-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PT2kvymfwdIz6zkoPYdwxQLJMzdOmKNspFXNNKGteLqih6IuR6OBHxzr4T43zF7z XsYdWhz2Odc3xZuaaBZA7Q== 0001072613-05-001420.txt : 20050613 0001072613-05-001420.hdr.sgml : 20050613 20050613124529 ACCESSION NUMBER: 0001072613-05-001420 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20050331 FILED AS OF DATE: 20050613 DATE AS OF CHANGE: 20050613 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SEMOTUS SOLUTIONS INC CENTRAL INDEX KEY: 0000832370 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 954599440 STATE OF INCORPORATION: NV FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-15569 FILM NUMBER: 05891770 BUSINESS ADDRESS: STREET 1: 16400 LARK AVE STREET 2: SUITE 230 CITY: LOS GATOS STATE: CA ZIP: 95032 BUSINESS PHONE: 4083587100 MAIL ADDRESS: STREET 1: 16400 LARK AVE STREET 2: SUITE 230 CITY: LOS GATOS STATE: CA ZIP: 95032 FORMER COMPANY: FORMER CONFORMED NAME: DATALINK NET INC DATE OF NAME CHANGE: 19990707 FORMER COMPANY: FORMER CONFORMED NAME: DATALINK SYSTEMS CORP /CA/ DATE OF NAME CHANGE: 19960723 FORMER COMPANY: FORMER CONFORMED NAME: LORD ABBOTT INC DATE OF NAME CHANGE: 19920703 10KSB 1 form10-ksb_13603.txt FORM 10-KSB FOR YEAR ENDED MARCH 31, 2005 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: MARCH 31, 2005 COMMISSION FILE NUMBER: 1-15569 SEMOTUS SOLUTIONS, INC. - -------------------------------------------------------------------------------- (Name of small business issuer in its charter) Nevada 36-3574355 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 16400 LARK AVE., SUITE 230, LOS GATOS, CA 95032 - -------------------------------------------------------------------------------- (Address of principal executive offices, including zip code) Issuer's telephone number: (408) 358-7100 Securities registered under Section 12(b) of the Exchange Act: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- COMMON STOCK, $0.01 PAR VALUE AMERICAN STOCK EXCHANGE Securities Registered Pursuant to Section 12(g) of the Act: NONE Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 [_]. Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [_] Issuer's revenues for its most recent fiscal year were $1,806,295. The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of May 12, 2005 was $9,506,458. As of June 3, 2005, 24,603,048 shares of the issuer's Common stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE The Proxy Statement for the 2005 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 of the Form 10-KSB. REDUCED DISCLOSURE FORMAT The registrant meets the conditions set forth in General Instruction G(1)(a) and (b) of Form 10-KSB and is therefore filing this Form with the reduced disclosure format. ================================================================================ SEMOTUS SOLUTIONS, INC. ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED MARCH 31, 2005 INDEX PAGE ---- PART I ITEM 1 Description of Business........................................... 3 ITEM 2 Description of Property........................................... 11 ITEM 3 Legal Proceedings................................................. 12 ITEM 4 Submission of Matters to a Vote of Security Holders............... 12 PART II ITEM 5 Market for Common Equity and Related Stockholder Matters.......... 12 ITEM 6 Management's Discussion and Analysis or Plan of Operation......... 13 ITEM 7 Financial Statements.............................................. 17 ITEM 8 Changes In and Disagreements With Accountants on Accounting and Financial Disclosure............................... 17 ITEM 8A Controls and Procedures........................................... 17 ITEM 8B Other Information................................................. 17 PART III ITEM 9 Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act........ 17 ITEM 10 Executive Compensation............................................ 17 ITEM 11 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters........................ 17 ITEM 12 Certain Relationships and Related Transactions.................... 18 ITEM 13 Exhibits.......................................................... 18 ITEM 14 Principal Accountant Fees and Services............................ 19 SIGNATURES................................................................. 39 CERTIFICATIONS............................................................. 42 THIS ANNUAL REPORT ON FORM 10-KSB 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. ("WE", "OUR", "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 OR PLAN OF OPERATION. SEMOTUS UNDERTAKES NO OBLIGATION TO UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE. 2 PART 1 ITEM 1. DESCRIPTION OF BUSINESS. OVERVIEW AND FORMATION OF THE COMPANY Semotus(R) Solutions, Inc. ("We" or "Our"), is a leading provider of software for wireless enterprise applications. Our software connects employees wirelessly to critical business systems, information and processes. We help mobile employees make better and faster decisions, increase customer satisfaction, and improve efficiencies in their business processes for shorter sales and service cycles. Our wireless software products and services include the Global Market Pro, Equity Market Pro and Futures Market Pro software and services, and the HipLinkXS family of software and services. Our software provides mobility and convenience, increases efficiency, and improves profitability. We were formed under the laws of the State of Nevada on June 18, 1996. On June 27, 1996, we 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, we also acquired a Canadian corporation, DSC Datalink Systems Corporation, incorporated in Vancouver, British Columbia, now named Semotus Systems Corp. We currently have two wholly owned subsidiaries: Semotus Systems Corporation (Canadian subsidiary) and Expand Beyond Corporation ("Expand Beyond"). The other following subsidiaries have been closed or sold or are in discontinued operations: Wares on the Web, Inc., Five Star Advantage, Inc., WizShop.com, Inc. and Application Design Associates, Inc. Two other subsidiaries, Cross Communications, Inc. and Simkin, Inc. were merged with and into Semotus. All significant intercompany transactions and balances have been eliminated in consolidation. Operations of the Canadian subsidiary consist mainly of research and development and engineering on behalf of Semotus. Operations of Expand Beyond consist mainly of sales of software products and professional services and support of existing software applications. Expand Beyond's products and services further enhance HipLinkXS's capabilities, and will therefore be added to our HipLinkXS software products. 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 or 10-KSB, Quarterly Reports on Form 10-Q or 10-QSB, 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-KSB. SIGNIFICANT EVENTS On March 28, 2005 we completed an acquisition of Expand Beyond Corporation. Semotus Solutions, Inc. acquired 100% of the issued and outstanding capital stock of Expand Beyond Corporation for 1,910,961 shares of Semotus Solutions' common stock on March 28, 2005 pursuant to a Merger Agreement entered into on March 24, 2005. The shareholders of XB have a right to contingent purchase consideration based upon operating performance of Expand Beyond for which a maximum total of 2,089,039 additional shares of Semotus common stock may be issued at the first and/or second annual anniversary of the close of the acquisition should certain revenue targets be met. In connection with the acquisition, Semotus paid a finder's fee to Bathgate Capital Partners, LLC of $45,786, of which $10,000 was paid in cash and the balance was paid by the issuance of 42,944 shares of common stock. Bathgate Capital Partners, LLC was retained by Semotus on May 27, 2004 as a financial advisor to assist Semotus in seeking and evaluating potential business combinations, and was granted warrants to purchase up to 45,000 shares of Semotus common stock immediately exercisable at an exercise price of $0.34 per share, the closing price on May 27, 2004, with a five year term and containing certain registration rights. Expand Beyond's products and services are synergistic with and enhance HipLinkXS's capabilities, and will therefore be added to our HipLinkXS family of products. BUSINESS OF ISSUER Except for the historical information contained herein, this report contains forward-looking statements that involve risks and uncertainties. Our 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" and "Risk Factors" as well as in the section entitled "Management's Discussion and Analysis or Plan of Operation." THE SEMOTUS STRATEGY Our focus is on growing revenues through increased sales in our existing software applications and services utilized by businesses and their employees to wirelessly connect to critical business systems, information and processes. .We focus our enterprise wireless 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 our formula. While we continue to improve and maintain our market leading technology, we mold our products for market acceptance. Through strong customer relationships and market knowledge, we blend our 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. Our technology can service any enterprise in any market segment. We have chosen to focus in two areas that we believe 3 project the greatest amount of growth potential and the strongest need for mobile and wireless solutions. Those two target markets 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. 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, decreasing their transaction time and giving them a competitive advantage. It is for this reason that Semotus developed Global Market Pro ("GMP") 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 GMP. 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. We address 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. Mobile and wireless software solutions are becoming a critical component of many enterprises today. SERVICES AND PRODUCTS During the fiscal year ended March 31, 2005, we offered our services and products in two target markets within the enterprise application software market: (i) wireless financial services and software, and (ii) wireless messaging and communications software. 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. We create mobile and wireless information products by customizing and delivering actionable and time sensitive information whenever that information is most valuable to the customer. Our 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. We provide two different types of wireless solutions: (i) ASP-based, where we host and manage the information on our servers and (ii) premise-based where we install and engineer the software and information on our customers' servers. Wireless Financial Services and Software Global Market Pro(TM) ("GMP") is a wireless application designed for traders and financial professionals in the global capital, derivative and foreign exchange markets. We developed GMP in cooperation with J.P. Morgan Chase Manhattan Bank's Global Markets Data Division in 1999. This application is being marketed to the trading and professional finance industry, where it is highly adaptable to a variety of wireless platforms. In addition, GMP is capable of advanced customization based on the unique preferences of each individual. GMP 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. We are continuing to expand the product's features and capabilities. Equity Market Pro(TM) ("EMP") is an enterprise application built for the institutional equity trader using the GMP financial platform. We developed EMP with the same customization capability and are deploying EMP using our over-the-air-programming (OTAP) technology. EMP is designed for the secure delivery of real-time financial information and news. EMP features Dow Jones News Service(SM) as its premier news source. Market data for EMP is sourced from Reuters and GovPX. EMP is targeted to the over 400,000 institutional professionals who use real-time 4 equity data at a workstation and is sold to institutions for their employees. All data provided through EMP is completely customizable providing information specific to each trader's needs. Features include 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. EMP 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) ("FMP") is a dynamic wireless financial application that gives financial professionals instant access to real-time futures and equities data. FMP, like EMP and GMP, can be customized to individual information needs. FMP monitors the market for events on any contract or stock, and creates and tracks 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. Legacy Financial Consumer Products. We continue 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. Our current line of financial consumer products is mostly comprised of QuoteXpress(R), CompanyNewsX and CommodityXpress(TM). Wireless Messaging and Communications Software Hiplink(TM)XS Family. As part of our expanding enterprise application technology and product offerings, we 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. With the acquisition of Expand Beyond, and its patented XBanywhere framework, we will be able to develop additional web-based wireless software applications faster than traditional embedded development methods such as J2ME and .NET. The HipLinkXS 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. Expand Beyond Products. Through the acquisition of Expand Beyond Corporation, we acquired a number of additional wireless messaging and communications software applications, including PocketDBA and PocketAdmin. These software solutions provide immediate mobile access and control of business-critical software applications, databases, networks and servers. This solves the vulnerabilities of relying on on-call staff, which may require 30 to 40 minutes to relocate to the home or office, by giving them the tools to respond immediately from the field. A range of products allow for the secure real-time management of Oracle, SQL Server, Teradata, Windows Active Directory, Exchange, servers and more from mobile devices including BlackBerry, Palm, Pocket PC, laptops, smartphones, and desktops. STRATEGIC RELATIONSHIPS We maintain strategic relationships with wireless and technology companies in order to further develop our services and product offerings. Maintaining market-leading technology is a difficult task; however, we believe that we continue to produce new software and engineered products and services that are leading the mobile and wireless market. The key relationships for us are with telecommunications carriers, wireless device manufacturers and content providers. CUSTOMERS We have a very diversified customer list. Although we have many customers utilizing our mobile and wireless services, the broadly diversified base means there is no significant concentration in any industry. We derive revenue from our customers as discussed in Note 3, "Summary of Significant Accounting Policies: Revenue Recognition". Two customers accounted for 19% of our revenues for the fiscal year ended March 31, 2005. One customer accounted for 13% and the second customer accounted for 6%. One of these customers accounted for 7% of our accounts receivable at March 31, 2005. REVENUE AND LONG-LIVED ASSETS Almost all of our revenue is generated in the United States through our Los Gatos, California office, and most of our fixed assets are located in the Los Gatos, California office. VENDORS We maintain strong relationships with all of the major telecommunications carriers, content providers and wireless hardware manufacturers that are applicable to our wireless software application products and services. We are not dependent upon any one carrier, content provider or hardware manufacturer for our business. 