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. 9 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 $1,156,077 from $1,229,151 and to $0.06 per share from $0.07 per share in the three months ended September 30, 2003 versus 2002. Also, the net loss declined to $1,828,785 or $0.09 per share from $2,263,708 or $0.13 per share for the six months ended September 30, 2003 versus 2002. Likewise, the overall cash decline was reduced to $424,272 from $1,293,133 in the six months ended September 30, 2003 versus 2002. RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 REVENUES Revenues for the three and six months ended September 30, 2003 were $373,172 and $726,834, respectively, as compared to $295,188 and $655,167, respectively, for the three and six months ended September 30, 2002. The 26% and 11% increase in revenue for the three and six months ended September 30, 2003 as compared to 2002 is largely due to moderate increases in sales of Semotus' wireless products and services: the Global Market Pro family of products and the HipLink family of products. Semotus has experienced some sales increases as corporate capital spending is recovering in calendar 2003. COST OF REVENUES AND GROSS MARGIN The overall gross profit margin increased to 83% and 80% in the three and six months ended September 30, 2003 from 63% and 72% in the same periods ended September 30, 2002. The increase is the result of continuing improvements in the reduction of costs and low variable costs for the wireless and mobile enterprise software products. The cost of sales consists mainly of network, airtime and data feed charges. OPERATING EXPENSES Operating expenses declined overall in the three and six month periods ended September 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): Three Months Ended Six Months Ended September 30, September 30, ---------------------------------------------------------------------------------------------- Description 2003 2002 2003 2002 ---------- ---------- ---------- ---------- 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 $1,478,315 $1,742,112 $2,514,494 $3,109,656 ---------------------------------------------------------------------------------------------- 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 and HiplinkXS product lines have 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 10 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, business development consulting, rent, administrative personnel, and other overhead related costs. This category also includes the costs associated with being a publicly traded company, including the costs of the AMEX listings, SEC filings, investor and public relations. These costs declined substantially during the three and six months ended September 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 and six months ended September 30, 2003 versus 2002 is as a result of the full amortization of the GMP asset in fiscal year 2003, and from the decline in capital spending on depreciable assets 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, legal and business development 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. 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 increases in the fair value of the Company's common stock. $914,727 and $1,262,562, respectively, in compensation expense was required to be recognized in the three and six months ended September 30, 2003; no compensation expense for variable stock options was required to be recognized in the three and six months ended September 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 and six months ended September 30, 2003 are primarily interest income from invested cash and interest expense from notes payable (see Note 4, "Other Income"). For the three and six months ended September 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 and six month periods ended September 30, 2003 versus 2002 as Semotus continues with operating losses. The interest expense from notes payable resulted in a net expense for the six months ended September 30, 2003. Another factor was 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 decrease in comprehensive loss of $1,155,783 or $0.06 per share, and $1,813,518 or $0.09 per share for the three and six months ended September 30, 2003, respectively, compared to $1,241,095 or $0.07 per share, and $2,261,421 or $0.13 per share for the three months ended September 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 six month period ended September 30, 2003, versus 2002. The sources and uses of cash are summarized as follows (unaudited): SIX MONTHS ENDED SEPTEMBER 30, ----------------------------------------------------------------------------------------------- 2003 2002 ------------ ------------ Cash used in operating activities $ (585,847) $ (1,214,882) Cash used in investing activities -- (16,358) 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) ============ ============ ----------------------------------------------------------------------------------------------- 11 Cash used in operating activities consisted principally of a net loss of $1,828,785 offset by $1,293,377 of stock based compensation, and somewhat offset by non-cash charges of $108,266 of depreciation and amortization, and $38,213 of amortization of notes receivable. Additional non-cash income of $105,834 was contributed by discontinued operations. Other operating activities that contributed to the use of cash were $147,315 in the net change of current assets and current liabilities. This largely resulted from decreases in accounts payable $151,239 offset somewhat by increases in accrued liabilities and deferred revenue of $24,227 and $29,947 respectively, and an increase in accounts receivable of $45,223. There was no cash used in investing activities for the six months ended September 30, 2003. Cash used in investing activities for the six months ended September 30, 2002 consisted principally of the acquisition of property and equipment. Cash flows from financing activities produced a net increase in cash of $84,003, which resulted primarily from the exercise of stock options, offset slightly from repayments on notes payable and capital leases. Net cash provided by discontinued operations of $77,572 is primarily from the operations of WizShop, Inc. As of September 30, 2003, the Company had cash and cash equivalents amounting to $1,545,638, a decrease of $424,272 from the balance at March 31, 2003. Working capital decreased to $1,252,341 at September 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 September 30, 2003. Management believes that it has adequate working capital for the next 12 months. 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 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. 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. 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 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 12 statements. Such risks, uncertainties and assumptions include, but are not limited to, our limited operating history, our historical losses, our reduced capital resources, 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.