-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GPdLr523Eg8qqh2bR/xoFFG4lJAkuH4kWP/TSAilBH2b2FKgqOFwV4vy+Uw0IGnB ELCW1acRgsy3j2VHaWrtng== 0001019687-00-000408.txt : 20000412 0001019687-00-000408.hdr.sgml : 20000412 ACCESSION NUMBER: 0001019687-00-000408 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000229 FILED AS OF DATE: 20000411 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIMULATIONS PLUS INC CENTRAL INDEX KEY: 0001023459 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 954595609 FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 333-05600-LA FILM NUMBER: 598471 BUSINESS ADDRESS: STREET 1: 40015 SIERRA HIGHWAY STREET 2: BLDG B-145 CITY: PALMDALE STATE: CA ZIP: 93550 BUSINESS PHONE: 8052668500 MAIL ADDRESS: STREET 1: 40015 SIERRA HWY BLDG B0-110 STREET 2: 40015 SIERRA HWY BLDG B0-110 CITY: PALMDALE STATE: CA ZIP: 93550 10QSB 1 SIMULATIONS PLUS, INC. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-QSB [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended February 29, 2000 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1937 For the transition period from _________ to _________ Commission file number: 000-21665 SIMULATIONS PLUS, INC. (Exact name of registrant as specified in its charter) CALIFORNIA 95-4595609 (State or other jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 1220 W. AVENUE J LANCASTER, CA 93534-2902 (Address of principal executive offices including zip code) (661) 723-7723 (Registrant's telephone number, including area code) NOT APPLICABLE (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ----- ----- The number of shares outstanding of the Issuer's common stock, par value $0.001 per share, as of March 31, 2000, was 3,385,531. SIMULATIONS PLUS, INC. FORM 10-QSB FOR THE QUARTERLY PERIOD ENDED FEBRUARY 29, 2000 Table of Contents
Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheet at February 29, 2000 (unaudited) 1 Consolidated Statements of Operations for the three and six months ended February 29, 2000 and February 28, 1999 (unaudited) 2 Consolidated Statements of Cash Flows for the six months ended February 29, 2000 and February 28, 1999 (unaudited) 3 Notes to Consolidated Financial Statements (unaudited) 4 Item 2. Management's Discussion and Analysis or Plan of Operations General 7 Results of Operations 11 Liquidity and Capital Resources 16 PART II. OTHER INFORMATION Item 1. Legal Proceedings 19 Item 2. Changes in Securities 19 Item 3. Defaults upon Senior Securities 19 Item 4. Submission of Matters to a Vote of Security Holders 19 Item 5. Other Information 19 Item 6. Exhibits and Reports on Form 8-K 20 Signature 21 Exhibit Index 22
Item 1. Financial Statements -------------------- SIMULATIONS PLUS, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET February 29, 2000 (Unaudited) ASSETS Current assets: Cash and cash equivalents (note 2) $ 132,741 Accounts receivable, net of allowance for doubtful accounts of $14,078 485,433 Prepaid expenses 23,298 Inventory 152,848 -------------- Total current assets 794,320 -------------- Capitalized computer software development costs, net of accumulated amortization (note 3) 588,731 Furniture and equipment, net (note 4) 118,908 Other assets 15,862 -------------- Total assets $ 1,517,821 ============== LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities: Advance line of credit $ 99,992 Accounts payable 149,569 Accrued payroll and other expenses 426,726 Accrued warranty and service costs 70,761 Current portion of capitalized lease obligations 19,961 -------------- Total current liabilities 767,009 -------------- Capitalized lease obligations, net of current portion 2,873 -------------- Total liabilities 769,882 -------------- Shareholders' equity Preferred stock: $0.001 par value, authorized 10,000,000 shares, no shares issued and outstanding Common stock: $0.001 par value, authorized 20,000,000 shares, issued and outstanding 3,385,531 (note 5) 3,386 Additional paid-in capital 4,631,886 Accumulated deficit (3,887,333) -------------- Total shareholders' equity 747,939 -------------- Total liabilities and stockholders' equity $ 1,517,821 ============== The accompanying footnotes are an integral part of these statements.
