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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: March 31, 2003
Commission file number: 1-15569
SEMOTUS SOLUTIONS, INC.
(Exact name or Registrant as specified in its Charter)
Nevada 36-3574355
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16400 Lark Ave., Suite 230, Los Gatos, CA 95032
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(Address of principal executive offices, including zip code)
(408) 358-7100
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(Registrant's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
COMMON STOCK, $0.01 PAR VALUE
Securities Registered Pursuant to Section 12(g) of the Act: NONE.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [_] No [X]
The aggregate market value of voting stock held by non-affiliates of the
registrant, based on the closing price of the registrant's Common Stock on
September 30, 2002 as reported by Amex ($0.14 per share), was approximately
$2,394,980. The aggregate market value of voting stock held by non-affiliates of
the registrant, based on the closing price of the registrant's Common Stock on
June 19, 2003 as reported by Amex ($0.40 per share), was approximately
$7,837,732. Shares of voting stock held by each officer and director and by each
person who owns 5% or more of the outstanding voting stock have been excluded in
that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
As of June 19, 2003, 20,594,330 shares of the registrant's Common Stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
The Proxy Statement for the 2003 Annual Meeting of Shareholders, which will be
filed with the Commission within 120 days after the close of the fiscal year, is
incorporated by reference into Part III.
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SEMOTUS SOLUTIONS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED MARCH 31, 2003
INDEX
Page
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PART I
Item 1 Business 2
Item 2 Properties 15
Item 3 Legal Proceedings 15
Item 4 Submission of Matters to a Vote of Security Holders 15
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder
Matters 15
Item 6 Selected Consolidated Financial Data 16
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations 17
Item 7A Quantitative and Qualitative Disclosures About Market Risk 27
Item 8 Financial Statements and Supplementary Data 27
Item 9 Change in and Disagreements With Accountants on Accounting and
Financial Disclosure 27
PART III
Item 10 Directors and Executive Officers of the Registrant 28
Item 11 Executive Compensation 28
Item 12 Security Ownership of Certain Beneficial Owners and Management 28
Item 13 Certain Relationships and Related Transactions 28
Item 14 Controls and Procedures 28
PART IV
Item 15 Principal Accountant Fees and Services 28
Item 16 Exhibits, Financial Statement Schedules and Reports on Form 8-K 28
SIGNATURES 64
CERTIFICATIONS 69
THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. THE STATEMENTS CONTAINED IN THIS REPORT THAT ARE NOT
PURELY HISTORICAL ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES
ACT OF 1934, AS AMENDED. WHEN USED HEREIN, WORDS SUCH AS "ANTICIPATE",
"BELIEVE", "ESTIMATE", "INTEND", "MAY", "WILL", "CONTINUE" AND "EXPECT" AND
SIMILAR EXPRESSIONS AS THEY RELATE TO SEMOTUS SOLUTIONS, INC. (SEMOTUS OR THE
COMPANY) OR ITS MANAGEMENT ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING
STATEMENTS. THE COMPANY'S ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS COULD
DIFFER MATERIALLY FROM THE RESULTS EXPRESSED IN, OR IMPLIED BY, THESE
FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE THOSE DISCUSSED IN MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND BUSINESS. SEMOTUS UNDERTAKES
NO OBLIGATION TO UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A
RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
1
PART 1
ITEM 1. BUSINESS.
OVERVIEW AND FORMATION OF THE COMPANY
Semotus(R) is a leading provider of software for wireless enterprise
applications. Our software connects 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. Our products
serve such vertical markets as enterprise wireless communications and financial
services. Semotus' enterprise application software provides mobility,
convenience, and efficiency and improves profitability.
Semotus changed its name from Datalink.net, Inc. as of January 11, 2001. The
Company, originally Datalink Systems Corporation, was formed under the laws of
the State of Nevada on June 18, 1996. On June 27, 1996, the Company went public
through an acquisition of a public corporation, Datalink Communications
Corporation ("DCC"), which was previously Lord Abbott, Inc., a Colorado
corporation formed in 1986. As a part of the transaction, the Company also
acquired a Canadian corporation, DSC Datalink Systems Corporation, incorporated
in Vancouver, British Columbia, now named Semotus Systems Corp.
COMPANY INTERNET SITE AND AVAILABILITY OF SEC FILINGS. Our corporate Internet
site is www.semotus.com. We make available on that site our Annual Reports on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, as well
as any amendments to those filings, and other filings we make electronically
with the U.S. Securities and Exchange Commission. The filings can be found in
the Investor Relations section of our site, and are available free of charge. In
addition to our web site, the SEC maintains an Internet site at www.sec.gov that
contains reports, proxy and information statements, and other information
regarding us and other issuers that file electronically with the SEC.
Information on our Internet site is not part of this Form 10-K.
RECENT DEVELOPMENTS
SALE AND DISCONTINUATION OF OPERATIONS
As part of our Centralization and Consolidation Plan (See "Centralization and
Consolidation Plan"), Semotus reduced its e-commerce and m-commerce presence
with the elimination of unprofitable products and services in that segment. One
of our subsidiaries, Five Star Advantage, Inc. (Five Star), 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 of Five Star 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 a reduced e-commerce and m-commerce presence
and the elimination of unprofitable products and services, Semotus decided to
also discontinue the operations of Wares on the Web, Inc. (Wares), another
Semotus subsidiary, in August of 2002. The Wares operations were unprofitable.
Furthermore, Wares filed for liquidation under Chapter 7 of the U.S. Bankruptcy
Code on August 19, 2002. The Final Decree in the Wares bankruptcy case was filed
by the U.S. Bankruptcy Court on March 24, 2003 and the bankruptcy case was
closed at that time.
Application Design Associates, Inc. (ADA), largely comprising our logistic
systems segment, was sold on May 6, 2003 as part of the original investment and
option agreement with Global Beverage Group (GBG). In January 2002, GBG became a
49% shareholder in ADA, and GBG has now exercised its option to purchase the
remaining 51% of ADA from Semotus. (See "Significant Events").
In accordance with FAS 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", the operations of Five Star, Wares and ADA have been
recorded as discontinued operations in the year-end period ended March 31, 2003.
For comparison purposes, the operations have also been classified as
discontinued for the fiscal years ended March 31, 2001 and 2002. Five Star was
part of the Enterprise and Commerce Sales segment. The disposal of its assets
and liabilities is now under the control of the U.S. Bankruptcy Court. Wares was
also a part of the Enterprise and Commerce Sales segment. The disposal of its
assets and liabilities was also under the control of the U.S. Bankruptcy Court,
which closed the bankruptcy case on March 24, 2003. A net loss from discontinued
operations for Five Star and Wares of $122,021 was recorded at March 31, 2003.
Further, a net gain on disposition of $128,582 was recorded at March 31, 2003
for the final disposal of the assets and liabilities of both Five Star and
Wares. ADA's operations have also been recorded as discontinued in the year
ended March 31, 2003. ADA made up the logistic systems segment. A loss from
discontinued operations of $$677,069 was recorded for ADA as of March 31, 2003,
mostly comprised of an impairment to goodwill of $635,724. Management performed
the impairment tests as described in Note 6, "Impairment of Long Lived Assets
and Goodwill" and as defined in SFAS 144 and SFAS 142 to determine the
impairment expense.
CENTRALIZATION AND CONSOLIDATION PLAN
During fiscal year 2003, we determined that the economy would continue in a weak
recovery and that the market for technology products would stay anemic.
Accordingly, the Company has continued to centralize and consolidate its
organization and its operations.
2
The headcount has been reduced 50% from March 31, 2002 and as a result,
engineering, sales and marketing and administrative costs have been further
reduced and centralized. The overall Semotus organization has eliminated
redundant positions and functions while improving the sales effort through
utilizing existing customer relationships to shorten the sales cycle.
Semotus has organized its operations around two core lines of business, while
maintaining but de-emphasizing its other operations: i) financial services with
the Global Market Pro, Equity Market Pro and Futures Market Pro products and
services and ii) workforce automation with the HipLinkXS family of products and
services. These products maintain high gross and operating margins and form the
core of the enterprise software marketing strategy with wireless and mobile
features available in the software.
As for our other segments, professional services and the enterprise and commerce
segment, most of the operations have been discontinued (Five Star, Wares On The
Web and ADA), while others have been further consolidated and reduced through
the elimination of unprofitable contracts and services. In professional
services, Simkin's Kinetidex 2.0 product was sold to the joint developer and
exclusive distributor of the product, Micromedex, Inc. Wireless medical software
products have been slow to penetrate the market and therefore have been
eliminated by Semotus. Simkin maintains small amounts of business through
continuing software training and some replacement software sales.
M-commerce initiatives have been significantly reduced. The e-commerce economy
has contracted and m-commerce is not expected to make a significant contribution
in the market in the near future. Consequently, Semotus has reduced its
e-commerce and m-commerce business with the closures of Five Star and Wares, and
the reduction of other unprofitable products and services in that segment. At
WizShop, the operations have been largely consolidated into Semotus' other
divisions and subsidiaries. At the end of June, 2002, Five Star's operations
were closed as the market for e-fulfillment is currently unprofitable. In August
of 2002, Wares' operations were closed. So, while Semotus maintains a reduced
m-commerce and e-commerce presence, it has de-emphasized the e-fulfillment
portion of that business. (See "Significant Events".)
SIGNIFICANT EVENTS
In May 2002, the Board of Directors of Semotus determined that the Company
needed to focus its operations on its core enterprise software products (See
"Centralization and Consolidation Plan"). Given the continued economic recession
and limited capital spending, as well as the reduced access to capital, the
Company must economically utilize its limited resources towards those products
with the best margins and cash flow generation. As part of that effort, Semotus
reduced its e-commerce operations, closed the Five Star business as of the end
of June 2002 and closed the Wares' business in August 2002. While maintaining a
reduced m-commerce and e-commerce presence, Semotus has de-emphasized the
e-fulfillment portion of that business as the e-fulfillment markets have
declined dramatically over the past year and are not expected to recover
significantly in the near future. Additionally, the remaining 51% of ADA that
Semotus owned during the fiscal year was purchased by GBG on May 6, 2003.
Accordingly, Semotus has redirected its human and capital resources towards more
profitable products and services.
DESCRIPTION OF BUSINESS
Except for the historical information contained herein, this report contains
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ materially from those discussed herein. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed in this section under "Description of Business", "Recent
Acquisitions" and "Risk Factors" as well as in the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
THE SEMOTUS STRATEGY
Semotus focuses its enterprise application software strategy in target markets
where there are significant growth opportunities and an existing strong customer
base that is adopting mobile and wireless technology. Customer penetration and
product acceptance are paramount to the Semotus formula. While the Company
continues to improve and maintain its market leading technology, Semotus molds
its products for market acceptance. Through strong customer relationships and
market knowledge, Semotus blends its technology into readily identifiable and
sellable products and services.
