10QSB 1 form10-qsb_13935.txt 10-QSB FOR THE QUARTER ENDED SEPTEMBER 30, 2005 ================================================================================ U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2005 COMMISSION FILE NUMBER: 1-15569 SEMOTUS SOLUTIONS, INC. (Exact name of small business issuer in its charter) Nevada 36-3574355 ------------------------------ --------------------------- (State or other jurisdiction of (IRS Employer Identification Incorporation or Organization) Number) 718 University Ave., Suite 202, Los Gatos, CA 95032 (Address of Principal Executive Offices including zip code) (408) 399-6120 (Issuer's telephone number) 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 [_] There were 29,186,013 shares of our Common Stock issued, and 28,378,720 shares of our Common Stock outstanding as of October 31, 2005. Transitional Small Business Disclosure Format: Yes [_] No [X] ================================================================================ SEMOTUS SOLUTIONS, INC. QUARTERLY REPORT ON FORM 10QSB FOR THE QUARTER ENDED SEPTEMBER 30, 2005 TABLE OF CONTENTS ----------------- PAGE ---- PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS: a. Condensed Consolidated Balance Sheets as of September 30, 2005 (unaudited) and March 31, 2005 3 b. Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended September 30, 2005 and 2004 (unaudited) 4 c. Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2005 and 2004 (unaudited) 5 d. Notes to the Condensed Consolidated Financial Statements (unaudited) 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 10 ITEM 3. CONTROLS AND PROCEDURES 15 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 15 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 15 ITEM 3. DEFAULTS UPON SENIOR SECURITIES 16 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16 ITEM 5. OTHER INFORMATION 16 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16 SIGNATURES 18 CERTIFICATIONS 19 2 PART I - FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, March 31, ASSETS 2005 2005 ----------- ----------- CURRENT ASSETS: (unaudited) Cash and cash equivalents $ 1,048,584 $ 1,435,246 Trade receivables (net of allowance for doubtful accounts of $17,267 at September 30, 2005 and $0.00 at March 31, 2005) 367,177 220,234 Prepaid expenses and other current assets 26,334 45,510 ----------- ----------- Total current assets 1,442,095 1,700,990 Property and equipment, net 24,437 50,273 Goodwill, net 3,445,409 1,860,162 ----------- ----------- Total assets $ 4,911,941 $ 3,611,425 =========== =========== LIABILITIES & SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Bank line of credit $ 143,372 $ -- Accounts payable 351,644 224,630 Accrued vacation 90,357 53,303 Other accrued liabilities 143,188 55,903 Deferred revenue 210,496 179,113 ----------- ----------- Total current liabilities 939,057 512,949 ----------- ----------- Total liabilities 939,057 512,949 ----------- ----------- Commitments and contingencies (Note 8) ----------- ----------- SHAREHOLDERS' EQUITY: Common stock: $0.01 par value; authorized: 50,000,000 shares; 29,186,013 issued and 28,378,720 outstanding at September 30, 2005, and 24,767,144 issued and 24,576,048 outstanding at March 31, 2005 283,787 245,761 Additional paid-in capital 70,329,212 68,698,586 Accumulated other comprehensive loss (81,922) (78,344) Accumulated deficit (66,558,193) (65,767,527) ----------- ----------- Total shareholders' equity 3,972,884 3,098,476 ----------- ----------- Total liabilities and shareholders' equity $ 4,911,941 $ 3,611,425 =========== ===========
See accompanying notes to consolidated financial statements. 3 SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (unaudited)
Three Months Ended Six Months Ended September 30, September 30, 2005 2004 2005 2004 ------------ ------------ ------------ ------------ Revenues $ 685,721 $ 457,562 $ 1,163,066 $ 898,137 Cost of revenues 82,472 75,319 222,697 143,739 ------------ ------------ ------------ ------------ Gross profit 603,249 382,243 940,369 754,398 Operating expenses: (Exclusive of depreciation and amortization and stock, option and warrant expense) Research and development 289,212 129,715 429,149 254,979 Sales and marketing 340,086 221,828 609,745 405,973 General and administrative 325,938 213,994 596,697 459,170 Depreciation and amortization 18,513 37,337 39,627 73,313 Stock, option and warrant expense (19,633) (61,190) 99,918 (593,121) ------------ ------------ ------------ ------------ Total operating expenses 954,116 541,684 1,775,136 600,314 ------------ ------------ ------------ ------------ Operating income (loss) (350,867) (159,441) (834,767) 154,084 Other income (loss) 32,670 3,532 44,101 4,966 ------------ ------------ ------------ ------------ Net income (loss) (318,197) (155,909) (790,666) 159,050 Other comprehensive income (loss) - Translation adjustment 1,370 8,219 (3,578) (1,290) ------------ ------------ ------------ ------------ Comprehensive income (loss) $ (316,827) $ (147,690) (794,244) $ 157,760 ============ ============ ============ ============ Net income (loss) per common share: Basic $ (0.01) $ (0.01) $ (0.03) $ 0.01 Diluted $ (0.01) $ (0.01) $ (0.03) $ 0.01 Weighted average shares outstanding: Basic 25,081,392 22,743,965 22,834,455 22,718,412 Diluted 25,081,392 22,743,965 22,834,455 23,713,647 ============ ============ ============ ============
See accompanying notes to consolidated financial statements. 4 SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Six Months Ended September 30, 2005 2004 ----------- ----------- Cash flows from operating activities: Net income (loss) $ (790,666) $ 159,050 Adjustments to reconcile loss from continuing operations to net cash used in operating activities: Depreciation and amortization 39,627 73,313 Compensation expense related to stock, stock options and warrants issued for services 99,918 (593,121) Amortization of notes receivable, net -- 14,731 Non-cash settlement of liabilities (9,146) -- Changes in assets and liabilities net of acquired assets and liabilities due to acquisition: Accounts and other receivables (82,370) (37,495) Prepaid expenses and other assets 28,414 21,030 Accounts payable 113,482 110,182 Accrued expenses and other current liabilities (53,289) 44,996 Deferred revenue (5,174) 5,280 ----------- ----------- Net cash used in operating activities (659,204) (202,034) ----------- ----------- Cash flows from investing activities: Cash acquired for stock in acquisition 120,442 -- ----------- ----------- Net cash provided by investing activities 120,442 -- ----------- ----------- Cash flows from financing activities: Bank line of credit (Note 6) 143,372 -- Proceeds from exercise of options and warrants 7,438 8,007 ----------- ----------- Net cash provided by (used in) financing activities 150,810 8,007 ----------- ----------- Effect of exchange rate changes on cash 1,290 (3,503) ----------- ----------- Net decrease in cash and cash equivalents (386,662) (197,530) Cash and cash equivalents, beginning of period 1,435,246 1,717,052 ----------- ----------- Cash and cash equivalents, end of period $ 1,048,584 $ 1,519,522 =========== ===========
See accompanying notes to consolidated financial statements. 5 SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (unaudited)
Six Months Ended September 30, 2005 2004 ----------- ----------- SUPPLEMENTAL CASH FLOW DISCLOSURE: Cash paid for interest $ 1,432 $ 405 =========== =========== Cash paid for income taxes $ 3,325 $ 2,400 =========== =========== SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES: Non-cash compensation expense (reversal) due to variable accounting for repriced stock options $ (81,201) $ (634,693) =========== =========== Assets acquired for stock, and liabilities assumed, in Clickmarks, Inc.: Assets acquired $ 203,766 $ -- Goodwill 1,585,247 -- ----------- ----------- Fair value of assets 1,789,013 -- Liabilities assumed (227,716) -- ----------- ----------- Non-cash purchase consideration for the acquisition of Clickmarks, Inc. through the issuance of common stock $ 1,561,297 $ -- =========== =========== Non-cash value of warrants issued as part of the acquisition of Clickmarks, Inc. $ 279,692 $ -- =========== ===========
See accompanying notes to consolidated financial statements. 6 SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. FORMATION AND BUSINESS OF THE COMPANY: Semotus(R) Solutions, Inc. ("We" or "Our"), changed its 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 software for wireless enterprise applications. Our software solutions provide immediate mobile access to, and control of, business-critical software applications, databases, networks and servers. 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 family of financial market data software and services, the HipLinkXS family of software and services, including PocketAdmin and PocketDBA, and a patented Presentation Level Integration (PLI) technology that enables rapid creation of composite applications and web services out of existing backend systems. Our software provides mobility and convenience, increases efficiency, and improves profitability. 