10KSB 1 form10-ksb_15228.txt SEMOTUS SOLUTIONS, INC. FORM 10-KSB ================================================================================ 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, 2007 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.) 718 UNIVERSITY AVE., SUITE 202, LOS GATOS, CA 95032 (Address of principal executive offices, including zip code) Issuer's telephone number: (408) 399-6120 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 $1,621,277. 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 16, 2007 was $3,557,060. As of May 15, 2007, 35,570,599 shares of the issuer's Common stock were issued and 34,954,405 shares were outstanding. DOCUMENTS INCORPORATED BY REFERENCE The Proxy Statement for the 2007 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, 2007 INDEX PAGE ---- PART I ITEM 1 Description of Business.............................................. 3 ITEM 2 Description of Property.............................................. 13 ITEM 3 Legal Proceedings.................................................... 13 ITEM 4 Submission of Matters to a Vote of Security Holders.................. 13 PART II ITEM 5 Market for Common Equity and Related Stockholder Matters............. 13 ITEM 6 Management's Discussion and Analysis or Plan of Operation............ 14 ITEM 7 Financial Statements................................................. 19 ITEM 8 Changes In and Disagreements With Accountants on Accounting and Financial Disclosure................................................ 19 ITEM 8A Controls and Procedures.............................................. 19 ITEM 8B Other Information.................................................... 19 PART III ITEM 9 Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act.................. 20 ITEM 10 Executive Compensation............................................... 20 ITEM 11 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.................................... 20 ITEM 12 Certain Relationships and Related Transactions....................... 20 ITEM 13 Exhibits............................................................. 20 ITEM 14 Principal Accountant Fees and Services............................... 22 SIGNATURES................................................................... 47 CERTIFICATIONS............................................................... 48 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 enterprise application software connecting 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 HipLinkXS family of software, the PocketAdmin and PocketDBA software from Expand Beyond, and the technology and software solutions from Clickmarks. Our enterprise application software and services provide mobility, convenience, and efficiency and improve profitability. These software solutions provide immediate mobile access and control of business-critical software applications, databases, networks and servers. 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, which changed its name to Semotus Systems Corp. We currently have two wholly owned subsidiaries: Expand Beyond Corporation ("Expand Beyond") and Clickmarks, Inc. ("Clickmarks"). All significant intercompany transactions and balances have been eliminated in consolidation. In the year ended March 31, 2007, we closed the operations of Expand Beyond and transferred our research and development activities from Vancouver, Canada to Pakistan. Additionally, and more recently, the Global Market Pro Family and other legacy wireless financial data consumer services and software were sold to Stockgroup Systems, Ltd. pursuant to an asset purchase agreement signed in May of 2007. Operations of Clickmarks consist mainly of sales of software products and professional services and support of existing software applications. Clickmarks utilizes 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 has also been added to our HipLinkXS family of software products, as well as sold as a stand-alone software solution. 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 AND RECENT DEVELOPMENTS We entered into a definitive Agreement and Plan of Reorganization on November 10, 2006 with Citytalk, Inc. (Citytalk), relating to the merger of Citytalk with and into Semotus, with Semotus as the surviving corporation of the merger (the "Merger Agreement"). In the Merger Agreement, we have agreed to acquire 100% of the issued and outstanding capital stock of Citytalk for 418,744,000 shares of Semotus Solutions' common stock. On a fully diluted basis, taking into consideration our outstanding stock, and assuming the exercise of all our warrants and vested stock options, we would have approximately 46,500,000 common shares outstanding. Therefore, the issuance of 418,744,000 common shares to Citytalk will result in Semotus' shareholders owning approximately 10% of the combined corporation upon the close of the merger. The agreement is subject to Semotus' stockholders approval, Citytalk's stockholders approval, the American Stock Exchange's approval and other closing conditions, including the acquisition by Citytalk of three other companies, NTCH Colorado, Inc., NTCH Idaho, Inc. and NTCH Tennessee, Inc. (collectively, "NTCH"), and an investment of at least $60,000,000 into Citytalk. Citytalk is a merger vehicle created to acquire tower infrastructure and flat rate cellular operations in key markets in the continential United States. If the merger with Citytalk does close, we have agreed to pay a placement fee to the placement agent, Bathgate Capital Partners, LLC in the form of $150,000 and 2,000,000 shares of restricted common stock. As of June 1, 2007, the merger was not consummated for a number of reasons, including the fact that Citytalk has not finalized the financing of NTCH and that we received comments from the SEC regarding our preliminary proxy statement, which we are in the process of responding to. We have agreed to the June 28th extension that was an option allowed for in the second amendment to the merger agreement that was filed with the proxy statement. We are currently in discussions with Citytalk regarding another extension that will provide the necessary time required for Citytalk to finalize the financing and for the SEC to complete their review of our proxy statement. We are also considering the pursuit of other alternatives to the merger with Citytalk after the June 28th extension deadline expires. We received a deficiency letter from the American Stock Exchange (Amex) dated July 14, 2006, advising that, based upon its review of our financial statements included in our Annual Report on Form 10-KSB for the fiscal year ended March 31, 2006, we are not in compliance with Amex' continued listing requirements. Specifically, we are not in compliance with Section 1003(a)(iii) of the Amex Company Guide, because our stockholders' equity is less than $6,000,000 and we sustained losses from continuing operations and/or net losses in our five most recent fiscal years. We submitted a compliance plan to Amex in August of 2006 which outlines our plans to regain compliance with Amex' continued listing requirements. Since that time, we have provided updates and amendments to our original compliance plan. The plan was approved on November 15, 2006. Therefore, our listing is being continued pursuant to an 3 extension period that will end concurrent with the closing of the merger with Citytalk, Inc. As of June 1, 2007, the merger was not consummated for a number of reasons, including the fact that Citytalk has not finalized the financing of NTCH and that we received comments from the SEC regarding our preliminary proxy statement, which we are in the process of responding to. We have agreed to the June 28th extension that was an option allowed for in the second amendment to the merger agreement that was filed with the proxy statement. Semotus and Citytalk are currently in discussions regarding another extension that will provide the necessary time required for Citytalk to finalize the financing and for the SEC to complete their review of our proxy statement. To maintain our listing, we are subject to periodic review by AMEX staff during this extension period. If Semotus does not make progress consistent with the plan, the AMEX will initiate delisting proceedings pursuant to Section 1009 of the AMEX Company Guide. As part of our ongoing emphasis on financial responsibility and the streamlining of operations, we have closed our Vancouver, Canada facility. On September 20, 2006, our Canadian subsidiary company, Semotus Systems Corporation, filed a notice of voluntary bankruptcy in the District of British Columbia, Canada. The majority of our engineering, and research and development efforts are now being handled offshore by an independent contractor. We accounted for the Semotus Systems Corporation bankruptcy filing in accordance with FAS 146, "Accounting for Costs Associated with Exit or Disposal Activities." A trustee fee of $2,672 was incurred in the three months ended September 30, 2006 to complete the bankruptcy filing. This fee is reflected in the general and administrative expenses line item in our income statement for the fiscal year ended March 31, 2007. Certain liabilities and assets in the amounts of $56,490 and $7,156, respectively, were discharged in the bankruptcy filing and the net result was a gain of $49,334. We booked the cumulative translation loss of $80,928 in the quarter ending September 30, 2006. No other one time or cumulative costs were incurred, paid or otherwise settled as part of the shut down of Semotus Systems Corporation. On May 9, 2007, we consummated the sale of the Global Market Pro family of products and services, our financial data wireless distribution technology and related intellectual property. The purchase price for this asset sale consists of up to $350,000. $150,000 was paid on the closing date and the remaining $200,000 will be paid through a monthly revenue share of 30%, subject to a reduction to 15% should total revenues fall below 25% within six months of the close, until $200,000 has been paid to us or two years have passed from the date of closing, whichever occurs first. We entered into an investment agreement dated February 1, 2007, with an individual investor, Miro Knezevic and Gail L. Knezevic, Co-Trustees, Knezevic Family Trust dated June 30, 1992, relating to a cash investment of US$200,000 into our company (the "Investment Agreement"). The investment was taken in the form of a promissory note (the "Convertible Promissory Note") which may be converted by the investor at his discretion at any time into restricted common shares of Semotus at a conversion price equal to the lesser of (a) ten cents ($0.10) per share and (b) a fifteen percent (15%) discount from the closing price of our common stock calculated using the average closing price over ten consecutive trading days immediately preceding the date the investor gives us a conversion notice, and with a floor which is not to exceed a total maximum potential issuance of 3,557,060 shares. Additionally, during the time period beginning from February 1, 2007 and ending on the earlier of (a) the date the investor gives us a conversion notice and (b) February 1, 2009, if we issue common stock or securities convertible or exercisable into stock at a price that is less than the conversion price, then, we shall reduce a certain number of the investor's shares from the conversion price to an adjusted price, in proportion to the number of securities we actually issue at the adjusted price. The closing price of Semotus' common stock on February 1, 2007 was $0.12 per share, thereby creating a beneficial conversion feature in the Convertible Promissory Note. Applying EITF 00-27, "Application of Issue 98-5 to Certain Convertible Instruments", the beneficial conversion feature is calculated to be $36,667 (net of accretion of $3,333). The unpaid principal shall accrue interest at 10% per annum and all unconverted principal and interest is due and payable on February 1, 2009. We will incur no placement agent fees or expenses for this investment. The issuance of the underlying shares is dependent upon the American Stock Exchange's approval. These funds will be used to increase our sales and marketing efforts and for other general working capital purposes. As part of the investment, we agreed to file a registration statement with the Securities and Exchange Commission to qualify the resale of the 3,557,060 maximum total shares of common stock potentially issuable upon the conversion of the Convertible Promissory Note. We signed an investment agreement dated November 13, 2006 with an individual investor, Richard Sullivan, Citytalk's Chairman and CEO, relating to an investment of $225,000 (the "Investment Agreement"). The investment was taken in the form of a promissory note (the "Convertible Promissory Note") which may be converted by Mr. Sullivan at his discretion at any time into restricted common shares of Semotus at a conversion price of ten cents ($0.10) per share, for a total of 2,250,000 shares. The closing price of Semotus' common stock on November 13, 2006 was $0.14 per share, thereby creating a beneficial conversion feature in the Convertible Promissory Note. Applying EITF 00-27, "Application of Issue 98-5 to Certain Convertible Instruments", the beneficial conversion feature is calculated to be $72,766 (net of accretion of $17,234). The Convertible Promissory Note is recorded net of the beneficial conversion feature and the discount will be amortized over the life of the Convertible Promissory Note. The unpaid principal shall accrue interest at 8% per annum and all unconverted principal and interest is due and payable on November 1, 2008. We will incur no placement agent fees or expenses for this $225,000 investment. The issuance of the underlying shares is dependent upon the American Stock Exchange's approval. These funds will be used to increase our sales and marketing efforts and for other general working capital purposes. We closed an equity private placement of $560,000 on May 16, 2006. Under the terms of the private placement, we sold to Southshore Capital Fund, Ltd. and Southridge Partners, LP an aggregate of 3,294,118 shares of common stock at $0.17 per share and 2,810,000 share purchase warrants. Each warrant entitles the holder to purchase an additional share of common stock at a price of $0.30 per share until May 16, 2011. These warrants became exercisable on November 16, 2006. We incurred no placement agent fees, 4 but after payment of expenses in the amount of $45,000, we received net proceeds of $515,000. These funds were used to increase our sales and marketing efforts and for other general working capital purposes. 