5 COMPETITION We are 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 our competitors have far greater financial, technical and marketing resources than we do. The competitive factors important to us are our technology, engineering expertise, customer support and customer relationships. 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. We leverage the quality of our engineering team and customer service team, the depth and breadth of our customer relationships, and our ability to respond quickly to change in order to be competitive and successful. RESEARCH AND DEVELOPMENT We maintain our research and development operations in Vancouver, B.C., Canada. As of March 31, 2005, we employed 6 persons and contracted with 2 independent consultants in research and development and engineering. We find it advantageous to have our 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 $525,930 and $563,602, respectively, in the years ended March 31, 2005 and 2004, respectively. INTELLECTUAL PROPERTY Our success and ability to compete effectively are dependent in part upon our proprietary technology. We rely on a combination of copyright, patent, trademark and trade secret laws, as well as nondisclosure agreements and other contractual restrictions, to establish and protect our proprietary rights. Employees are required to execute 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. To date, we have federally registered certain of our trademarks. "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. In December 2003, we sold the rights to most of our issued patents and patent applications, but we retained a nonexclusive worldwide right to make, use and sell any products covered by these patents that we sold. We retained patent #5875436 "Virtual Transcription System" and a patent application related to our financial data services software. Additionally, we now own 2 patents and 3 patent applications through the acquisition of Expand Beyond Corporation. However, future 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. Our practice is to affix copyright notices on our software and product literature in order to assert copyright protection for these works. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to duplicate aspects of our products or to obtain and use information that we regard as proprietary. Our steps to protect our proprietary technology may not be adequate to prevent misappropriation of such technology, and may not preclude competitors from independently developing products with functionality or features similar to our products. If we fail to protect our proprietary technology, our business, financial condition and results of operations could be harmed significantly. 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, 2005, we had 22 full-time employees and 1 part-time employee, approximately 12 of whom were engaged in sales and marketing, 5 in finance and administration, and 6 in engineering. No employees are covered by a collective bargaining agreement. We believe that we have a good relationship with all of our employees. 6 RISK FACTORS Our business and the results of our operations are affected by a variety of risk factors, including those described below. RISK FACTORS 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, 2005. As of March 31, 2005, we had an accumulated deficit of $65,767,527.. 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 incurred (and may incur in the future) 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 software and messaging and communications software. Economic activity continues to be slow in these markets, and our sales cycle is significantly extended as existing and potential customers continue to reduce their spending commitments, deferring wireless projects and declining 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. 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: o effectively use and integrate new wireless and data technologies; o continue to develop our technical expertise; o enhance our wireless data, engineering and system design services; o develop applications for new wireless networks; and o 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 7 financial, operational and management resources. We may be unable to expand our operations for one or more of the following reasons: o we may not be able to locate or hire at reasonable compensation rates qualified engineers and other employees necessary to expand our capacity; o we may not be able to obtain the hardware necessary to expand our capacity; o we may not be able to expand our customer service, billing and other related support systems; and o 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. 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 reduced our operating expenses, which entails a reduction in operational and management resources. While we believe that our cost reductions were 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 messaging software industries is intense, and finding and retaining 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 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, and Ari Kaplan, President of Expand Beyond Corporation, a wholly owned subsidiary of Semotus. We do not have employment agreements with any other officer or employee. If we lose the services of Mr. LaPine or any other officer or key employee, such as Pamela LaPine, Tali Durant or Charles K. Dargan, we may not be able to manage or operate our business successfully and achieve our business objectives. WE DEPEND ON RECRUITING AND RETAINING KEY MANAGEMENT AND TECHNICAL PERSONNEL, AND WE MAY NOT BE ABLE TO RECRUIT OR RETAIN SUCH EMPLOYEES IF WE DO NOT RECEIVE BOARD AND SHAREHOLDER APPROVAL TO ADOPT A NEW EQUITY INCENTIVE PLAN. One of the components to our compensation and benefits package that we currently offer new and existing employees is stock options under our 1996 Stock Option Plan. This Plan is going to expire in June of 2006, and although we plan to attempt to adopt a new equity incentive plan, we may not receive board and shareholder approval to adopt a new equity incentive plan. We may not be able to recruit or retain key employees if we do not have a new equity incentive plan in place. 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 during the past two fiscal years 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, and we will incur debt service costs. OUR SUCCESS IS DEPENDENT IN PART ON OUR ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY, AND OUR FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY COULD HAVE A SIGNIFICANT ADVERSE IMPACT IN OUR BUSINESS. Our success and ability to compete effectively are dependent in part upon our proprietary technology. We rely on a combination of copyright, patent, trademark and trade secret laws, as well as nondisclosure agreements and other contractual restrictions, to establish 8 and protect our proprietary rights. The measures we undertake may not be adequate to protect our proprietary technology. To date, we have federally registered certain of our trademarks and applied for a patent on our financial data services software. Our practice is to affix copyright notices on our software and product literature in order to assert copyright protection for these works. The lack of federal registration of all of our trademarks, patents and copyrights may have an adverse effect on our intellectual property rights in the future. Additionally, we may be subject to further risks as we enter into transactions in countries where intellectual property laws are unavailable, do not provide adequate protection or are difficult to enforce. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to duplicate aspects of our products or to obtain and use information that we regard as proprietary. Our steps to protect our proprietary technology may not be adequate to prevent misappropriation of such technology, and may not preclude competitors from independently developing products with functionality or features similar to our products. If we fail to protect our proprietary technology, our business, financial condition and results of operations could be harmed significantly. 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 OF 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. DISRUPTION OF OUR SERVICES DUE TO ACCIDENTAL OR INTENTIONAL SECURITY BREACHES MAY HARM OUR REPUTATION CAUSING A LOSS OF SALES AND INCREASED 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 software and 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 software and 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 software and 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 9 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 THE MARKET FOR WIRELESS DATA SOFTWARE APPLICATIONS AND SERVICES IS HIGHLY UNCERTAIN AND WE MAY NOT BE ABLE TO SELL ENOUGH OF OUR SOFTWARE OR SERVICES TO BECOME PROFITABLE. The market for wireless data software and services is still emerging and continued growth in demand for and acceptance of these software applications and 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 software and services does not grow or grows more slowly than we currently anticipate, we may not be able to attract enough customers for our software and services, and our revenues, business, financial condition and operating results 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 SOFTWARE AND SERVICES AT A PROFIT COULD BE IMPAIRED BY COMPETITORS. Intense competition could develop in the market for the software and 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 would be possible for competitors to replicate our services. Our potential competitors could include: wireless network carriers such as Verizon Wireless, Cingular, Sprint PCS, TMobile, Nextel and AT&T Wireless; wireless device manufacturers, such as Palm, Motorola, Good Technology and RIM; software developers such as Microsoft Corporation; and systems integrators such as IBM. Most of our potential competitors have significantly greater resources than we do. Furthermore, competitors may develop a different approach to marketing the software and services we provide in which subscribers may not be required to pay for the information provided by our software and services. Competition could reduce our market share or force us to lower prices to unprofitable levels. 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 ("FCC") 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 a 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 terrorist 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. RISK FACTORS RELATED TO OUR STOCK PRICE SALES OF SUBSTANTIAL AMOUNTS OF OUR COMMON STOCK BY OUR MAJOR STOCKHOLDERS AND OTHERS COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK. Sales of substantial numbers of shares of common stock by our major stockholders in the public market could harm the price of our common stock. As of March 31, 2005, Anthony N. LaPine, our President and Chief Executive Officer and Chairman of the Board, beneficially owned 2,844,000 shares of our common stock. These shares are eligible for resale into the public market within the restrictions imposed by Rule 144 under the Securities Act of 1933. Sales of a significant amount of these shares could adversely affect the market price of our common stock. In addition, as of March 31, 2005, we have granted and have outstanding 3,408,818 options, with 2,569,868 of those immediately exercisable, 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 addition, as part of the acquisition of Expand Beyond Corporation, we agreed to file a registration statement with the Securities and 10 Exchange Commission by no later than July 30, 2005 to qualify the resale of up to 1,910,961 shares of common stock issued to the Expand Beyond shareholders, as well as approximately 100,000 additional shares of common stock issued to various individuals and entities throughout the year. If this registration statement is declared effective by the Securities and Exchange Commission, 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. 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. 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: o announcements of technological or competitive developments; o acquisitions or strategic alliances by us or our competitors; o the gain or loss of a significant customer or order; o changes in estimates of our financial performance or changes in recommendations by securities analysts regarding us or our industry; or o general market or economic conditions. This risk may be heightened because our industry is relatively 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 has 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. FORWARD-LOOKING STATEMENTS This report, including the sections entitled "Description of Business", "Recent Developments" 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 document. 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 document to conform these statements to actual results except as required by law. ITEM 2. DESCRIPTION OF PROPERTY. Our corporate headquarters are located in Los Gatos, California. The accounting and legal departments, as well as a portion of our marketing, sales, and customer support departments, are housed at this location. This facility is approximately 2,000 square feet, and is under a month to month lease with a monthly rental expense of $4,704. Semotus Systems Corp., a Semotus subsidiary which houses our engineering and research and development group, is located in Vancouver, British Columbia, Canada, where it occupies a facility of approximately 2,437 square feet. This lease expires on June 30, 2007, and has a monthly rental expense of $2,843 Canadian dollars. 11 Expand Beyond Corporation, a Semotus subsidiary, is located in Chicago, Illinois, where it occupies a facility of approximately 3,920 square feet, under a lease which expires on November 30, 2005 and has a monthly rental expense of $5,383. 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. We are not a party to any legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to the Company's stockholders for consideration during the fiscal quarter ended March 31, 2005. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) Market Information. Our common stock is traded on the American Stock Exchange ("AMEX") under the symbol "DLK". 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, 2004 ------------------------------------------- ---------- ---------- Quarter ended June 30, 2003 $ 0.68 $ 0.10 ------------------------------------------- ---------- ---------- Quarter ended September 30, 2003 $ 1.39 $ 0.36 ------------------------------------------- ---------- ---------- Quarter ended December 31, 2003 $ 0.94 $ 0.65 ------------------------------------------- ---------- ---------- Quarter ended March 31, 2004 $ 0.94 $ 0.53 ------------------------------------------- ---------- ---------- FISCAL YEAR ENDED MARCH 31, 2005 ------------------------------------------- ---------- ---------- Quarter ended June 30, 2004 $ 0.31 $ 0.28 ------------------------------------------- ---------- ---------- Quarter ended September 30, 2004 $ 0.24 $ 0.23 ------------------------------------------- ---------- ---------- Quarter ended December 31, 2004 $ 0.68 $ 0.60 ------------------------------------------- ---------- ---------- Quarter ended March 31, 2005 $ 0.42 $ 0.39 ----------------------------------------------------------------- (b) Holders. As of March 31, 2005, we had approximately 450 shareholders of record. We believe that in excess of 7,000 beneficial owners hold shares of our 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 our Proxy Statement for the Annual Meeting of Shareholders to be held in September 2005 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, 2005, and is incorporated herein by reference. Recent Sales of Unregistered Securities. During the quarter ended March 31, 2005 we issued securities which were not registered under the Securities Act of 1933, as amended, as follows: In connection with the acquisition of Expand Beyond, we issued 1,910,961 shares of common stock on March 28, 2005 to Expand Beyond's shareholders. 