1 SIMULATIONS PLUS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS For the three and six months ended February 29, 2000 and February 28, 1999 (Unaudited)
Three months ended Six months ended ---------------------------------------------------------------------- 02/29/00 02/28/99 02/29/00 02/28/99 --------------- --------------- --------------- --------------- Net sales $ 1,091,949 $ 777,638 $ 1,905,865 $ 1,658,924 Cost of sales 368,363 392,286 605,952 788,896 --------------- --------------- --------------- --------------- Gross profit 723,586 385,352 1,299,913 870,028 --------------- --------------- --------------- --------------- Operating expenses: Selling, general & administration 596,408 542,864 1,121,700 1,141,588 Research and development 74,686 35,797 164,498 71,670 --------------- --------------- --------------- --------------- Total operating expenses 671,094 578,661 1,286,198 1,213,258 --------------- --------------- --------------- --------------- Profit (Loss) from operations 52,492 (193,309) 13,715 (343,230) Other income (expenses): Grant revenue 0 0 0 75,000 Interest revenue 80 1,520 314 4,947 Interest expense (4,348) (7,791) (8,763) (10,130) Gain (Loss) on sale of asset (605) 0 (605) 0 --------------- --------------- --------------- --------------- Profit (Loss) before provision 47,619 (199,580) 4,661 (273,413) for income taxes Provision (benefit) for income taxes 0 0 0 0 --------------- --------------- --------------- --------------- Net profit (loss) $ 47,619 $ (199,580) $ 4,661 $ (273,413) =============== =============== =============== =============== Basic net profit (loss) per common share $ 0.01 $ (0.06) $ 0.00 $ (0.08) =============== =============== =============== =============== Diluted net profit (loss) per common share $ 0.01 $ (0.06) $ 0.00 $ (0.08) =============== =============== =============== =============== Weighted average # of common shares outstanding 3,384,203 3,383,531 3,380,403 3,371,423 =============== =============== =============== =============== The accompanying footnotes are an integral part of these statements.
2 SIMULATIONS PLUS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS For the six months ended February 29, 2000 and February 28, 1999 (Unaudited)
Six months ended -------------------------------- 02/29/00 02/28/99 -------------------------------- Cash flows from operating activities: Net profit (loss) $ 4,661 $ (273,413) Adjustments to reconcile net profit (loss) to net cash used for operating activities: Depreciation and amortization of furniture and equipment 33,002 40,248 Amortization of capitalized software development costs 62,149 124,448 (Increase) decrease in: Accounts receivable 84,913 (84,970) Inventory 40,326 118,328 Other assets 10,841 906 Income tax receivable 28,941 Increase (decrease) in: Accounts payable (94,478) (80,669) Accrued payroll and other expenses (3,312) 68,180 Accrued warranty and service costs 5,948 --------------- --------------- Net cash provided by (used for) operating activities 138,102 (52,053) --------------- --------------- Cash flows from investing activities: Issuance of common stock 2,620 Purchase of furniture and equipment (2,490) Capitalized computer software development cost (54,890) (94,223) --------------- --------------- Net cash used for investing activities (54,760) (94,223) --------------- --------------- Cash flows from financing activities: Borrowed from on line of credit 10,164 (5,269) Payments on capitalized lease obligations (13,089) (15,819) --------------- --------------- Net cash used for financing activities (2,925) (21,088) --------------- --------------- Net increase (decrease) in cash 80,418 (167,364) Cash and cash equivalents, beginning of period 52,323 198,154 --------------- --------------- Cash and cash equivalents, end of period $ 132,741 $ 30,790 =============== ============== The accompanying footnotes are an integral part of these statements.