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 While our technology can drive efficiencies in virtually any enterprise, we have chosen to focus in a manageable number of target markets, which we believe project the greatest amount of growth potential and the strongest need for mobile and wireless solutions. This is summarized in the following chart: --------------------- ---------------------------------------------------------- MARKET MARKET NEEDS --------------------- ---------------------------------------------------------- Healthcare Highly reliable wireless alerts to defined groups of people with disparate handheld devices. --------------------- ---------------------------------------------------------- Government Offering citizens web-based access to internal data and applications on legacy systems. --------------------- ---------------------------------------------------------- Retail Wireless messaging to create greater intimacy with customers and ensure just-in-time product availability. --------------------- ---------------------------------------------------------- Security Mission-critical wireless alerts, reducing the time needed to respond to security breaches. --------------------- ---------------------------------------------------------- Transportation Work order notification and dispatch, status updates, and pickup and delivery information, enabling the workforce to maintain real-time communication and enhance fleet efficiency. --------------------- ---------------------------------------------------------- Any enterprise Offering sales people remote access to product with a large specifications, customer databases, appointment calendars, outside sales pricing, and competitive information. force --------------------- ---------------------------------------------------------- Any enterprise Remotely monitoring, managing, and troubleshooting of with a large IT databases, servers, routers and switches. infrastructure --------------------- ---------------------------------------------------------- SERVICES AND PRODUCTS During the fiscal year ended March 31, 2007, we offered the following services and products: 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. 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. Expand Beyond's operations have been closed as of March 31, 2007. Clickmarks Products. Through the acquisition of Clickmarks, we acquired a technology that enables enterprises to rapidly and cost-effectively develop and deploy real-time web, portal and mobile applications that automate workflows and improve information access for employees and customers. Clickmarks' technology allows client companies to unite disparate project, customer and partner information into a single Enterprise Information Portal (EIP) platform for all of its employees, without rewriting or replacing existing backend applications. 5 Wireless Messaging and Communications Software: Hiplink(TM)XS Family. As part of our enterprise application software offerings, we launched 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. Legacy Wireless Financial Data Services and Software: The Global Market Pro(TM) ("GMP") Family. These wireless software applications securely deliver real-time financial information and news; they monitor any security or market indicator in real-time and send out a wireless alert when pre-set values have been reached. These services are marketed to financial institutions who employ traders and other 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. The GMP Family of software and services currently includes: GMP; Equity Market Pro(TM) ("EMP"); and Futures Market Pro ("FMP"). We also offered a suite of wireless financial data 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). The Global Market Pro Family and other legacy wireless financial data consumer services and software were sold to Stockgroup Systems, Ltd. pursuant to an asset purchase agreement which closed on May 9, 2007. See "Significant Events and Recent Developments". 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 and wireless device manufacturers. CUSTOMERS We have a diversified customer list. Many different types of corporations utilize our mobile and wireless software and services, such as hospitals, airports, federal, state and local government agencies, as well as any large corporation with a large IT infrastructure and any corporation with a large outside sales force. REVENUE AND LONG-LIVED ASSETS Most 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. Although we have a diversified customer list and many customers utilizing our mobile and wireless services, we have a high concentration of credit risk because a large portion of our revenue is derived from a small number of customers. We derive revenue from our customers as discussed in Note 3, "Summary of Significant Accounting Policies: Revenue Recognition". Three customers accounted for 34% of our revenue for the year ended March 31, 2007. We did not have a high concentration of credit risk in the previous fiscal year. 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 or hardware manufacturer for our business. COMPETITION We are participating in the highly competitive businesses of enterprise application software, mobile and wireless telecommunications, 6 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 have moved the majority of our research and development operations from Vancouver, B.C., Canada to Pakistan. As of March 31, 2007, we continued to employ 3 engineering persons and contract with 1 independent contractor in Canada. Additionally, we contracted with one corporate independent contractor in Pakistan, utilizing 15 full time and 6 part time individuals within that company for our research and development activities. We found it more advantageous to have our research and development operations located in Pakistan due to the abundance of available, affordable and talented software engineers. Furthermore, these particular engineers in Pakistan have considerable experience in wireless mobility software and are cost effective for us. The previous chief operating officer of Semotus and current advisory board member, Mr. Umair Khan, is a partial owner of the company we are contracting with in Pakistan. Total costs incurred in research and development amounted to $781,394 and $1,064,934, in the years ended March 31, 2007 and 2006, 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, 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. To date, we have federally registered certain of our trademarks. "Semotus", "HipLink", "QuoteXpress", "MailXpress", "Net2Wireless" and "Simkin" are registered trademarks of ours. The mark, "QuoteXpress," was sold to Stockgroup pursuant to an asset purchase agreement which closed in May of 2007. See "Significant Events and Recent Developments". We are not currently applying for federal registration of any other marks. 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, which we later also sold. In 2005, Clickmarks sold its rights to its issued patents and patent applications under a similar arrangement where Clickmarks retained a nonexclusive worldwide right to make, use and sell any products covered by these patents. In January 2006, Expand Beyond and Semotus sold, assigned, transferred and conveyed all of Expand Beyond's patents and/or patent applications, as well as the three patents and/or patent applications still owned by Semotus (together, the "Patents"), with a similar grant back to us, with certain limitations, of a royalty-free, irrevocable, non-exclusive, non-transferable, non-assignable, non-sublicensable, worldwide right and license under the Patents to internally practice the methods and processes covered by the Patents, and to make, have made, use, distribute, lease, sell, offer for sale, import, export, develop and otherwise transfer or dispose of and otherwise exploit any products covered by the Patents. These licenses shall apply to the reproduction and subsequent distribution of our products by authorized agents, such as a distributor, replicator, VAR or OEM. We do not currently have any patents issued or patent applications in process. Any future patent applications 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 7 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, 2007, we had 17 full-time employees and 2 part-time employees, approximately 13 of whom were engaged in sales and marketing, 3 in finance and administration, and 3 in engineering. No employees are covered by a collective bargaining agreement. We believe that we have a good relationship with all of our employees. 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, 2007. As of March 31, 2007, we had an accumulated deficit of $69,264,178. 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. 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. 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. ANY DELAY IN COMPLETING THE MERGER WITH CITYTALK MAY REDUCE OR ELIMINATE THE BENEFITS EXPECTED. The merger is subject to a number of conditions beyond our control that may prevent, delay or otherwise materially adversely affect its completion. We cannot predict whether and when these other conditions will be satisfied. Any delay in satisfying these conditions could delay the completion of the merger for a significant period of time or prevent it from occurring. Any delay in completing the merger could cause us not to realize some or all of the synergies that we expect to achieve if the merger is successfully completed within its expected timeframe. 8 THE ANNOUNCED MERGER WITH CITYTALK MAY ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK AND OUR RESULTS OF OPERATIONS. If the merger is significantly delayed and/or not completed, the price of our common stock may decline to the extent that the current market price reflects a market assumption that the merger will be completed. In addition, in response to the announcement of the merger, our customers and strategic partners may delay or defer decisions which could have a material adverse effect on our business regardless of whether the merger is ultimately completed. Similarly, current and prospective employees of our company may experience uncertainty about their future roles with the combined company. These conditions may adversely affect employee morale and our ability to attract and retain key management, sales, marketing and technical personnel. In addition, focus on the merger and related matters has resulted in, and may continue to result in, the diversion of management attention and resources. To the extent that there is uncertainty about the closing of the merger, or if the merger does not close, our business may be harmed if customers, strategic partners or others believe that we cannot effectively compete in the marketplace without the merger or if there is customer and employee uncertainty surrounding the future direction of our company on a stand-alone basis. 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 MAY FAIL TO SUPPORT OUR ANTICIPATED EVENTUAL GROWTH IN OPERATIONS WHICH COULD REDUCE DEMAND FOR OUR SERVICES AND MATERIALLY ADVERSELY AFFECT OUR REVENUE. Our business strategy is based on the assumption that the number of subscribers to our services, the amount of information they want to receive and the number of services we offer will all increase. We must continue to develop and expand our systems and operations to accommodate this growth. The expansion and adaptation of our customer service and network operations center requires substantial financial, operational and management resources. We may be unable to expand our operations for one or more of the following reasons: 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. We do not have employment agreements with any other officer or employee. If we lose the services of Mr. LaPine or any other key officer 9 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. 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 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. 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, trademark and trade secret laws, as well as nondisclosure agreements and other contractual restrictions, to establish 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 and copyrights may have an adverse effect on our intellectual property rights in the future. The sale of all of our patents, even while retaining a grant-back license to continue developing and licensing the technology underlying these patents, limits our ability to enforce our intellectual property rights. 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. 