TARGET MARKETS
Enterprises are adopting mobile and wireless software solutions in order to
increase their employees' productivity and customer satisfaction. Semotus'
technology can service any enterprise in any market segment; however, the
Company has chosen to focus in two areas that the Company believes project the
greatest amount of growth potential and the strongest need for mobile and
wireless solutions. Those two lines of business are: (i) wireless financial
services with the Global Market Pro, Equity Market Pro and Futures Market Pro
software and services, and ii)enterprise wireless messaging and communications
with the HipLinkXS family of software and services.
3
WIRELESS FINANCIAL SERVICES: Mobile and wireless software services, handheld
devices, and financial management applications are now standard on the floors of
stock exchanges. Wireless data delivery can put the individual traders one step
ahead of the market, increasing their transaction time and giving them a
competitive advantage. It is for this reason that Semotus developed Global
Market Pro with J.P. Morgan Chase in 1999. Global Market Pro is an advanced
wireless application designed specifically for traders and financial
professionals in the global capital, derivative and foreign exchange markets.
Equity Market Pro was developed from the GMP platform and is designed for equity
traders and salesmen who have a real-time need for equity market information. A
new product, Futures Market Pro, was also developed from the GMP platform and is
designed for futures traders and other people who have a real-time need for
futures market information. Equity Market Pro and Futures Market Pro services
are marketed to major financial institutions, similar to Global Market Pro.
These applications provide the flexibility for a user to request additional
information or change requirements and set-up at any time from the Internet or
the user's wireless device.
ENTERPRISE WIRELESS MESSAGING AND COMMUNICATIONS: HipLinkXS has evolved from an
enterprise text messaging application into a complete mobile communications
solution. HipLinkXS consists of a suite of powerful messaging products that
provide real-time wireless text and voice messaging and paging capabilities.
This family of software applications enables corporations and individuals to
send messages to a large mobile field force, through network management software
for sales force automation, or a database management application. Semotus
addresses the needs of enterprises with large numbers of employees in the field
by providing complete solutions that assist field service organizations with
routing and dispatching, communications, order status, access to corporate
databases and customer billing. By having remote access to technical
information, inventory status and corporate databases, the field service
worker's productivity increases. Therefore mobile and wireless software
solutions are becoming a critical component of many enterprises today.
SERVICES AND PRODUCTS
During this fiscal year, Semotus determined to centralize and consolidate its
operations into the enterprise application software business. In fiscal year
2003, Semotus offered its services and products through its two major lines of
business within the enterprise application software market: (i) wireless
financial services and software, and (ii) wireless messaging and communications
software. (See "Centralization and Consolidation Plan").
ENTERPRISE APPLICATION SOFTWARE
Enterprise application software connects employees to critical business systems,
information, and processes. It helps mobile employees make better and faster
decisions, increase customer satisfaction, and improve efficiencies in their
business processes for shorter sales and service cycles through the immediate
access to mission critical information in a mobile environment. The Company
creates mobile and wireless information products by customizing and delivering
actionable and time sensitive information whenever that information is most
valuable to the customer. Services and applications are device agnostic and
protocol independent, integrating seamlessly into every enterprise
infrastructure and working with every wireless carrier and all text messaging
devices. Semotus provides two different wireless solutions: (i) ASP-based, where
Semotus hosts and manages the information on its servers and (ii) premise based
where Semotus installs and engineers the software and information on the
customers' servers.
GLOBAL MARKET PRO(TM)
Global Market Pro, is a wireless application designed for traders and financial
professionals in the global capital, derivative and foreign exchange markets.
Semotus developed Global Market Pro in cooperation with J.P. Morgan Chase
Manhattan Bank's Global Markets Data Division in 1999. The application is being
marketed to the trading and professional finance industry, where it is highly
adaptable to a variety of wireless platforms. In addition, Global Market Pro is
capable of advanced customization based on the unique preferences of each
individual.
Global Market Pro provides real-time financial data from leading news and
information sources, including Reuters, Market News International and GovPX.
This product has been engineered for all device platforms including, RIM
Interactive 957, two-way pagers, WAP phones and the Palm VII. The application
features a portfolio customization Web site interface, allowing users to set
event or time driven push alerts based on specific criteria or establish custom
portfolios for real-time on-demand data requests. Semotus is continuing to
expand the product's features and capabilities.
EQUITY MARKET PRO(TM)
Equity Market Pro is an enterprise application built for the institutional
equity trader using the Global Market Pro financial platform; Semotus developed
EMPro with the same customization capability and is deploying EMPro using its
new over-the-air-programming technology (OTAP). Equity Market Pro is designed
for the secure delivery of real-time financial information and news. EMPro
features Dow Jones News Service(SM) as its premier news source. Market data for
EMPro is sourced from Reuters and GovPX.
Equity Market Pro is targeted to the over 400,000 Institutional professionals
who use real-time equity data at a workstation and will be
4
sold to institutions for their employees. All data provided through EMPro is
completely customizable providing information specific to each trader's needs.
Features included the ability to create and track an unlimited number of watch
lists for either push or pull delivery, snap quotes, charts and graphs,
corporate profiles, symbol lookup, indices, and world composite data. EMPro
monitors any security or market indicator in real-time and sends out a wireless
alert when pre-set values have been reached.
FUTURES MARKET PRO(TM)
Futures Market Pro is a dynamic wireless financial application that gives
financial professionals instant access to real-time futures and equities data.
FMPro, like Equity Market Pro and Global Market Pro, can be customized to
individual information needs. FMPro monitors the market for events on any
contract or stock, create and track custom watch lists. Alerts can be set on
futures, securities or indices so that a user is notified when the market moves.
Other features include snap quotes, time and sales info, watch lists, charts,
news from Dow Jones and Comtex, built in portfolios, customized alerts,
corporate profiles, symbol lookup and an OTAP application loader.
HIPLINKXS(TM) FAMILY
As part of its expanding enterprise application technology and product
offerings, Semotus launched a newly upgraded Hiplink product called HipLinkXS in
July of 2001. HipLinkXS has developed into a suite of powerful messaging
products that provide real-time wireless text and voice messaging and paging
capabilities. This family of software applications enables corporations and
individuals to send messages to a large mobile field force, through network
management software for sales force automation, or a database management
application. Some examples of applications that HipLinkXS can easily integrate
with, working as the critical event notification component, include: NetIQ
AppManager, Remedy ARS, HP OpenView, Tivoli Enterprise Console, Tivoli NetView,
CA Paradigm Service Desk, CA Unicenter, ISS Real Secure, and many more.
HipLinkXS products also have sophisticated voice and two-way messaging
capabilities that can turn a wireless device literally into a remote control,
allowing the user access to the designated computer network anytime, anywhere.
Users can send messages and request a response back from the receiver, with the
ability to trigger server processes based on the response from the two-way
device. HipLinkXS supports virtually any wireless device for secure, reliable,
two-way communications via a single integration point, providing turnkey access
to wireless carriers around the world.
The HipLink solution supports both UNIX and NT and is scalable and configurable
to the specific requirements of the enterprise customer. The software functions
in the mission critical environment of enterprise messaging including wireless
applications for network management messaging and monitoring, field work force
communications, help desk operations and Internet messaging and monitoring.
Currently, the HipLinkXS Family of products includes: HipLinkXS Desktop
Messaging; HipLinkXS Application Messaging; RemLinkXS; IQLinkXS; OpenLinkXS;
QuickLinkXS.
LEGACY FINANCIAL CONSUMER PRODUCTS
Semotus continues to offer a suite of wireless financial consumer products.
These products allow customers to retrieve customized information from real-time
data feeds, receive and send messages and other information, as well as set
their own parameters for real-time data they wish to receive. Semotus' current
line of financial consumer products is mostly comprised of QuoteXpress(R),
CompanyNewsX and CommodityXpress(TM).
ENTERPRISE AND COMMERCE SALES
Semotus' enterprise and commerce line of business provides online transactional
information and sales of products and services. The online services include web
site development and maintenance, sales, marketing, customer retention programs
and services, logistics, distribution, and tracking and reporting. In essence,
Semotus can take care of all of a customer's online requirements from building a
web presence to sales of products to collections and cash management. Semotus
uses the enterprise and commerce business to add-on wireless products such as
alerts to wireless devices, comparative data information and real time
messaging.
In May 2002, the Board of Directors of Semotus determined that the Company
needed to focus its operations on its core enterprise software products. (See
"Centralization and Consolidation Plan"). Given the continued economic recession
and limited capital spending, as well as the reduced access to capital, the
Company must economically utilize its limited resources towards those products
with the best margins and cash flow generation. As part of that effort, Semotus
reduced its e-commerce operations by closing the Five Star business as of the
end of June 2002 and the Wares' business in August 2002. While maintaining a
reduced m-commerce and e-commerce presence, Semotus has de-emphasized the
e-fulfillment portion of that business as the e-fulfillment markets have
declined dramatically over the past year and are not expected to recover
significantly in the near future. Accordingly, Semotus is redirecting its human
and capital resources towards more profitable products and services within the
enterprise application software business.
5
PROFESSIONAL AND RELATED SERVICES
Semotus' professional service line of business provides customers with online
and wireless information and operations consulting, software engineering, and
training. This line of business provides the software tools and management to
install and efficiently run online and wireless operations. Semotus sold
Simkin's Kinetidex 2.0 product to the joint developer and exclusive distributor
of the product, Micromedex, Inc. Wireless medical software products have been
slow to penetrate the market and therefore have been eliminated by Semotus.
Simkin maintains modest amounts of business through continuing software training
and some replacement software sales. Additionally, the Wares' business was
closed in August 2002.
Profitable services and applications are being continued through the two core
lines of business within the enterprise application software segment, consisting
of financial services and workforce automation.
LOGISTIC SYSTEMS
Through Semotus' ADA subsidiary, the Company created proprietary software and
integrated it with other hardware and software products to produce a complete
logistical solution for automation of customer call centers, dispatching,
equipment deployment, servicing and invoicing, while interfacing to existing
corporate business functions and existing ERP solutions. As part of the system
integration function, ADA resells HipLink software and services among other
mobile products. ADA's largest customers are in the soft drink beverage
industry.
In May of 2003, GBG, a 49% shareholder in ADA, purchased the remaining 51% of
ADA. Therefore, these operations were discontinued. (See "Discontinuation of
Operations"). Profitable services and applications are being continued through
the two core lines of business within the enterprise application software
market, consisting of financial services and workforce automation.
STRATEGIC RELATIONSHIPS
Semotus maintains strategic relationships with wireless and technology companies
in order to further develop its services and product offerings. Maintaining
market-leading technology is a difficult task; however, Semotus believes that it
continues to produce new software and engineered products that are leading the
mobile and wireless market. The key relationships for Semotus are with carriers,
device manufacturers and content providers.