10% of these shares (191,096) are being held in escrow, and may be used by us for indemnification purposes related to the acquisition. We may also issue additional shares over the following two years, pursuant to an earn-out arrangement as defined in the Merger Agreement with Expand Beyond. As part of the employment of Mr. Ari Kaplan as President of Expand Beyond, we issued Mr. Kaplan warrants to purchase up to 400,000 shares of common stock at an exercise price equal to $0.37 per share, which was the closing price on his date of hire, March 28, 2005, vesting over a three year period and having a ten year term. In connection with the acquisition of Expand Beyond, Semotus also issued 42,944 shares of common stock to Bathgate Capital Partners, LLC. In addition, during the quarter ended March 31, 2005, we issued a total of 5,000 shares to various suppliers of services. With respect to these transactions, we relied on Section 4(2) of the Securities Act of 1933, as amended. The investors were sophisticated and were given complete information concerning the Company. The issuances were made without general solicitation or advertising. The appropriate restrictive legend was placed on the certificates and stop transfer instructions were issued to the transfer agent. 12 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. 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 Through fiscal year 2004 to present, we have focused on growing revenues through increased sales in our existing software applications and services utilized by businesses and their employees to wirelessly connect to critical business systems, information and processes. 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. Through the acquisition of Expand Beyond Corporation, we acquired a number of additional enterprise wireless messaging and communications software applications, including PocketDBA and PocketAdmin. Expand Beyond's products and services are synergistic with and enhance HipLinkXS's capabilities, and will therefore be added to our HipLinkXS family of products. Management believes that it has adequate working capital for the next 12 months. CRITICAL ACCOUNTING POLICIES The critical accounting policies are revenue recognition, cost allocation to revenue and valuation of intangible assets. PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of Semotus Solutions, Inc. and our wholly owned subsidiaries: Semotus Systems Corporation (Canadian subsidiary) and Expand Beyond Corporation ("Expand Beyond"). The other following subsidiaries have been closed or sold and are now in discontinued operations: Wares on the Web, Inc. (Wares), Five Star Advantage, Inc. (Five Star), WizShop.com, Inc. (WizShop) and Application Design Associates, Inc. (ADA). Two subsidiaries, Cross Communications, Inc. and Simkin, Inc. were merged with and into Semotus Solutions, Inc. All significant intercompany transactions and balances have been eliminated in consolidation. Operations of the Canadian subsidiary consist mainly of research and development and engineering on behalf of the parent. Expand Beyond generates revenues from the sales of products and services. REVENUE RECOGNITION We recognize revenues based upon contract terms and completion of the sales process. Revenue is generated from one-time software licensing fees, annual maintenance fees and monthly wireless services fees provided to enterprises and consumers. We also receive 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. The revenue for the maintenance fees received through the Hiplink contracts are recognized ratably over the life of the maintenance contract. In the financial services, the monthly wireless services are billed in arrears and are recognized upon invoicing. COST OF REVENUE The cost of revenue 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. VALUATION OF LONG-LIVED ASSETS Our management performs an on-going analysis of the recoverability of our goodwill and other intangibles and the value of our acquired net assets in accordance with SFAS 144 and SFAS 142. Based on quantitative and qualitative measures, we assess the need to record impairment losses on long-lived assets used in operations when impairment indicators are present. In accordance with SFAS 144 and SFAS 142, we perform an undiscounted cash flow analysis of the long-lived assets and acquired net assets to determine whether an impairment exists. 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: o Discounted cash flow analysis, which is based upon converting expected future cash flows to present value. o Changes in market value since the date of acquisition relative to the following: o The Company's stock price; o Comparable companies; o Contribution to the Company's market valuation and overall business prospects. We adopted SFAS 141 "Business Combinations" and SFAS 142 "Goodwill and Other Intangible Assets" as of April 1, 2002. Accordingly, we no longer amortize intangible assets with an indefinite useful life or goodwill, but instead will assess potential future impairments of such intangible assets and goodwill by performing impairments tests on a quarterly basis to analyze the current fair market value of the intangible assets and goodwill in relation to the carrying value of the assets. Management has determined that the goodwill of $1,860,162 (net of accumulated amortization prior to the adoption of SFAS 142, 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 of our wireless enterprise application software product lines, the HipLink family of software products, which is generating current revenue and cash flow, and our recent acquisition of Expand Beyond's software applications. 13 STOCK BASED COMPENSATION: We have adopted the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") and SFAS No. 148, "Accounting for Stock-Based Compensation, Transition and Disclosure." Under these standards, companies are encouraged, but not required, to adopt the fair value method of accounting for employee stock-based compensation. The fair value method is required for all stock-based compensation issued to non-employees, including consultants and advisors. Under the fair value method, compensation cost relating to issuances of stock options, warrants and appreciation rights is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period. Companies are permitted to continue to account for employee stock-based compensation under APB No. 25, "Accounting for Stock Issued to Employees," but are required to disclose pro forma net loss, stock compensation cost and earnings per share as if the fair value method has been adopted. We have elected to continue to account for stock based compensation under APB No. 25. Certain options, which have been repriced, are subject to the variable plan requirements of APB No. 25 and FASB Interpretation No. 44 "Accounting for Certain Transactions Involving Stock Compensation" ("FIN 44"), that requires we record compensation expense for changes in the fair value of our common stock when it exceeds the repriced amount. We have adopted the disclosure only provisions of SFAS 123. Accordingly, no compensation expense has been recognized for employee fixed awards options. 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 year ended March 31, 2004 have also been restated for the discontinued operations of WizShop. REVENUES Revenues for the years ended March 31, 2005 and 2004 were $1,806,295 and $1,338,373, respectively, an increase of 35%, due to an overall recovery in the economy and increased technology capital spending. We have also increased our sales force, which has helped our marketing efforts and enhanced our sales. COST OF REVENUES AND GROSS MARGIN The gross profit margin increased by 4% to 80% for the fiscal year ended March 31, 2005, due to the fact that we are continuing to increase our sales in our enterprise application software and wireless financial software and services, which have a high gross profit margin, and we continue to be more efficient in all of our business operations, which improved gross and operating margins. OPERATING EXPENSES Operating expenses decreased by 38% in the fiscal year ended March 31, 2005 versus 2004, largely due to the reversal of the stock option expense, and also due to a reduction in the general and administrative expenses. We categorize operating expenses into five major categories: research and development, sales and marketing, general and administrative, depreciation and amortization and stock, option and warrant expense. For the fiscal years ended March 31, 2005 and 2004, there were not any impairment charges from continuing operations. The table below summarizes the changes in these categories of operating expenses during the past three fiscal years: - ----------------------------------------------------------------------- YEAR ENDED MARCH 31, - --------------------------------------------------------------------- DESCRIPTION 2005 2004 - ----------- ---- ---- - --------------------------------------------------------------------- Research and development $ 525,930 $ 563,602 - --------------------------------------------------------------------- Sales and marketing 869,328 725,114 - --------------------------------------------------------------------- General and administrative 839,077 963,790 - --------------------------------------------------------------------- Depreciation and amortization 119,812 201,181 - --------------------------------------------------------------------- Stock, option and warrant expense (248,997) 952,473 - --------------------------------------------------------------------- Totals $2,105,150 $3,406,160 - --------------------------------------------------------------------- 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 principally for the development of updates to existing products, such as Futures Market Pro, Equity Market Pro and Global Market Pro, and for releases of new versions of our enterprise application products, HiplinkXS, OpenLink, IQLink and RemLink. These expenses have declined because the major development work for these products has been completed. Sales and marketing expenses consist of costs incurred to develop and implement marketing and sales programs for our product lines. These include costs required to staff the marketing department and develop a sales and marketing strategy, participation in trade shows, media development and advertising, and web site development and maintenance. These costs also include the expenses of hiring sales personnel and maintaining a customer support call center. These costs have increased principally due to an increase in our marketing efforts and hiring of more sales personnel. 14 General and administrative expenses include senior management, accounting, legal and consulting expenses. This category also includes the costs associated with being a publicly traded company, including the costs of being listed on the American Stock Exchange, investor and public relations, rent, administrative personnel, and other overhead related costs. These costs declined as personnel and offices were reduced and operating functions were consolidated. We have also continued to improve our efficiency in operations and have maintained overhead cost controls. 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 decline in this expense is due to the fact that there were few acquisitions of property, and equipment in fiscal year 2005 and that the existing property and equipment is reaching the end of its depreciable life. The non-cash charges for compensation consist mainly of grants of stock, options and warrants for services. Such services include financial, marketing and public relations consulting. The decrease in non-cash charges for compensation in fiscal 2005 is due to the reversal of the stock option expense which was initially expensed under the variable plan requirements of APB 25. 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 us to record compensation expense for changes in the fair value of our common stock. An offset of $334,018 to the compensation expense was required to be recognized in the fiscal year ended March 31, 2005 to reflect the net decrease in stock price over the repriced amount for the twelve months ended March 31, 2005. Increases or decreases in our stock price will continue to be recognized in the future for outstanding vested repriced options if the stock price continues to be above the revised exercise price of the options. NON-OPERATING INCOME AND EXPENSES Non-operating income and expenses are primarily made up of interest income from invested cash and a note receivable, interest expense from a note payable and retired bank lines of credit and miscellaneous gains and losses from sales of non-operating assets. Non-operating income, net of expenses, decreased in the year ended March 31, 2005 versus 2004, due to the fact that miscellaneous income was higher in fiscal year 2004 due to a one time sale of some of our patents and there was no interest income in fiscal year 2005. COMPREHENSIVE LOSS The decrease by 70% in the comprehensive loss for the fiscal year ended March 31, 2005 to ($659,427) or ($0.03) per share from ($2,232,707) or $(0.11) per share for the fiscal year ended March 31, 2004 was due to increased sales, a continued improvement in our overall operating efficiency and reduction in overhead expenses and due to the reversal of the repriced stock option expense. LIQUIDITY AND CAPITAL RESOURCES Our cash flow use at March 31, 2005, was largely due to the cash used in operations offset by the cash received from the acquisition of Expand Beyond Corporation. In the year ended March 31, 2004, cash flow was enhanced by the private placement financing and exercise of stock options. The sources and uses of cash are summarized as follows: - -------------------------------------------------------------------------------- YEAR ENDED MARCH 31, - ------------------------------------------------------ ----------- ------------- 2005 2004 ---- ---- - ------------------------------------------------------ ----------- ------------- Net cash used in operating activities $(676,618) $(1,384,378) - ------------------------------------------------------ ----------- ------------- Net cash provided by (used in) investing activities 399,319 -- - ------------------------------------------------------ ----------- ------------- Net cash provided by (used in) financing activities 11,366 1,112,542 - ------------------------------------------------------ ----------- ------------- Effect of exchange rate changes on cash (15,873) 18,978 - ------------------------------------------------------ ----------- ------------- Net decrease in cash and cash equivalents (281,806) (252,858) - -------------------------------------------------------------------------------- Cash used in operating activities at March 31, 2005 consisted principally of a net loss of $654,053 derived from gross profits of $1,443,132 offset by operating expenses of $2,105,150. Operating activities that contributed cash were a decline of $42,933 in prepaid expenses and an increase in accounts payable of $45,991 and accrued expenses of $20,895. This was offset slightly by the increase in accounts receivable of $21,744. Cash used in operating activities at March 31, 2004 consisted principally of a net loss of $2,251,685 derived mainly from a gross profit of $1,014,525 offset by operating expenses of $3,406,160. Other operating activities that used cash were accounts payable and accrued liabilities in the amounts of $296,978 and $40,345, respectively. During the fiscal year ended March 31, 2005, cash flows from investing activities produced a net increase in cash of $399,319. This resulted from cash acquired in the Expand Beyond acquisition. During the fiscal