10 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 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 11 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 THE CONTINUED LISTING OF OUR COMMON STOCK ON THE AMERICAN STOCK EXCHANGE IS UNCERTAIN. We received a deficiency letter from the American Stock Exchange (Amex) dated July 14, 2006, advising that, based upon its review of our financial statements included in our Annual Report on Form 10-KSB for the fiscal year ended March 31, 2006, we are not in compliance with Amex' continued listing requirements. Specifically, we are not in compliance with Section 1003(a)(iii) of the Amex Company Guide, because our stockholders' equity is less than $6,000,000 and we sustained losses from continuing operations and/or net losses in our five most recent fiscal years. We submitted a compliance plan to Amex in August of 2006 which outlines our plans to regain compliance with Amex' continued listing requirements. Since that time, we have provided updates and amendments to our original compliance plan. The plan was approved on November 15, 2006. Therefore, our listing is being continued pursuant to an extension period that will end concurrent with the closing of the merger with Citytalk, Inc. As of June 1, 2007, the merger was not consummated for a number of reasons, including the fact that Citytalk has not finalized the financing of NTCH and that we received comments from the SEC regarding our preliminary proxy statement, which we are in the process of responding to. We have agreed to the June 28th extension that was an option allowed for in the second amendment to the merger agreement that was filed with the proxy statement. Semotus and Citytalk are currently in discussions regarding another extension that will provide the necessary time required for Citytalk to finalize the financing and for the SEC to complete their review of our proxy statement. To maintain our listing, we are subject to periodic review by AMEX staff during this extension period. If Semotus does not make progress consistent with the plan, the AMEX will initiate delisting proceedings pursuant to Section 1009 of the AMEX Company Guide. Our current total stockholders' equity as of March 31, 2007 is $2,862,310. If our common stock is delisted from the American Stock Exchange, our common stock would be listed on the Over the Counter ("OTC") Bulletin Board, which could affect the market and the liquidity of our common stock. 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, 2007, Anthony N. LaPine, our 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, 2007, we have granted and have outstanding 4,669,731 options, with 3,107,357 of those options immediately exercisable, to purchase our common shares in accordance with our 1996 and 2005 Stock Option Plans. 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 Clickmarks completed in June 2005 and an equity private placement of $700,000 completed in November 2005, we filed a registration statement with the Securities and Exchange Commission that was declared effective by the Securities and Exchange Commission on February 16, 2006 to qualify the resale of up to 7,130,640 shares of common stock and 1,875,000 shares issuable upon exercise of warrants. Additionally, on June 19, 2006 we filed a registration statement with the Securities and Exchange Commission that was declared effective on June 30, 2006 to qualify the resale of up to 3,294,118 shares of common stock and 2,810,000 shares issuable upon exercise of warrants. 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 $0.04 to $42.00 (as adjusted for stock splits). We expect that the market price of our common stock 12 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, and one of our subsidiaries, Clickmarks, are all housed at this location. This facility is approximately 3,704 square feet, and is under a lease through September 30, 2008 with a monthly rental expense of $9,075. Semotus Systems Corp., a Semotus subsidiary which housed our engineering and research and development group, was located in Vancouver, British Columbia, Canada, where it occupied a facility of approximately 2,437 square feet. This lease had a monthly rental expense of $2,843 Canadian dollars, and was terminated on September 20, 2006 as part of its voluntary bankruptcy notice filing. Expand Beyond Corporation, a Semotus subsidiary, was located in Chicago, Illinois and occupied a small portion of approximately 200 square feet within a facility of approximately 3,920 square feet, under a sublease which expired on November 30, 2006 and had a monthly rental expense of $357. 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, 2007. 13 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, 2006 ------------------------------------------ ---------- ---------- Quarter ended June 30, 2005 $ 0.54 $ 0.38 ------------------------------------------ ---------- ---------- Quarter ended September 30, 2005 $ 0.42 $ 0.26 ------------------------------------------ ---------- ---------- Quarter ended December 31, 2005 $ 0.35 $ 0.25 ------------------------------------------ ---------- ---------- Quarter ended March 31, 2006 $ 0.30 $ 0.20 ------------------------------------------ ---------- ---------- ------------------------------------------ ---------- ---------- FISCAL YEAR ENDED MARCH 31, 2007 ------------------------------------------ ---------- ---------- Quarter ended June 30, 2006 $ 0.26 $ 0.15 ------------------------------------------ ---------- ---------- Quarter ended September 30, 2006 $ 0.17 $ 0.04 ------------------------------------------ ---------- ---------- Quarter ended December 31, 2006 $ 0.30 $ 0.06 ------------------------------------------ ---------- ---------- Quarter ended March 31, 2007 $ 0.14 $ 0.10 ------------------------------------------ ---------- ---------- (b) Holders. As of March 31, 2007, we had approximately 550 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 2007 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, 2007, and is incorporated herein by reference. Recent Sales of Unregistered Securities. During the quarter ended March 31, 2007 we did not issue any securities which were not registered under the Securities Act of 1933, as amended. 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 During fiscal years 2006 and 2007, 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. During fiscal 2007, with the economies of scale increasing in the mobile software industry, we agreed to merge with Citytalk and NTCH, the combination of which would give our products a larger footprint in the mobile market. As of June 1, 2007, the merger was not consummated. Further, on May 9, 2007, we sold our Global Market family of products to Stockgroup, a financial data services provider, since those products serve a specific market that Stockgroup has a larger presence in. See "Significant Events and Recent Developments". 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), Expand Beyond Corporation ("Expand Beyond") and Clickmarks, Inc. ("Clickmarks"). 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 and Clickmarks generate revenues from the sales of their software 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 14 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, Expand Beyond and Clickmarks families of products, software is delivered to the customer and revenue is recognized upon shipment, assuming no significant obligations remain. The revenue from the maintenance fees received through these 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. CONCENTRATIONS OF CREDIT RISK Financial instruments which potentially subject us to concentrations of risk consist principally of trade and other receivables. 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. 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 $3,414,575 (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. The goodwill increased $1,554,413 in the fiscal year ended March 31, 2006 from the acquisition of Clickmarks, with the remaining amount of goodwill of $1,860,162 consisting of our wireless enterprise application software products: the HipLink family of software products, which is generating current revenue and cash flow, and our recent acquisition of Expand Beyond's and Clickmarks' software applications. In the year ended March 31, 2007, we incurred an impairment charge of $430,022 related to the goodwill of Expand Beyond. We determined that the value of the goodwill from the acquisition was not recoverable when we ceased the operations of Expand Beyond. 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. 15 STOCK BASED COMPENSATION: On April 1, 2006, we adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), "Share-Based Payment," requiring us to recognize expense related to the fair value of our employee stock option awards. We recognize the cost of all share-based awards on a straight line vesting basis over the vesting period of the award. Total stock compensation expense recognized by us during the fiscal year ended March 31, 2007 was $259,954. Prior to April 1, 2006, we accounted for our stock option plans under the recognition and measurement provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations, as permitted by SFAS No. 123, "Accounting for Stock-Based Compensation." Effective April 1, 2006, we adopted the fair value recognition provisions of SFAS No. 123(R), using the modified-prospective-transition method. Under that transition method, compensation cost recognized in 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of April 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation cost for all share-based payments granted subsequent to April 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R). Results for prior periods have not been restated. For other accounting policies see Note 3 to the Financial Statements, "Summary of Significant Accounting Policies". RESULTS OF OPERATIONS REVENUES Revenues for the years ended March 31, 2007 and 2006 were $1,621,277 and $2,432,922, respectively, which represents a decrease of 33%, due to a reduction in the services provided by Expand Beyond as that operation was closed, a decline in the sales of Clickmarks due to a reduction in follow-on contracts and no new customer additions and a decline in the sales of the Global Market Pro family of products as customers declined to renew service contracts. COST OF REVENUES AND GROSS MARGIN The gross profit margin decreased slightly by 1% to 81% for the fiscal year ended March 31, 2007 versus 2006. While revenues declined 33%, the cost of revenues only increased marginally since data feed contracts were also reduced in price as those contracts were renewed. Further, other direct costs such as engineering were reduced as those services were no longer needed. Finally, a significant portion of the cost or revenue is variable and decrease or increase in proportion to the revenue decreases or increase. OPERATING EXPENSES Operating expenses decreased by 6% in the fiscal year ended March 31, 2007 versus 2006, due to a decrease in most of the operating expense categories resulting from consolidation and centralization that occurred after the acquisitions of Expand Beyond and Clickmarks, a reduction in research and development costs from closing of the Vancouver office and the redeployment of the engineering to Pakistan and due to the closing of the Expand Beyond operations. This was offset to some extent by the impairment of goodwill that was taken for Expand Beyond and to an increase in the grant of stock options, which have been expensed. 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, 2007 and 2006, there were impairment charges to goodwill. The table below summarizes the changes in these categories of operating expenses during the past two fiscal years: YEAR ENDED MARCH 31, ------------------------- DESCRIPTION 2007 2006 ----------- ---------- ---------- Research and development $ 781,394 $1,064,934 Sales and marketing 1,005,044 1,136,119 General and administrative 852,128 1,231,031 Impairment of goodwill 430,022 -- Depreciation and amortization 3,413 60,648 Stock, option and warrant expense 259,954 61,831 ---------- ---------- Totals $3,331,955 $3,554,563 ========== ========== 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, the HipLinkXS family of software, PocketDBA and the other Expand Beyond software products, and the Clickmarks technology. These expenses have historically increased because major development work is going on to update HipLinkXS, Expand Beyond and the Clickmarks software products. For fiscal 2007, the expenses have declined as the development and update work has been completed. Further, Expand Beyond's operations have been closed and the R&D operations have been moved from Canada to lower cost Pakistan. 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 16 hiring sales personnel and maintaining a customer support call center. These costs have declined slightly due to a decrease in sales personnel. 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 decreased in fiscal 2007 as the acquisitions were consolidated and Expand Beyond was closed. Further, Semotus is consolidating all of its general and administrative costs and reducing overhead personnel. In the fiscal year ended March 31, 2007, we determined that the $430,022 in goodwill from the Expand Beyond acquisition was impaired and would not be recovered. Expand Beyond's operations were closed in fiscal 2007. 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 no acquisitions of property, and equipment in fiscal year 2007 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 general and administrative services. The increase in non-cash charges for compensation in fiscal 2007 is due to the increase in stock option grants as compensation to employees. Additional grants were made to consultants in lieu of cash compensation. 