CUSTOMERS
Semotus has a very diversified customer list. Although Semotus has many
customers utilizing its mobile and wireless services, the broadly diversified
base means there is no significant concentration in any industry. In the fiscal
year ended March 31, 2003, there were two customers accounting for over 5% of
the Company's revenues. One customer in the wireless services segment accounted
for 17% of revenues, and a second customer in the wireless services segment
accounted for 6% of revenues. None of these customers account for any
significant accounts receivable at March 31, 2003.
VENDORS
Semotus maintains strong relationships with all of the major telecommunications
carriers, content providers and hardware manufacturers for its wireless and
e-commerce products and services. The Company is not dependent upon any one
carrier, content provider or hardware manufacturer for its business, nor is its
business affected by any of the current financial problems experienced by
certain telecommunication equipment and service providers.
COMPETITION
Semotus is participating in the highly competitive businesses of enterprise
application software, mobile and wireless telecommunications, systems
integration and professional services. The competition is from a broad range of
both large and small domestic and international corporations. Some of the
Company's competitors have far greater financial, technical and marketing
resources than the Company.
The competitive factors important to Semotus are its technology, its engineering
expertise, its customer support and its customer relationships. Business segment
and industry competitive factors include, but are not limited to, technology,
engineering capability, customer support, breadth and depth of strategic
relationships, financial condition, and marketing initiatives. The Company
leverages the quality of its engineering team and its customer service team, the
depth and breadth of its customer relationships, and its ability to respond
quickly to change in order to be competitive and successful.
6
RESEARCH AND DEVELOPMENT
Semotus maintains its research and development operations in Vancouver, B.C. As
of March 31, 2003, Semotus employed 9 personnel in research and development and
engineering. The Company finds it advantageous to have its research and
development activities in Vancouver due to the abundance of available,
affordable and talented software engineers. Total costs incurred in research and
development amounted to $719,965, $1,010,720 and $1,187,348 respectively, in the
years ended March 31, 2003, 2002 and 2001.
INTELLECTUAL PROPERTY
Our success depends significantly upon our technology. To protect our rights, we
rely on a combination of copyright and trademark laws, patents, trade secrets,
confidentiality agreements with employees and third parties and protective
contractual provisions. Most of our employees have executed confidentiality and
non-use agreements that transfer any rights they may have in copyrightable works
or patentable technologies to us. In addition, prior to entering into
discussions with potential business partners or customers regarding our business
and technologies, we generally require that such parties enter into
nondisclosure agreements with us. If these discussions result in a license or
other business relationship, we also generally require that the agreement
setting forth the parties' respective rights and obligations include provisions
for the protection of our intellectual property rights. For example, the
standard language in our agreements provides that we retain ownership of all
patents and copyrights in our technologies and requires our customers to display
our copyright and trademark notices.
"Semotus", "QuoteXpress", "MailXpress", "Net2Wireless" and "Simkin" are
registered trademarks of ours. In addition, we have applied for federal
registration of other marks. However, we may not be successful in obtaining the
service marks and trademarks for which we have applied.
The Company has a total of nine issued patents as of March 31 2003, as follows:
Interactive Two-Way Pager System #5,838,252 and Divisional Case #6,049,291;
Pager Enhanced Keyboard and system #5,964,833 and Divisional Case #6,085,232;
System and Method for a Real-Time Data Stream Analyzer and Alert System
#5,872,921; Virtual Transcription System #5,875,436; Mail Alert System
#6,035,104; Alphanumeric Paging Message System Operating on the Internet
#6,040,784 and Divisional Case #6,515,576. Semotus also has 6 patents pending.
We anticipate on-going patent application activity in the future. However,
patents with respect to our technology may not be granted, and, if granted,
patents may be challenged or invalidated. In addition, issued patents may not
provide us with any competitive advantages and may be challenged by third
parties.
Despite our efforts to protect our rights, unauthorized parties may copy aspects
of our products or services or obtain and use information that we regard as
proprietary. The laws of some foreign countries do not protect proprietary
rights to as great an extent as do the laws of the United States. In addition,
others could possibly independently develop substantially equivalent
intellectual property. If we do not effectively protect our intellectual
property, our business could suffer.
Companies in the software and application services and wireless industries have
frequently resorted to litigation regarding intellectual property rights. We may
have to litigate to enforce our intellectual property rights, to protect our
trade secrets or to determine the validity and scope of others' proprietary
rights. From time to time, we have received, and may receive in the future,
notice of claims of infringement of others' proprietary rights. Any such claims
could be time-consuming, result in costly litigation, divert management's
attention, cause product or service release delays, require us to redesign our
products or services or require us to enter into royalty or licensing
agreements. If a successful claim of infringement were made against us and we
could not develop non-infringing technology or license the infringed or similar
technology on a timely and cost-effective basis, our business could suffer.
EMPLOYEES
At March 31, 2003, without ADA, we had 22 full-time employees and 3 part-time
employees, approximately 10 of who were engaged in sales and marketing, 6 in
finance and administration, and 9 in engineering. No employees of the Company
are covered by a collective bargaining agreement. At March 31, 2003, ADA had 8
employees.
RISK FACTORS
Our business and the results of our operations are affected by a variety of risk
factors, including those described below.
RISKS PARTICULAR TO SEMOTUS
WE HAVE HISTORICALLY INCURRED LOSSES AND THESE LOSSES ARE EXPECTED TO CONTINUE
IN THE FUTURE.
We recorded a net loss for each year since our current business started in 1996
through our fiscal year ended March 31, 2003. As of March 31, 2003, we had an
accumulated deficit of $62,861,789.
7
We have not achieved profitability and we expect to continue to incur operating
losses in the future. These losses may be higher than our current losses from
operations. Many of our operating expenses are fixed in the short term. We have
(and may in the future) incurred losses from the impairment of goodwill or other
intangible assets, or from the impairment of the value of private companies that
we acquired. We must therefore generate revenues sufficient to offset these
expenses in order for us to become profitable. If we do achieve profitability,
we may not be able to sustain it.
Because we expect to continue to incur significant sales and marketing, systems
development and administrative expenses, we will need to generate significant
revenue to become profitable and sustain profitability on a quarterly or annual
basis. We may not achieve or sustain our revenue or profit goals and our losses
may continue or grow in the future. As a result, we may not be able to increase
revenue or achieve profitability on a quarterly or annual basis.
OUR FUTURE REVENUES AND OPERATING RESULTS ARE DEPENDENT TO A LARGE EXTENT UPON
GENERAL ECONOMIC CONDITIONS, CONDITIONS IN THE WIRELESS SERVICES MARKET AND
CONDITIONS IN OUR PRIMARY TARGET MARKETS.
Our future revenues and operating results are dependent to a large extent upon
general economic conditions, conditions in the wireless market and within that
market, our primary target markets of financial services and field and
automation services. Economic activity continues to be slow in these markets,
our sales cycle are still lengthened significantly as existing and potential
customers continue to reduce their spending commitments, deferring wireless
projects and reducing their willingness to make investments in new wireless
services. Moreover, adoption of wireless services has not proceeded as rapidly
as previously anticipated. If general economic conditions continue to be
adverse, if the economies in which our target customers are located continue to
suffer from a recession, if demand for our solutions does not expand, or if war
or terrorism impacts the U.S., Canada or our other target markets, our ability
to increase our customer base may be limited, and our revenue may decrease
further.
OUR ACQUISITIONS MAY NOT DELIVER THE VALUE WE PAID OR WILL PAY FOR THEM.
Excessive expenses may result if we do not successfully integrate our
acquisitions, or if the costs and management resources we expend in connection
with the integrations exceed our expectations. We expect that our acquisitions
and any acquisitions we may pursue in the future will have a continuing,
significant impact on our business, financial condition and operating results.
Additionally, we cannot guarantee that we will realize the benefits or strategic
objectives we are seeking to obtain by acquiring these companies. The value of
the companies that we acquired may be less than the amount we paid if there is:
- - a decline of their position in the respective markets they serve; or
- - a decline in general of the markets they serve.
Our financial results may be adversely affected if:
- - we fail to assimilate the acquired assets with our pre-existing business;
- - we lose key employees of these companies or of Semotus as a result of the
acquisitions;
- - our management's attention is diverted by other business concerns; or
- - we assume unanticipated liabilities related to the acquired assets.
At March 31, 2003, we recorded a net gain from the disposition of Five Star and
Wares of $128,582.
WE MAY NOT BE ABLE TO RECOVER ANY OF THE VALUE OF GOODWILL RECORDED ON SOME OF
OUR ACQUISITIONS AND INVESTMENTS.
During 2002 and 2001, we recorded approximately $9,695,199 in goodwill and other
intangibles related to our acquisitions. Consideration for our acquisitions was
partially or fully funded through the issuance of shares of our common stock at
a time when our stock price was at historically high prices. All of these
companies were privately held and their fair values are highly subjective and
not readily determinable. Our policy is to review the value of all our
acquisitions for impairment whenever events or circumstances indicate that the
carrying amount may not be recoverable. At the time of our acquisitions and
investments, market valuations and the availability of capital for such
companies were at historically high levels. During the year ended March 31,
2003, stock prices and market valuations in our industry and in our vertical
markets have fallen substantially in response to a variety of factors, including
a general downturn in the economy, terrorism, a curtailment in the availability
of capital and a general reduction in technology expenditures. The market
valuations of those companies in which we have invested and of other companies
similar to
8
those we acquired have declined substantially. For the year ended March 31,
2003, we did not record any impairment charges from continuing operations.
However, for the fiscal year ended March 31, 2002 we recorded $3,617,283 in
goodwill impairment charges and $3,420,000 in other intellectual property
impairments charges. If similar adverse market conditions develop in the future,
we may be required to take additional impairment charges. Further, in accordance
with SFAS 144, Semotus has presented the operations of FiveStar, Wares and ADA
as discontinued operations. In the net loss from discontinued operations for
2002 and 2003, impairment charges were taken against the goodwill of both Wares
(fiscal year 2002) and ADA (fiscal year2003). As discussed in Note 6,
"Impairment of Long Lived Assets and Goodwill," Semotus performed the impairment
tests and determined that impairment charges were required. The impairment
expense for the Wares goodwill was $1,156,587 and for the ADA goodwill was
$635,724.
OUR FUTURE EARNINGS COULD CONTINUE TO BE NEGATIVELY IMPACTED BY SIGNIFICANT
CHARGES RESULTING FROM THE IMPAIRMENT IN THE VALUE OF ACQUIRED ASSETS
For acquisitions which we have accounted for using the purchase method, we
regularly evaluate the recorded amount of long-lived assets, consisting
primarily of goodwill, acquired contracts and core technology, to determine
whether there has been any impairment of the value of the assets and the
appropriateness of their estimated remaining lives. We evaluate impairment
whenever events or changed circumstances indicate that the carrying amount of
the long-lived assets might not be recoverable. At March 31, 2002, we recorded
an impairment charge of $3,420,000 related to intellectual property assets, and
$3,617,283 related to goodwill. Further, in accordance with SFAS 144, Semotus
has presented the operations of Five Star, Wares and ADA as discontinued
operations. In the net loss from discontinued operations for 2002 and 2003,
impairment charges were taken against the goodwill of both Wares (fiscal year
2002) and ADA (fiscal year2003). As discussed in Note 6, "Impairment of Long
Lived Assets and Goodwill," Semotus performed the impairment tests and
determined that impairment charges were required. The impairment expense for the
Wares goodwill was $1,156,587 and for the ADA goodwill was $635,724.