2. BASIS OF PRESENTATION The accompanying condensed consolidated financial statements include the accounts of Semotus Solutions, Inc. and its subsidiaries. The condensed consolidated balance sheet as of September 30, 2005, the condensed consolidated statements of operations and comprehensive loss for the three and six months ended September 30, 2005 and 2004, and the condensed consolidated statements of cash flows for the six months ended September 30, 2005 and 2004 have been prepared by us, without audit and in accordance with the instructions to Form 10-QSB and Regulation SB. In the opinion of our management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended September 30, 2005 are not necessarily indicative of the results that may be expected for the year ending March 31, 2006. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. We believe that the disclosures provided are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-KSB for the year ended March 31, 2005. The preparation of condensed consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. The condensed consolidated financial statements include the accounts of Semotus Solutions, Inc. and our wholly owned subsidiaries: Semotus Systems Corporation (Canadian subsidiary), Expand Beyond Corporation ("Expand Beyond") and Clickmarks, Inc. ("Clickmarks"). 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. Operations of Clickmarks consist mainly of sales of 7 software products and professional services and support of existing software applications. Clickmarks owns a patented Presentation Level Integration (PLI) technology which enables rapid creation of composite applications and web services out of existing backend systems, which may be delivered via web, portal, and mobile front-ends. Clickmarks' technology will also be added to our HipLinkXS family of software products, as well as sold as a stand-alone software solution. 3. RECENT PRONOUNCEMENTS 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. In December of 2004, the FASB amended APB No. 29, "Accounting for Nonmonetary Transactions", which is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The guidance in that Opinion, however, included certain exceptions to that principle. This Statement amends Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The adoption did not have a material effect on the Company's consolidated financial results of operations or cash flows. 4. 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. Effective October 23, 2002 our Board of Directors approved the repricing of most of the options under our 1996 Stock Option Plan, as amended, with exercise prices ranging from $0.22 to $0.84 per share held by most of the employees (including executive officers) and Board members. In light of the reductions in work force and salary reductions, our Board of Directors deemed it advisable to reprice the options to provide a retention incentive for the remaining employees. The option grants were repriced to an exercise price of $0.15 per share (the current fair market value of our common stock as of the reprice date) and an exercise price of $0.17 per share (110% of the fair market value at the date of reprice) for those persons owning more than 10% of the voting power of all classes of stock. All grants maintained their 8 existing vesting schedule. This is deemed to be a repricing under FIN 44 and resulted in variable plan accounting. A decrease in the closing stock price on September 30, 2005 from the closing stock price on March 31, 2005 resulted in an offset of $104,701 and $81,201 to the compensation expense to be recognized in the three and six months ended September 30, 2005, respectively. A decrease in the closing stock price on September 30, 2004 from the closing stock price on March 31, 2004 resulted in an offset of $79,502 and $634,693 to the compensation expense to be recognized in the three months and six months ended September 30, 2004, respectively. 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. 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, our net loss in fiscal quarters ended September 30, 2005 and 2004 would have been adjusted to the pro forma amounts indicated below:
Three Months Ended Six Months Ended September 30, September 30, 2005 2004 2005 2004 --------- --------- --------- --------- Net income (loss), as reported $(318,197) $(155,909) $(790,666) $ 159,050 (Less) add: Total stock-based employee compensation expense (reversal) determined under intrinsic value based method for all awards and variable accounting for repriced options (104,701) (79,502) (81,201) (634,693) Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards (31,042) (19,368) (60,016) (58,221) Pro forma net loss $(453,940) $(254,779) (931,883) (533,864) Net income (loss) per share: Basic - as reported $(0.01) $(0.01) $(0.03) $ 0.01 Basic - pro forma $(0.02) $(0.01) $(0.04) $(0.02) Diluted - as reported $(0.01) $(0.01) $(0.03) $ 0.01 Diluted - pro forma $(0.02) $(0.01) $(0.04) $(0.02)