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. Prior to adoption of SFAS 123(revised) on April 1, 2006, certain employee stock options, which have been repriced, 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 $325,244 to the compensation expense was required to be recognized in the fiscal year ended March 31, 2006 to reflect the net decrease in stock price over the repriced amount for the twelve months ended March 31, 2006. NON-OPERATING INCOME AND EXPENSES Non-operating income, net of expenses, decreased in the year ended March 31, 2007 versus 2006, due to increased interest expense, including the discount amortization, from the issuance of convertible promissory notes in fiscal 2007 and due to the net loss from the closing of the Canadian operations. Non-operating income, net of expenses, increased in the year ended March 31, 2006 versus 2005, due to the sale of our patents, which was somewhat offset by expenses related to our common stock offering in 2006. NET LOSS The increase by 44% in the net loss for the fiscal year ended March 31, 2007 to ($2,062,988) or ($0.06) per share from ($1,433,663) or ($0.05) per share for the fiscal year ended March 31, 2006 was due to a decline in revenues and gross profit from the reduction in follow-on and new customer contracts offset somewhat by impairment of goodwill and a reduction in operating expenses. LIQUIDITY AND CAPITAL RESOURCES Our cash flow use for the fiscal year ended March 31, 2007 was largely due to the cash used in operations and paid for merger fees, offset by the cash received from a common stock offering and two promissory notes. Our cash flow use for the year ended March 31, 2006 was largely due to the cash used in operations offset by the cash received from a common stock offering, the acquisition of Clickmarks, and the sale of our patents. The sources and uses of cash are summarized as follows: YEAR ENDED MARCH 31, -------------------------- 2007 2006 ---- ---- Net cash used in operating activities $(1,397,891) $(1,339,146) Net cash provided by (used in) investing activities (100,000) 120,442 Net cash provided by (used in) financing activities 698,296 886,252 Effect of exchange rate changes on cash (501) 2,890 Net decrease in cash and cash equivalents (800,096) (329,562) Cash used in operating activities for the year ended March 31, 2007 consisted principally of a net loss of $2,062,988 derived from gross profits of $1,319,490 offset by operating expenses of $3,331,955. Non-cash adjustments were made for the stock option expense of $ 259,954 and the impairment of goodwill of $430,022. Operating activities that contributed cash were mostly a decrease in accounts receivable of $211,685, while operating activities that used cash were mainly from a decrease in accounts payable of $154,690 and a decrease in accrued expenses of $139,263. Cash used in operating activities for the year ended March 31, 2006 consisted principally of a net loss of $1,433,663 derived from gross profits of $1,987,874 offset by operating expenses of $3,554,563. Operating activities that contributed cash were an increase in accounts payable of $156,256, and a decline of $33,347 in prepaid expenses. This was offset by an increase in accounts receivable of 17 $189,578 and a decrease in accrued expenses of $41,618. During the fiscal year ended March 31, 2007, cash flows from investing activities produced a net decrease in cash of $100,000. This resulted from cash paid for merger fees related to the pending Citytalk merger. During the fiscal year ended March 31, 2006, cash flows from investing activities produced a net increase in cash of $120,442. This resulted from the cash acquired in the Clickmarks acquisition. During the fiscal year ended March 31, 2007, cash flows from financing activities produced a net increase in cash of $698,296. This resulted from $515,000 in net cash proceeds from a common stock offering and $425,000 in net cash from the issuance of two promissory notes and $8,296 in net cash from an equipment loan reduced by the repayment of a bank line of credit of $250,000. During the fiscal year ended March 31, 2006, cash flows from financing activities produced a net increase in cash of $886,252. This resulted from $628,814 in net cash proceeds from a common stock offering, $250,000 in proceeds from our bank line of credit, and $7,438 in net cash from the exercise of stock options and warrants. 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, 2007 we had cash and cash equivalents of $305,588, a decrease of $800,096 from the prior fiscal year. As of March 31, 2006 we had cash and cash equivalents of $1,105,684, a decrease of $329,562 from the prior fiscal 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, 2007, we elected to repay our bank line of credit of $250,000. During the fiscal year ended March 31, 2006, we drew down on our bank line of credit in the amount of $250,000. Except for the bank line of credit, there were no material commitments for capital expenditures at March 31, 2007 and we have no future capital lease payments. Operating lease expenses were $115,460 in fiscal year 2007 and will be $119,908 in fiscal year 2008. The following table discloses our contractual commitments for future periods. Long term commitments are comprised solely of operating leases (See Note 9). YEAR ENDING MARCH 31, --------------------- 2008 $ 119,908 2009 62,496 ---------- 2010 3,600 ---------- $ 186,004 ========== At March 31, 2007 and 2006, we had a deferred tax asset of approximately $14,000,000 in both years, 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 February 2007, the FASB issued Statement No. 159, "The Fair Value Option for Financial Assets and Liabilities". This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The fair value option established by this Statement permits all entities to choose to measure eligible items at fair value at specified election dates. A business entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings (or another performance indicator if the business entity does not report earnings) at each subsequent reporting date. This Statement is effective as of the beginning of an entity's first fiscal year that begins after November 15, 2007. We do not believe that the adoption of SFAS 159 will have a material affect on our financial statements. In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes -- an interpretation of FASB Statement No. 109" (FIN 48). FIN 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are currently evaluating the impact of adopting FIN 48 on its financial statements. In September 2006, the FASB issued FASB Statement No. 157, Fair Value Measurements (SFAS 157). The standard provides guidance for using fair value to measure assets and liabilities. The standard also responds to investors' requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. The standard applies whenever other standards 18 require or permit assets or liabilities to be measured at fair value. The standard does not expand the use of fair value in any new circumstances. SFAS 157 must be adopted prospectively as of the beginning of the year it is initially applied. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We are currently evaluating the impact this standard will have on its financial statements. In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in the Current Year Financial Statements" (SAB 108). SAB 108 addresses how the effects of prior-year uncorrected misstatements should be considered when quantifying misstatements in current-year financial statements. SAB 108 requires an entity to quantify misstatements using a balance sheet and income-statement approach and to evaluate whether either approach results in quantifying an error that is material in light of relevant quantitative and qualitative factors. The guidance is applicable for fiscal years ending after November 15, 2006. We currently do not believe that SAB 108 will have a material impact on our financial statements. In May 2005, the FASB issued Statement 154, "Accounting Changes and Error Corrections", which is a replacement for APB Opinion No. 20, "Accounting Changes" and FASB statement No. 3 "Reporting Accounting Changes in Interim Financial Statements". This Statement requires retrospective application to prior periods' financial statements of changes in accounting principles, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. When it is impracticable to determine the period-specific effects of an accounting change on one or more individual prior periods presented, this Statement requires that the new accounting principle be applied to the balances of assets and liabilities as of the beginning of the earliest period for which retrospective application is practicable and that a corresponding adjustment be made to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) for that period rather than being reported in an income statement. When it is impracticable to determine the cumulative effect of applying a change in accounting principle to all prior periods, this Statement requires that the new accounting principle be applied as if it were adopted prospectively from the earliest date practicable. The Statement is effective for fiscal years beginning after December 15, 2005. The adoption in the year ended March 31, 2007 did not have a material effect on our consolidated financial position, results of operations or cash flows. 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). We adopted SFAS 123 (revised) as of April 1, 2006 and have subsequently been expensing employee stock options in our statement of operations. For the fiscal year ended March 31, 2007, the stock option expense related to the grants was $144,437. 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 25 of this report: Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of March 31, 2007 and 2006 Consolidated Statements of Operations and Comprehensive Loss for the years ended March 31, 2007 and 2006 Consolidated Statements of Shareholders' Equity for the years ended March 31, 2007 and 2006 Consolidated Statements of Cash Flows for the years ended March 31, 2007 and 2006 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 19 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 2007 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, 2007, 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 2007 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, 2007, 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 2007 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, 2007, 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 2007 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, 2007, and is incorporated by reference into this Item. ITEM 13. EXHIBITS.
EXHIBIT NUMBER DESCRIPTION LOCATION ------ ----------- -------- 2.1 Waiver by and among Semotus Solutions, Inc. and Citytalk, Inc. dated Incorporated by reference to Exhibit 2.3 to the May 7, 2007. Registrant's Form 8-K filed May 11, 2007. 2.2 Merger Agreement by and among Semotus Solutions, Inc., Clickmarks, Incorporated by reference to Exhibit 2.1 to the Inc. and Semotus Acquisition Company, Ltd. dated June 14, 2005. Registrant's Form 8-K filed June 27, 2005. 2.3 Form of Subscription Agreement for a total of $340,000 by and among Incorporated by reference to Exhibit 2.1 to the Semotus Solutions, Inc. and certain Investors. Registrant's Form 8-K filed November 17, 2005 2.4 Form of amended Subscription Agreement (including a six month hold Incorporated by reference to Exhibit 2.2 to the on the warrants) for a total of $360,000 by and among Semotus and Registrant's Form 8-K filed November 17, 2005 certain Investors. 2.5 Asset Purchase Agreement by and among Semotus Solutions, Inc. and Incorporated by reference to Exhibit 2.1 to the Stockgroup Systems, Ltd. dated May 8, 2007. Registrant's Form 8-K filed May 11, 2007. 2.6 Transition Services Agreement by and among Semotus Solutions, Inc. and Incorporated by reference to Exhibit 2.2 to the Stockgroup Systems, Ltd. dated May 8, 2007. Registrant's Form 8-K filed May 11, 2007. 2.7 Investment Agreement by and among Semotus Solutions, Inc. and Knezevic Incorporated by reference to Exhibit 2.1 to the Family Trust dated February 1, 2007. Registrant's Form 8-K filed February 7, 2007. 2.8 Agreement and Plan of Reorganization by and among Semotus Solutions, Incorporated by reference to Exhibit 2.1 to the Inc. and Citytalk, Inc. dated November 10, 2006. Registrant's Form 8-K filed November 16, 2006. 2.9 First Amendment to Agreement and Plan of Reorganization by by and Incorporated by reference to Exhibit 2.1 to the among Semotus Solutions, Inc. and Citytalk, Inc. dated January 3, 2007. Registrant's Form 8-K filed January 8, 2007. 2.10 Investment Agreement by and among Semotus Solutions, Inc. and Richard Incorporated by reference to Exhibit 2.1 to the J. Sullivan dated November 13, 2006. Registrant's Form 8-K filed November 16, 2006 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). 20
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. 3.7 Certificate of Amendment to Articles of Incorporation dated May 17, Filed electronically herewith. 2007. 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. 4.2 Convertible Promissory Note for $200,000 issued to Knezevic Family Incorporated by reference to Exhibit 4.1 to the Trust on February 1, 2007. Registrant's Form 8-K filed on February 7, 2007. 4.3 Convertible Promissory Note for $225,000 issued to Richard J. Sullivan Incorporated by reference to Exhibit 4.1 to the on November 13, 2006. Registrant's Form 8-K filed on November 16, 2006. 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 10.7 Form of Warrant to purchase up to a maximum total of 1,000,000 shares Incorporated by reference to Exhibit 4.1 to the of Semotus Solutions, Inc. common stock issued to certain Clickmarks' Registrant's Form 8-K filed on June 27, 2005. employees dated June 23, 2005. 10.8 Form of Warrant to purchase up to a maximum total of 680,000 shares of Incorporated by reference to Exhibit 4.1 to the Semotus Solutions, Inc. common stock issued to the Investors dated Registrant's Form 8-K filed November 17, 2005 November 14, 2005 10.9 Form of Warrant to purchase up to a maximum total of 720,000 shares of Incorporated by reference to Exhibit 4.2 to the Semotus Solutions, Inc. common stock issued to the Investors dated Registrant's Form 8-K filed November 17, 2005 November 14, 2005 10.10 Form of Warrant to purchase up to a maximum total of 420,000 shares of Incorporated by reference to Exhibit 4.3 to the Semotus' common stock issued to Bathgate Capital Partners dated Registrant's Form 8-K filed November 17, 2005 November 14, 2005 10.11 Registration Rights Agreement by and among Semotus Solutions, Inc. and Incorporated by reference to Exhibit 10.1 to Knezevic Family Trust dated February 1, 2007. the Registrant's Form 8-K filed February 7, 2007 10.12 Amendment Number 4 to the Agreement between Semotus Solutions, Inc. Incorporated by reference to Exhibit 10.1 to and Bathgate Capital Partners, dated October 27, 2006 the Registrant's Form 8-K filed November 16, 2006. 21
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 Patent Purchase Agreement by and among Semotus Solutions, Inc., Expand Incorporated by reference to Exhibit 10.1 to Beyond Corporation and Stavros Investments LLC dated January 11, 2006 the Registrant's Form 8-K filed January 17, 2006