In addition, recent changes in GAAP require us to discontinue amortizing
goodwill and certain intangible assets. We adopted these changes effective April
1, 2002. Under this approach, goodwill and certain intangible assets will not be
amortized into results of operations, but instead are reviewed for impairment
and written down and charged to results of operations only in the periods in
which the recorded value of goodwill and certain intangible assets is more than
its fair value.
We will continue to regularly evaluate the recorded amount of our long-lived
assets including acquired contracts and core technology and test for impairment.
In the event we determine that any long-lived asset has been impaired, we will
record additional impairment charges in future quarters. Goodwill will be
evaluated at least annually. We are unable to predict the amount, if any, of
potential future impairments.
WE MAY NOT ACHIEVE PROFITABILITY IF WE ARE UNABLE TO MAINTAIN, IMPROVE AND
DEVELOP THE WIRELESS DATA SERVICES WE OFFER.
We believe that our future business prospects depend in part on our ability to
maintain and improve our current services and to develop new ones on a timely
basis. Our services will have to achieve market acceptance, maintain
technological competitiveness and meet an expanding range of customer
requirements. As a result of the complexities inherent in our service offerings,
major new wireless data services and service enhancements require long
development and testing periods. We may experience difficulties that could delay
or prevent the successful development, introduction or marketing of new services
and service enhancements. Additionally, our new services and service
enhancements may not achieve market acceptance. If we cannot effectively
maintain, improve and develop services we may not be able to recover our fixed
costs or otherwise become profitable.
IF WE DO NOT RESPOND EFFECTIVELY AND ON A TIMELY BASIS TO RAPID TECHNOLOGICAL
CHANGE, OUR SERVICES MAY BECOME OBSOLETE AND WE MAY LOSE SALES.
The wireless and data communications industries are characterized by rapidly
changing technologies, industry standards, customer needs and competition, as
well as by frequent new product and service introductions. Our services are
integrated with wireless handheld devices and the computer systems of our
customers. Our services must also be compatible with the data networks of
wireless carriers. We must respond to technological changes affecting both our
customers and suppliers. We may not be successful in developing and marketing,
on a timely and cost-effective basis, new services that respond to technological
changes, evolving industry standards or changing customer requirements. Our
ability to grow and achieve profitability will depend, in part, on our ability
to accomplish all of the following in a timely and cost-effective manner:
- - effectively use and integrate new wireless and data technologies;
- - continue to develop our technical expertise;
- - enhance our wireless data, engineering and system design services;
9
- - develop applications for new wireless networks; and
- - influence and respond to emerging industry standards and other changes.
WE DEPEND UPON WIRELESS NETWORKS OWNED AND CONTROLLED BY OTHERS. IF WE DO NOT
HAVE CONTINUED ACCESS TO SUFFICIENT CAPACITY ON RELIABLE NETWORKS, WE MAY BE
UNABLE TO DELIVER SERVICES AND OUR SALES COULD DECREASE.
Our ability to grow and achieve profitability partly depends on our ability to
buy sufficient capacity on the networks of wireless carriers and on the
reliability and security of their systems. We depend on these companies to
provide uninterrupted and trouble free service and would not be able to satisfy
our customers' needs if they failed to provide the required capacity or needed
level of service. In addition, our expenses would increase and our profitability
could be materially adversely affected if wireless carriers were to increase the
prices of their services.
WE MAY FAIL TO SUPPORT OUR ANTICIPATED EVENTUAL GROWTH IN OPERATIONS WHICH COULD
REDUCE DEMAND FOR OUR SERVICES AND MATERIALLY ADVERSELY AFFECT OUR REVENUE.
Our business strategy is based on the assumption that the number of subscribers
to our services, the amount of information they want to receive and the number
of services we offer will all increase. We must continue to develop and expand
our systems and operations to accommodate this growth. The expansion and
adaptation of our customer service and network operations center requires
substantial financial, operational and management resources. We may be unable to
expand our operations for one or more of the following reasons:
- - we may not be able to locate or hire at reasonable compensation rates
qualified engineers and other employees necessary to expand our capacity;
- - we may not be able to obtain the hardware necessary to expand our capacity;
- - we may not be able to expand our customer service, billing and other related
support systems; and
- - we may not be able to obtain sufficient additional capacity from wireless
carriers.
Due to the limited deployment of our services to date, the ability of our
systems and operations to connect and manage a substantially larger number of
customers while maintaining superior performance is unknown. Any failure on our
part to develop and maintain our wireless data services as we experience growth
could significantly reduce demand for our services and materially adversely
affect our revenue. Further, the Company has implemented a Centralization and
Consolidation Plan which may limit growth in the short term.
AS WE IMPLEMENT OUR CENTRALIZATION AND CONSOLIDATION PLAN TO REDUCE OUR
OPERATING EXPENSES, WE MAY FAIL TO SUPPORT OUR OPERATIONS, WHICH COULD REDUCE
DEMAND FOR OUR SERVICES AND MATERIALLY ADVERSELY AFFECT OUR REVENUE.
Our business strategy is based on the assumption that the number of subscribers
to our services, the amount of information they want to receive and the number
of services we offer will all increase. We must continue to develop and expand
our systems and operations to accommodate this growth. The expansion and or
maintenance and adaptation of our customer service and network operations
centers require substantial financial, operations and management resources. At
the same time, we have implemented plans to reduce our operating expenses, which
entails a reduction in operational and management resources. While we believe
that our cost reductions are targeted at areas that are not necessary to
maintain and develop our ability to serve customers, there can be no assurance
that we will succeed in lowering costs while maintaining our ability to provide
service. If we fail to maintain or improve service levels, we may lose customers
and/or the opportunity to provide more services and products.
WE DEPEND ON RECRUITING AND RETAINING KEY MANAGEMENT AND TECHNICAL PERSONNEL
WITH WIRELESS DATA AND SOFTWARE EXPERIENCE AND WE MAY NOT BE ABLE TO DEVELOP NEW
PRODUCTS OR SUPPORT EXISTING PRODUCTS IF WE CANNOT HIRE OR RETAIN QUALIFIED
EMPLOYEES.
Because of the technical nature of our products and the dynamic market in which
we compete, our performance depends on attracting and retaining key employees.
Competition for qualified personnel in the wireless data and software industries
is intense and finding qualified personnel with experience in both industries is
even more difficult. We believe there are only a limited number of individuals
with the requisite skills in the field of wireless data communication, and it is
becoming increasingly difficult to hire and retain these persons. We have a
written employment agreement with Anthony N. LaPine, the Company's chairman, CEO
and president. We do not have employment agreements with any other officer. The
loss of Mr. LaPine or any other officer may have an adverse effect on our
business and prospects by depriving us of the management services necessary to
operate our business and achieve profitability.
10
IF WE DO NOT HAVE SUFFICIENT CAPITAL TO FUND OUR OPERATIONS, WE MAY BE FORCED TO
DISCONTINUE PRODUCT DEVELOPMENT, REDUCE OUR SALES AND MARKETING EFFORTS OR
FOREGO ATTRACTIVE BUSINESS OPPORTUNITIES.
To help ensure that we would have sufficient capital to take advantage of our
core business opportunities we have taken significant actions since the first
quarter of this fiscal yea to reduce our operating expenses. Most of our current
operating expenses, such as employee compensation and lease payments for
facilities and equipment, are relatively stable and these expense levels are
based in part on our expectations regarding future revenues. As a result, any
shortfall in our revenues relative to our expectations could cause significant
changes in our operating results from quarter to quarter. If the cost-cutting
actions that we have taken are insufficient, we may not have sufficient capital
to fund our operations, and additional capital may not be available on
acceptable terms, if at all. Any of these outcomes could adversely impact our
ability to respond to competitive pressures or could prevent us from conducting
all or a portion of our planned operations. We may need to undertake additional
measures to reduce our operating expenses in the future.
We expect that the cash we receive through our operations and our cash on hand
will be sufficient to meet our working capital and capital expenditure needs for
the next 12 months. After that, we may need to raise additional funds, and
additional financing may not be available on acceptable terms, if at all. We
also may require additional capital to acquire or invest in complementary
businesses or products or to obtain the right to use complementary technologies.
If we issue additional equity securities to raise funds, the ownership
percentage of existing shareholders will be reduced. If we incur debt, the debt
will rank senior to our common shares, we will incur debt service costs and we
will likely have to enter into agreements that will restrict our operations in
some respects and our ability to declare dividends to the holders of our common
shares.
OUR PATENTS MAY NOT PROTECT US FROM COMPETITORS.
Costs of prosecuting and defending patent infringement claims could hurt our
business. We currently own a number of patents related to our products, and have
applied for additional patents. We are not certain whether any new patents will
be granted in the future. Even if we receive additional patents, they may not
provide us with protection from competitors. Our failure to obtain patent
protection, or illegal use by others of any patents we have or may obtain could
adversely affect our business, financial condition and operating results. In
addition, the laws of certain foreign countries do not protect proprietary
rights to the same extent as the laws of the United States. Claims for damages
resulting from any such infringement may be asserted or prosecuted against us.
The validity of any patents we have or obtain could also be challenged. Any such
claims could be time consuming and costly to defend, diverting management's
attention and our resources.
OUR SALES CYCLE IS LONG, AND OUR STOCK PRICE COULD DECLINE IF SALES ARE DELAYED
OR CANCELLED.
Quarterly fluctuations in our operating performance are exacerbated by the
length of time between our first contact with a business customer and the first
revenue from sales of services to that customer or end users. Because our
services represent a significant investment for our business customers, we spend
a substantial amount of time educating them regarding the use and benefits of
our services and they, in turn, spend a substantial amount of time performing
internal reviews and obtaining capital expenditure approvals before purchasing
our services. As much as a year may elapse between the time we approach a
business customer and the time we begin to deliver services to a customer or end
user. Any delay in sales of our services could cause our quarterly operating
results to vary significantly from projected results, which could cause our
stock price to decline. In addition, we may spend a significant amount of time
and money on a potential customer that ultimately does not purchase our
services.
OUR SOFTWARE MAY CONTAIN DEFECTS OR ERRORS, AND OUR SALES COULD GO DOWN IF THIS
INJURES OUR REPUTATION OR DELAYS SHIPMENTS OR OUR SOFTWARE.
Our software products and platforms are complex and must meet the stringent
technical requirements of our customers. We must develop our services quickly to
keep pace with the rapidly changing software and telecommunications markets.
