150 has not had a material impact on the Company's results of operations or financial condition. 4. OTHER INCOME In the three and six months ended September 30, 2002 Other income is substantially comprised of 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. For the three and six months ended September 30, 2003, other income and expense is primarily the net of interest income and interest expense. 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 or greater than 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, "Accounting for Certain Transactions Involving Stock Compensation", and accordingly, compensation expense was recorded in the three and six months ended September 30, 2003, 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 loss and per share 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 SIX MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------------- ------------------------------- 2003 2002 2003 2002 ------------------------------------------------------------------------------------------------------------------------------- Net loss, as reported $ (1,156,077) $ (1,229,151) $ (1,828,785) $ (2,263,708) ------------------------------------------------------------------------------------------------------------------------------- Add: Total stock-based employee compensation expense determined under intrinsic value based method for all awards and variable accounting for repriced options 914,727 -- 1,262,562 -- ------------------------------------------------------------------------------------------------------------------------------- Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards (95,103) (7,700) (126,242) (13,664) ------------------------------------------------------------------------------------------------------------------------------- Pro forma net loss (336,453) (1,236,850) (692,465) (2,277,372) ------------------------------------------------------------------------------------------------------------------------------- Net loss per share: Basic - as reported $ (0.06) $ (0.07) $ (0.09) $ (0.13) ------------------------------------------------------------------------------------------------------------------------------- Basic - pro forma $ (0.02) $ (0.07) $ (0.03) $ (0.13) ------------------------------------------------------------------------------------------------------------------------------- Diluted - as reported $ (0.06) $ (0.07) $ (0.09) $ (0.13) ------------------------------------------------------------------------------------------------------------------------------- Diluted - pro forma $ (0.02) $ (0.07) $ (0.03) $ (0.13) ------------------------------------------------------------------------------------------------------------------------------- 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. 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 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 and six months ended September 30, 2003 and 2002, 4,357,479 potential shares and 7,174,563 potential shares, respectively, were excluded from the shares used to calculate diluted EPS as their effect is anti-dilutive. 8 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. WizShop's operations were also discontinued as of September 30, 2003, as it was not expected to make a significant contribution to the Company's future profitability since WizShop does not have any additional contracts for its online software marketing business, the last of which was completed as of 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. In May 2003, GBG purchased the remaining 51% of ADA for the return of 500,000 shares of Semotus' common stock. This event 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, ADA and WizShop have been recorded as discontinued operations in the three and six month periods ended September 30, 2003 and 2002. In the 2003 fiscal year, the net income from discontinued operations of $10,108 and $105,834 in the three and six months ended September 30, 2003 is comprised solely of the operations of WizShop. Substantially all of the income was from a legal settlement. The net income from discontinued operations of $234,047 and $173,381 for the three and six months ended September 30, 2002 consisted of a net loss from operations in the three and six months ended September 30, 2002 of $4,935 and $127,770 respectively at Five Star, net income from operations of $ 2,225 and $7,004 respectively at Wares, a net loss from operations of $543 and $22,375 respectively at ADA and net income of $237,300 and $316,522 respectively at WizShop. A net gain upon disposition of the assets and liabilities of Five Star and Wares of $128,582 was recognized at March 31, 2003. 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. In light of the reductions in work force and salary reductions, the Board of Directors deemed it advisable to reprice the options to provide a retention incentive for the remaining 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 $914,727 and $1,262,562 was required to be recognized in the three months and six months ended September 30, 2003 respectively, and expense will be recognized in the future if the stock price continues to be above the revised exercise price of the options. 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.