* Management contract or compensatory plan or arrangement. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. The information required by this Item will be included in our Proxy Statement for the 2007 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, 2007, and is incorporated by reference into this Item. 22 INDEX TO FINANCIAL STATEMENTS PAGE(S) Report of Independent Registered Public Accounting Firm .................... 24 Consolidated Financial Statements: Consolidated Balance Sheets, March 31, 2007 and 2006 .................. 25 Consolidated Statements of Operations and Comprehensive Loss for the years ended March 31, 2007 and 2006 ...................... 26 Consolidated Statements of Shareholders' Equity for the years ended March 31, 2007 and 2006 ........................... 27 Consolidated Statements of Cash Flows for the years ended March 31, 2007 and 2006 ......................................... 29 Notes to Consolidated Financial Statements ............................ 31 23 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, 2007 and 2006, 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, 2007. 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, 2007 and 2006 and the consolidated results of their operations and their cash flows for each of the two years in the period ended March 31, 2007 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 JUNE 8, 2007 24 SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
MARCH 31, MARCH 31, 2007 2006 ------------ ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 305,588 $ 1,105,684 Trade receivables (net of allowance for doubtful accounts of $7,035 at March 31, 262,700 474,385 2007 and $2,700 at March 31, 2006) Prepaid expenses and other current assets 12,140 21,400 ------------ ------------ Total current assets 580,428 1,601,469 Property and equipment, net -- 3,413 Goodwill, net 2,984,553 3,414,575 Other assets 117,708 -- ------------ ------------ Total assets $ 3,682,689 $ 5,019,457 ============ ============ LIABILITIES & SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Bank line of credit $ -- $ 250,000 Equipment loan 7,244 -- Accounts payable 187,903 394,418 Accrued vacation 53,042 84,444 Other accrued liabilities 48,245 160,773 Deferred revenue 198,294 207,613 ------------ ------------ Total current liabilities 494,728 1,097,248 ------------ ------------ LONG TERM LIABILITIES: Convertible Promissory notes, net of discounts 315,567 -- Accrued interest on convertible promissory notes 10,084 -- ------------ ------------ Total liabilities 820,379 1,097,248 ------------ ------------ Commitments and contingencies (Notes 19 and 21) ------------ ------------ SHAREHOLDERS' EQUITY: Common Stock: $0.01 par value; authorized: 50,000,000 shares; 35,570,599 issued and 34,954,405 outstanding at March 31, 2007 and 32,219,637 issued and 31,412,344 outstanding at March 31, 2006 349,544 314,123 Additional paid-in capital 71,776,944 70,889,703 Accumulated other comprehensive loss -- (80,427) Accumulated deficit (69,264,178) (67,201,190) ------------ ------------ Total shareholders' equity 2,862,310 3,922,209 ------------ ------------ Total liabilities and shareholders' equity $ 3,682,689 $ 5,019,457 ============ ============
See accompanying notes to consolidated financial statements. 25 SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
YEAR ENDED MARCH 31, ------------------------------ 2007 2006 ------------ ------------ Revenues $ 1,621,277 $ 2,432,922 Cost of revenues 301,787 445,048 ------------ ------------ Gross profit 1,319,490 1,987,874 Operating expenses: (Exclusive of depreciation and amortization and stock, option and warrant expense) Research and development 781,394 1,064,934 Sales and marketing 1,005,044 1,136,119 General and administrative 852,128 1,231,031 Impairment of goodwill 430,022 -- Depreciation and amortization: Research and development -- 51,827 General and administrative 3,413 8,821 ------------ ------------ 3,413 60,648 ------------ ------------ Stock, option and warrant expense: Research and development 13,823 -- Sales and marketing 31,074 35,045 General and administrative 215,057 26,786 ------------ ------------ 259,954 61,831 ------------ ------------ Total operating expenses 3,331,955 3,554,563 ------------ ------------ Operating income (loss) (2,012,465) (1,566,689) Other income (loss) (50,523) 133,026 ------------ ------------ Net income (loss) (2,062,988) (1,433,663) Other comprehensive income (loss) - Translation adjustment (501) (2,083) ------------ ------------ Comprehensive income (loss) $ (2,063,489) $ (1,435,746) ============ ============ Net income (loss) per common share: Basic $ (0.06) $ (0.05) Diluted $ (0.06) $ (0.05) Weighted average shares used in per share calculation, basic and diluted 34,971,780 29,188,146 ============ ============
See accompanying notes to consolidated financial statements. 26 SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK ADDITIONAL ----------------------------- PAID-IN SHARES AMOUNT CAPITAL ------------ ------------ ------------ Balances at March 31, 2005 24,576,048 $ 245,761 $ 68,698,586 Issuance of stock due to exercise of options and warrants 42,917 429 7,009 Issuance of stock options and warrants to consultants and advisory board -- -- 51,029 Issuance of stock for services rendered 293,624 2,936 82,984 Issuance of stock in connection with the acquisition of Clickmarks, Inc. 3,699,755 36,997 1,524,299 Issuance of stock and warrants in the private placement financing, net of expenses of $70,000 2,800,000 28,000 600,814 Compensation expense due to stock option repricing -- -- (325,244) Foreign currency translation adjustment -- -- -- Net loss -- -- -- Issuance of warrants to Clickmarks employees -- -- 250,226 ------------ ------------ ------------ Balances at March 31, 2006 31,412,344 314,123 70,889,703 Issuance of stock options and warrants to consultants and advisory board -- -- 51,186 Issuance of stock options to employees -- -- 144,436 Issuance of stock for services rendered 159,505 1,595 29,317 Issuance of stock to Clickmarks employees 88,438 885 15,035 Foreign currency translation adjustment -- -- -- Issuance of stock and warrants in the private placement financing, net of expenses of $45,000 3,294,118 32,941 482,059 Issuance of warrants to Clickmarks employees -- -- 17,500 Deferred tax asset -- -- 17,708 Beneficial conversion on notes payable -- -- 130,000 Net loss -- -- -- ------------ ------------ ------------ Balances at March 31, 2007 34,954,405 $ 349,544 $ 71,776,944 ============ ============ ============
See accompanying notes to consolidated financial statements. 27 SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
ACCUMULATED OTHER COMPREHENSIVE ACCUMULATED LOSS DEFICIT TOTAL ------------ ------------ ------------ Balances at March 31, 2005 $ (78,344) $(65,767,527) $ 3,098,476 Issuance of stock due to exercise of options and warrants -- -- 7,438 Issuance of stock options and warrants to consultants and advisory board -- -- 51,029 Issuance of stock for services rendered -- -- 85,920 Issuance of stock in connection with the acquisition of Clickmarks, Inc. -- -- 1,561,296 Issuance of stock and warrants in the private placement financing, net of expenses of $70,000 -- -- 628,814 Compensation expense due to stock option repricing -- -- (325,244) Foreign currency translation adjustment (2,083) -- (2,083) Net loss -- (1,433,663) (1,433,663) Issuance of warrants to Clickmarks employees -- -- 250,226 ------------ ------------ ------------ Balances at March 31, 2006 (80,427) (67,201,190) 3,922,209 Issuance of stock options and warrants to consultants and advisory board -- -- 51,186 Issuance of stock options to employees -- -- 144,436 Issuance of stock for services rendered -- -- 30,912 Issuance of stock to Clickmarks employees -- -- 15,920 Foreign currency translation adjustment 80,427 -- 80,427 Issuance of stock and warrants in the private placement financing, net of expenses of $45,000 -- -- 515,000 Issuance of warrants to Clickmarks employees -- -- 17,500 Deferred tax asset -- -- 17,708 Beneficial conversion on notes payable -- -- 130,000 Net loss -- (2,062,988) (2,062,988) ------------ ------------ ------------ Balances at March 31, 2007 $ -- $(69,264,178) $ 2,862,310 ============ ============ ============
See accompanying notes to consolidated financial statements. 28 SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED MARCH 31, ------------------------------ 2007 2006 ------------ ------------ Cash flows from operating activities: Net income (loss) $ (2,062,988) $ (1,433,663) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 3,413 60,648 Compensation expense related to stock, stock options and warrants issued for services 259,954 61,831 Accretion of discounts on convertible promissory notes 20,567 -- Accrued interest on convertible promissory notes 10,084 -- Non-cash settlement of liabilities (49,334) 21,688 Accumulated translation loss 80,928 -- Impairment of goodwill 430,022 -- Changes in assets and liabilities net of acquired assets and liabilities due to acquisitions: Accounts and other receivables 211,685 (189,578) Prepaid expenses and other assets 1,050 33,347 Accounts payable (154,690) 156,256 Accrued expenses and other current liabilities (139,263) (41,618) Deferred revenue (9,319) (8,057) ------------ ------------ Net cash used in operating activities (1,397,891) (1,339,146) ------------ ------------ Cash flows from investing activities: Cash acquired for stock in acquisitions -- 120,442 Cash paid for merger fees and expenses (100,000) -- ------------ ------------ Net cash provided by (used in) investing activities (100,000) 120,442 ------------ ------------ Cash flows from financing activities: Proceeds from (payments on) bank line of credit (250,000) 250,000 Net proceeds from Bathgate financing -- 628,814 Net proceeds from Southshore financing 515,000 -- Net proceeds from convertible promissory notes 425,000 -- Equipment loan 8,296 -- Proceeds from exercise of options and warrants -- 7,438 ------------ ------------ Net cash provided by financing activities 698,296 886,252 ------------ ------------ Effect of exchange rate changes on cash (501) 2,890 ------------ ------------ Net decrease in cash and cash equivalents (800,096) (329,562) Cash and cash equivalents, beginning of year 1,105,684 1,435,246 ------------ ------------ Cash and cash equivalents, end of year $ 305,588 $ 1,105,684 ============ ============
See accompanying notes to consolidated financial statements. 29 SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEAR ENDED MARCH 31, ----------------------------- 2007 2006 ------------ ------------ SUPPLEMENTAL CASH FLOW DISCLOSURE: Cash paid for interest $ 7,083 $ 2,911 ============ ============ Cash paid for income taxes $ 3,444 $ 3,439 ============ ============ Gross proceeds as part of the private placement financing -- $ 700,000 ============ ============ Gross proceeds as part of the Southshore financing $ 560,000 -- ============ ============ Gross proceeds as part of the promissory notes $ 425,000 -- ============ ============ SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Non-cash purchase consideration for the acquisition of Clickmarks through the issuance of common stock $ -- $ 1,561,297 ============ ============ Common stock issued for services $ 30,912 $ 96,668 ============ ============ Non-cash value of warrants issued as part of the Bathgate financing -- $ 425,112 ============ ============ Non-cash value of warrants issued as part of the investment bank's fees for the Bathgate financing -- $ 98,159 ============ ============ Non-cash compensation expense (reversal) due to variable accounting for repriced stock options -- $ (325,244) ============ ============ Deferred tax asset related to stock option grants $ 17,708 $ -- ============ ============ Assets acquired for stock, and liabilities assumed, in Clickmarks acquisition: Assets acquired -- $ 216,853 Goodwill -- 1,554,413 Fair value of assets -- 1,771,266 Liabilities assumed -- 209,970
See accompanying notes to consolidated financial statements. 30 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 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 HipLinkXS family of software, the PocketAdmin and PocketDBA software from Expand Beyond, and the technology and software solutions from Clickmarks. Our enterprise application software and services provide mobility, convenience, and efficiency and improve profitability. These software solutions provide immediate mobile access and control of business-critical software applications, databases, networks and servers. In the year ended March 31, 2007, we closed the operations of Expand Beyond and transferred our research and development activities from Vancouver, Canada to Pakistan. More recently, the Global Market Pro Family and other legacy wireless financial data consumer services and software were sold to Stockgroup Systems, Ltd. pursuant to an asset purchase agreement signed in May of 2007. 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, 2007 and 2006, the consolidated statements of operations and comprehensive loss for the years ended March 31, 2007 and 2006, the consolidated statements of common shareholders' equity for the years ended March 31, 2007 and 2006, and the consolidated statements of cash flows for the years ended March 31, 2007 and 2006, 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), Expand Beyond Corporation ("Expand Beyond") and Clickmarks, Inc. ("Clickmarks"). Operations of the Canadian subsidiary consisted mainly of research and development and engineering on behalf of the parent. All significant intercompany transactions and balances have been eliminated in consolidation. Expand Beyond and Clickmarks generate 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. 31 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 goodwill increased $1,554,413 in the fiscal year ended March 31, 2006 from the acquisition of Clickmarks. For the year ended March 31, 2007, we incurred an impairment charge of $430,022 related to the goodwill of Expand Beyond. We determined that the value of the goodwill from the acquisition was not recoverable when we ceased the operations of Expand Beyond. Our management has determined that the remaining goodwill of $2,984,553, consisting entirely of our wireless enterprise application software products: the HipLink family of software products, which is generating current revenue and cash flow, and our recent acquisition of Expand Beyond's and Clickmarks' software applications, 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. 