year ended March 31, 2004, there was no cash used in or provided by investing activities. During the fiscal year ended March 31, 2005, $11,366 in net cash was produced, from the exercise of stock options and warrants. Cash flows from financing activities during the fiscal year ended March 31, 2004 produced a net increase in cash of $1,112,542. This 15 resulted from net proceeds from a private placement of $977,474, and from the proceeds from the exercise of stock options and warrants for $211,583. This was offset slightly by the repayments of notes payable and capital leases by $56,224 and $20,291, respectively. The effect of exchange rate changes in cash has been due to the changes in the Canadian and United States dollar exchange rate. The net effect has not been material. As of March 31, 2005, we had cash and cash equivalents of $1,435,246, a decrease of $281,806 from the prior fiscal year. As of March 31, 2004, we had cash and cash equivalents of $1,717,052, a decrease of $252,858 from the prior year. The decrease in working capital is from the resources used in our operations, as explained above. We have not yet generated sufficient revenues to cover the costs of continued product development and support, sales and marketing efforts and general and administrative expenses. During the fiscal year ended March 31, 2005, we elected to repay our bank line of credit of $50,000. In the fiscal year ended March 31, 2004, we elected to pay off all of our outstanding capital leases. There were no material commitments for capital expenditures at March 31, 2004 and we have no future capital lease payments. Operating lease expenses were $120,969 in fiscal 2005 and will be $71,278 in fiscal year 2006. The following table discloses our contractual commitments for future periods. Long term commitments are comprised solely of operating leases (See Note 16). --------------------------------- YEAR ENDING MARCH 31, --------------------- ----------- 2006 71,278 --------------------- ----------- 2007 29,722 --------------------- ----------- 2008 7,556 --------------------- ----------- 2009 -- --------------------- ----------- $108,557 ======== --------------------------------- At March 31, 2005 and 2004, we had a deferred tax asset of approximately $15,030,000 and $15,032,000, respectively, principally arising from net operating loss carryforwards available to offset future taxable income. As management cannot determine that it is more likely than not that we will realize the benefit of this asset, a 100% valuation allowance has been established. RECENT PRONOUNCEMENTS: In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities". This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS 133, "Accounting for Derivative Instruments and Hedging Activities". The Statement clarifies and creates more consistent reporting of contracts as either derivatives or hybrid financial instruments. The Statement is effective for contracts entered into or modified after June 30, 2003. We historically have not used derivatives or hedging instruments. Currently, we do have a small exposure to the Canadian - U.S. dollar exchange rate, but we have not deemed it necessary to hedge this exposure. In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity and is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective as of the beginning of the first interim period beginning after June 15, 2003. We adopted SFAS No. 150 on June 1, 2003. The adoption of SFAS No. 150 has not had a material impact on our results of operations or financial condition. In December 2004, the FASB issued Statement 123 (revised 2004) which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. This Statement supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. This Statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments. This Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. This Statement requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award--the requisite service period (usually the vesting period). The Company files as a small business issuer and must meet the requirements of this Statement for accounting periods beginning after December 15, 2005. As part of its employee compensation, the Company issues stock options that have been accounted for under APB No. 25 and will need to be accounted for under the fair value method as described in this Statement. This will have a significant impact on the financial statements of the Company. 16 ITEM 7. FINANCIAL STATEMENTS. (a)(1) FINANCIAL STATEMENTS The following financial statements required by this item are submitted in a separate section beginning on page 21 of this report: Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of March 31, 2005 and 2004 Consolidated Statements of Operations and Comprehensive Loss for the years ended March 31, 2005 and 2004 Consolidated Statements of Shareholders' Equity for the years ended March 31, 2005 and 2004 Consolidated Statements of Cash Flows for the years ended March 31, 2005 and 2004 Notes to Consolidated Financial Statements (a)(2) FINANCIAL STATEMENT SCHEDULES All financial statement schedules are omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or the notes thereto. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. ITEM 8A. CONTROLS AND PROCEDURES. Within 90 days prior to the date of this report, we carried out an evaluation, under the supervision of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. First, it should be noted that the design of any system of controls is based in part upon certain assumptions, and there can be no assurance that any design will succeed in achieving its stated goals. Further, in designing and evaluating the disclosure controls and procedures, Semotus and its management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Based upon our evaluation, our CEO and CFO concluded that our disclosure controls and procedures are effective in bringing to their attention on a timely basis, information required to be disclosed in the reports the Company files under the Exchange Act. The CEO and CFO note that, since our last evaluation of internal controls, there have been no significant changes in internal controls or in other factors that could significantly affect internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses. ITEM 8B. OTHER INFORMATION. None. PART III We have omitted certain information from this Report that is required by Part III. We intend to file a definitive proxy statement pursuant to Regulation 14A with the Securities and Exchange Commission relating to our annual meeting of stockholders not later than 120 days after the end of the fiscal year covered by this Report, and such information is incorporated by reference herein. ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT. The information required by this Item will be included in our Proxy Statement for the 2005 Annual Meeting of Shareholders under the caption "Directors and Executive Officers" 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, 2005, and is incorporated by reference into this Item. ITEM 10. EXECUTIVE COMPENSATION. The information required by this Item will be included in our Proxy Statement for the 2005 Annual Meeting of Shareholders under the caption "Executive Compensation" 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, 2005, and is incorporated by reference into this Item. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. The information required by this Item will be included in our Proxy Statement for the 2005 Annual Meeting of Shareholders under the caption "Security Ownership of Certain Beneficial Owners and Management" 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, 2005, and is incorporated by reference into this Item. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this Item will be included in our Proxy Statement for the 2005 Annual Meeting of Shareholders under the caption "Certain Relationships and Related Transactions" 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, 2005, and is incorporated by reference into this Item. 17 ITEM 13. EXHIBITS.
- ---------------------------------------------------------------------------------------------------------------------------------- EXHIBIT NUMBER DESCRIPTION LOCATION - -------- --------------------------------------------------------------------- ------------------------------------------------- 2.1 Merger Agreement by and among Semotus Solutions, Inc., Semotus Incorporated by reference to Exhibit 2.1 to the Acquisition, Inc and Expand Beyond Corporation dated March 24, 2005. Registrant's Form 8-K filed March 30, 2005 - -------- --------------------------------------------------------------------- ------------------------------------------------- 3.1 Articles of Incorporation. Incorporated by reference to Exhibit No. 2 to the Registrant's Form 8-A filed on July 22, 1996 (No. 0-21069). - -------- --------------------------------------------------------------------- ------------------------------------------------- 3.2 Bylaws of the Company. Incorporated by reference to Exhibit No. 3 to the Registrant's Form 8-A filed on July 22, 1996 (No. 0-21069). - -------- --------------------------------------------------------------------- ------------------------------------------------- 3.3 Amended and Restated Bylaws of the Company dated January 24, 2000. Incorporated by reference to Exhibit 3.1 to the Registrant's Form 8-K Filed on February 17, 2000. - -------- --------------------------------------------------------------------- ------------------------------------------------- 3.4 Certificate of Amendment to the Articles of Incorporation dated Incorporated by reference to Exhibit 3.2 to the February 17, 1998. Registrant's Form 10-KSB for the year ended March 31, 1998. - -------- --------------------------------------------------------------------- ------------------------------------------------- 3.5 Certificate of Amendment to Articles of Incorporation dated July 6, Incorporated by reference to Exhibit 3.4 to the 1999. Registrant's Form 8-A12B filed on December 21, 1999. - -------- --------------------------------------------------------------------- ------------------------------------------------- 3.6 Certificate of Amendment to Articles of Incorporation Dated January Incorporated by reference to Exhibit 3.5 to the 12, 2001. Registrant's Form 10-KSB for the year ended March 31, 2001. - -------- --------------------------------------------------------------------- ------------------------------------------------- 4.1 Specimen Stock Certificate. Incorporated by reference to Exhibit 4.1 to the Registrant's Form 8-A-12B filed on December 21, 1999. - -------- --------------------------------------------------------------------- ------------------------------------------------- 10.1 Agreement Concerning the Exchange of Common Stock Between Datalink Incorporated by reference to Exhibit No. 10 to Systems Corporation and Datalink Communications Corporation. the Registrant's Form 8-K dated June 27, 1996. - -------- --------------------------------------------------------------------- ------------------------------------------------- *10.2 Employment Agreement with Anthony LaPine dated May 1, 1996. Incorporated by reference to Exhibit 10.6 to the Registrant's Form 10-KSB for the year ended March 31, 1997. - -------- --------------------------------------------------------------------- ------------------------------------------------- 10.3 Form of Common Stock and Warrant Purchase Agreement by and among Incorporated by reference to Exhibit 10.1 to Semotus Solutions, Inc. and each of Redwood Capital Partners, Inc., the Registrant's Form 10Q filed on February 12, Bara Limited, Southshore Capital Fund Limited, James M. Totaro and 2004. Enable Growth Partners, LP dated January 14, 2004. - -------- --------------------------------------------------------------------- ------------------------------------------------- 10.4 Form of Warrant dated January 14, 2004 by and among Semotus Solutions Incorporated by reference to Exhibit 10.2 to Inc. and each of Redwood Capital Partners, Inc., Bara Limited, the Registrant's Form 10Q filed on February 12, Southshore Capital Fund Limited, James M. Totaro, Enable Growth 2004. Partners, LP., Richard Rosenblum, David Stefansky, vFinance Investments, Inc. and Arend Verweij. - -------- --------------------------------------------------------------------- ------------------------------------------------- 10.5 Warrant to purchase up to 400,000 shares of Semotus Solutions, Inc. Incorporated by reference to Exhibit 4.1 to the common stock issued to Ari Kaplan dated March 28, 2005 Registrant's Form 8-K filed on March 30, 2005 - -------- --------------------------------------------------------------------- ------------------------------------------------- 10.6 Warrant to purchase up to 45,000 shares of Semotus Solutions, Inc. Incorporated by reference to Exhibit 4.2 to the common stock issued to Bathgate Capital Partners, LLC dated May 27, Registrant's Form 8-K filed on March 30, 2005 2004 - -------- --------------------------------------------------------------------- ------------------------------------------------- 21 Subsidiaries of the Registrant. Filed electronically herewith. - -------- --------------------------------------------------------------------- ------------------------------------------------- 23.1 Consent of LL Bradford & Co. Filed electronically herewith. - -------- --------------------------------------------------------------------- ------------------------------------------------- 31.1 Certification of Anthony LaPine Filed electronically herewith pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. - -------- --------------------------------------------------------------------- ------------------------------------------------- 31.2 Certification of Charles, K. Dargan, II Filed electronically herewith pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. - -------- --------------------------------------------------------------------- ------------------------------------------------- 32.1 Certification of Anthony LaPine Filed electronically herewith pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. - -------- --------------------------------------------------------------------- ------------------------------------------------- 32.2 Certification of Charles, K. Dargan, II Filed electronically herewith pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. - -------- --------------------------------------------------------------------- ------------------------------------------------- 99.1 Form of Registration Rights Agreement by and among Semotus Solutions, Incorporated by reference to Exhibit 4.1 to the Inc., vFinance Investments, Inc. and each of Redwood Capital Partners Registrant's Form 10Q filed on February 12, Inc., Bara Limited, Southshore Capital Fund Limited, James M. Totaro 2004. and Enable Growth Partners, LP dated January 14, 2004. - ----------------------------------------------------------------------------------------------------------------------------------