Software as complex as ours is likely to contain undetected errors or defects,
especially when first introduced or when new versions are released. Our software
may not be free from errors or defects after delivery to customers has begun,
which could result in the rejection of our software or services, damage to our
reputation, lost revenue, diverted development resources and increased service
and warranty costs.
WE MAY BE SUBJECT TO LIABILITY FOR TRANSMITTING INFORMATION, AND OUR INSURANCE
COVERAGE MAY BE INADEQUATE TO PROTECT US FROM THIS LIABILITY.
We may be subject to claims relating to information transmitted over systems we
develop or operate. These claims could take the form of lawsuits for defamation,
negligence, copyright or trademark infringement or other actions based on the
nature and content of the materials. Although we carry general liability
insurance, our insurance may not cover potential claims of this type or may not
be adequate to cover all costs incurred in defense of potential claims or to
indemnify us for all liability that may be imposed.
11
DISRUPTION OF OUR SERVICES DUE TO ACCIDENTAL OR INTENTIONAL SECURITY BREACHES
MAY HARM OUR REPUTATION CAUSING A LOSS OF SALES AND COULD INCREASE OUR EXPENSES.
A significant barrier to the growth of wireless data services or transactions on
the Internet or by other electronic means has been the need for secure
transmission of confidential information. Our systems could be disrupted by
unauthorized access, computer viruses and other accidental or intentional
actions. We may incur significant costs to protect against the threat of
security breaches or to alleviate problems caused by such breaches. If a
third-party were able to misappropriate our users' personal or proprietary
information or credit card information, we could be subject to claims,
litigation or other potential liabilities that could materially adversely impact
our revenue and may result in the loss of customers.
ANY TYPE OF SYSTEMS FAILURE COULD REDUCE SALES, OR INCREASE COSTS OR RESULT IN
CLAIMS OF LIABILITY.
Our existing wireless data services are dependent on real-time, continuous feeds
from outside third parties. The ability of our subscribers to obtain data or
make wireless transactions through our service requires timely and uninterrupted
connections with our wireless network carriers. Any significant disruption in
the feeds or wireless carriers could result in delays in our subscribers'
ability to receive information or execute wireless transactions. There can be no
assurance that our systems will operate appropriately if we experience a
hardware or software failure or if there is an earthquake, fire or other natural
disaster, a power or telecommunications failure, insurrection or an act of war.
A failure in our systems could cause delays in transmitting data, and as a
result we may lose customers or face litigation that could involve material
costs and distract management from operating our business.
AN INTERRUPTION IN THE SUPPLY OF PRODUCTS AND SERVICES THAT WE OBTAIN FROM THIRD
PARTIES COULD CAUSE A DECLINE IN SALES OF OUR SERVICES.
In designing, developing and supporting our wireless data services, we rely on
wireless carriers, wireless handheld device manufacturers, content providers and
software providers. These suppliers may experience difficulty in supplying us
products or services sufficient to meet our needs or they may terminate or fail
to renew contracts for supplying us these products or services on terms we find
acceptable. Any significant interruption in the supply of any of these products
or services could cause a decline in sales of our services unless and until we
are able to replace the functionality provided by these products and services.
We also depend on third parties to deliver and support reliable products,
enhance their current products, develop new products on a timely and
cost-effective basis and respond to emerging industry standards and other
technological changes. In addition, we rely on the ability of our content
providers to continue to provide us with uninterrupted access to the news and
financial information we provide to our customers. The failure of third parties
to meet these criteria, or their refusal or failure to deliver the information
for whatever reason, could materially harm our business.
RISK FACTORS RELATED TO OUR INDUSTRY
THERE IS NO ESTABLISHED MARKET FOR WIRELESS DATA SERVICES AND WE MAY NOT BE ABLE
TO SELL ENOUGH OF OUR SERVICES TO BECOME PROFITABLE.
The markets for wireless data services are still emerging and continued growth
in demand for and acceptance of these services remains uncertain. Current
barriers to market acceptance of these services include cost, reliability,
functionality and ease of use. We cannot be certain that these barriers will be
overcome. Our competitors may develop alternative wireless data communications
systems that gain broader market acceptance than our systems. If the market for
our services does not grow or grows more slowly than we currently anticipate, we
may not be able to attract customers for our services and our revenues would be
adversely affected.
THERE IS NO ASSURANCE THAT WE WILL BE ABLE TO EFFECTIVELY COMPETE AGAINST
CURRENT AND FUTURE COMPETITORS.
There are a number of competitors who are larger and have much greater resources
than we do. Many of our competitors have more experienced people and larger
facilities and budgets than we do. These competitors could use their resources
to conduct greater amounts of research and development and to offer services at
lower prices than we can. These factors may adversely affect our ability to
compete by decreasing the demand for our products and services.
OUR ABILITY TO SELL NEW AND EXISTING SERVICES AT A PROFIT COULD BE IMPAIRED BY
COMPETITORS.
Intense competition could develop in the market for services we offer. We
developed our software using standard industry development tools. Many of our
agreements with wireless carriers, wireless handheld device manufacturers and
data providers are non-exclusive. Our competitors could develop and use the same
products and services in competition with us. With time and capital, it
12
would be possible for competitors to replicate our services. Our potential
competitors could include: wireless network carriers such as Verizon Wireless,
Cingular Interactive, Sprint PCS, Voice Stream, Nextel and AT&T Wireless;
wireless device manufacturers, such as Palm, Handspring, Motorola and RIM;
software developers such as Microsoft Corporation; emerging wireless Internet
service providers, such as Aether Systems, i3Mobile, Go America, Wolf Tech,
Avant Go and 724 Solutions and systems integrators such as IBM. Many of our
potential competitors have significantly greater resources than we do.
Furthermore, competitors may develop a different approach to marketing the
services we provide in which subscribers may not be required to pay for the
information provided by our services. Competition could reduce our market share
or force us to lower prices to unprofitable levels.
CONSOLIDATION IN OUR INDUSTRY COULD LEAD TO INCREASED COMPETITION AND LOSS OF
CUSTOMERS.
The Internet and wireless industries have experienced substantial consolidation.
We expect this consolidation to continue. These acquisitions could adversely
affect our business and results of operations in a number of ways, including the
following:
o our customers could acquire or be acquired by one of our competitors and
terminate their relationship with us;
o our customers could merge with other customers, which could reduce the size of
our customer base;
o current and potential competitors could improve their competitive positions
through strategic acquisitions; and
o companies from whom we acquire content could acquire or be acquired by one of
our competitors and stop licensing content to us.
THE MARKET FOR OUR SERVICES IS NEW AND HIGHLY UNCERTAIN.
The market for wireless data services is still emerging and continued growth in
demand for and acceptance of these services remains uncertain. Current barriers
to market acceptance of these services include cost, reliability, functionality
and ease of use. We cannot be certain that these barriers will be overcome. If
the market for our services does not grow or grows slower than we currently
anticipate, our business, financial condition and operating results could be
adversely affected.
NEW LAWS AND REGULATIONS THAT IMPACT OUR INDUSTRY COULD ADVERSELY AFFECT OUR
BUSINESS.
We are not currently subject to direct regulation by the Federal Communications
Commission or any other governmental agency, other than regulations applicable
to businesses in general. However, in the future, we may become subject to
regulation by the FCC or another regulatory agency. In addition, the wireless
carriers who supply us airtime are subject to regulation by the FCC and
regulations that affect them could adversely affect our business, by, for
example, increasing our costs or reducing our ability to continue selling and
supporting our services. Our business could suffer depending on the extent to
which our activities or those of our customers or suppliers are regulated.
WE MAY FACE INTERRUPTION OF PRODUCTION AND SERVICES DUE TO INCREASED SECURITY
MEASURES IN RESPONSE TO TERRORISM.
Our business depends on the free flow of products and services through the
channels of commerce. Recently, in response to terrorists' activities and
threats aimed at the United States, transportation, mail, financial and other
services have been slowed or stopped altogether. Further delays or stoppages in
transportation, mail, financial or other services could have material adverse
effect on our business, results of operations and financial condition.
Furthermore, we may experience an increase in operating costs, such as costs for
transportation, insurance and security as a result of the activities and
potential activities. We may also experience delays in receiving payments from
payers that have been affected by the terrorist activities and potential
activities. The U.S. economy in general is being adversely affected by the
terrorist activities and potential activities and any economic downturn could
adversely impact our results of operations, impair our ability to raise capital
or otherwise adversely affect our ability to grow our business.
RISKS RELATED TO OUR STOCK PRICE
OUR STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE VOLATILE.
The trading price of our common stock has historically been highly volatile.
Since we began trading on the American Stock Exchange, our stock price has
ranged from $0.10 to $42.00 (as adjusted for stock splits). We expect that the
market price of our common stock will continue to fluctuate as a result of
variations in our quarterly operating results and other factors beyond our
control. These fluctuations may be exaggerated if the trading volume of our
common stock is low. In addition, due to the technology-intensive and emerging
nature of our business, the market price of our common stock may rise and fall
in response to a variety of factors, including:
- - announcements of technological or competitive developments;
13
- - acquisitions or strategic alliances by us or our competitors;
- - the gain or loss of a significant customer or order;
- - changes in estimates of our financial performance or changes in
recommendations by securities analysts regarding us or our industry; or
- - general market or economic conditions.
This risk may be heightened because our industry is new and evolving,
characterized by rapid technological change and susceptible to the introduction
of new competing technologies or competitors.
In addition, the market for internet, wireless and technology companies in
particular have experienced extreme price and volume fluctuations. These price
and volume fluctuations often have been unrelated to the operating performance
of the affected companies. These broad market and industry factors and general
economic conditions may materially and adversely affect our stock price.
WE DO NOT PLAN TO PAY ANY DIVIDENDS.
Our shares should not be purchased by investors who need income from their
holdings. We intend to retain any future earnings to fund the operation and
expansion of our business. We do not anticipate paying cash dividends on our
shares in the future. As a result, our common stock is not a good investment for
people who need income from their holdings.
FUTURE SALES OF COMMON SHARES BY OUR EXISTING SHAREHOLDERS COULD CAUSE OUR SHARE
PRICE TO FALL.
The volume of trading in our common shares on the American Stock Exchange has
not been substantial. As a result, even small dispositions of our common shares
in the public market could cause the market price of the common shares to fall.
The perception among investors that these sales will occur could also produce
this effect.
We have granted options to purchase our common shares in accordance with our
1996 Stock Option Plan. The exercise of options and the subsequent sale of
shares could adversely affect the market price of our common shares. In 2001 we
registered approximately 1,500,000 shares of common stock subject to resale by
certain of our security holders, and we have contractual obligations that will
potentially require us to register an additional 1,000,000 shares. We are unable
to predict the effect that sales of these shares may have on the then prevailing
market price of our shares. It is likely that market sales of large amounts of
our shares (or the potential for those sales even if they do not actually occur)
will have the effect of depressing the market price of our shares.
