Ealixir, Inc. 10-Q

ITEM 1: FINANCIAL STATEMENTS SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (unaudited) ASSETS December 31 2003 March 31 2003 CURRENT ASSETS: Cash and cash equivalents $ 1,317,539 $ 1,969,910 Trade receivables (net of allowance for doubtful accounts of $0.00 at December 31, 2003 and $6,090 at March 31, 2003) 155,499 140,646 Prepaid expenses and other current assets 29,859 35,284 Current assets held for sale -- 298,200 Current assets from discontinued operations -- 23,029 ------------ ----------- Total current assets 1,502,897 2,467,069 Property and equipment, net 191,476 342,614 Goodwill, net 1,430,141 1,430,141 Non-current assets held for sale -- 408,732 ------------ ------------ Total assets $ 3,124,514 $ 4,648,556 ============ ============ LIABILITIES and SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 245,535 $ 372,391 Accrued vacation 51,556 60,528 Other accrued liabilities 89,442 63,122 Notes payable 10,000 56,224 Current portion of capital lease obligations 9,172 17,609 Deferred revenue 123,878 79,119 Current liabilities related to assets held for sale -- 300,717 Current liabilities from discontinued operations -- 52,714 ------------ ------------ Total current liabilities 529,583 1,002,424 Capital lease obligation, net of current portion 689 15,189 Non-current liabilities related to assets held for sale -- 321,216 ------------ ------------ Total liabilities 530,272 1,338,829 ------------ ------------ Commitments and contingencies (Note 8) ------------ ------------ SHAREHOLDERS' EQUITY Common stock: $0.01 par value; authorized: 50,000,000 shares; issued and outstanding: 20,435,496 at December 31, 2003 and 19,275,211 at March 31, 2003 204,355 192,752 Additional paid-in capital 67,258,568 66,163,351 Accumulated other comprehensive loss (73,142) (93,306) Notes receivable -- related parties (33,455) (91,281) Accumulated deficit (64,762,084) (62,861,789) ------------ ------------ Total shareholders' equity 2,594,242 3,309,727 ------------ ------------ Total liabilities and shareholders' equity $ 3,124,514 ============ $ 4,648,556 ============ See accompanying notes to consolidated financial statements. SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (unaudited) Three Months December Ended 31, Nine Months December Ended 31, 2003 2002 2003 2002 Revenues: $ 283,846 $ 350,445 $ 1,010,680 $ 1,005,612 Cost of revenue: 79,398 70,746 225,257 251,101 ------------ ------------ ------------ ------------ Gross profit 204,448 279,699 785,423 754,511 Operating expenses: Research and development 121,783 142,532 434,413 523,295 Sales and marketing 166,431 220,810 512,715 713,439 General and administrative 249,050 340,774 702,982 1,889,088 Depreciation and amortization 51,269 278,922 159,187 943,951 Stock, option and warrant expense (280,054) 1,362 1,013,323 24,283 ------------ ------------ ------------ ------------ Total operating expenses 308,479 984,400 2,822,620 4,094,056 ------------ ------------ ------------ ------------ Operating loss from continuing operations (104,031) (704,701) (2,037,197) (3,339,545) Other income 32,515 101,030 31,068 298,784 ------------ ------------ ------------ ------------ Loss from continuing operations (71,516) (603,671) (2,006,129) (3,040,761) Income from discontinued operations -- 31,728 105,834 205,110 ------------ ------------ ------------ ------------ Net loss (71,516) (571,943) (1,900,295) (2,835,651) Other comprehensive income (loss) -- Translation adjustment 4,897 2,080 20,164 207 ------------ ------------ ------------ ------------ Comprehensive loss $ (66,619) $ (569,863) $(1,880,131) $(2,835,444) ============ ============ ============ ============ Net loss per common share: Basic $ (0.00) $ (0.03) $ (0.09) $ (0.16) Diluted $ (0.00) $ (0.03) $ (0.09) $ (0.16) Weighted average shares used in per share calculation, basic and diluted 20,401,292 18,108,715 20,135,053 17,764,736 ============ ============ ============ ============ See accompanying notes to consolidated financial statements. SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Nine Months December Ended 31, 2003 2002 Cash flows from operating activities: Net loss $(1,900,295) $(2,835,651) Income from discontinued operations (105,834) (205,110) ------------ ------------ Loss from continuing operations (2,006,129) (3,040,761) Foreign currency translation adjustment 20,164 207 Adjustments to reconcile net loss from continuing operations to net cash used in operating activities from continuing operations: Depreciation and amortization 159,187 943,951 Compensation expense related to stock and stock options issued for services 1,013,323 24,283 Amortization of advances on technology sales -- (206,724) Amortization of notes receivable 57,826 574,647 Net loss (gain) from disposition of assets (3,616) 1,220 Non-cash settlement of liabilities 44,580 45,353 Non-cash legal settlement -- 119,862 Changes in assets and liabilities: Accounts and other receivables (14,853) (43,931) Prepaid expenses and other assets 5,425 69,604 Accounts payable (126,857) 97,253 Accrued liabilities 17,348 (111,477) Deferred revenue 44,759 (27,455) Advances on technology sales -- 13,966 ------------ ------------ Net cash used in operating activities (788,843) (1,540,002) ------------ ------------ Cash flows from investing activities: Acquisition of property & equipment -- (18,925) Cash proceeds from sale of fixed assets -- 560 ------------ ------------ Net cash used in investing activities -- (18,365) ------------ ------------ Cash flows from financing activities: Repayments of notes payable (46,224) (22,881) Repayments of capital lease obligations (10,120) (12,564) Proceeds from exercise of options and warrants 128,377 -- Repurchase of preferred stock -- (100,000) ------------ ------------ Net cash provided by (used in) financing activities 72,033 (135,445) ------------ ------------ Net cash provided by (used in) discontinued operations 64,439 (86,289) Net decrease in cash and cash equivalents (652,371) (1,780,101) Cash and cash equivalents, beginning of period 1,969,910 4,070,642 ------------ ------------ Cash and cash equivalents, end of period $ 1,317,539 $ 2,290,541 ============ ============ See accompanying notes to consolidated financial statements. SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (unaudited) Nine Months December Ended 31, 2003 2002 SUPPLEMENTAL CASH FLOW DISCLOSURE: Cash paid for interest $ 8,175 $ 61,917 ============= ============= Cash paid for income taxes $ -- $ 3,701 ============ ============= SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Additional non-cash purchase consideration paid to shareholders of WizShop.com, Inc. pursuant to the Merger Agreement $ 30,815 $ 122,681 ============= ============= Non-cash compensation expense due to variable accounting for repriced stock options $ 947,850 $ -- ============ ============= Common stock issued for services $ 34,658 $ 24,283 ============ ============= Common stock issued for liabilities $ 44,580 $ 165,215 ============= ============= Warrant issued as partial consideration for repurchase of preferred stock $ -- $ 90,497 See accompanying notes to consolidated financial statements. SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BUSINESS OF THE COMPANY: Semotus Solutions, Inc. ("We" or "Our") is a leading provider of enterprise application software connecting employees to critical business systems, information, and processes. We help mobile employees make better and faster decisions, increase customer satisfaction, and improve efficiencies in their business processes for shorter sales and service cycles. Our products serve such vertical markets as workforce automation and financial services. Our 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 our subsidiaries. The consolidated balance sheet as of December 31, 2003, the consolidated statements of operations and comprehensive loss for the three and nine month periods ended December 31, 2003 and 2002, and the consolidated statements of cash flows for the nine months ended December 31, 2003 and 2002 have been prepared by us, 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 nine month periods ended December 31, 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. We believe 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 our Annual Report on Form 10-K for the year ended March 31, 2003. The consolidated financial statements include our accounts and our wholly owned subsidiaries: Semotus Systems Corporation (Canadian subsidiary) and Simkin, Inc., and our discontinued entities: Five Star Advantage, Inc. (Five Star), Wares on the Web, Inc. (Wares), Application Design Associates, Inc. (ADA) and WizShop.com, Inc. (WizShop). 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 our behalf. Five Star's and Wares' 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. Cross Communications, Inc. was merged with and into Semotus as of October 21, 2003. Simkin continues to generate some 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 our 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 our financial statements. The interpretation requires certain disclosures in financial statements issued after January 31, 2003 if it is reasonably possible that we will consolidate or disclose information about variable interest entities when the interpretation becomes effective. As of December 31, 2003, we do 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. We historically have not used derivatives or hedging instruments. Currently, we do have a small exposure to the Canadian -- U.S. dollar exchange rate, but we have 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 and otherwise is effective as of the beginning of the first interim period beginning after June 15, 2003. We adopted SFAS No. 150 on June 1, 2003. As of December 31, 2003, the adoption of SFAS No. 150 has not had a material impact on our results of operations or financial condition. 4. OTHER INCOME For the three and nine months ended December 31, 2003, other income and expense is primarily the net of interest income and interest expense and the realization of a small one-time gain from the sale of old expiring patents. In the three and nine months ended December 31, 2002, other income was 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. 5. STOCK-BASED COMPENSATION EXPENSE We account 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 our 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, we 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 nine months ended December 31, 2003, since the current market price of the underlying stock exceeded the exercise price on the date the grant was repriced. At December 31, 2003, our closing stock price was $0.70 per share, a decline of $0.21 per share from the closing stock price at September 30, 2003. In accordance with FIN 44, we reduced our previous estimate of stock compensation expense by the reduction in stock price, multiplied by the number of outstanding vested repriced options at December 31, 2003. This produced a net reduction of $314,712 in the intrinsic value based method of expense as shown in the following table. The following is a summary of the effect on net loss and net loss per share if we 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 Nine Months Ended December 31, December 31, 2003 2002 2003 2002 Net loss, as reported $ (71,516) $ (571,943) $ (1,900,295) $ (2,835,651) Add: Total stock-based employee compensation expense determined under intrinsic value based method for all awards and variable accounting for repriced options (314,712) -- 947,850 -- Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards (100,195) -- (250,564) -- Pro forma net loss (486,423) (571,943) (1,203,009) (2,835,651) Net loss per share: Basic - as reported $ (0.00) $ (0.03) $ (0.09) $ (0.16) Basic -- pro forma $ (0.02) $ (0.03) $ (0.06) $ (0.16) Diluted -- as reported $ (0.00) $ (0.03) $ (0.09) $ (0.16) Diluted -- pro forma $ (0.02) $ (0.03) $ (0.06) $ (0.16) 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), we report 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 nine months ended December 31, 2003 and 2002, 4,349,738 potential shares and 6,569,039 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 our Centralization and Consolidation Plan, which is further described in our March 31, 2003 Form 10-K, we reduced our 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 our future profitability as its operations were unprofitable. Therefore, we 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, we decided to discontinue the operations of Wares on the Web in August 2002. The Wares on the Web operations were unprofitable, and consequently, 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 our future profitability. 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 us $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 our common stock originally issued in May of 2001 and 2002 as part of our acquisition of ADA. 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 nine month periods ended December 31, 2003 and 2002, respectively. In the three months ended December 31, 2003, there was not any income or loss from discontinued operations. In the nine months ended December 31, 2003, the net income from discontinued operations of $105,834 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 $31,728 and $205,110 for the three and nine months ended December 31, 2002, respectively, consisted of a net loss from operations in the nine months ended December 31, 2002 of $127,770 at Five Star, and net income (loss) from operations of $(315) and $6,689, respectively, at Wares, a net loss from operations of $3,862 and $26,237 respectively at ADA and net income of $35,905 and $352,428, 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 our Board of Directors approved the repricing of most of the options under our 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. In light of the reductions in work force and salary reductions, our 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 our 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 resulted in variable plan accounting. A decrease in the closing stock price on December 31, 2003 from the closing stock price on September 30, 2003 resulted in an offset of $314,712 to the compensation expense to be recognized in the three months ended December 31, 2003; however, a compensation expense in the amount of $947,850 was required to be recognized to reflect the net increase in stock price over the repriced amount for the nine months ended December 31, 2003. Increases or decreases in our stock price will continue to be recognized in the future for outstanding vested repriced options 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, we determined that our ongoing operations were in one segment, wireless and mobile enterprise software. Our 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, we 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. 10. SUBSEQUENT EVENTS On January 23, 2004, we closed an equity private placement of US$1,028,750. Under the terms of the private placement, we sold an aggregate of 1,959,524 shares at $0.525 per share and 489,881 share purchase warrants. Each warrant entitles the holder to purchase an additional share of common stock at a price of $0.8625 per share for a period of five years. In connection with the private placement, we paid a placement fee of $85,000, of which $51,216 was paid in cash and the balance was paid by the issuance of 64,350 shares of common stock and 40,476 share purchase warrants. After payment of expenses and placement fees, we received net proceeds of $972,534. These funds will be used to finance the ongoing operations of the business and to augment its sales and marketing efforts. As part of the private placement, we have agreed to file a registration statement with the Securities and Exchange Commission to qualify the resale of the 2,023,874 shares of common stock and the 530,357 shares of common stock issuable upon the exercise of the share purchase warrants issued in the private placement. We are required to file this registration by March 3, 2004 and have the registration statement declared effective by the Securities and Exchange Commission by May 2, 2004. Should we fail to file the registration statement or have it declared effective within the time requirements, we will be required to pay a penalty of 1% of the purchase price per month, or $10,287.50 per month, for the first 3 months of noncompliance and 2% per month, or $20,575 per month, thereafter. At this time, we believe that we will meet the time requirements for filing the registration statement and having it declared effective; however, having the registration statement declared effective is subject to the review and approval of the Securities and Exchange Commission. The securities issued in this private placement have not been registered under the Securities Act of 1933, as amended, and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements of the Securities Act of 1933.