* Management contract or compensatory plan or arrangement. 18 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. The information required by this Item will be included in our Proxy Statement for the 2005 Annual Meeting of Shareholders under the caption "Principal Accountant Fees and Services" 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, 2005, and is incorporated by reference into this Item. 19 INDEX TO FINANCIAL STATEMENTS PAGE(S) Report of Independent Registered Public Accounting Firm ..................... 21 Consolidated Financial Statements: Consolidated Balance Sheets, March 31, 2005 and 2004 ................... 22 Consolidated Statements of Operations and Comprehensive Loss for the years ended March 31, 2005 and 2004 ..................... 23 Consolidated Statements of Shareholders' Equity for the years ended March 31, 2005 and 2004 ........................... 24 Consolidated Statements of Cash Flows for the years ended March 31, 2005 and 2004 .......................................... 26 Notes to Consolidated Financial Statements ............................. 28 20 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM THE BOARD OF DIRECTORS AND SHAREHOLDERS OF SEMOTUS SOLUTIONS, INC.: We have audited the accompanying consolidated balance sheets of Semotus Solutions, Inc., and subsidiaries as of March 31, 2005 and 2004, and the related consolidated statements of operations and comprehensive loss, shareholders' equity and cash flows for each of the two years in the period ended March 31, 2005. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform our audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Semotus Solutions, Inc. and subsidiaries as of March 31, 2005 and 2004 and the consolidated results of their operations and their cash flows for each of the two years in the period ended March 31, 2005 in conformity with accounting principles generally accepted in the United States of America. /S/ LL BRADFORD & COMPANY, LLC LL BRADFORD & COMPANY, LLC LAS VEGAS, NEVADA MAY 18, 2005 21 SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
MARCH 31, MARCH 31, 2005 2004 ------------ ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 1,435,246 $ 1,717,052 Trade receivables 220,234 191,945 Prepaid expenses and other current assets 45,510 63,972 ------------ ------------ Total current assets 1,700,990 1,972,969 Property and equipment, net 50,273 148,820 Goodwill, net 1,860,162 1,430,141 ------------ ------------ Total assets $ 3,611,425 $ 3,551,930 ============ ============ LIABILITIES & SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 224,630 $ 75,413 Accrued vacation 53,303 57,663 Other accrued liabilities 55,903 25,642 Deferred revenue 179,113 131,756 ------------ ------------ Total current liabilities 512,949 290,474 Total long term liabilities -- -- ------------ ------------ Total liabilities 512,949 290,474 ------------ ------------ Commitments and contingencies (Notes 16 and 18) ------------ ------------ SHAREHOLDERS' EQUITY: Common Stock: $0.01 par value; authorized: 50,000,000 shares; 24,767,144 issued and 24,576,048 outstanding at March 31, 2005, and 22,687,469 issued and outstanding at March 31, 2004 245,761 226,875 Additional paid-in capital 68,698,586 68,235,881 Accumulated other comprehensive loss (78,344) (74,328) Notes receivable - related parties -- (13,498) Accumulated deficit (65,767,527) (65,113,474) ------------ ------------ Total shareholders' equity 3,098,476 3,261,456 ------------ ------------ Total liabilities and shareholders' equity $ 3,611,425 $ 3,551,930 ============ ============
See accompanying notes to consolidated financial statements. 22 SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
YEAR ENDED MARCH 31, ---------------------------- 2005 2004 ------------ ------------ Revenues $ 1,806,295 $ 1,338,373 Cost of revenues 363,163 323,848 ------------ ------------ Gross profit 1,443,132 1,014,525 Operating expenses: (Exclusive of depreciation and amortization and stock, option and warrant expense) Research and development 525,930 563,602 Sales and marketing 869,328 725,114 General and administrative 839,077 963,790 Stock, option and warrant expense (248,997) 952,473 Depreciation and amortization: Research and development 43,930 84,577 General and administrative 75,882 116,604 ------------ ------------ 119,812 201,181 ------------ ------------ Total operating expenses 2,105,150 3,406,160 ------------ ------------ Operating loss from continuing operations (662,018) (2,391,635) Net interest income -- 22,666 Other income 7,965 11,450 ------------ ------------ Total interest and other income 7,965 34,116 ------------ ------------ Loss from continuing operations (654,053) (2,357,519) Income (loss) from discontinued operations (Note 5) -- 105,834 ------------ ------------ Net loss (654,053) (2,251,685) Other comprehensive income (loss) - Translation adjustment (4,016) 18,978 ------------ ------------ Comprehensive loss $ (658,069) $ (2,232,707) ============ ============ Loss per common share from continuing operations: Basic $ (0.03) $ (0.11) Diluted $ (0.03) $ (0.11) Net loss per common share: Basic $ (0.03) $ (0.11) Diluted $ (0.03) $ (0.11) Weighted average shares used in per share calculation, basic and diluted 22,755,373 20,604,458 ============ ============
See accompanying notes to consolidated financial statements. 23 SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK ADDITIONAL ---------------------------- PAID-IN SHARES AMOUNT CAPITAL ------------ ------------ ------------ Balances at March 31, 2003 19,275,211 $ 192,752 $ 66,163,351 Issuance of stock due to exercise of options and warrants 1,574,103 15,741 195,842 Issuance of stock options to consultants -- -- 35,619 Issuance of stock for services rendered 37,500 375 28,538 Issuance of stock for liability settlements 276,782 2,768 78,168 Issuance of stock and warrants in private placement financing, net of expenses of $106,221 2,023,873 20,239 957,235 Repurchase of stock through ADA sale (500,000) (5,000) (80,000) Compensation expense due to stock option repricing -- -- 857,128 Amortization of note receivable -- -- -- Foreign currency translation adjustment -- -- -- Net loss -- -- -- ------------ ------------ ------------ Balances at March 31, 2004 22,687,469 226,875 68,235,881 Issuance of stock due to exercise of options and warrants 75,770 758 10,608 Issuance of stock options and warrants to consultants and advisory board -- -- 68,817 ------------ ------------ ------------ Issuance of stock for services rendered 50,000 500 15,700 Issuance of stock in connection with the acquisition of Expand Beyond Corporation 1,762,809 17,628 701,598 Compensation expense due to stock option repricing -- -- (334,018) Amortization of note receivable -- -- -- Foreign currency translation adjustment -- -- -- Net loss -- -- -- ------------ ------------ ------------ Balances at March 31, 2005 24,576,048 $ 245,761 $ 68,698,586
See accompanying notes to consolidated financial statements. 24 SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
ACCUMULATED OTHER COMPREHENSIVE NOTES ACCUMULATED LOSS RECEIVABLE DEFICIT TOTAL ------------ ------------ ------------ ------------ Balances at March 31, 2003 $ (93,306) $ (91,281) $(62,861,789) $ 3,309,727 Issuance of stock due to exercise of options and warrants -- -- -- 211,583 Issuance of stock options to consultants -- -- -- 35,619 Issuance of stock for services rendered -- -- -- 28,913 Issuance of stock for liability settlements -- -- -- 80,936 Issuance of stock and warrants in private placement -- -- -- 977,474 financing, net of expenses of $106,221 Repurchase of stock through ADA sale -- -- -- (85,000) Compensation expense due to stock option repricing -- -- -- 857,128 Amortization of note receivable -- 77,783 -- 77,783 Foreign currency translation adjustment 18,978 -- -- 18,978 Net loss -- -- (2,251,685) (2,251,685) ------------ ------------ ------------ ------------ Balances at March 31, 2004 (74,328) (13,498) (65,113,474) 3,261,456 Issuance of stock due to exercise of options and warrants -- -- -- 11,366 Issuance of stock options and warrants to consultants and advisory board -- -- -- 68,817 Issuance of stock for services rendered -- -- -- 16,200 Issuance of stock in connection with the acquisition of Expand Beyond -- -- -- 719,226 Compensation expense due to stock option repricing -- -- -- (334,018) Amortization of note receivable -- 13,498 -- 13,498 Foreign currency translation adjustment (4,016) -- -- (4,016) Net loss -- -- (654,053) (654,053) ------------ ------------ ------------ ------------ Balances at March 31, 2005 $ (78,344) -- $(65,767,527) $ 3,098,476
See accompanying notes to consolidated financial statements. 25 SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED MARCH 31, ---------------------------- 2005 2004 ------------ ------------ Cash flows from operating activities: Net loss $ (654,053) $ (2,251,685) (Income) loss from discontinued operations -- (105,834) Loss from continuing operations (654,053) (2,357,519) ============ ============ Adjustments to reconcile loss from continuing operations to net cash used in operating activities: (Gain) loss on asset sale - discontinued operations -- 970 Depreciation and amortization 119,812 201,181 Compensation expense related to options/warrants issued for services and repriced options -- 952,473 (248,997) Amortization and forgiveness of notes receivable, net 13,498 77,783 Net (gain) loss from sale of assets -- (3,614) Non-cash settlement of liabilities -- 44,578 Changes in assets and liabilities net of acquired assets and liabilities due to acquisitions: Accounts and other receivables (21,744) (51,299) Prepaid expenses and other assets 42,933 (28,688) Accounts payable 45,991 (296,978) Accrued expenses and other current liabilities 20,895 (40,345) Deferred revenue 5,047 52,637 Net working capital provided by (used in) discontinued operations -- 64,443 ------------ ------------ Net cash used in operating activities (676,618) (1,384,378) ------------ ------------ Cash flows from investing activities: Cash acquired for stock in acquisition 399,319 -- ------------ ------------ Net cash (used in) provided by investing activities 399,319 -- ------------ ------------ Cash flows from financing activities: Repayments of notes payable -- (56,224) Repayments of capital lease obligations -- (20,291) Proceeds from exercise of options and warrants 11,366 211,583 Net proceeds from private placement of $0.01 par value restricted common stock and warrants -- 977,474 ------------ ------------ Net cash provided by (used in) financing activities 11,366 1,112,542 ------------ ------------ Effect of exchange rate changes on cash (15,873) 18,978 ------------ ------------ Net decrease in cash and cash equivalents (281,806) (252,858) Cash and cash equivalents, beginning of year 1,717,052 1,969,910 ------------ ------------ Cash and cash equivalents, end of year $ 1,435,246 $ 1,717,052 ============ ============
See accompanying notes to consolidated financial statements. 26 SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEAR ENDED MARCH 31, ---------------------------- 2005 2004 ------------ ------------ SUPPLEMENTAL CASH FLOW DISCLOSURE: Cash paid for interest $ 3,638 $ 2,444 ============ ============ Cash paid for income taxes $ 2,077 $ 94 ============ ============ Gross proceeds as part of the private placement financing -- $ 1,028,750 ============ ============ SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Non-cash purchase consideration for the acquisition of Expand Beyond Corporation through the issuance of common stock $ 719,226 -- ============ ============ Common stock issued for liabilities -- $ 80,936 ============ ============ Non-cash value of warrants issued as part of the private placement financing -- $ 277,270 ============ ============ Assets acquired for stock, and liabilities assumed, in Expand Beyond acquisition: Assets acquired $ 439,746 -- Goodwill 430,021 -- Fair value of assets 869,767 -- Liabilities assumed 150,541 --
See accompanying notes to consolidated financial statements. 27 SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. FORMATION AND BUSINESS OF THE COMPANY: Semotus(R) Solutions, Inc. ("We" or "Our"), changed our name from Datalink.net, Inc. as of January 11, 2001. We were originally named Datalink Systems Corporation, and we were formed under the laws of the State of Nevada on June 18, 1996. On June 27, 1996, we 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. In the June 27, 1996 acquisition of DCC, we issued 3,293,064 shares of our $0.01 par value Common Stock to the holders of 100% of the outstanding Common Stock of DCC, and DCC became our wholly owned subsidiary. As a part of the transaction, we acquired a Canadian corporation, DSC Datalink Systems Corporation, incorporated in Vancouver, British Columbia, now named Semotus Systems Corporation. We are a leading provider of enterprise application software connecting employees to critical business systems, information, and processes. We help mobile employees make better and faster decisions, increase customer satisfaction, and improve efficiencies in their business processes for shorter sales and service cycles. Our wireless software products and services include the Global Market Pro, Equity Market Pro and Futures Market Pro software and services, and the HipLinkXS family of software and services.. Our enterprise application software provides mobility, convenience, and efficiency and improves profitability. The Company added wireless products and services with its acquisition of Expand Beyond Corporation on March 28, 2005. Such products and services are additional enterprise wireless messaging and communications software applications, including PocketDBA and PocketAdmin. These software solutions provide immediate mobile access and control of business-critical software applications, databases, networks and servers. 2. BASIS OF PRESENTATION AND FUTURE PROSPECTS: The accompanying consolidated financial statements include the accounts of Semotus Solutions, Inc. and our subsidiaries. The consolidated balance sheets as of March 31, 2005 and 2004, the consolidated statements of operations and comprehensive loss for the years ended March 31, 2005 and 2004, the consolidated statements of common shareholders' equity for the years ended March 31, 2005 and 2004, and the consolidated statements of cash flows for the years ended March 31, 2005 and 2004, have been prepared by us, with an audit and in accordance with the instructions to Form 10-KSB and Regulation S-K. In the opinion of our management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included. We believe that the disclosures provided are adequate to make the information presented not misleading. Our management believes, after discontinuing all operations that were unprofitable, that the remaining continuing operations are sustainable and that we will have enough cash to maintain our operations over the next twelve months. Although those operations range from slightly cash positive to cash negative on a monthly basis, the overall trend toward positive cash flow is continuing. Further, with the trend toward an economic recovery, our operations should be augmented in the current fiscal year. Our continued operation is dependant on increasing sales and achieving profitability and/or obtaining sufficient long-term financing. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The following summary of significant accounting policies is presented to assist the reader in understanding and evaluating the consolidated financial statements. These policies are in conformity with generally accepted accounting principles and have been applied consistently in all material respects. PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of Semotus Solutions, Inc. and our wholly owned subsidiaries: Semotus Systems Corporation (Canadian subsidiary) and Expand Beyond Corporation ("Expand Beyond"). The other following subsidiaries have been closed or sold and are now in discontinued operations: Wares on the Web, Inc. (Wares), Five Star Advantage, Inc. (Five Star), WizShop.com, Inc. (WizShop) and Application Design Associates, Inc. (ADA). Two subsidiaries, Cross Communications, Inc. and Simkin, Inc. were merged with and into Semotus Solutions, Inc. All significant intercompany transactions and balances have been eliminated in consolidation. Operations of the Canadian subsidiary consist mainly of research and development and engineering on behalf of the parent. Expand Beyond generates revenues from the sales of products and services. USE OF ESTIMATES: The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS: We consider all highly liquid investments with original maturities of three months or less or money market funds from substantial financial institutions to be cash equivalents. We place substantially all of our cash and cash equivalents in interest bearing demand deposit accounts with one financial institution. CONCENTRATIONS OF CREDIT RISK: Financial instruments which potentially subject us to concentrations of risk consist principally of trade and other receivables. 