The above pro forma disclosures are not expected to be representative of the effects on reported net income (loss) for future years. 5. EARNINGS PER SHARE (EPS) DISCLOSURES In accordance with SFAS No. 128 "Earnings Per Share" (EPS), we report Basic and Diluted EPS as follows: Basic EPS is computed as net 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. For the three and six months ended September 30, 2005, 5,241,381 potential shares were excluded from the shares used to calculate diluted EPS as their effect is anti-dilutive. For the three and six months ended September 30, 2004, 5,166,450 and 4,145,279 potential shares, respectively, were excluded from the shares to calculate diluted EPS as their effect is anti-dilutive. 9 6. BANK LINE OF CREDIT On September 30, 2004 we entered into a loan and security agreement with a medium sized local bank. The outstanding amount under line of credit is $143,372, which is being used for working capital purposes. The maximum amount allowed to be advanced is 80% of our eligible accounts receivable or $150,000, whichever is less. 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 was renewed on July 29, 2005 for one year so that the line of credit terminates on July 28, 2006, when all advances are immediately payable. 7. ACQUISITIONS We made no acquisitions in the fiscal quarters ended September 30, 2005 or 2004. In the quarter ended June 30, 2005, we acquired Clickmarks, Inc. In exchange for 100% of Clickmarks' issued and outstanding capital stock we issued 4,107,982 shares of our common stock to the stockholders of Clickmarks as of the close of the acquisition, June 23, 2005. 15% of these shares are being held in escrow, and may be used by us for indemnification purposes related to the acquisition. Through the acquisition of Clickmarks, we acquired $203,766 in fair value of assets and recorded $1,585,247 in goodwill. Separate from the merger agreement, as a hiring and retention incentive and in lieu of issuing stock options under the Company's stock option plan, Semotus issued warrants to this group of employees to purchase up to a total of 1,000,000 shares of Semotus common stock at an exercise price of $0.39 per share, which was the closing price of Semotus' stock on June 23rd, the date the acquisition closed and their date of hire, vesting over a one year period and having a ten year term. These warrants have a total value of $279,692. We recorded approximately $141,000 in expense in the six months ended September 30, 2005, related to the 1,000,000 warrants granted to the Clickmarks' employees. Semotus has also issued 70,646 shares of restricted common stock to some of these Clickmarks' employees, and may issue up to 129,354 additional shares of restricted common stock to some of these Clickmarks' employees at or before their annual anniversary with Semotus. In connection with the acquisition of Clickmarks, Semotus paid a finder's fee to Bathgate Capital Partners, LLC of $48,750, all of which was paid by the issuance of 137,324 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. 8. COMMITMENTS AND CONTINGENCIES We have a new operating lease for our facility in Los Gatos, California for which the future minimum lease payments are $54,450 in from October 1, 2005 through March 31, 2006, $111,860 in FY 2007, $116,308 in FY 2008 and $58,896 in FY 2009. There are no material commitments for capital expenditures at September 30, 2005. 9. SUBSEQUENT EVENT On October 11, 2005 we entered into an Amendment to the loan and security agreement discussed in Footnote 6. This Amendment increased the maximum amount allowed to be advanced up to 80% of our eligible accounts receivable, including accounts receivable from two of our subsidiaries, Clickmarks and Expand Beyond, or $150,000, whichever is less. ITEM 2. 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. 