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 of such critical accounting policies fairly depicts our financial condition and results of operations for all periods presented. OVERVIEW 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. As a result of the centralization and consolidation implementation, the net loss declined to $71,516 from $571,943 and to $0.00 per share from $0.03 per share in the three months ended December 31, 2003 versus 2002. Also, the net loss declined to $1,900,295 or $0.09 per share from $2,835,651 or $0.16 per share for the nine months ended December 31, 2003 versus 2002. Likewise, the overall net decrease in cash was reduced to $652,371 from $1,780,101 in the nine months ended December 31, 2003 versus 2002. RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2003 AND 2002 REVENUES Revenues for the three and nine months ended December 31, 2003 were $283,846 and $1,010,680, respectively, as compared to $350,445 and $1,005,612, respectively, for the three and nine months ended December 31, 2002. The 19% decrease in revenue for the three months ended December 31, 2003 as compared to 2002 is largely due to a decline in the fourth quarter calendar year 2003 technology purchases, which we believe is largely due to changes in technology purchasing allocations between 2003 and 2004. This decline only affected our third quarter and was not large enough to offset the increase in revenue over the nine months ended December 31, 2003 as compared to the comparable period ended December 31, 2002. COST OF REVENUES AND GROSS MARGIN The overall gross profit margin decreased to 72% in the three months ended December 31, 2003 from 80% in the comparable period ended December 31, 2002. The decrease is a result of increases in data feed costs. This only affected the third quarter ended December 31, 2003 and was not large enough to offset the small increase in gross profit for the nine months ended December 31, 2003 to 78% from 75% in the comparable period ended December 31, 2002. The nine-month period 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 nine month periods ended December 31, 2003 versus the comparable periods 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, including research and development, sales and marketing and general and administrative cost centers. We categorize 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 December Ended 31, Nine Months December Ended 31, Description 2003 2002 2003 2002 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 $ 308,479 $ 984,400 $ 2,822,620 $ 4,094,056 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 our 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 we have shifted to emphasizing marketing and sales support for our 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 nine months ended December 31, 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 nine months ended December 31, 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. The non-cash charges for compensation consists mainly of grants of stock, options and warrants for services provided to us. 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 us to adjust compensation expense for increases and decreases in the intrinsic value of our common stock until those options are exercised, forfeited, or expire unexercised. 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; $947,850 in compensation expense was required to be recognized in the nine months ended December 31, 2003. No compensation expense for variable stock options was required to be recognized in the three and nine months ended December 31, 2002 (See Note 5, "Stock Based Compensation Expense"). Increases or decreases in our stock price will also 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. 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. and restricted stock grants to consultants. NON-OPERATING INCOME AND EXPENSES Non-operating income and expense for the three and nine months ended December 31, 2003 consists primarily of interest income from invested cash and interest expense from notes payable and a small one-time gain from the sale of old, expiring patents (see Note 4, "Other Income"). For the three and nine months ended December 31, 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 nine-month periods ended December 31, 2003 versus 2002, as we continue with operating losses. The other income for the three and nine months ended December 31, 2003 includes a small realized one-time gain from the sale of old expiring patents. Another factor in the other income for the three and nine months ended December 31, 2002 is the amortization of technology advances, which had been declining due to the smaller balances resulting from the effective interest method of amortization. We 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 to $66,619 or $0.00 per share, and $1,880,131 or $0.09 per share for the three and nine months ended December 31, 2003, respectively, compared to $569,863 or $0.03 per share, and $2,835,444 or $0.16 per share for the three and nine months ended December 31, 2002, respectively, is a direct result of the implementation of cost reduction programs which have consolidated and centralized our operating units and the elimination of unprofitable products and services. LIQUIDITY AND CAPITAL RESOURCES The overall decrease in our cash position is due to our continued operating losses. 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 63% for the nine month period ended December 31, 2003, versus 2002. The sources and uses of cash are summarized as follows (unaudited): NINE MONTHS ENDED DECEMBER 31, 2003 2002 Net cash used in operating activities $ (788,843) $ (1,540,002) Net cash used in investing activities -- (18,365) 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 used in operating activities consisted principally of net loss of $1,900,295 offset primarily by $1,013,323 of stock-based compensation, as well as by non-cash charges of $159,187 in depreciation and amortization, and $57,826 in amortization of notes receivable. Other operating activities that contributed to the use of cash were $74,178 in the net change of current assets and current liabilities. This decrease resulted primarily from a decrease in accounts payable of $126,857 offset by increases in accrued liabilities and deferred revenue of $17,348 and $44,759, respectively, and an increase in accounts receivable of $14,853. There was no cash used in investing activities for the nine months ended December 31, 2003. Cash used in investing activities for the nine months ended December 31, 2002 consisted principally of cash used for the acquisition of property and equipment. Cash flows from financing activities produced a net increase in cash of $72,033, which resulted primarily from the exercise of stock options, offset in part from repayments of notes payable and capital leases. Net cash provided by discontinued operations of $64,439 for the nine months ended December 31, 2003 is primarily from the discontinuation of the operations of WizShop, Inc. As of December 31, 2003, we had cash and cash equivalents amounting to $1,317,539, a decrease of $652,371 from the balance at March 31, 2003. Working capital decreased to $973,314 at December 31, 2003 from $1,464,645 at the fiscal 2003 year end. The decrease in working capital is due to the resources used in our operations, as explained above. We have 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 December 31, 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 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 did 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 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. 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. 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 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. We claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.