28 In the ordinary course of business trade receivables are with a large number of customers, dispersed across a wide North American geographic base. We extend credit to our customers in the ordinary course of business and periodically review the credit levels extended to customers, estimate the collectibility and create an allowance for doubtful accounts, as needed. We do not require cash collateral or other security to support customer receivables. Provision is made for estimated losses on uncollectible accounts. We estimate our allowance for doubtful accounts by applying estimated loss percentages against our aging of accounts receivable balances. The estimated loss percentages are updated periodically and are based on our historical write-off experience, net of recoveries. Changes to allowances may be required if the financial condition of our customers improves or deteriorates or if we adjust our credit standards for new customers, thereby resulting in write-off patterns that differ from historical experience. Historically, changes to our estimated loss percentages have not been material. PROPERTY AND EQUIPMENT: Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation is provided on the straight-line method over the estimated useful lives of the related assets, generally three to seven years. Amortization on capital leases is over the lesser of the estimated useful life or term of the lease if shorter, and is included in depreciation and amortization expense in the statement of operations. Ordinary course repairs and maintenance on fixed assets are expensed as incurred. The carrying value of property and equipment is assessed annually or when factors indicating an impairment are present. In accordance with SFAS No. 144, we review our property, plant, and equipment for impairment whenever events or circumstances indicate that their carrying amount may not be recoverable. Impairment reviews require a comparison of the estimated future undiscounted cash flows to the carrying value of the asset. If the total of the undiscounted cash flows is less than the carrying value, an impairment charge is recorded for the difference between the estimated fair value and the carrying value of the asset. LONG-TERM ASSETS / GOODWILL: Historically, long-term assets, such as intellectual property rights and goodwill were amortized on a straight-line basis over the expected economic life of the assets. The expected useful life of those assets was five years, and was adjusted to one year as of April 1, 2002. We have adopted Statement of Financial Accounting Standards (SFAS) 141 "Business Combinations" and SFAS 142 "Goodwill and Other Intangible Assets" as of April 1, 2002. Accordingly, we no longer amortize goodwill and intangible assets with an indefinite useful life and instead assess potential impairments of such intangible assets and goodwill. The effect of the adoption of SFAS 142 resulted in the net loss for the fiscal years ended March 31, 2004 and 2003 being smaller by $432,541 and $432,541, respectively, due to not amortizing goodwill. Our management has determined that the remaining goodwill of $1,860,162 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 our wireless enterprise application software product lines, the HipLink family of software products, which is generating current revenue and cash flow, and our recent acquisition of Expand Beyond's software applications. Acquisitions which have been accounted for under the purchase method of accounting include the results of operations of the acquired business from the date of acquisition. Net assets of the companies acquired are recorded at their fair value to us at the date of acquisition. FOREIGN CURRENCY TRANSLATION: Exchange adjustments resulting from foreign currency transactions are generally recognized in operations. Adjustments resulting from translation of financial statements are reflected as a separate component of shareholders' equity. Net foreign currency transaction gains or losses are not material in any of the years presented. STOCK BASED COMPENSATION: We have adopted the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") and SFAS No. 148, "Accounting for Stock-Based Compensation, Transition and Disclosure." Under these standards, companies are encouraged, but not required, to adopt the fair value method of accounting for employee stock-based compensation. The fair value method is required for all stock-based compensation issued to non-employees, including consultants and advisors. Under the fair value method, compensation cost relating to issuances of stock options, warrants and appreciation rights is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period. Companies are permitted to continue to account for employee stock-based compensation under APB No. 25, "Accounting for Stock Issued to Employees," but are required to disclose pro forma net loss, stock compensation cost and earnings per share as if the fair value method has been adopted. We have elected to continue to account for stock based compensation under APB No. 25. Certain options, which have been repriced, are subject to the variable plan requirements of APB No. 25 and FASB Interpretation No. 44 "Accounting for Certain Transactions Involving Stock Compensation" ("FIN 44"), that requires we record compensation expense for changes in the fair value of our common stock when it exceeds the repriced amount. We have adopted the disclosure only provisions of SFAS 123. Accordingly, no compensation expense has been recognized for employee fixed awards options. Had compensation expense been determined based on the fair value at the grant dates for awards under these plans consistent with the method of SFAS 123, the Company's net loss in fiscal years ended March 31, 2005 and 2004 would have been adjusted to the pro forma amounts indicated below: 29
FISCAL YEARS ENDED MARCH 31, ---------------------------- 2005 2004 ------------ ------------ Net income (loss), as reported $ (654,053) $ (2,251,685) (Less) add: Total stock-based employee compensation expense (reversal) determined under intrinsic value based method for all awards and variable accounting for repriced options (334,018) 857,128 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards (127,415) (210,903) ------------ ------------ Pro forma net loss $ (1,115,486) $ (1,605,460) ============ ============ Net loss per share: Basic - as reported $ (0.03) $ (0.11) Basic - pro forma (0.05) (0.08) Diluted - as reported (0.03) (0.11) Diluted - pro forma (0.05) (0.08)
The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants under the Plan in 2005 and 2004: FISCAL YEARS ENDED MARCH 31, ---------------------------- 2005 2004 ------------ ------------ Expected dividend $ -- $ -- Expected life of option 4 years 4 years Risk-free interest rate 3.14% 2.51% Expected volatility 104% - 141% 89% - 173% The above pro forma disclosures are not expected to be representative of the effects on reported net income (loss) for future years. INCOME TAXES: Deferred income taxes have been recorded for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts using enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. A 100% valuation allowance has been provided as management is unable to determine that it is more likely than not that the deferred tax assets will be realized. REVENUE RECOGNITION: We recognize revenues based upon contract terms and completion of the sales process. Revenue is generated from one-time software licensing fees, annual maintenance fees and monthly wireless services fees provided to enterprises and consumers. We also receive a small revenue stream from pager rentals and from professional or related services. 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 Hiplink family of products, wireless software is delivered to the customer and revenue is recognized upon shipment, assuming no significant obligations remain. The revenue for the maintenance fees received through the Hiplink contracts are recognized ratably over the life of the maintenance contract. In the financial services, the monthly wireless services are billed in arrears and are recognized upon invoicing. For any professional or related services, revenue is generated from software engineering, training and consultation services; revenue is recognized when the engineering, training or consultation work has been performed in accordance with the contract. For consumer wireless services and pager rentals, revenue is recognized monthly upon credit card billing as the monthly service is delivered. COST OF REVENUE: The cost of revenue 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 professional and related services is primarily personnel costs for engineering, training and consultation work. FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amount of cash and cash equivalents, receivables and payables are reasonable estimates of their fair value due to their short-term nature. RESEARCH AND DEVELOPMENT EXPENDITURES: Expenditures related to research, design and development of products and services are charged to product development and engineering expenses as incurred. Software development costs are capitalized beginning when a product's technological feasibility has 30 been established and ending when a product is available for general release to customers. At March 31, 2005 and 2004 there were no capitalized software development costs as we expensed the remaining amounts at fiscal year end 2002. DISCONTINUED OPERATIONS In April 2002, we adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), which requires that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and by broadening the presentation of discontinued operations to include more disposal transactions. This statement requires that those long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. We evaluate long-lived assets, excluding goodwill and identifiable intangible assets with indefinite useful lives, for impairment in accordance with SFAS 144 whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Accordingly, for the fiscal year ended March 31, 2004, the operations of WizShop have been recorded in discontinued operations. The amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset. Fair value is determined generally based on discounted cash flows. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to sell. The assets from the discontinued operations including those assets held for sale have been recorded at their net realizable fair market value prior to disposition. BASIC AND DILUTED NET LOSS PER SHARE: Basic net loss per share is computed using the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed using the weighted average number of common and common equivalent shares, if dilutive, outstanding during the period. Common equivalent shares consist of the incremental common shares issuable upon conversion of convertible preferred stock (using the if-converted method) and shares issuable upon the exercise of stock options and warrants (using the treasury stock method). RECLASSIFICATIONS: Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation. COMPREHENSIVE INCOME (LOSS): Our policy in reporting comprehensive income (loss) is as defined in SFAS No. 130, "Reporting Comprehensive Income" and includes all changes in equity (net assets) during a period from non-owner sources. We exclude from net income (loss) foreign currency translation adjustments, which are included in comprehensive income (loss). For the periods presented in this Form 10-KSB, foreign currency translation adjustments is the only item which affects our comprehensive income (loss). RECENT ACCOUNTING PRONOUNCEMENTS: In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities". This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS 133, "Accounting for Derivative Instruments and Hedging Activities". The Statement clarifies and creates more consistent reporting of contracts as either derivatives or hybrid financial instruments. The Statement is effective for contracts entered into or modified after June 30, 2003. We historically have not used derivatives or hedging instruments. Currently, we do have a small exposure to the Canadian - U.S. dollar exchange rate, but we have not deemed it necessary to hedge this exposure. In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity and is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective as of the beginning of the first interim period beginning after June 15, 2003. We adopted SFAS No. 150 on June 1, 2003. The adoption of SFAS No. 150 has not had a material impact on our results of operations or financial condition. In December 2004, the FASB issued Statement 123 (revised 2004) which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. This Statement supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. This Statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments. This Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. This Statement requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award--the requisite service period (usually the vesting period). The Company files as a small business issuer and must meet the requirements of this Statement for accounting periods beginning after December 15, 2005. As part of its employee compensation, the Company issues stock options that have been accounted for under APB No. 25 and will need to be accounted for under the fair value method as described in this Statement. This will have a significant impact on the financial statements of the Company. 4. ACQUISITIONS In the fiscal year ended March 31, 2005, we acquired Expand Beyond Corporation. We issued 1,910,961 shares of our common stock to the stockholders of Expand Beyond as of the close of the acquisition, March 28, 2005. 10% of these shares are being held in 31 escrow, and may be used by us for indemnification purposes related to the acquisition. Additional shares may be issued if certain revenue targets are met at the first and/or second annual anniversary of the close of the acquisition. In connection with the acquisition, Semotus paid a finder's fee to Bathgate Capital Partners, LLC of $45,786, of which $10,000 was paid in cash and the balance was paid by the issuance of 42,944 shares of common stock. Bathgate Capital Partners, LLC was retained by Semotus on May 27, 2004 as a financial advisor to assist Semotus in seeking and evaluating potential business combinations, and was granted warrants to purchase up to 45,000 shares of Semotus common stock immediately exercisable at an exercise price of $0.34 per share, the closing price on May 27, 2004, with a five year term and containing certain registration rights. Expand Beyond's products and services are additional enterprise wireless messaging and communications software applications, including PocketDBA and PocketAdmin. These software solutions provide immediate mobile access and control of business-critical software applications, databases, networks and servers. This solves the vulnerabilities of relying on on-call staff, which may require 30 to 40 minutes to relocate to the home or office, by giving employees the tools to respond immediately from the field. A range of products allow for the secure real-time management of Oracle, SQL Server, Teradata, Windows Active Directory, Exchange, servers and more from mobile devices including BlackBerry, Palm, Pocket PC, laptops, smartphones, and desktops. The following condensed financial information for the fiscal years ended December 31, 2004 and 2003 and pro forma combined financial information as of March 31, 2005 is more fully discussed in our SEC Form 8-K/A filing on June 9, 2005.