FORWARD-LOOKING STATEMENTS
This report, including the sections entitled "Description of Business", "Recent
Acquisitions" and "Risk Factors," contains forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934. Any statements in this report regarding Semotus' outlook
for its business and their respective markets, such as projections of future
performance, statements of management's plans and objectives, forecasts of
market trends and other matters, are forward-looking statements. These
statements relate to future events or our future financial and operating
performance and involve known and unknown risks, uncertainties and other factors
that may cause our or our industry's actual results, levels of activity,
performance or achievements to be materially different from that expressed or
implied by these forward-looking statements. These risks and other factors
include, among other things, those listed under "Risk Factors" and elsewhere in
this prospectus. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential," "continue," "our future
success depends," "seek to continue" or the negative of these terms or other
comparable terminology. These statements are only predictions. Actual events or
results may differ materially. In evaluating these statements, you should
specifically consider various factors, including the risks outlined under "Risk
Factors." These factors may cause our actual results to differ materially from
any forward-looking statement.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of these statements. We
do not intend to update any of the forward-looking statements after the date of
this prospectus to conform these statements to actual results except as required
by law.
14
ITEM 2. PROPERTIES.
Our corporate headquarters are located in Los Gatos, California. The accounting
and legal, as well as a portion of our marketing, sales, and customer support
departments are housed at this location. The headquarters facility is
approximately 2,000 square feet, which is under a lease that expires on
September 20, 2004, with an option to terminate one year earlier without
penalty.
Some of Semotus' subsidiaries have facilities in various locations around the
country. Semotus Systems Corp., which houses the Company's engineering and
Research and Development group, is located in Vancouver, British Columbia, where
it occupies a facility of approximately 2,437 square feet. This lease expires on
June 30, 2007. Application Design Associates has offices located in Englewood,
Colorado, of approximately 3,191 square feet under a three-year lease effective
February 1, 2003. As of May 6, 2003, this lease is no longer an obligation of
Semotus because of the sale of ADA (See Note 26, "Strategic Investment in ADA".)
Five Star's lease was cancelled without penalty on June 30, 2002, at the time of
the closing of the Five Star operations.
We believe that the existing facilities will be sufficient to meet our current
needs. Should we need additional space to accommodate increased activities, we
believe we can secure additional space at comparable cost.
ITEM 3. LEGAL PROCEEDINGS.
Wizshop.com, Inc., one of our wholly-owned subsidiaries, filed a lawsuit against
Earthlink Network, Inc. and Earthlink Operations, Inc. (collectively
"Earthlink") on April 15, 2002 in the California Superior Court. This suit
alleges eight causes of action against Earthlink, including breach of written
agreement, promissory fraud, fraudulent concealment, breach of fiduciary duty,
constructive fraud, unfair business practices, accounting and constructive
trust. The suit arises out of Earthlink's breach of the written agreement with
Wizshop, and Earthlink's apparent acts of fraud in connection with Earthlink's
failure and refusal to accurately account for and pay to Wizshop revenues to
which Wizshop is entitled to under the agreement. We are seeking monetary
damages for the above matter. On May 19, 2003, the parties reached a settlement
and signed a settlement and mutual general release agreement, in which Earthlink
agreed to pay to WizShop a total sum of $210,000.
Semotus and WizShop were dismissed with prejudice on March 7, 2003 from a class
action lawsuit brought by the California Teachers' Retirement System in November
of 2002.
We are also a party to other legal proceedings in the normal course of business.
Based on evaluation of these matters and discussions with counsel, we believe
that any potential liabilities arising from these matters will not have a
material adverse effect on our consolidated results of operations or financial
position.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to the Company's stockholders for consideration during
the fiscal quarter ended March 31, 2003.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) MARKET INFORMATION. Our common stock first began trading on the OTC Bulletin
Board on May 9, 1997. On December 29, 1999, trading in our common stock moved to
the American Stock Exchange ("AMEX"), under the symbol "DLK". On August 14, 2000
trading in our common stock moved to the Nasdaq National Market ("Nasdaq"),
under the symbol "XLNK". On December 18, 2000, trading in our common stock moved
back to the AMEX under the symbol "DLK".
A 2 for 1 forward stock split became effective on April 27, 2000. Share prices
have been adjusted to reflect this split.
The following table sets forth the high and low closing sales prices of our
common stock as reported by the AMEX for the periods indicated:
------------------------------------------- -------------- --------------
HIGH LOW
------------------------------------------- -------------- --------------
FISCAL YEAR ENDED MARCH 31, 2002
------------------------------------------- -------------- --------------
Quarter ended June 30, 2001 $ 3.15 $ 1.46
------------------------------------------- -------------- --------------
Quarter ended September 30, 2001 $ 1.75 $ 0.66
------------------------------------------- -------------- --------------
Quarter ended December 31, 2001 $ 1.05 $ 0.53
------------------------------------------- -------------- --------------
Quarter ended March 31, 2002 $ 0.94 $ 0.60
------------------------------------------- -------------- --------------
FISCAL YEAR ENDED MARCH 31, 2003
------------------------------------------- -------------- --------------
Quarter ended June 30, 2002 $ 0.70 $ 0.25
------------------------------------------- -------------- --------------
15
------------------------------------------- -------------- --------------
Quarter ended September 30, 2002 $ 0.39 $ 0.14
------------------------------------------- -------------- --------------
Quarter ended December 31, 2002 $ 0.27 $ 0.10
------------------------------------------- -------------- --------------
Quarter ended March 31, 2003 $ 0.20 $ 0.11
------------------------------------------- -------------- --------------
(b) HOLDERS. As of March 31, 2003 we had approximately 450 shareholders of
record. We believe that in excess of 15,000 beneficial owners hold shares of the
Company's common stock in depository or nominee form.
(c) DIVIDENDS. We have never declared or paid any cash dividends on our common
stock. We currently intend to retain earnings, if any, to support the
development and growth of our business and we do not anticipate paying any cash
dividends in the foreseeable future.
(d) SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS. The
information required by this Item will be included in the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held in September 2003
under the caption "Executive Compensation - Summary Information Concerning Stock
Option Plans," which will be filed with the Securities and Exchange Commission
no later than 120 days after the close of the fiscal year ended March 31, 2003,
and is incorporation by reference.
RECENT SALES OF UNREGISTERED SECURITIES. During the Quarter ended March 31, 2003
the Company issued securities which were not registered under the Securities Act
of 1933, as amended as follows: On January 24, 2003, the Company issued a total
of 1,153,846 shares of its common stock to Brown Simpson Partners, I Ltd. due
from Brown Simpson's exercise of 1,153,846 warrants at $0.01 per share for a
total of $11,538.46. With respect to these transactions, the Company relied on
Section 4(2) of the Securities Act of 1933, as amended. The investors were given
complete information concerning the Company. The appropriate restrictive legend
was placed on the certificates and stop transfer instructions were issued to the
transfer agent.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations," our consolidated financial statements and notes thereto and other
financial information included elsewhere in this report. The selected
consolidated statements of operations data for the years ended March 31, 1999,
2000, 2001, 2002 and 2003 are derived from our audited consolidated financial
statements.
YEAR ENDED MARCH 31,
--------------------------------------------------------------------------------
2003 2002 2001 2000* 1999*
------------ ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Wireless services $ 1,293,801 $ 1,305,347 $ 1,731,948 $ 1,459,920 $ 2,128,438
Enterprise and commerce sales 1,005,060 1,114,481 -- -- --
Professional and related services 45,390 111,590 178,246 -- --
------------ ------------ ------------ ------------ ------------
Total revenue 2,344,251 2,531,418 1,910,194 1,459,920 2,128,438
Cost of Sales:
Wireless services 347,312 511,837 985,305 805,099 822,636
Enterprise and commerce sales 576,959 654,885 -- -- --
Professional and related services 4,972 28,556 49,298 -- --
------------ ------------ ------------ ------------ ------------
Total cost of sales 929,243 1,195,278 1,034,603 805,099 822,636
Gross Profit 1,415,008 1,336,140 875,591 654,821 1,305,802
Operating expenses from continuing operations:
Research and development 719,965 1,010,720 1,187,348 600,957 798,549
Sales and marketing 1,027,366 1,849,582 4,098,228 1,608,056 2,937,140
General and administrative 2,238,825 3,203,131 4,218,224 3,428,314 2,816,655
Impairment of goodwill -- 3,617,283 -- -- --
Impairment of intangible assets -- 3,420,000 -- -- --
16
Depreciation and amortization 1,313,596 3,080,063 1,786,514 -- 205,305
Stock, option and warrant expense 52,455 496,181 601,932 -- --
Operating loss from continuing operations (3,937,199) (15,340,820) (11,016,655) (4,982,507) (5,451,847)
Net loss from continuing operations (2,761,842) (14,781,925) (9,913,215) (4,246,949) (4,430,164)
Net loss from discontinued operations (799,090) (3,662,553) (1,380,166) -- --
Gain from disposal of discontinued
operations 128,582 -- -- -- --
Net loss $ (3,432,350) $(18,444,478) $(11,293,381) $ (4,246,949) $ (4,430,164)
Net loss per common share from
continuing operations $ (0.15) $ (0.87) $ (0.65) $ (0.59) $ (1.06)
Net loss per common share from
discontinued operations $ (0.04) $ (0.22) $ (0.09) -- --
Net loss per common share $ (0.19) $ (1.09) $ (0.74) $ (0.59) $ (1.06)
Weighted average shares 18,039,262 16,975,660 15,199,895 7,213,715 4,187,374
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents (including
restricted cash) $ 1,976,062 $ 4,751,094 7,330,749 $ 15,673,264 $ 3,169,443
Working capital 1,464,645 2,064,396 7,479,156 15,753,980 1,664,133
Total assets 4,648,556 10,337,063 21,769,961 16,597,406 4,057,067
Long-term liabilities 336,405 821,475 898,617 1,362,590 1,778,049
Preferred shareholders' equity -- 5,682,456 5,682,456 9,315,501 --
Common shareholders' equity 3,309,727 294,481 13,182,551 5,804,468 2,427,999
* Fiscal years 2000 and 1999 selected financial data is presented in this table
as originally filed by Semotus with the SEC in the Form 10K. The data are not
restated to take into consideration the acquisition of Five Star on December 28,
2000 under the pooling method of accounting, which, because of the
discontinuance of the operations of Five Star, would have appeared only in the
net loss or gain from discontinued operations.
ITEM 7. 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.
OVERVIEW
At the end of the fiscal year 2002 and continuing through fiscal year 2003,
Semotus determined that the economy would continue in a weak recovery and that
the market for technology products would stay anemic. Accordingly, the Company
has continued to centralize and consolidate its organization and its operations.
The headcount has been reduced 50% since March 31, 2002 and as a result,
engineering, sales and marketing and administrative costs have been reduced and
centralized. The overall Semotus organization has eliminated redundant positions
and functions while improving the sales effort through utilizing existing
customer relationships to shorten the sales cycle.