10 CRITICAL ACCOUNTING POLICIES We described our critical accounting policies in Item 6, "Management's Discussion and Analysis or Plan of Operation," of our Annual Report on Form 10-KSB for the year ended March 31, 2005. Our critical accounting policies are those that are most important to the portrayal of our financial condition and results of operations, and require our management's significant judgments and estimates and such consistent application fairly depicts our financial condition and results of operations for all periods presented. OVERVIEW Through fiscal year 2004 to present, we have focused on growing revenues through increased sales in our existing and acquired 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. Through the acquisition of Clickmarks, we acquired a patented Presentation Level Integration (PLI) technology which enables rapid creation of composite applications and web services out of existing backend systems, which may be delivered via web, portal, and mobile front-ends. We had a net loss of $318,197 in the three months ended September 30, 2005, as compared to a net loss of $155,909 in the three months ended June 30, 2004. However, the per share loss for the three months ended September 30, 2005 and 2004 was identical, at $0.01 per share. We had a net loss of $790,666 and $0.03 per share in the six months ended September 30, 2005, as compared to net income of $159,050 and $0.01 per share in the six months ended September 30, 2004. The overall cash decline was increased to $386,662 from $197,530 in the six months ended September 30, 2005 versus 2004. Although the Company has increased its engineering and sales and marketing spending, it has not yet resulted in increased operating income or cash flow from product and service sales. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2005 AND 2004 REVENUES Revenues for the three months ended September 30, 2005 increased 50% to $685,721 as compared to $457,562 for the three months ended September 30, 2004. Revenues increased 29.5% to $1,163,066 for the six months ended September 30, 2005 as compared to $898,137 for the six months ended September 30, 2004. This is due to the addition of sales from both Expand Beyond and Clickmarks. In general, the increase in sales is largely due to the increased IT spending by corporate customers as the technology industry continues to recover. Corporate customers are using wireless products and services as tools to implement increased productivity in lieu of increasing personnel hiring. COST OF REVENUES AND GROSS MARGIN The overall gross profit margin increased to 87% from 84% in the three months ended September 30, 2005 versus September 30, 2004, but decreased to 80% from 84% in the six months ended September 30, 2005 versus 2004. The decrease in gross profit margin for the six months ended September 30, 2005 is principally due to increases in data feed costs from the various exchanges. As part of the Company's cost management, Semotus changes data feed suppliers on a competitive basis from time to time, which has improved the gross profit margin the the three months ended September 30, 2005. The cost of revenue principally includes costs to obtain data feeds from various exchanges, costs of engineering development directed to specifically identified products, and costs of servicing and hosting customer products. 11 OPERATING EXPENSES Operating expenses increased overall in the three and six month periods ended September 30, 2005 versus the same periods in the last fiscal year, due to the increases in operating cost centers, which resulted from the acquisitions of Clickmarks and Expand Beyond. Further, in the second quarter of last fiscal year, there was a large reversal of the repriced stock option expense required in the variable plan accounting. We categorize operating expenses into five major categories: research and development, sales and marketing, general and administrative, depreciation and amortization, and stock, option and warrant expense. The table below summarizes the changes in these five categories of operating expenses (unaudited):
THREE MONTHS SIX MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, DESCRIPTION 2005 2004 2005 2004 --------- --------- ---------- --------- Research and development $ 289,212 $ 129,715 $ 429,149 $ 254,979 Sales and marketing 340,086 221,828 609,745 405,973 General and administrative 325,938 213,994 596,697 459,170 Depreciation and amortization 18,513 37,337 39,627 73,313 Stock, option and warrant expense (19,633) (61,190) 99,918 (593,121) --------- --------- ---------- --------- Total $ 954,116 $ 541,684 $1,775,136 $ 600,314