PRO FORMA EXPAND BEYOND CORPORATION COMBINED FISCAL YEARS ENDED (DOLLARS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA) MARCH 31, DECEMBER 31, ------------ ---------------------------- 2005 2004 2003 UNAUDITED UNAUDITED UNAUDITED ------------ ------------ ------------ BALANCE SHEET DATA: Current Assets: Cash $ 1,436 $ 633 $ 1,818 Accounts receivable 220 23 197 Inventory, prepaid expenses and other current assets 45 19 37 ------------ ------------ ------------ Total current assets 1,701 675 2,052 Property, equipment and software: Property and equipment, net 41 143 297 Goodwill, net 1,860 -- -- Software development costs, net 9 95 196 ------------ ------------ ------------ Total property, equipment and software 238 493 Other assets -- 5 56 ------------ ------------ ------------ Total assets $ 3,611 $ 918 $ 2,601 ============ ============ ============ Current Liabilities: Accounts payable $ 223 $ 12 $ 71 Accrued expenses 58 13 168 Deferred revenue 179 61 232 Other current liabilities 52 1 5 ------------ ------------ ------------ Total current liabilities 512 87 476 ------------ ------------ ------------ Convertible preferred stock: Series A convertible preferred stock, $0.0001 par value; 6,000,000 shares authorized; 5,619,903 shares issued and outstanding at December 31, 2004 and 2003 (liquidation preference of $2.00 per share) -- 11,151 11,151 Series B convertible preferred stock, $0.0001 par value; 2,500,000 shares authorized; 1,665,909 shares issued and outstanding at December 31, 2004 and 2003 (liquidation preference of $2.00 per share) -- 3,624 3,624 Shareholders' deficit: Common stock, $0.0001 par value; 17,500,000 shares authorized and 4,751,108 issued and outstanding at December 31, 2004 and 2003 246 1 1 Common stock issued as part of acquisition 719 -- -- Additional paid-in capital 67,979 (502) (502)
32
Accumulated other comprehensive loss (78) -- -- Accumulated deficit (65,767) (13,443) (12,149) ------------ ------------ ------------ Total stockholders' deficit 3,099 (13,944) (12,650) ------------ ------------ ------------ Total liabilities, convertible preferred stock and stockholders' $ 3,611 $ 918 $ 2,601 deficit INCOME STATEMENT DATA: Revenue $ 2,108 $ 302 $ 530 Cost of revenues 495 132 137 ------------ ------------ ------------ Gross margin 1,613 170 393 Expenses: Research and development 850 324 1,069 Sales and marketing 1,048 179 1,754 General and administrative 1,807 968 1,720 Stock, option and warrant expense (249) -- -- Depreciation and amortization -- -- -- 120 -- -- ------------ ------------ ------------ Total expenses 3,576 1,471 4,543 ------------ ------------ ------------ Loss from operations (1,963) (1,301) (4,150) Interest income, net 7 7 25 Other income 8 -- -- ------------ ------------ ------------ Total interest and other income 15 7 25 Net loss $ (1,948) $ (1,294) $ (4,125) Other comprehensive income (loss) - Translation adjustment (4) -- -- ------------ ------------ ------------ Comprehensive loss $ (1,952) $ (1,294) $ (4,125) ============ ============ ============
We made no acquisitions in the fiscal year ended March 31, 2004. 5. DISCONTINUED OPERATIONS In accordance with FAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", in the second quarter of fiscal year ended March 31, 2004, the WizShop operation was recorded as a discontinued operation, and in the fiscal year ended March 31, 2004, the net income from discontinued operations of $105,834 is comprised solely of the operations of WizShop. Substantially all of the income was from a legal settlement. 6. IMPAIRMENT OF LONG-LIVED ASSETS AND GOODWILL At March 31, 2005 and 2004, we determined that the carrying value of our remaining goodwill and other intangibles from continuing operations are recoverable. Our management determined that the remaining goodwill of $1,860,162 (net of accumulated amortization of $727,058) is fairly valued using the impairment tests as described in SFAS 121, SFAS 142 and SFAS 144, which includes discounted cash flow analysis and comparable company analysis. This remaining amount of goodwill consists entirely of our wireless enterprise application software product lines, the HipLink family of software products, which is generating current revenue and cash flow, and our recent acquisition of Expand Beyond's software applications. We will continue to analyze the recoverability of our long-lived assets and goodwill, and assess the need to record impairment losses when impairment indicators are present. At March 31, 2004 we determined that there was no need to record impairment losses. 7. BANK LINE OF CREDIT On September 30, 2004 we entered into a loan and security agreement with a medium sized local bank. As of March 31, 2005 there is no amount outstanding under this line of credit. The maximum amount allowed to be advanced is 80% of our eligible accounts or $150,000, whichever is less, and is used for working capital purposes. The line of credit has an interest rate of 0.5% of one percentage point above the prime rate, but in no event shall the interest rate be less than 4.75%. The line of credit terminates on July 29, 2005, when all advances are immediately payable. 8. PROPERTY AND EQUIPMENT Property and equipment is comprised of the following: 33 MARCH 31, ---------------------------- 2005 2004 ------------ ------------ Furniture and fixtures $ 344,796 $ 315,384 Computers, and other office equipment 1,312,489 1,058,966 Capitalized equipment leases 49,400 48,037 Leasehold improvements 139,460 131,098 Software 705,565 289,638 ------------ ------------ 2,551,710 1,843,123 Less accumulated depreciation and amortization (2,501,437) (1,694,303) ------------ ------------ $ 50,273 $ 148,820 ============ ============ Depreciation and amortization expense related to the above assets was $119,812 and $201,181 for the fiscal years ended March 31, 2005 and 2004, respectively. 9. CAPITAL LEASES We did not enter into any new capital leases during the fiscal year ended March 31, 2005. In the fiscal year ended March 31, 2004, we elected to pay off all of our outstanding capital leases. We therefore have no future capital lease payments. Accumulated depreciation on capitalized lease assets was $41,188 at March 31, 2004. 10. CONVERTIBLE PREFERRED STOCK Under our Articles of Incorporation, as amended in February 1998, we are authorized to issue 5,000,000 shares of preferred stock. 2,740,000 shares have been designated as Series A preferred stock, of which no shares are outstanding as of March 31, 2005, and 769,231 have been designated as Series B preferred stock, of which no shares are outstanding as of March 31, 2005. 11. COMMON SHAREHOLDERS' EQUITY Under our Articles of Incorporation, as amended in June 1999, we are authorized to issue 50,000,000 shares of common stock, of which 24,767,144 were issued and 24,576,048 were outstanding as of March 31, 2005, and 22,687,469 were issued and outstanding as of March 31, 2004. During the fiscal year ended March 31, 2005, in connection with the acquisition of Expand Beyond that closed on March 28, 2005, we issued 1,910,961 shares of common stock to Expand Beyond's shareholders. 10% of these shares (191,096) are being held in escrow, and may be used by us for indemnification purposes related to the acquisition. We may also issue additional shares over the following two years, pursuant to an earn-out arrangement as set forth in the Merger Agreement with Expand Beyond. As part of the employment of Mr. Ari Kaplan as President of Expand Beyond, we issued Mr. Kaplan warrants to purchase up to 400,000 shares of common stock at an exercise price equal to $0.37 per share, which was the closing price of our common stock on his date of hire, March 28, 2005, vesting over a three year period and having a ten year term. In connection with the acquisition of Expand Beyond, we issued 42,944 shares of common stock to Bathgate Capital Partners, LLC. Bathgate was also issued warrants to purchase up to 45,000 shares of common stock at an exercise price equal to $0.34 per share and having a five year term. In addition, during the fiscal year ended March 31, 2005, we issued a total of 50,000 shares to various suppliers of services. During the fiscal year ended March 31, 2004, in connection with a private placement of $1,028,750 that occurred in January of 2004 which provided net cash in the amount of $977,474, we issued 1,959,523 common shares at $0.525 per share and 489,880 share purchase warrants. Each warrant entitles the holder to purchase an additional share of common stock at a price of $0.8625 per share for a period of five years. In connection with the private placement, we also paid a placement fee, a portion of which was paid by the issuance of 64,350 shares of common stock and 40,476 share purchase warrants. We also issued 187,500 shares in connection with an amendment and settlement to the merger agreement with Cross Communications. In addition, during the fiscal year ended March 31, 2004, we issued a total of 37,500 shares to various suppliers of services, and a total of 89,282 shares to settle certain liabilities. WARRANTS: As of March 31, 2005, a total of 1,805,356 warrants to purchase shares of our common stock remain outstanding and are currently exercisable as follows: EXERCISE PRICE NUMBER OF WARRANTS ($ / SHARE) EXPIRATION DATE - ------------------ -------------- --------------- 800,000 30.00 7/7/2005 30,000 18.00 8/2/2005 530,356 0.8625 1/14/2009 400,000 0.37 3/28/2015 45,000 0.34 5/27/2009 STOCK OPTION PLAN: In June 1996, we adopted the 1996 Stock Option Incentive Plan (the "Plan"). The "Plan" provides for the granting of stock options to acquire common stock and/or the granting of stock appreciation rights to obtain, in cash or shares of common stock, the benefit of the appreciation of the value of shares of common stock after the grant date. On September 17, 2002 our shareholders approved an increase in the number of shares of Common Stock issuable under the Plan from 4,345,000 to 5,200,000. The Plan expires in June of 2006, ten years after its adoption. 34 Under the Plan, the Board of Directors may grant incentive stock options to purchase shares of our common stock only to employees, and the Board of Directors may grant non-qualified stock options to purchase shares of our common stock to our directors, officers, consultants and advisers. The Board of Directors may grant options to purchase shares of our common stock at prices not less than fair market value, as defined under the Plan, at the date of grant for all stock options. The Board of Directors also has the authority to set exercise dates (no longer than ten years from the date of grant), payment terms and other provisions for each grant. In addition, incentive options may be granted to persons owning more than 10% of the voting power of all classes of stock, at a price no lower than 110% of the fair market value at the date of grant, as determined by the Board of Directors. Options granted under the Plan generally vest over four years at a rate of 25% after year one and then equally on a monthly basis over the next three years from the date of grant. As of March 31, 2005, no stock appreciation rights have been granted under the Plan. On May 1, 2002, all employees with a fifty thousand dollar annual salary or greater took a ten percent salary reduction. In exchange, on May 16, 2002, the Board of Directors approved the repricing of all of those employees' outstanding stock options under our 1996 Stock Option Plan to $0.43 per share, and $0.47 per share for Anthony LaPine and Pamela LaPine (which equals 110% of the amended exercise price). Exercise prices ranged from $0.76 to $0.84 per share. Additionally, those employees received an additional grant equal to 10% of their total options granted under the Stock Option Plan to date. Effective October 23, 2002, the Board of Directors approved the repricing of all of the options held by almost all of our employees (including executive officers). Exercise prices ranged from $0.22 to $0.47 per share. The Board of Directors determined such a repricing to be appropriate in order to sustain the incentivization of our employees. Employees' existing option grants were repriced on October 23, 2002 to an exercise price of $0.15 per share (the current fair market value of our common stock as of the reprice date) and an exercise price of $0.17 per share (110% of the fair market value at the date of reprice) for those persons owning more than 10% of the voting power of all classes of stock (Anthony LaPine and Pamela LaPine). All grants maintained their existing vesting schedules. These are deemed to be a repricing under FIN 44 and will result in variable plan accounting. An offset of $334,018 to the compensation expense was required to be recognized in the fiscal year ended March 31, 2005 to reflect the net decrease in stock price over the repriced amount for the twelve months ended March 31, 2005; however, a compensation expense in the amount of $857,128 was required to be recognized to reflect the net increase in stock price over the repriced amount for the twelve months ended March 31, 2004. Increases or decreases in our stock price will continue to be recognized in the future for outstanding vested repriced options if the stock price continues to be above the revised exercise price of the options. Activity for stock options under the 1996 Stock Option Incentive Plan for the years ended March 31, 2005 and 2004 is as follows:
WEIGHTED SHARES NUMBER AVERAGE AVAILABLE OF PRICE EXERCISE FOR GRANT OPTIONS PER SHARE PRICE ------------ ------------ ------------- ------------ Balances, March 31, 2003 1,647,631 3,140,305 $0.14 - $2.01 $0.31 Authorized -- Granted (1,719,000) 1,719,000 $0.12 - $1.00 $0.61 Canceled 723,021 (723,021) $0.14 - $2.01 $0.94 Exercised -- (727,949) $0.15 - $1.00 $0.28 ------------ ------------ ------------- ------------ Balances, March 31, 2004 651,652 3,408,335 $0.12 - $0.95 $0.33 Authorized -- Granted (866,000) 866,000 $0.23 - $0.63 $0.34 Canceled 789,747 (789,747) $0.14 - $0.93 $0.53 Exercised -- (75,770) $0.15 - $0.15 $0.15 ------------ ------------ ------------- ------------ Balances, March 31, 2005 575,399 3,408,818 $0.12 - $0.95 $0.29
The weighted average fair value of those options granted during the years ended March 31, 2005 and 2004 was $0.27 and $0.38, respectively. The weighted average fair value of those options that were repriced on October 23, 2002 was $0.08. Options to purchase 2,569,868 and 1,735,513 shares were exercisable with a weighted average exercise price of $0.25 and $0.16 at March 31, 2004 and 2004, respectively. The following table summarizes the stock options outstanding at March 31, 2005:
OPTIONS OUTSTANDING CURRENTLY EXERCISABLE - -------------------------------------------------------------------------- ---------------------------------- WEIGHTED AVERAGE NUMBER REMAINING WEIGHTED NUMBER WEIGHTED RANGE OF OUTSTANDING AT CONTRACTUAL AVERAGE EXERCISABLE AT AVERAGE EXERCISE PRICE MARCH 31, 2004 LIFE EXERCISE PRICE MARCH 31, 2004 EXERCISE PRICE - -------------- -------------- -------------- -------------- -------------- -------------- $0.00 - $0.15 553,693 6.2 $0.15 511,913 $0.15 $0.16 - $0.20 1,286,000 5.0 $0.17 1,286,000 $0.17 $0.21 - $0.50 1,117,458 8.7 $0.34 591,746 $0.36 $0.51 - $0.80 381,667 7.9 $0.68 158,959 $0.72 $0.81 - $1.00 70,000 5.7 $0.84 21,250 $0.85 -------------- -------------- -------------- -------------- -------------- 3,408,818 6.7 $0.29 2,569,868 $0.25 ============== ============== ============== ============== ==============
12. REVENUE We derive revenue from our customers as discussed in Note 3, "Summary of Significant Accounting Policies: Revenue Recognition". Two customers accounted for 19% of our revenues for the fiscal year ended March 31, 2005. One customer accounted for 13% and the second customer accounted for 6%. One of these customers accounted for 7% of our accounts receivable at March 31, 2005. Two customers accounted for 21% of our revenues for the fiscal year ended March 31, 2004. One customer accounted for 15% of revenues, and the second customer accounted for 6% of revenues. 13. STOCK, OPTION AND WARRANT EXPENSE The stock, option and warrant expense is a non-cash expense related to the issuance of equity and equity-related securities for services performed for us by employees and outside third party contractors. The accounting for these expenses is in accordance with APB 25 for employee options and SFAS 123, and EITF 96-18, "Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services", for outside third party contractors. Stock issued for contractor services and as payment for liabilities is priced using the closing price of our common stock on the date the shares are issued. The expense is recognized over the term of the agreement or when the services have been performed. The fair value of options and warrants issued for services is estimated using the Black Scholes option pricing model. The pricing model's variables are measured on the date of grant, or if there are contingencies related to the services and vesting, the variables are measured on the date the contingencies are satisfied. The exercise price is set equal to the closing price of the stock on the measurement date. The term of the options and warrants ranges from one to ten years; the assumed expected life of the options and warrants ranges from one to four years. For the fiscal year ended March 31, 2005, interest rates used are the approximate Treasury rate of 3.14%, and the expected volatility was 104% - -141%. For the fiscal year ended March 31, 2004, interest rates used are the approximate Treasury rate of 2.51%, and the expected volatility was 89% - 173%. The expense is recognized over the term of the agreement or when the services have been performed. 14. INCOME TAXES Deferred tax benefits arising from net operating loss carryforwards were determined using the applicable statutory rates. The net operating loss carryforward balances vary from the applicable percentages of net loss due to expenses recognized under generally accepted accounting principles, but not deductible for tax purposes, and due to amortization of goodwill for tax purposes, which was written off in prior years for book purposes. Net operating loss carryforwards available to us for U.S. federal and state tax purposes are as follows as of March 31, 2005: FEDERAL STATE - --------------------------- --------------------------- BALANCE EXPIRATION BALANCE EXPIRATION - ---------- ---------- ----------- ---------- 2,729,703 2012 3,219,423 2013 4,298,379 2011 4,429,411 2019 3,294,278 2012 3,684,281 2020 1,378,267 2013 9,313,338 2021 970,786 2014 8,036,642 2022 272,663 2015 2,349,193 2023 $10,214,373 1,749,406 2024 545,326 2025 - ---------- 36,056,723 ========== 36 At March 31, 2005, we have approximately $1,534,362 in Canadian net operating loss carryforwards that expire from 2007 through 2014. A change of $2,169,638 from the fiscal year ending March 31, 2004, at which time we had approximately $3,704,000 in Canadian net operating loss carryforwards that expired from 2006 through 2013. The utilization of the net operating losses to offset future taxable income may be limited under U.S. tax laws. For federal and state tax purposes, at March 31, 2005 and 2004, we had net deferred tax assets of approximately $15,030,000 and $15,032,000, respectively, which were fully offset by valuation allowances. These net deferred tax assets principally arise due to our net operating loss carryforwards. In accordance with generally accepted accounting principles, a valuation allowance must be established for a deferred tax asset if it is uncertain that a tax benefit may be realized from the asset in the future. We have established a valuation allowance to the extent of our deferred tax assets since it is more likely than not that the benefit will not be realized. The total valuation allowance changed during this fiscal year by $2,000 and by $1,170,000 in fiscal year 2004. 15. EARNINGS PER SHARE (EPS) NET LOSS PER SHARE: Basic EPS is computed as net income (loss) divided by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock options, warrants and other convertible securities. Common equivalent shares are excluded from the computation of net loss per share if their effect is anti-dilutive. The following is a reconciliation of the numerator (net loss) and denominator (number of shares) used in the basic and diluted EPS calculation:
YEAR ENDED MARCH 31, ------------------------------- 2005 2004 ------------ ------------ Basic EPS: Loss from continuing operations $ (654,053) $ (2,357,519) Income (loss) from discontinued operations (including gain from disposals) -- 105,834 Net loss $ (654,053) $ (2,251,685) ============ ============ Weighted average common shares outstanding 22,755,373 20,604,458 ============ ============ Basic EPS from continuing operations $ (0.03) $ (0.11) ============ ============ Basic EPS from discontinued operations $ 0.00 $ 0.00 ============ ============ Basic EPS $ (0.03) $ (0.11) ============ ============ Diluted EPS: Loss from continuing operations $ (654,053) $ (2,357,519) Income (loss) from discontinued operations (including gain from disposals) -- 105,834 Net loss $ (654,053) $ (2,251,685) ============ ============ Weighted average common shares outstanding 22,755,373 20,604,458 Convertible preferred -- -- Warrants -- -- Stock options -- -- ------------ ------------ Total shares 22,755,373 20,604,458 ------------ ------------ Diluted EPS from continuing operations $ (0.03) $ (0.11) ============ ============ Diluted EPS from discontinued operations $ 0.00 $ 0.00 ============ ============ Diluted EPS $ (0.03) $ (0.11) ============ ============
In the fiscal years ended March 31, 2005 and 2004, 5,214,174 and 5,043,195 potential shares, respectively, were excluded from the shares used to calculate diluted EPS as their effect is anti-dilutive. 16. OPERATING LEASES We currently lease space for our operations in Los Gatos, California, Chicago, Illinois and Vancouver, British Columbia, Canada. The lease for the California office expired in September 2004 and we are now currently renting this space on a month to month basis. The lease for the office located in British Columbia expires in June 2007. The lease for the Expand Beyond office located in Chicago, Illinois expires in November 2005. The terms and conditions of the leases are normal and customary. Rental expense was $120,969 in fiscal 2005 and $124,917 in fiscal 2004. 37 Future minimum lease payments due under these agreements are as follows for the years ending March 31: 2006 ..................... 71,278 2007 ..................... 29,722 2008 ..................... 7,556 --------- $ 108,557 ========= 17. RELATED PARTY TRANSACTIONS Effective May 1, 1996, we entered into a three year employment agreement with our Chief Executive Officer. This agreement was extended to May 1, 2004. The agreement automatically renews for one-year terms unless notice is provided by either party. As of May 1, 2005, no notice had been provided by either party, so the agreement has automatically renewed for an additional one-year term. 18. COMMITMENTS AND CONTINGENCIES We are not a party to any legal proceedings. 19. EMPLOYEE BENEFIT PLAN During 1998, we established a plan (the "Plan") which is qualified under Section 401(k) of the Internal Revenue Code of 1986. Eligible employees may make voluntary contributions to the Plan, not to exceed the statutory amount, and we may make matching contributions. We made no contributions in fiscal years 2005 or 2004. 38 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. DATE: JUNE 10, 2005 SEMOTUS SOLUTIONS, INC. BY: /S/ ANTHONY N. LAPINE ------------------------- ANTHONY N. LAPINE CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE --------- ----- ---- /S/ ANTHONY N. LAPINE - ------------------------ CHIEF EXECUTIVE OFFICER JUNE 10, 2005 ANTHONY N. LAPINE AND CHAIRMAN OF THE BOARD /S/ CHARLES K. DARGAN II - ------------------------ CHIEF FINANCIAL OFFICER, JUNE 10, 2005 CHARLES K. DARGAN II TREASURER /S/ MARK WILLIAMS - ------------------------ DIRECTOR JUNE 10, 2005 MARK WILLIAMS /S/ LAURENCE MURRAY - ------------------------ DIRECTOR JUNE 10, 2005 LAURENCE MURRAY /S/ ROBERT LANZ - ------------------------ DIRECTOR AND CHAIRMAN JUNE 10, 2005 ROBERT LANZ OF THE AUDIT COMMITTEE 39 EX-21 2 exhibit21_13603.txt SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 ---------- SUBSIDIARIES OF THE REGISTRANT NAME OF COMPANY STATE OF INCORPORATION Semotus Systems, Corp. British Columbia, Canada Expand Beyond Corporation Delaware WizShop.com, Inc. Delaware EX-23.1 3 exhibit23-1_13603.txt CONSENT OF INDEPENDENT ACCOUNTING FIRM EXHIBIT 23.1 ------------ CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (SEC File No. 333-15399) and the Registration Statements on Form S-3 (SEC File Nos. 333-67490, 333-63938, 333-57772 and 333-113179) of our report dated May 18, 2005, relating to the consolidated financial statements of Semotus Solutions, Inc. and subsidiaries which appears in the Annual Report on Form 10-KSB. /S/ LL BRADFORD & COMPANY, LLC EX-31.1 4 exhibit31-1_13603.txt 302 CERTIFICATION OF THE C.E.O. EXHIBIT 31.1 ------------ CERTIFICATIONS I, Anthony N. LaPine, President and Chief Executive Officer of the Company, certify that: 1. I have reviewed this annual report on Form 10-KSB of Semotus Solutions, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this annual report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's four fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: June 10, 2005 /S/ ANTHONY N. LAPINE - ---------------------------- ANTHONY N. LAPINE PRESIDENT AND CHIEF EXECUTIVE OFFICER EX-31.2 5 exhibit31-2_13603.txt 302 CERTIFICATION OF THE C.F.O. EXHIBIT 31.2 ------------ CERTIFICATIONS I, Charles K. Dargan, II, Chief Financial Officer of the Company, certify that: 1. I have reviewed this annual report on Form 10-KSB of Semotus Solutions, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this annual report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's four fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: June 10, 2005 /S/ CHARLES K. DARGAN, II - -------------------------------- CHARLES K. DARGAN, II CHIEF FINANCIAL OFFICER EX-32.1 6 exhibit32-1_13603.txt 906 CERTIFICATION OF THE C.E.O. EXHIBIT 32.1 ------------ CERTIFICATION PURSUANT TO 18 U.S.C. SS.1350 Pursuant to 18 U.S.C. ss.1350, the undersigned certifies that this Annual Report on Form 10-KSB for the period ended March 31, 2005 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in this report fairly presents, in all material respects, the financial condition and results of operations of Semotus Solutions, Inc. DATED: JUNE 10, 2005 /S/ ANTHONY N. LAPINE ------------------------------- ANTHONY N. LAPINE CHIEF EXECUTIVE OFFICER EX-32.2 7 exhibit32-2_13603.txt 302 CERTIFICATION OF THE C.F.O. EXHIBIT 32.2 ------------ CERTIFICATION PURSUANT TO 18 U.S.C. SS.1350 Pursuant to 18 U.S.C. ss.1350, the undersigned certifies that this Annual Report on Form 10-KSB for the period ended March 31, 2005 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in this report fairly presents, in all material respects, the financial condition and results of operations of Semotus Solutions, Inc. DATED: JUNE 10, 2005 /S/ CHARLES K. DARGAN, II ------------------------------ CHARLES K. DARGAN, II CHIEF FINANCIAL OFFICER -----END PRIVACY-ENHANCED MESSAGE-----