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: On April 1, 2006, we adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), "Share-Based Payment," requiring us to recognize expense related to the fair value of its employee stock option awards. We recognize the cost of all share-based awards on a straight line vesting basis over the vesting period of the award. Total stock compensation expense recognized by us during the fiscal year ended March 31, 2007 was $259,954. Prior to April 1, 2006, we accounted for our stock option plans under the recognition and measurement provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations, as permitted by SFAS No. 123, "Accounting for Stock-Based Compensation." Effective April 1, 2006, we adopted the fair value recognition provisions of SFAS No. 123(R), using the modified-prospective-transition method. Under that transition method, compensation cost recognized in 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of April 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation cost for all share-based payments granted subsequent to April 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R). Results for prior periods have not been restated. As a result of adopting SFAS 123(R) on April 1, 2006, our loss and net loss for the fiscal year ended March 31, 2007, was $26,597 lower than if we had continued to account for share-based compensation under Opinion 25. Basic and diluted earnings per share for the three month period and fiscal year ended March 31, 2007 would have been $(0.01) and $(0.04), if we had not adopted SFAS No. 32 123(R). Prior to the adoption of SFAS No. 123(R), we presented all tax benefits of deductions resulting from the exercise of stock options as operating cash flows in the Statement of Cash Flows. Beginning on April 1, 2006 we changed our cash flow presentation in accordance with SFAS No. 123(R) which requires the cash flows resulting from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows. We have estimated the fair value of its option awards granted after April 1, 2006 using the Black-Scholes option valuation model that uses the assumptions noted in the following table. Expected volatilities are based on the historical volatility of our stock. We use actual data to estimate option exercises, forfeitures and cancellations within the valuation model. The expected term of options granted is 4 years and represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Black-Scholes -Based Option Valuation Assumptions 2007 ---- Fair value of options granted during the period $ 0.148 Expected term (in years) 4 years Expected volatility 95.68% Weighted average volatility 95.68% Expected dividend yield -- Risk-free rate 4.94% We estimated the fair value of our option awards granted prior to April 1, 2006 using the Black-Scholes option-pricing formula. The Black-Scholes option pricing model was used with the following weighted-average assumptions for grants made in the following fiscal years: Black-Scholes Option Valuation Assumptions 2006 2005 2004 Fair value of options granted during the period $ 0.25 $ 0.27 $ 0.38 Expected term (in years) 4 4 4 Expected volatility 95-103% 104-141% 89-173% Expected dividend yield -- -- -- Risk free rate 4.18% 3.14% 2.51% 33 The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of SFAS 123 "Accounting for Stock-Based Compensation," to options granted under our stock option plans during the fiscal year ended March 31, 2006. For purposes of this pro forma disclosure, the value of the options is amortized to expense on a straight line vesting basis over a 4 year vesting period and forfeitures are recognized as they occur. Our pro forma information follows for the fiscal year ended March 31, 2006: FISCAL YEAR ENDED MARCH 31, 2006 -------------- Net loss, as reported $ (1,433,663) Total stock-based employee compensation expense determined (325,244) under intrinsic value based method for all awards and variable accounting for repriced options Total stock-based employee compensation expense determined under (129,429) fair value based method for all option awards, net of related tax effects Pro forma netloss $ (1,888,335) Basic loss per share as reported $ (0.05) Basic loss per share pro forma $ (0.06) Diluted loss per share as reported $ (0.05) Diluted loss per share pro forma $ (0.06) The following table summarizes the stock option transactions for the fiscal year ended March 31, 2007 based upon a closing stock price of $0.11 per share as of March 31, 2007: Weighted Aggregate Average Intrinsic Stock Options Shares Price Value ------------- ------ ----- ----- Outstanding at March 31, 2006 3,568,467 $ 0.28 -- Granted 2,235,000 $ 0.16 -- Exercised -- -- Forfeited 943,736 $ 0.25 -- Expired 190,000 $ 0.17 -- Outstanding at March 31, 2007 4,669,731 $ 0.23 -- Exercisable at March 31, 2007 3,107,357 $ 0.27 -- There were no options exercised in the fiscal year ended March 31, 2006. Effective October 23, 2002, our Board of Directors approved the repricing of most of the options under our 1996 Stock Option Plan, as amended, with exercise prices ranging from $0.22 to $0.84 per share held by most of the employees (including executive officers) and Board members. In light of the reductions in work force and salary reductions, our Board of Directors deemed it advisable to reprice the options to provide a retention incentive for the remaining employees. The option grants were repriced to an exercise price of $0.15 per share (the current fair market value of our common stock as of the reprice date) and an exercise price of $0.17 per share (110% of the fair market value at the date of reprice) for those persons owning more than 10% of the voting power of all classes of stock. All grants maintained their existing vesting schedule. This is deemed to be a repricing under FIN 44 and resulted in variable plan accounting. A $0.14 per share decrease in the closing stock price on March 31, 2006 from the closing stock price on March 31, 2005 resulted in an offset to the compensation expense of $238,241 to be recognized in the fiscal year ended March 31, 2006. 34 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, Expand Beyond and Clickmarks families of products, 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 these 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 been established and ending when a product is available for general release to customers. At March 31, 2007 and 2006 there were no capitalized software development costs as we expensed the remaining amounts at fiscal year end 2002. 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 February 2007, the FASB issued Statement No. 159, "The Fair Value Option for Financial Assets and Liabilities". This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The fair value option established by this Statement permits all entities to choose to measure eligible items at fair value at specified election dates. A business entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings (or another performance indicator if the business entity does not report earnings) at each subsequent reporting date. This Statement is effective as of the beginning of an entity's first fiscal year that begins after November 15, 2007. We do not believe that the adoption of SFAS 159 will have a material affect on our financial statements. In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes -- an interpretation of FASB Statement No. 109" (FIN 48). FIN 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on 35 derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are currently evaluating the impact of adopting FIN 48 on its financial statements. In September 2006, the FASB issued FASB Statement No. 157, Fair Value Measurements (SFAS 157). The standard provides guidance for using fair value to measure assets and liabilities. The standard also responds to investors' requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. The standard applies whenever other standards require or permit assets or liabilities to be measured at fair value. The standard does not expand the use of fair value in any new circumstances. SFAS 157 must be adopted prospectively as of the beginning of the year it is initially applied. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We are currently evaluating the impact this standard will have on its financial statements. In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in the Current Year Financial Statements" (SAB 108). SAB 108 addresses how the effects of prior-year uncorrected misstatements should be considered when quantifying misstatements in current-year financial statements. SAB 108 requires an entity to quantify misstatements using a balance sheet and income-statement approach and to evaluate whether either approach results in quantifying an error that is material in light of relevant quantitative and qualitative factors. The guidance is applicable for fiscal years ending after November 15, 2006. We currently do not believe that SAB 108 will have a material impact on our financial statements. In May 2005, the FASB issued Statement 154, "Accounting Changes and Error Corrections", which is a replacement for APB Opinion No. 20, "Accounting Changes" and FASB statement No. 3 "Reporting Accounting Changes in Interim Financial Statements". This Statement requires retrospective application to prior periods' financial statements of changes in accounting principles, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. When it is impracticable to determine the period-specific effects of an accounting change on one or more individual prior periods presented, this Statement requires that the new accounting principle be applied to the balances of assets and liabilities as of the beginning of the earliest period for which retrospective application is practicable and that a corresponding adjustment be made to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) for that period rather than being reported in an income statement. When it is impracticable to determine the cumulative effect of applying a change in accounting principle to all prior periods, this Statement requires that the new accounting principle be applied as if it were adopted prospectively from the earliest date practicable. The Statement is effective for fiscal years beginning after December 15, 2005. The adoption in the year ended March 31, 2007 did not have a material effect on our consolidated financial position, results of operations or cash flows. 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). We adopted SFAS 123 (revised) as of April 1, 2006 and have subsequently been expensing employee stock options in our statement of operations. For the fiscal year ended March 31, 2007, the stock option expense related to the grants was $144,437. 4. SEMOTUS SYSTEMS CORPORATION As part of our ongoing emphasis on financial responsibility and the streamlining of operations, we have closed our Vancouver, Canada facility. On September 20, 2006, our Canadian subsidiary company, Semotus Systems Corporation, filed a notice of bankruptcy in the District of British Columbia, Canada. The majority of our engineering, and research and development efforts are now being handled offshore by an independent contractor. We accounted for the Semotus Systems Corporation bankruptcy filing in accordance with FAS 146, "Accounting for Costs Associated with Exit or Disposal Activities." A trustee fee of $2,672 was incurred in the three months ended September 30, 2006 to complete the bankruptcy filing. This fee is reflected in the general and administrative expenses line item in our income statement for the fiscal year ended March 31, 2007. Certain liabilities and assets in the amounts of $56,490 and $7,156, respectively, were discharged in the bankruptcy filing and the net result was a gain of $49,334. We booked the cumulative translation loss of $80,928 in the quarter ending September 30, 2006. No other one time or cumulative costs were incurred, paid or otherwise settled as part of the shut down of Semotus Systems Corporation. 5. ACQUISITIONS During the fiscal year ended March 31, 2007 we did not acquire any companies. In the quarter ended June 30, 2005, we acquired Clickmarks, Inc. In exchange for 100% of Clickmarks' issued and outstanding 36 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 $216,853 in fair value of assets, $209,970 in liabilities and recorded $1,554,413 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 $245,000 in expense in the fiscal year ended March 31, 2006, 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. 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 September 6, 2005. 37 CLICKMARKS, INC. (DOLLARS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
PRO FORMA FISCAL YEARS ENDED COMBINED DECEMBER 31, MARCH 31, AS OF ---------------------- 2005 JUNE 23, 2004 2003 UNAUDITED 2005 UNAUDITED UNAUDITED -------- -------- -------- -------- BALANCE SHEET DATA: ASSETS Current Assets: Cash and cash equivalents $ 1,206 $ 120 $ 57 $ 339 Accounts receivable, net of allowance for doubtful accounts of $13,537 and $29,017 in 2004 and 2003, respectively -- 65 315 262 362 Other current assets 31 9 44 77 -------- -------- -------- -------- Total current assets 1,599 194 416 678 Property and equipment, net 42 13 85 194 Goodwill -- 1,581 -- -- Deposits -- -- -- 42 -------- -------- -------- -------- Total assets $ 5,084 $ 1,789 $ 501 $ 915 ======== ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) Current Liabilities: Bank loan $ 50 -- -- -- Accounts payable 323 13 26 36 Accrued compensation and related benefits 98 178 159 168 Deferred revenue 206 37 27 41 Other current liabilities 100 -- 23 75 -------- -------- -------- -------- Total current liabilities 777 228 235 320 Total liabilities 777 228 235 320 -------- -------- -------- -------- Stockholders' equity (deficiency): Series A convertible preferred stock - $0.001 par value; 1,000,000 shares authorized; 1,000,000 shares issued and outstanding in 2004 and 2003; liquidation preference -- 519 519 -- Series A-1 convertible preferred stock - $0.001 par value; 800,000 shares authorized; 707,756,000 shares issued and outstanding in 2004 and 2003; liquidation preference -- -- 765 765 Series B convertible preferred stock - $0.001 par value; 4,500,000 shares authorized; 3,025,184 shares issued and outstanding in 2004 and 2003; liquidation preference -- -- 4,654 4,654 Series C convertible preferred stock - $0.001 par value; 11,556,217 shares authorized; 9,257,260 shares issued and outstanding in 2004 and 2003; liquidation preference -- -- 15,090 15,090 Series D convertible preferred stock - $0.001 par value; 28,000,000 shares authorized; 22,528,269 shares issued and outstanding in 2004 and 2003; liquidation preference -- -- 4,843 4,843 Series D-1 convertible preferred stock - $0.001 par value; 21,276,595 shares authorized; 9,152,151 shares issued and outstanding in 2004 and 2003; liquidation preference -- -- 1,062 -- Common stock - $0.001 par value; 86,276,595 shares authorized; 7,484,873 shares issued and outstanding in 2004 and 2003; liquidation preference 283 -- 381 381 Common stock issued as part of acquisition 1,561 1,561 -- -- Additional paid-in capital 68,785 -- -- -- Accumulated other comprehensive loss (83) -- -- -- Accumulated deficit (66,240) -- (27,048) (25,657) -------- -------- -------- -------- Total stockholders' equity 4,306 1,561 266 595 -------- -------- -------- -------- Total liabilities and stockholders' equity $ 5,083 $ 1,789 $ 501 $ 915 ======== ======== ======== ========