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 increased due to product improvements and enhancements from the acquisition of Expand Beyond and Clickmarks, as well as from an increase in personnel in engineering. Remaining engineering costs are production projects for the existing products and services which has also increased spending in this second quarter ending September 30, 2005. 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 the increase in general advertising and non-sales supported marketing, as well as from the addition of new sales personnel. General and administrative expenses include senior management, accounting, legal, business development consulting, rent, administrative personnel, and other overhead related costs. This category also includes the costs associated with being a publicly traded company, including the costs of the AMEX listings, SEC filings, investor and public relations. These costs increased during the three and six months ended September 30, 2005 versus 2004 due substantially to additional overhead costs related to the acquisitions of Expand Beyond and Clickmarks. Depreciation and amortization expense includes depreciation of computers and other related hardware and certain fixtures. The decline in this expense for the three and six months ended September 30, 2005 versus 2004 is as a result of fully depreciated assets and from the decline in capital spending on depreciable assets. The non-cash charges for compensation consists mainly of grants of stock, options and warrants for services provided to us. Such services include financial, legal and business development consulting. The common stock issued was valued at its fair market value at the time of issuance. Certain employee stock options, which have been repriced, are subject to the variable plan requirements of FIN No. 44, that requires us to adjust compensation expense for increases and decreases in the intrinsic value of our common stock until those options are exercised, forfeited, or expire unexercised. An offset of $104,701 to the compensation expense was required to be recognized in the three months ended September 30, 2005. $81,201 in compensation expense was required to be recognized in the six months ended September 30, 2005. Offsets of $79,502 and $634,693 to the compensation expense were required to be recognized in 12 the three and six months ended September 30, 2004. (See Note 4, "Stock Based Compensation"). Increases or decreases in our stock price will also be recognized in the future for outstanding vested repriced options if the stock price continues to be above the revised exercise price of the options. The increase in non-cash charges for compensation for the six months ended September 30, 2005 is due mainly to the compensation expense for restricted stock grants and warrants to the new Expand Beyond and Clickmarks employees, and to a lesser extent to the compensation expense recorded for the October 2002 repriced stock options. COMPREHENSIVE LOSS The comprehensive loss of $316,827 or $0.01 per share and $794,244 or $0.03 per share for the three and six months ended September 30, 2005, respectively, compared to the comprehensive loss of $147,690 or $0.01 per share and comprehensive income of $157,760 or $0.01 per share for the three and six months ended September 30, 2004, respectively, is mainly a result of the combination of a substantial offset to the stock, option and warrant compensation expense as a result of variable plan accounting that was taken in 2004 and a substantial stock, option and warrant compensation expense taken in 2005, and as a result of increased operating expenses related to the Expand Beyond and Clickmarks acquisitions. LIQUIDITY AND CAPITAL RESOURCES Cash continued to be spent on operating resources and upgrading and maintaining certain wireless products as well as new staff. Additionally, the recent acquisitions of Expand Beyond and Clickmarks have increased the cash used in operating activities, and consequently the overall cash loss increased by 96% for the six months ended September 30, 2005 versus 2004. The sources and uses of cash are summarized as follows (unaudited): SIX MONTHS ENDED SEPTEMBER 30, 2005 2004 --------- --------- Cash used in operating activities $(659,204) $(202,034) Cash provided by investing activities 120,442 -- Cash provided by financing activities 150,810 8,007 Effect of exchange rate changes on cash 1,290 (3,503) --------- --------- Net decrease in cash and cash equivalents $(386,662) $(197,530) ========= ========= Cash used in operating activities from continuing operations consisted principally of an operating loss of $834,767 resulting from gross profits of $940,369 and operating expenses of $1,775,136. Some of the operating loss is offset by non-cash expenses of $39,627 of depreciation and amortization and $99,918 of stock compensation expense. Other operating activities that contributed