Semotus has organized its operations around two core lines of businesses, while
maintaining but de-emphasizing its other operations: i) financial services with
the Global Market Pro and Equity Market Pro products and services and ii)
workforce automation with the HiplinkXS family of products and services. These
products maintain high gross and operating margins and form the core of the
enterprise software marketing strategy with wireless and mobile features
available in the software.
Logistic systems, comprised largely of ADA's products and services, has been
sold as of May 6, 2003 and is presented in discontinued operations. This is due
to Global Beverage Group (GBG), a Canadian-based direct store delivery
consortium and a 49% shareholder in ADA, exercising its option to purchase the
remaining 51% of ADA from Semotus. In January 2002, GBG completed a strategic
investment in ADA and became a 49% shareholder in ADA (see "Significant Events"
and see Note 26 to the Financial Statements, "Strategic Investment in ADA"). ADA
develops and licenses proprietary software that gives enterprises a total
solution for automation
17
of customer call centers, dispatching, equipment deployment, servicing and
invoicing while interfacing with existing corporate business functions and ERP
solutions.
Certain professional services have been de-emphasized. In this fiscal year,
Simkin's Kinetidex 2.0 product was sold to the joint developer and exclusive
distributor of the product, Micromedex, Inc. Wireless medical software products
have been slow to penetrate the market and therefore have been eliminated by
Semotus. Other unprofitable professional service contracts at Wares On the Web
have been eliminated and Wares was closed in August 2002.
M-commerce initiatives have been reduced. The e-commerce economy has contracted
and m-commerce is not expected to make a significant contribution in the market
in the near future. Consequently, Semotus has reduced its e-commerce and
m-commerce presence with the closure of the Wares' and Five Star businesses, and
elimination of unprofitable products and services in that segment. At WizShop,
the operations have been largely consolidated into Semotus' other divisions and
subsidiaries. At the end of June, FiveStar's operations were closed as the
market for e-fulfillment is currently unprofitable, and in August, Wares'
operations were closed. (See "Significant Events".)
FACTORS AFFECTING COMPARABILITY
Semotus has transitioned its business from consumer driven wireless products and
services to enterprise-based application software products and services with
emphasis in the mobile and wireless software markets. This transition has mostly
taken place since March 2000. As part of the transition, Semotus acquired six
companies. Subsequently, as the technology economy has declined since January
2001, Semotus has centralized and consolidated its operations and has closed
Five Star and Wares, sold ADA, and consolidated Simkin and WizShop.
STRATEGIC REPOSITIONING
In FY 2000, the Company announced a strategic repositioning as an enterprise
application software company emphasizing mobile and wireless solutions that
deliver end-to-end wireless data solutions to enterprises and custom data
applications to their customers utilizing its patented Xpresslink(TM)
application server. This repositioning involved major infrastructure changes,
which continued throughout FY 2001.
Semotus is concentrating on providing consulting and engineering services and
turnkey applications for enterprise application software. Further, with its
recently acquired subsidiaries, Semotus provides software and consulting
products and services and marketing, sales, customer service and logistics
management to existing customers in the targeted vertical markets. Semotus then
provides additional service through wirelessly enabling those customers.
ACQUISITIONS
As part of the Company's previous growth strategy, Semotus acquired six
companies: Cross, Simkin, Wares, Five Star, WizShop and ADA. For specific
information concerning the acquired companies see Note 4 to the Financial
Statements, "Acquisitions". Each provided revenues and a significant customer
base to allow the Company to add to its technology, expand its product offerings
and penetrate targeted vertical markets. However, due to the continued economic
recession and limited capital spending, the Company began and is currently
continuing with its Centralization and Consolidation Plan. As part of that
effort, Semotus decided to reduce its e-commerce operations, to close the
FiveStar business as of the end of June 2002 and to close the Wares' business as
of August 2002. Both Simkin's and WizShop's operations have been consolidated,
and as of May 6, 2003, ADA has been sold.
CENTRALIZATION AND CONSOLIDATION PLAN
In May 2002, the Board of Directors of Semotus determined that the Company
needed to focus its operations on its core enterprise software products. (See
"Centralization and Consolidation Plan"). Given the continued economic recession
and limited capital spending, as well as the reduced access to capital, the
Company must economically utilize its limited resources towards those products
with the best margins and cash flow generation. As part of that effort, Semotus
has decided to reduce its e-commerce operations and to close the FiveStar
business as of the end of June 2002 and to close the Wares' business as of
August 2002. While maintaining a reduced m-commerce and e-commerce presence,
Semotus has de-emphasized the e-fulfillment portion of that business as the
e-fulfillment markets have declined dramatically over the past year and are not
expected to recover significantly in the near future. Additionally, the
remaining 51% of ADA was purchased by GBG on May 6, 2003. Accordingly, Semotus
is redirecting its human and capital resources towards more profitable products
and services.
IMPAIRMENT OF LONG-LIVED ASSETS AND GOODWILL
Semotus' management performs an on-going analysis of the recoverability of its
goodwill and other intangibles and the value of its investments in accordance
with SFAS 142, "Goodwill and Other Intangible Assets". Based on quantitative and
qualitative measures,
18
the Company assesses the need to record impairment losses on long-lived assets
used in operations when impairment indicators are present.
A number of factors indicated that impairment may have arisen in the period
ended March 31, 2002 for certain amounts of goodwill related to the acquisitions
of Simkin, Wares and WizShop. Also, an impairment may have arisen with the
recorded asset value of the Company's Global Market Pro intellectual property.
For Simkin, the analysis was to determine if a further reduction in goodwill was
necessary. Semotus had previously taken a $650,000 net impairment charge in the
quarter ended June 30, 2001. See Note 7, "Sale of Technology and Net Impairment
of Goodwill". For Wares and WizShop, Semotus analyzed the current carrying value
of the goodwill related to both acquisitions.
The result of this analysis has necessitated charges to income of certain
intangible assets which include goodwill, GMP intellectual property and acquired
software. Those charges total approximately $7 million for the fiscal year ended
March 31, 2002. See Notes 6 and 7 to the Financial Statements, "Impairment of
Long-Lived Assets and Goodwill" and "Sale of Technology and Net Impairment of
Goodwill" respectively. No further impairment charges in continuing operations
have been taken in fiscal year ended March 31, 2003, although a net loss from
discontinued operations of $799,090 was taken for the operations of Five Star,
Wares and ADA, mostly comprised of an impairment to goodwill of $635,724 at ADA.
Management has determined that the remaining goodwill of $1,430,141 (net of
accumulated amortization of $727,058) is fairly valued using the impairment
tests as described in SFAS 144 and SFAS 142, which includes discounted cash flow
analysis and comparable company analysis. This remaining amount of goodwill
consists entirely of one of the Company's wireless enterprise application
software product lines, the HipLink family of software products, which is
generating current revenue and cash flow.
CRITICAL ACCOUNTING POLICIES
The critical accounting policies are revenue recognition, cost allocation to
revenue and valuation of intangible assets.
REVENUE RECOGNITION
The Company recognizes revenues in each of its lines of business based upon
contract terms and completion of the sales process.
Wireless services: revenue is generated from wireless services provided to
enterprises and consumers. The revenue is from recurring monthly charges based
on utilization fees, transaction fees, and maintenance and service charges. In
the financial consumer business, the Company also receives a small revenue
stream from pager rentals. Revenues are recognized over the service period and
any revenue that relates to more than one service period is recognized ratably
over those service periods. In the premise-based business, wireless software is
delivered to the customer and revenue is recognized upon shipment, assuming no
significant obligations remain.
Enterprise and commerce sales and service: revenue is generated from online
sales, advertising, sponsorships and hosting fees and other services. Revenue is
recognized upon a completed sale and shipment of a product and for advertising
and sponsorships, revenue is recognized when payment is received. Hosting fees
and other services, such as licensing, are recognized ratably over the service
period.
Professional and related services: revenue is generated from software
engineering and sales and from training and consultation. Revenue is recognized
when the engineering, training or consultation work has been performed in
accordance with the contract.
COST OF REVENUE
The cost of revenue for the wireless services line of business principally
includes costs to obtain data feeds from various exchanges, costs of engineering
development directed to specifically identified products, costs of servicing and
hosting customer products, costs for pager rental or depreciation and pager
airtime for those customers without their own pagers, and certain telephone,
computer and other direct operational costs.
The cost of revenue for the enterprise and commerce sales and service line of
business includes the purchase cost of the products, advertising, costs of
servicing and hosting and shipping. Any engineering costs directly related to
the products offered are also included as a cost of revenue.
The cost of revenue for professional and related services is primarily personnel
costs for engineering, training and consulting.
VALUATION OF LONG-LIVED ASSETS
Semotus' management performs an on-going analysis of the recoverability of its
goodwill and other intangibles and the value of its investments in accordance
with SFAS No. 144 and SFAS 142. Based on quantitative and qualitative measures,
the Company assesses
19
the need to record impairment losses on long-lived assets used in operations
when impairment indicators are present.
In accordance with SFAS No. 144 and SFAS 142, the Company performs an
undiscounted cash flow analysis of its acquisition to determine whether an
impairment existed. When the undiscounted cash flows are less than the carrying
value of the net assets, management determines a range of fair values using a
combination of valuation methodologies. The methodologies include:
- - Discounted cash flow analysis, which is based upon converting expected future
cash flows to present value.
- - Changes in market value since the date of acquisition relative to the
following:
- - The Company's stock price;
- - Comparable companies;
- - Contribution to the Company's market valuation and overall business prospects.
Long-term assets, such as intellectual property rights and goodwill are
amortized on a straight-line basis over the economic life of the assets. The
expected useful life of those assets is currently five years. The Company
adopted SFAS 141 "Business Combinations" and SFAS 142 "Goodwill and Other
Intangible Assets" as of April 1, 2002. Accordingly, Semotus no longer amortizes
intangible assets with an indefinite useful life and will begin assessing
potential future impairments of such intangible assets, but performs impairments
tests on a quarterly basis to analyze the current fair market value of the
intangible assets in relation to the carrying value of the assets.
In prior years, Semotus had capitalized the fair value of contracts acquired in
business combinations as required by APB 16 "Business Combinations". Fair value
was determined by estimating the cost expected to be incurred in order to
perform the obligations under the contract plus adding a reasonable profit
associated with the performance effort. The capitalized cost was amortized into
cost of revenue as revenues were recognized.
For other accounting policies see Note 3 to the Financial Statements, "Summary
of Significant Accounting Policies".
RESULTS OF OPERATIONS
All financial results for the fiscal years ended March 31, 2003, 2002 and 2001
have been restated for the discontinued operations of Five Star, Wares and ADA.
REVENUES
Revenues for the years ended March 31, 2003, 2002 and 2001 were $2,344,251,
$2,531,418 and $1,910,194, respectively.