38 CLICKMARKS, INC. (DOLLARS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
PRO FORMA COMBINED FISCAL YEARS ENDED MARCH 31, ------------------------------ 2005 2004 2003 ------------ ------------ ------------ UNAUDITED UNAUDITED UNAUDITED INCOME STATEMENT DATA: Revenue $ 3,538,375 $ 1,732,080 $ 894,565 Cost of revenue 1,873,670 1,510,507 1,732,547 ------------ ------------ ------------ Gross profit (loss) 1,664,705 221,573 (837,982) ------------ ------------ ------------ Operating expenses: Research and development 1,125,952 600,022 1,590,822 Sales and marketing 1,648,815 779,487 1,164,786 General and administrative 967,675 128,598 705,359 Stock, option and warrant expense (248,997) -- -- Depreciation and amortization 181,685 111,342 -- ------------ ------------ ------------ Total operating expenses 3,675,130 1,619,449 3,460,967 ------------ ------------ ------------ Operating income (loss) (2,010,425) (1,397,876) (4,298,949) Other income (expense): Interest income 3,511 3,511 16,965 Other income and expense, net 10,781 2,816 (4,683) ------------ ------------ ------------ Total interest and other income 14,292 6,327 12,282 Net loss before extraordinary item (1,996,133) (1,391,549) (4,286,667) Extraordinary item - Loss on expropriation of assets by payroll -- -- (95,643) service -- -- -- Net loss (1,996,133) (1,391,549) (4,382,310) Other comprehensive income (loss) - Translation adjustment (4,016) -- -- ------------ ------------ ------------ Comprehensive loss $ (2,000,149) $ (1,391,549) $ (4,382,310) ============ ============ ============
39 6. IMPAIRMENT OF LONG-LIVED ASSETS AND 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 goodwill increased $1,554,413 in the fiscal year ended March 31, 2006 from the acquisition of Clickmarks. For the year ended March 31, 2007, we incurred an impairment charge of $430,022 related to the goodwill of Expand Beyond. We determined that the value of the goodwill from the acquisition was not recoverable when we ceased the operations of Expand Beyond. Our management has determined that the remaining goodwill of $2,984,553, consisting entirely of our wireless enterprise application software products: the HipLink family of software products, which is generating current revenue and cash flow, and our recent acquisition of Expand Beyond's and Clickmarks' software applications, 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. 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. 7. BANK LINE OF CREDIT On September 30, 2004 we entered into a loan and security agreement with a medium sized local bank. On March 5, 2007, we terminated the agreement and there was $0 outstanding under this line of credit. 8. PROPERTY AND EQUIPMENT Property and equipment is comprised of the following:
MARCH 31, ------------------------------ 2007 2006 ------------ ------------ Furniture and fixtures ............................. $ 279,617 $ 347,164 Computers, and other office equipment .............. 1,854,754 1,983,958 Capitalized equipment leases ....................... 396,966 415,361 Leasehold improvements ............................. 30,572 143,416 Software ........................................... 630,702 1,102,771 ------------ ------------ 3,192,611 3,992,670 Less accumulated depreciation and amortization ..... (3,192,611) (3,989,257) ------------ ------------ $ -- $ 3,413 ============ ============
Depreciation and amortization expense related to the above assets was $3,413 and $60,648 for the fiscal years ended March 31, 2007 and 2006, respectively. 9. CAPITAL LEASES We did not enter into any new capital leases during the fiscal year ended March 31, 2007 or 2006. 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. 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, 2007, and 769,231 have been designated as Series B preferred stock, of which no shares are outstanding as of March 31, 2007. 11. COMMON SHAREHOLDERS' EQUITY Under our Articles of Incorporation, as amended in June 1999 and in May 2007, we are authorized to issue 150,000,000 shares of common stock, of which 35,570,599 shares were issued and 34,954,405 were outstanding as of March 31, 2007; 32,219,637 shares were issued and 31,412,344 shares were outstanding as of March 31, 2006. During the first quarter of fiscal year ended March 31, 2007, in May 2006, we closed an equity private placement of $560,000 in which we issued to Southshore Capital Fund, Ltd. and Southridge Partners, LP an aggregate of 3,294,118 shares of common stock at $0.17 per share and 2,810,000 share purchase warrants. Each warrant entitles the holder to purchase an additional share of common stock at a price of $0.30 per share until May 16, 2011. In addition, during the fiscal year ended March 31, 2007 we issued 247,943 40 shares to various other third parties as consideration for certain services. 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 $216,853 in fair value of assets, $209,970 in liabilities and recorded $1,554,413 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 $245,000 in expense in the fiscal year ended March 31, 2006, 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. On November 14, 2005, we closed an equity private placement of $700,000. Under the terms of the private placement, we sold an aggregate of 700,000 Units, consisting of 2,800,000 shares of common stock at $0.25 per share and 1,400,000 share purchase warrants. Each warrant entitles the holder to purchase an additional share of common stock at a price of $0.50 per share until September 30, 2008. 720,000 of these warrants are not exercisable until May 14, 2006. In connection with the private placement, we paid a placement fee to the placement agent, Bathgate Capital Partners, of $56,000, and issued 420,000 share purchase warrants exercisable at $0.30 per share at a value of $98,159. After payment of expenses in the amount of $14,000 and placement fees, we received net proceeds of approximately $630,000. These funds will be used to increase our sales and marketing efforts and for other general working capital purposes. In addition, during the fiscal year ended March 31, 2006, we issued 293,624 shares and 125,000 warrants to purchase shares of our common stock to various third party suppliers of services. WARRANTS: As of March 31, 2007, a total of 5,675,356 warrants to purchase shares of our common stock remain outstanding and are currently exercisable as follows: NUMBER OF EXERCISE PRICE EXPIRATION WARRANTS ($ / SHARE) DATE 2,810,000 0.30 5/16/2011 1,400,000 0.50 9/30/2008 530,356 0.8625 1/14/2009 420,000 0.30 11/14/2010 300,000 0.39 6/23/2015 75,000 0.26 1/19/2009 45,000 0.34 5/27/2009 45,000 0.28 12/8/2010 40,000 0.35 2/4/2008 10,000 0.35 11/4/2007 STOCK OPTION PLANS: In July 2005, we adopted the 2005 Stock Option Plan (the "2005 Plan") and in September 2005 the 2005 Plan was approved by our shareholders. The 2005 Plan provides for the granting of stock options to purchase up to 3,000,000 shares of our common stock, subject to adjustment only in the event of a stock split, stock or other extraordinary dividend, or other similar change in the common stock or capital structure. The 2005 Plan expires in July 2015, ten years after its adoption. Under the 2005 Plan, the Option Committee may grant incentive stock options to purchase shares of our common stock only to employees, and may grant non-qualified stock options to purchase shares of our common stock to our directors, officers, consultants and advisers. The Option Committee may grant options to purchase shares of our common stock at prices not less than fair market value, as defined under the 2005 Plan, at the date of grant for all stock options. The Option Committee 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 Option Committee. As of March 31, 2007, 1,307,095 options are outstanding under the 2005 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 41 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 expired in June of 2006, ten years after its adoption. As of March 31, 2007, 3,362,636 options remain outstanding under the 1996 Plan. 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. No stock appreciation rights were 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. Activity for stock options under the 1996 Plan and 2005 Plan for the fiscal years ended March 31, 2007 and 2006 is as follows:
WEIGHTED SHARES AVERAGE AVAILABLE NUMBER OF EXERCISE FOR GRANT OPTIONS PRICE PER SHARE PRICE --------- ------- --------------- ----- Balances, March 31, 2005 575,399 3,408,818 $ 0.12 - $ 0.95 $0.29 Authorized -- Granted (751,400) 751,400 $0.23-$0.52 $0.35 Canceled 547,167 (548,834) $0.14-$0.82 $0.45 Exercised -- (42,917) $0.15-$0.25 $0.17 Balances, March 31, 2006 371,166 3,568,467 $0.14-$0.82 $0.28 Authorized 3,000,000 -- Granted (2,235,000) 2,235,000 $0.11 - $0.25 $0.16 Canceled 1,133,736 (1,133,736) $0.14 - $0.95 $0.25 Canceled due to 1996 Plan termination (576,997) -- -- -- Exercised -- -- -- -- Balances, March 31, 2007 1,692,905 4,669,731 $0.11 - $0.82 $0.23
The weighted average fair value of those options granted during the years ended March 31, 2007 and 2006 was $0.27 and $0.25, respectively. The weighted average fair value of those options that were repriced on October 23, 2002 was $0.08. Options to purchase 3,107,357 and 2,723,305 shares were exercisable at March 31, 2007 and 2006, respectively, with a weighted average exercise price of $0.27 and $0.25, respectively. The following table summarizes the stock options outstanding at March 31, 2007: 42
----------------------------------------------------------- ----------------------- OPTIONS OUTSTANDING CURRENTLY EXERCISABLE ----------------------------------------------------------- ----------------------- WEIGHTED NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE RANGE OF AT MARCH 31, CONTRACTUAL EXERCISE AT MARCH 31, EXERCISE EXERCISE PRICE 2007 LIFE PRICE 2007 PRICE -------------- ---- ---- ----- ---- ----- $0.11 - $0.15 1,415,162 7.89 $0.13 538,495 $0.15 $0.16 - $0.20 1,536,000 5.33 $0.17 1,129,332 $0.17 $0.21 - $0.30 539,169 8.69 $0.23 366,670 $0.23 $0.31 - $0.50 924,400 6.95 $0.37 858,691 $0.37 $0.51 - $0.95 255,000 7.03 $0.68 214,170 $0.69 --------- --------- --------- --------- --------- 4,669,731 6.91 $0.23 3,107,357 $0.27 ========= ========= ========= ========= =========
12. CONVERTIBLE PROMISSORY NOTES, NET OF DISCOUNTS We signed an investment agreement dated November 13, 2006 with an individual investor, Richard Sullivan, Citytalk's Chairman and CEO, relating to an investment of $225,000 (the "Investment Agreement"). The investment was taken in the form of a promissory note (the "Convertible Promissory Note") which may be converted by Mr. Sullivan at his discretion at any time into restricted common shares of Semotus at a conversion price of ten cents ($0.10) per share, for a total of 2,250,000 shares. The closing price of Semotus' common stock on November 13, 2006 was $0.14 per share, thereby creating a beneficial conversion feature in the Convertible Promissory Note. Applying EITF 00-27, "Application of Issue 98-5 to Certain Convertible Instruments", the beneficial conversion feature is calculated to be $72,766 (net of accretion of $17,234). The Convertible Promissory Note is recorded net of the beneficial conversion feature and the discount will be amortized over the life of the Convertible Promissory Note. The unpaid principal shall accrue interest at 8% per annum and all unconverted principal and interest is due and payable on November 1, 2008. We will incur no placement agent fees or expenses for this $225,000 investment. The issuance of the underlying shares is dependent upon the American Stock Exchange's approval. These funds will be used to increase our sales and marketing efforts and for other general working capital purposes. We have also signed an investment agreement dated February 1, 2007, by and among Semotus and an individual investor, Miro Knezevic and Gail L. Knezevic, Co-Trustees, Knezevic Family Trust dated June 30, 1992, relating to a cash investment of US$200,000 (the "Investment Agreement"). The investment was taken in the form of a promissory note (the "Convertible Promissory Note") which may be converted by the investor at his discretion at any time into restricted common shares of Semotus at a conversion price equal to the lesser of (a) ten cents ($0.10) per share and (b) a fifteen percent (15%) discount from the closing price of our common stock calculated using the average closing price over ten consecutive trading days immediately preceding the date the investor gives us a conversion notice, and with a floor which is not to exceed a total maximum potential issuance of 3,557,060 shares. Additionally, during the time period beginning from February 1, 2007 and ending on the earlier of (a) the date the investor gives us a conversion notice and (b) February 1, 2009, if we issue common stock or securities convertible or exercisable into stock at a price that is less than the conversion price, then, we shall reduce a certain number of the investor's shares from the conversion price to an adjusted price, in proportion to the number of securities we actually issue at the adjusted price. The closing price of Semotus' common stock on February 1, 2007 was $0.12 per share, thereby creating a beneficial conversion feature in the Convertible Promissory Note. Applying EITF 00-27, "Application of Issue 98-5 to Certain Convertible Instruments", the beneficial conversion feature is calculated to be $36,667 (net of accretion of $3,333). The unpaid principal shall accrue interest at 10% per annum and all unconverted principal and interest is due and payable on February 1, 2009. We will incur no placement agent fees or expenses for this investment. The issuance of the underlying shares is dependent upon the American Stock Exchange's approval. These funds will be used to increase our sales and marketing efforts and for other general working capital purposes. As part of the investment, we agreed to file a registration statement with the Securities and Exchange Commission to qualify the resale of the 3,557,060 maximum total shares of common stock potentially issuable upon the conversion of the Convertible Promissory Note. 13. REVENUE We have a diversified customer list. We have many corporate customers utilizing our wireless software applications and services, and the broadly diversified base means there is no significant concentration in any one particular industry. We derive revenue from our customers as discussed in Note 3, "Summary of Significant Accounting Policies: Revenue Recognition". 