to the reduction in the use of cash were an increase in accounts payable of $113,482 and an increase in prepaid expenses of $28,414, offset by an increase in other accrued liabilities of $53,289 and an increase in accounts receivable of $82,370. Cash used in operating activities in the six months ended September 30, 2004 consisted principally of an operating loss of $439,037 after eliminating the reversal in the stock compensation expense of $593,121. This loss resulted from gross profits of $754,398 and operating expenses of $1,193,435. Other operating activities that reduced the use of cash were a decrease in prepaid expenses of $21,030, an increase in accounts payable of $110,182 and an increase in accrued expenses of $44,996. 13 Cash provided by investing activities for the six months ended September 30, 2005 consisted principally of cash acquired in the Clickmarks acquisition of $120,442. There was no cash used in or provided by investing activities for the six months ended September 30, 2004. Cash provided by financing activities for the six months ended September 30, 2005 consisted principally of draw down on our revolving line of credit of $150,000 and $7,438 of cash from the exercise of stock options. Cash provided by financing activities for the six months ended September 30, 2004 consisted of $8,007 of cash from the exercise of stock options. As of September 30, 2005, we had cash and cash equivalents amounting to $1,048,584, a decrease of $386,662 from the balance at March 31, 2005, which was $1,435,246. Working capital decreased to $503,038 at September 30, 2005 from $1,188,041 at the fiscal 2005 year end, a decrease of $685,003. 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. We have a new operating lease for our facility in Los Gatos, California for which the future minimum lease payments are $77,138 in FY 2006, $111,860 in FY 2007, $116,308 in FY 2008 and $58,896 in FY 2009. There are no material commitments for capital expenditures at September 30, 2005. Management believes that it has adequate working capital for the next 12 months. RECENT PRONOUNCEMENTS: 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 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. In December of 2004, the FASB amended APB No. 29, "Accounting for Nonmonetary Transactions", which is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The guidance in that Opinion, however, included certain exceptions to that principle. This Statement amends Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The adoption did not have a material effect on the Company's consolidated financial results of operations or cash flows. FORWARD LOOKING STATEMENTS AND RISK FACTORS This report includes forward-looking statements relating to, among other things, projections of future results of operations, our plans, objectives and expectations regarding our future services and operations, and general industry and business conditions applicable to us. We have based these forward-looking statements on our current expectations and projections about future events. You can find many of these forward-looking statements by looking for words such as "may", "should", "believes", "expects", "anticipates", "estimates", "intends", "projects", "goals", "objectives", or similar expressions in this document or in documents incorporated herein. 14 These forward-looking statements are subject to a number of risks, uncertainties and assumptions about us that could cause actual results to differ materially from those in such forward-looking statements. Such risks, uncertainties and assumptions include, but are not limited to, our limited operating history, our historical losses, the infancy of the wireless data industry where there is no established market for our products and services, our ability to adapt to rapid technological changes, our dependence on wireless networks owned and controlled by others, and the other factors that we describe in the section entitled "Risk Factors" in the Form 10KSB for the year ended March 31, 2005. We claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. QUANTITATIVE AND QUALITATIVE DISCLOSURE REGARDING MARKET RISK We have limited exposure to financial market risks, including changes in interest rates. At September 30, 2005, we had cash and cash equivalents of $1,048,584. Cash and cash equivalents consisted of demand deposits and money market accounts. Because of the cash equivalency of the money market accounts and the liquidity thereof, there is no material exposure to interest rates for these accounts. We have $150,000 in a revolving