The 7% decrease in overall revenues for the fiscal year ended March 31, 2003
versus 2002 was due to the continuation of the technology recession as the
enterprise and commerce sales and the professional services segments had
declines with fewer new customers and contracts. Wireless Services generally
maintained its level of revenues.
The overall increase in revenues at March 31, 2002 from March 31, 2001 is due to
the revenues associated with a significant contract at the WizShop subsidiary in
the enterprise and commerce segment, which was started in April 2002. Further,
there was some small growth in the professional services business. This was
offset somewhat by the decline in sales in the wireless segment as corporations
reduced their capital spending at the onset of the recession.
WIRELESS SERVICES
The revenues in this segment were essentially the same in the years ended March
31, 2003 versus 2002. While there has been some variability in the number of
customers, the overall revenue level has not changed as corporate capital
spending has stabilized although it is at a modest level of spending.
The 25% decline in revenues from March 31, 2001 to 2002 is the result of two
opposite trends that have continued from the year ended March 31, 2000. First,
there was an approximate 14% increase in revenues in the enterprise application
software business from the sales of HiplinkXS and GMP and EMP financial
products. This has been more than offset by the 66% decline in the Company's
financial consumer software products. The Company has emphasized its enterprise
products, which continue to sell well in the economic recession.
20
ENTERPRISE AND COMMERCE SALES
The 10% decline in revenues from March 31, 2002 to March 31, 2003 is due to the
smaller amortization into revenue of the WizShop customer loyalty contract. The
contract is completely amortized as of March 31, 2003.
The increase in revenues from March 31, 2001 to March 31, 2002 is due to the
revenues associated with the WizShop customer loyalty contract, which began in
April 2002.
PROFESSIONAL AND RELATED SERVICES
The 59% decrease in revenues from March 31, 2002 to March 31, 2003 is due to the
decline in new professional services contracts, mainly from the Simkin
subsidiary. Wireless medical software products have been slow to penetrate the
market and therefore have been eliminated by Semotus. Other unprofitable
professional service contracts have also been eliminated.
The 37% decrease in revenues from March 31, 2001 to 2002 is largely the result
of the decline in new professional services contracts, mainly from the Simkin
subsidiary.
COST OF REVENUES AND GROSS MARGIN
The overall gross profit margin increased by 7% in March 31, 2003 to 60%, due
largely to the higher margin wireless services segment which is a larger
component of the overall revenue mix and from the improved margins with the
Centralization and Consolidation Plan implementation.
The overall gross profit margin increased by 7% to 53% in the fiscal year ended
March 31, 2002. The wireless services business gross profit margin improved to
60% as more of the enterprise application software was sold versus the consumer
financial software, which has a lower margin. Further , the addition of the
WizShop contract, in the enterprise and commerce segment, with a higher margin
added to the increase in the overall company gross profit margin.
WIRELESS SERVICES
The 73% gross profit margin for the wireless segment for the fiscal year ended
March 31, 2003 is the result of Semotus is selling more of the enterprise
application software, which carries higher gross margins than the consumer
financial software. Further, through the Centralization and Consolidation Plan,
Semotus has become more efficient in all of its business which has improved
gross and operating margins.
The 60% gross profit margin for the wireless segment for the fiscal year ended
March 31, 2002 is the result of the continuing trends in this business. Semotus
is selling more of the enterprise application software, which carries higher
gross margins than the consumer financial software. Further, the consumer
business is continuing to decline as a percentage of wireless revenues, as fewer
individuals maintain their subscriptions.
Cost of revenues in this segment principally includes costs to obtain data feeds
from various exchanges, costs of engineering development directed to
specifically identified products, costs of servicing and hosting customer
products, costs for pager rental or depreciation and pager airtime for those
customers without their own pagers, and certain telephone, computer and other
direct operational costs.
ENTERPRISE AND COMMERCE SALES
The gross profit margin in this segment increased to 43% in the fiscal year
ended March 31, 2003 as the initial costs associated with the WizShop contract
were absorbed in fiscal year 2002; the contract began in April 2001.
The gross profit margin in this segment was 41% in the fiscal year ended March
31, 2002.
PROFESSIONAL AND RELATED SERVICES
The gross profit margin increased to 89% in the fiscal year ended March 31, 2003
due to the elimination of unprofitable contracts and services. As the
professional services business has declined, the remaining contracts have the
highest margins.
The gross profit margin slightly increased by 2% to 74% in the fiscal year ended
March 31, 2002, which is largely due to the mix of contracts serviced in the
year. Many of the unprofitable contracts with lower margins in this segment were
eliminated through the Centralization and Consolidation Plan.
21
OPERATING EXPENSES
Operating expenses decreased in the fiscal year ended March 31, 2003, due to the
continued reduction in overall expenses through the Centralization and
Consolidation Plan. Further, there were not any impairment charges taken in the
fiscal year ended March 31, 2003.
Although operating expenses increased in the fiscal year ended March 31, 2002,
this was substantially all the result of impairment charges to goodwill and
intangible assets and to increased depreciation and amortization expense. Sales
and marketing expenses and general and administrative expenses declined in the
fiscal year as Semotus installed a corporate-wide cost reduction and cash
management program, which has significantly reduced these expenses.
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. For the fiscal year
ended March 31, 2002, there are two categories of impairment charges: goodwill
and intangible assets. For the fiscal year ended March 31, 2003, there were not
any impairment charges from continuing operations. The table below summarizes
the changes in these categories of operating expenses:
YEAR ENDED MARCH 31,
----------------------------------------------------
DESCRIPTION 2003 2002 2001
- ----------- ---- ---- ----
Research and development $ 719,965 $ 1,010,720 $ 1,187,348
Sales and marketing 1,027,366 1,849,582 4,098,228
General and administrative 2,238,825 3,203,131 4,218,224
Impairment of goodwill -- 3,617,283 --
Impairment of intangible assets -- 3,420,000 --
Depreciation and amortization 1,313,596 3,080,063 1,786,514
Stock, option and warrant expense 52,455 496,181 601,932
Totals $ 5,352,207 $ 16,676,960 $ 11,892,246
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. These costs are due principally for the
development of updates to existing products and new products, such as Futures
Market Pro, Equity Market Pro, Global Market Pro, and the new release of the
Company's enterprise application products, HiplinkXS, OpenLink, IQLink, RemLink.
Much of the development work for these products has been completed and
currently, research and development expenses have been reduced as part of the
Centralization and Consolidation Plan.
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 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 Nasdaq and AMEX listings,
investor and public relations, rent, administrative personnel, and other
overhead related costs.
These costs declined during the fiscal year ended March 31, 2002 and March 31,
2003 as personnel and offices were reduced and operating functions were
consolidated. This trend should continue as Semotus continues to implement its
Centralization and Consolidation Plan.
In the prior year, Semotus' management performed an on-going analysis of the
recoverability of its goodwill and other intangibles and the value of its
investments in accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and For Long-Lived Assets to be Disposed Of," and in
accordance with SFAS 142, goodwill and other intangible assets. Based on
quantitative and qualitative measures, the Company assessed the need to record
impairment losses on long-lived assets used in operations when impairment
indicators were present. As a result of Semotus' review, management determined
that the carrying value of goodwill and recorded asset value were not fully
recoverable and an impairment charge of $3,617,283 was taken comprised of an
impairment charge to Simkin's goodwill of $909,272 and $2,708,011 for WizShop's
goodwill in fiscal year 2002. Furthermore, Semotus took an impairment charge of
$3,420,000 for GMP in the quarter ended March 31, 2002. See Notes 6 and 7,
"Impairment of Long-Lived Assets and Goodwill" and "Sale of Technology and Net
Impairment of Goodwill" respectively, to the Financial Statements in this 10K.
There were no impairment charges from continuing operations in the fiscal year
ended March 31, 2003, although an impairment
22
charge of $635,724 was taken in the discontinued operations of ADA. Management
has determined that the remaining goodwill of $1,430,141 (net of accumulated
amortization of $727,058) is fairly valued using the impairment tests as
described in SFAS 144 and SFAS 142, which includes discounted cash flow analysis
and comparable company analysis. This remaining amount of goodwill consists
entirely of one of the Company's wireless enterprise application software
product lines, the HipLink family of software products, which is generating
current revenue and cash flow.
In accordance with SFAS 144, Semotus has presented the operations of FiveStar,
Wares and ADA as discontinued operations. In the net loss from discontinued
operations for 2002 and 2003, impairment charges were taken against the goodwill
of both Wares (fiscal year 2002) and ADA (fiscal year2003). As discussed in Note
6, "Impairment of Long-Lived Assets and Goodwill," Semotus performed the
impairment tests and determined that impairment charges were required. The
impairment expense for the Wares goodwill was $1,156,587 and for the ADA
goodwill was $635,724.
Depreciation and amortization expense includes depreciation of computers and
other related hardware and certain fixtures. Amortization includes goodwill
costs and certain intellectual property costs. The increase in this expense from
March 31, 2001 to 2002 is primarily the result of the amortization of goodwill
from the Company's acquisitions and the amortization associated with the
warrants awarded to Chase in connection with Global Market Pro (GMP). The
decline in this expense through fiscal 2003 is as a result of the impairment
charges in fiscal 2002 which reduced the asset balances to be amortized 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 decline in non-cash charges for
compensation is due mainly to the termination of contracts with service
providers, which called for stock or warrant compensation, as well as the
decline in the stock and option grants to service providers, in the fiscal years
ended March 31, 2003 and 2002.
The common stock issued was valued at the fair market value of stock issued, 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 APB No. 25, that
requires the Company to record compensation expense for changes in the fair
value of the Company's common stock. While no compensation expense was required
to be recognized in FY 2003, FY2002 or FY 2001, expense will be recognized in
the future if the stock price increases above the exercise price of the options.
NON-OPERATING INCOME AND EXPENSES
Non-operating income and expenses are primarily made up of interest income from
invested cash, interest expense from a note payable and retired bank lines of
credit, 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. The following tables reflect the changes in other
income (expense).
YEAR ENDED MARCH 31,
------------------------------------------------
DESCRIPTION 2003 2002 2001
- ----------- ---- ---- ----
Net interest income $ 52,301 $ 269,210 $ 671,915
Owners fee sales of technology (1,176,750) (1,569,000) (1,569,000)
Interest on note from sales of technology 1,176,750 1,569,000 1,569,000
Amortization of technology advances 206,723 306,908 371,052
Gain from cancellation of sales of 628,927 -- --
technology contracts
Miscellaneous income (expenses) 287,406 (17,223) 60,473
------------ ------------ ------------
$ 1,175,357 $ 558,895 $ 1,103,440
============ ============ ============
Non-operating income, net of expenses, increased in the fiscal year ended March
31, 2003 versus 2002, due to the cancellation of the technology sales contracts,
of which the remaining deferred balances were recognized as income. This was
offset somewhat due to less cash available for investment during the year
resulting from the operating losses and the amortization of technology advances.
decreased somewhat due to the application of the effective interest method of
amortization on the b