14. CONCENTRATIONS OF CREDIT RISK: Three customers accounted for 34% of our revenues for the fiscal year ended March 31, 2007; one customer accounted for 15%, one customer accounted for 10% and one customer accounted for 9% of our total revenue. One customer accounted for 16% of our accounts receivable at March 31, 2007 and one customer accounted for 14% of our accounts receivable at March 31, 2007, for a combined total of two customers accounting for 30% of our accounts receivable at March 31, 2007. Two customers accounted for 12% of our revenues for the fiscal year ended March 31, 2006. One customer accounted for 7% and the second customer accounted for 5%. One of these customers accounted for 8% of our accounts receivable at March 31, 2006. 15. MERGER AGREEMENT We entered into a definitive Agreement and Plan of Reorganization on November 10, 2006 with Citytalk, Inc. (Citytalk), relating to the merger of Citytalk with and into Semotus, with Semotus as the surviving corporation of the merger (the "Merger Agreement"). In the Merger Agreement, we have agreed to acquire 100% of the issued and outstanding capital stock of Citytalk for 418,744,000 shares of Semotus Solutions' common stock. On a fully diluted basis, taking into consideration our outstanding stock, and assuming the exercise of all our warrants and vested stock options, we would have approximately 46,500,000 common shares outstanding. 43 Therefore, the issuance of 418,744,000 common shares to Citytalk will result in Semotus' shareholders owning approximately 10% of the combined corporation upon the close of the merger. The agreement is subject to Semotus' stockholders approval, Citytalk's stockholders approval, the American Stock Exchange's approval and other closing conditions, including the acquisition by Citytalk of three other companies, NTCH Colorado, Inc., NTCH Idaho, Inc. and NTCH Tennessee, Inc. (collectively, "NTCH"), and an investment of at least $60,000,000 into Citytalk. Citytalk is a merger vehicle created to acquire tower infrastructure and flat rate cellular operations in key markets in the continential United States. If the merger with Citytalk does close, we have agreed to pay a placement fee to the placement agent, Bathgate Capital Partners, LLC in the form of $150,000 and 2,000,000 shares of restricted common stock. As of June 1, 2007, the merger was not consummated for a number of reasons, including the fact that Citytalk has not finalized the financing of NTCH and that we received comments from the SEC regarding our preliminary proxy statement, which we are in the process of responding to. We have agreed to the June 28th extension that was an option allowed for in the second amendment to the merger agreement that was filed with the proxy statement. We are currently in discussions with Citytalk regarding another extension that will provide the necessary time required for Citytalk to finalize the financing and for the SEC to complete their review of our proxy statement. We are also considering the pursuit of other alternatives to the merger with Citytalk after the June 28th extension deadline expires 16. 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 SFAS 123 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, 2007, interest rates used are the approximate Treasury rate of 4.94%, and the expected volatility was 95.68%. For the fiscal year ended March 31, 2006, interest rates used are the approximate Treasury rate of 4.18%, and the expected volatility was 95% to 103%. The expense is recognized over the term of the agreement or when the services have been performed. 17. 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, 2007:
--------------------------- ---------------------------- FEDERAL STATE --------------------------- ---------------------------- BALANCE EXPIRATION BALANCE EXPIRATION ------- ---------- ------- ---------- $ 2,729,703 2012 $ 4,298,379 2011 3,219,423 2013 3,294,278 2012 4,429,411 2019 1,378,267 2013 3,684,281 2020 970,786 2014 9,313,338 2021 841,822 2015 8,036,642 2022 1,171,635 2016 ----------- 2,349,193 2023 1,432,966 2017 ----------- 1,749,406 2024 $13,388,133 862,523 2025 =========== 1,343,164 2026 ----------- 1,632,966 2027 ----------- $39,350,050 ===========
At March 31, 2007, we no longer owned a Canadian subsidiary, see Footnote 4: Semotus Systems Corporation, and therefore we no longer have any Canadian net operating loss carryover. . The utilization of the net operating losses to offset future taxable income may be limited under U.S. tax laws. 44 For federal and state tax purposes, at March 31, 2006 and 2005, we had net deferred tax assets of approximately $14,000,000 for both years, 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 changedby $0.00 in the last two fiscal years. 18. 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, ------------------------------ 2007 2006 ------------ ------------ Basic EPS: Net income (loss) $ (2,062,988) $ (1,433,663) Weighted average common shares outstanding 34,971,780 29,188,146 ============ ============ Basic EPS $ (0.06) $ (0.05) ============ ============ Diluted EPS: Net income (loss) $ (2,062,988) $ (1,433,663) ============ ============ Weighted average common shares outstanding 34,971,780 29,188,146 Convertible preferred -- -- Warrants -- -- Stock options -- -- ------------ ------------ Total shares 34,971,780 29,188,146 ------------ ------------ Diluted EPS $ (0.06) $ (0.05) ============ ============
In the fiscal years ended March 31, 2007 and 2006, 10,345,087 and 7,257,712 potential shares, respectively, were excluded from the shares used to calculate diluted EPS as their effect is anti-dilutive. 19. OPERATING LEASES We currently lease space for our operations in Los Gatos, California. The lease for the California office expires in September 2008. The lease for the office located in British Columbia was terminated in September 2006. The lease for the Expand Beyond office located in Chicago, Illinois expired in November 2006. The terms and conditions of the California lease are normal and customary. Rental expense was $115,460 in fiscal year 2007 and $184,236 in fiscal 2006. Future minimum lease payments due under these agreements are as follows for the years ending March 31: 2008 ................... $ 119,908 2009 ................... 62,496 2010 ................... 3,600 ---------- $ 186,004 ========== 20. 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, 2007. The agreement automatically renews for one-year terms unless notice is provided by either party. As of May 1, 2007, no notice had been provided by either party, so the agreement has automatically renewed for an additional one-year term. Effective January 2005 we entered into an independent contractor agreement with a company located in Pakistan to provide us with certain engineering services. This Pakistani company is partially owned by Mr. Umair Khan, who was our Chief Operating Officer from December 14, 2005 to May 5, 2006 and who was the Chairman and President of Clickmarks, Inc., one of our wholly owned 45 subsidiaries, from 1999 until May 5, 2006. Mr. Khan is currently on our Advisory Board and as of March 31, 2007 held 80,000 shares of our restricted common stock and 10,000 options to purchase shares of our common stock at $0.25 per share. 21. COMMITMENTS AND CONTINGENCIES We are not a party to any legal proceedings. 22. 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 2007 or 2006. 23. AMEX DEFICIENCY LETTER We received a deficiency letter from the American Stock Exchange (Amex) dated July 14, 2006, advising that, based upon its review of our financial statements included in our Annual Report on Form 10-KSB for the fiscal year ended March 31, 2006, we are not in compliance with Amex' continued listing requirements. Specifically, we are not in compliance with Section 1003(a)(iii) of the Amex Company Guide, because our stockholders' equity is less than $6,000,000 and we sustained losses from continuing operations and/or net losses in our five most recent fiscal years. We submitted a compliance plan to Amex in August of 2006 which outlines our plans to regain compliance with Amex' continued listing requirements. Since that time, we have provided updates and amendments to our original compliance plan. The plan was approved on November 15, 2006. Therefore, our listing is being continued pursuant to an extension period that will end concurrent with the closing of the merger with Citytalk, Inc. As of June 1, 2007, the merger was not consummated for a number of reasons, including the fact that Citytalk has not finalized the financing of NTCH and that we received comments from the SEC regarding our preliminary proxy statement, which we are in the process of responding to. We have agreed to the June 28th extension that was an option allowed for in the second amendment to the merger agreement that was filed with the proxy statement. Semotus and Citytalk are currently in discussions regarding another extension that will provide the necessary time required for Citytalk to finalize the financing and for the SEC to complete their review of our proxy statement. To maintain our listing, we are subject to periodic review by AMEX staff during this extension period. If Semotus does not make progress consistent with the plan, the AMEX will initiate delisting proceedings pursuant to Section 1009 of the AMEX Company Guide. 24. EQUITY PRIVATE PLACEMENT We closed an equity private placement of $560,000 on May 16, 2006. Under the terms of the private placement, we sold to Southshore Capital Fund, Ltd. and Southridge Partners, LP an aggregate of 3,294,118 shares of common stock at $0.17 per share and 2,810,000 share purchase warrants. Each warrant entitles the holder to purchase an additional share of common stock at a price of $0.30 per share until May 16, 2011. These warrants became exercisable on November 16, 2006. We incurred no placement agent fees, but after payment of expenses in the amount of $45,000, we received net proceeds of $515,000. These funds are being used to increase our sales and marketing efforts and for other general working capital purposes. 25. SUBSEQUENT EVENTS We have agreed to the June 28th extension to closing the merger with Citytalk, which was an option allowed for in the second amendment to the merger agreement that was filed with our preliminary proxy statement on March 19, 2007. We are currently in discussions with Citytalk regarding another extension that will provide the necessary time required for Citytalk to finalize the financing and for the SEC to complete their review of our proxy statement. We are also considering the pursuit of other alternatives to the merger with Citytalk after the June 28th extension deadline expires. We entered into a definitive Asset Purchase Agreement and Transition Services Agreement on May 8, 2007 with Stockgroup Systems, Ltd. ("Stockgroup"), relating to the sale of our wireless financial information assets (the "Agreement"). As part of the Agreement, we agreed to sell our financial data wireless distribution technology and intellectual property, and the related wireless financial data services, including the Global Market Pro family of software and services. The purchase price for this asset sale consists of up to $350,000; $150,000 to be paid upon the Closing and the remaining $200,000 to be paid through a monthly revenue share of 30%, subject to a reduction to 15% should total revenues fall below 25% within six months of Close, until $200,000 has been paid to us or two years have passed from the date of Closing, whichever occurs first. On May 9, 2007, we completed the above described disposition of assets. On May 17, 2007, we filed an Amendment to our Articles of Incorporation, increasing our total authorized common shares from 50,000,000 to 150,000,000. This increase was authorized by our shareholders at our last year's annual shareholders meeting that took place on September 21, 2006. 46 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 25, 2007 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 25, 2007 ANTHONY N. LAPINE AND CHAIRMAN OF THE BOARD /S/ CHARLES K. DARGAN, II ------------------------ CHIEF FINANCIAL OFFICER, JUNE 25, 2007 CHARLES K. DARGAN II TREASURER /S/ MARK WILLIAMS ------------------------ DIRECTOR JUNE 25, 2007 MARK WILLIAMS /S/ LAURENCE MURRAY ------------------------ DIRECTOR JUNE 25, 2007 LAURENCE MURRAY /S/ ROBERT LANZ ------------------------ DIRECTOR AND CHAIRMAN JUNE 25, 2007 ROBERT LANZ OF THE AUDIT COMMITTEE 47