line of credit with a bank at September 30, 2005. Due to the short term nature of the line of credit, there is no material exposure to interest rates. We have a permanent engineering operation in Vancouver, B.C., Canada, and therefore we have an exposure to the Canadian and U.S. dollar exchange rate. In the ordinary course of business, we transfer funds to the Canadian company and record the translation at the current exchange rate. We record translation gains and losses in comprehensive income (loss). At September 30, 2005, the cumulative translation loss was $81,922. Given the historical relative stability of the Canadian and U.S. dollar exchange rate, and due to the small cost center in Canada, we have not deemed it necessary to hedge this exposure. We actively monitor the situation and while as of September 30, 2005 there has been a small decline in the U.S. dollar against the Canadian dollaR we do not deem it significant enough to incur the cost of hedging. Should the trend continue, we would seek to limit or hedge the exposure. ITEM 3. CONTROLS AND PROCEDURES As of the end of our most recently completed fiscal quarter covered by 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. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS We are not a party to any legal proceedings. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS We issued securities, which were not registered under the Securities Act of 1933, as amended, as follows: 15 During the quarter ended September 30, 2005, we issued 60,000 shares of restricted common stock to two third party independent consultants in exchange for services. With respect to these transactions, we relied on Section 4(2) of the Securities Act of 1933, as amended. The investors were given complete information concerning us and represented that the shares were being acquired for investment purposes. 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. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. We held our Annual Meeting of Stockholders on September 22, 2005, for the purpose of (1) electing four directors, (2) ratifying the appointment of L.L. Bradford & Company as the Company's independent accountants for the fiscal year ending March 31, 2006, and (3) approving the Company's 2005 Stock Option Plan. The following summarizes the voting results: ITEM (1). Stockholders elected Anthony N. LaPine, Robert Lanz, Mark Williams and Laurence Murray each until the next Annual Meeting of Stockholders or until their successors have been duly elected and qualified. The vote for each director was as follows: % OF SHARES VOTES % OF VOTED DIRECTORS VOTES FOR VOTED WITHHELD WITHHELD --------- --------- ----- -------- -------- Anthony N. LaPine 25,331,916 97.89% 546,877 2.11% Robert Lanz 25,701,081 99.32% 177,712 0.68% Mark Williams 25,698,673 99.31% 180,120 0.69% Laurence W. Murray 25,700,136 99.31% 178,657 0.69% ITEM (2). The appointment of L.L. Bradford & Company as the Company's independent accountants for the fiscal year ending March 31, 2006 was approved. The vote was as follows: VOTES FOR % OF SHARES VOTED VOTES AGAINST VOTES ABSTAINED --------- ---------------- ------------- --------------- 25,797,181 99.68% 48,727 32,885 ITEM (3). The approval of the Company's 2005 Stock Option Plan was approved. The vote was as follows: % OF SHARES VOTES FOR VOTED VOTES AGAINST VOTES ABSTAINED BROKER NON-VOTES --------- ----- ------------- --------------- ---------------- 8,670,872 89.11% 705,466 353,405 16,149,050 ITEM 5. OTHER INFORMATION. None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. a) Exhibits: 31.1 Certification pursuant to 17 C.F.R. ss.240.15d-14(a) for Anthony N. LaPine. 16 31.2 Certification pursuant to 17 C.F.R. ss.240.15d-14(a) for Charles K. Dargan, II. 32.1 Certification pursuant to 18 U.S.C. ss.1350 for Anthony N. LaPine. 32.2 Certification pursuant to 18 U.S.C. ss.1350 for Charles K. Dargan, II. b) Reports on Form 8-K: The Company filed one Current Report on Form 8-K during this quarter. On September 6, 2005 a Form 8-K/A was filed to attach the financial statements and related pro forma financial statements of Clickmarks Corporation. 17 SIGNATURES Pursuant to the requirements 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. SEMOTUS SOLUTIONS, INC. DATE: NOVEMBER 8, 2005 BY: /S/ ANTHONY N. LAPINE --------------------------------- ANTHONY N. LAPINE, PRESIDENT, CEO AND CHIEF EXECUTIVE OFFICER (PRINCIPAL EXECUTIVE OFFICER) BY: /S/ CHARLES K. DARGAN, II --------------------------------- CHARLES K. DARGAN, II, CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL OFFICER) 18