3 SIMULATIONS PLUS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited) Note 1: GENERAL - ------- As contemplated by the Securities and Exchange Commission under Item 310(b) of Regulation S-B, the accompanying financial statements and footnotes have been condensed and therefore do not contain all disclosures required by generally accepted accounting principles. The interim financial data are unaudited; however, in the opinion of Simulations Plus, Inc. (the "Company"), the interim data include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the interim periods. Results for interim periods are not necessarily indicative of those to be expected for the full year. Note 2: CASH AND CASH EQUIVALENTS - ------- The Company maintains cash deposits at banks located in California. Deposits at each bank are insured by the Federal Deposit Insurance Corporation up to $100,000. As of February 29, 2000, the Company had no uninsured cash. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents. Note 3: CAPITALIZED COMPUTER SOFTWARE DEVELOPMENT COSTS - ------- Software development costs are capitalized in accordance with Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Cost of Computer Software to be Sold, Leased, or Otherwise Marketed." Capitalization of software development costs begins upon the establishment of technological feasibility and is discontinued when the product is available for sale. The establishment of technological feasibility and the ongoing assessment for recoverability of capitalized software development costs require considerable judgement by management with respect to certain external factors including, but not limited to, technological feasibility, anticipated future gross revenue, estimated economic life, and changes in software and hardware technologies. Capitalized software development costs are comprised primarily of salaries and direct payroll related costs and the purchase of existing software to be used in the Company's software products. Amortization of capitalized software development costs is provided on a product-by-product basis on the straight-line method over the estimated economic life of the products, not exceeding three years. Management periodically compares estimated net realizable value by product with the amount of software development costs capitalized for that product to ensure the amount capitalized is recoverable through revenues. Any excess of development costs to expected net realizable value is expensed at that time. The Company expensed total of $532,925, $182,925 in the fiscal year 1999 and $350,000 in the fiscal year 1998, when it was determined that the capitalized amount relating to educational software was greater than net realizable value. 4 Note 4: FURNITURE AND EQUIPMENT - ------- Furniture and equipment as of February 29, 2000 consisted of the following: Equipment $ 50,185 Computer equipment 340,798 Furniture and fixtures 45,036 Leasehold improvements 39,434 ---------- 475,453 Less accumulated depreciation 356,545 ---------- $ 118,908 ========== Note 5: STOCKHOLDERS' EQUITY - ------- ISSUANCE OF WARRANTS In August and September 1996, the Company issued 100,000 and 150,000 warrants associated with two notes in the amount of $200,000 and $300,000, respectively, to purchase common stock. The warrants are exercisable at $4.00 per share and expire five years from the date of grant. The notes were repaid upon the completion of the Company's stock offering. To date, these warrants have not been exercised. In January 1997, the Company entered into Subscription Agreements whereby the Company issued notes in the amount of $1,100,000 and issued 280,000 warrants to purchase common stock. The warrants are exercisable at $2.50 per share, are subject to a 12-month-lock-up period, and expire five years from the grant date. The notes were repaid upon the completion of the Company's stock offering. To date, these warrants have not been exercised. STOCK OPTION PLAN In September 1996, the Board of Directors adopted and the shareholders approved the 1996 Stock Option Plan (the "Option Plan") under which a total of 250,000 shares of common stock was reserved for issuance. In March 1999, the shareholders approved an increase in the number of shares that may be granted under the Option Plan to 500,000. In March 2000, the shareholders approved a second increase in the number of shares that may be granted under the Option Plan to 1,000,000. The Option Plan terminates in 2006, subject to earlier termination by the Board of Directors. As of February 29, 2000, 501,086 shares had been issued to various employees and at an exercise price of the fair market value at the date of grant with five-year vesting periods, of which 2,000 shares were exercised. 5 SUBSCRIPTION AGREEMENT In November 1998, the Company entered into a Subscription Agreement whereby the Company issued Common Stock in the amount of $33,531 with a 12-month lock-up period in exchange for service received by the Company in making tenant improvements to its new facility after relocating in July 1998. The value of common stock issued was equal to the service received by the Company. Note 6: Income Taxes - ------- The Company used the liability method of accounting for income taxes pursuant to SFAS No. 109 "Accounting for Income Taxes." Note 7: Earnings Per Share - ------- Effective February 28, 1998, the Company adopted SFAS No. 128 "Earnings Per Share." All prior periods presented have been restated to confirm with SFAS No. 128. 6 Item 2. Management's Discussion and Analysis or Plan of Operations ------------------------------------------------------------------ FORWARD-LOOKING STATEMENTS The following discussion should be read in conjunction with the financial statements and the notes thereto appearing elsewhere in this quarterly report on Form 10-QSB for the quarter ended February 29, 2000 (the "Form 10-QSB"). In addition to historical information, this Form 10-QSB contains forward-looking statements. The forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in the section entitled "Management's Discussion and Analysis or Plan of Operations." Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. Simulations Plus, Inc. undertakes no obligation to publicly revise these forward-looking statements, or to reflect events or circumstances that arise after the date hereof. Readers should carefully review the risk factors described in other documents that the Company has filed and will continue to file from time to time with the Securities and Exchange Commission. GENERAL BUSINESS - -------- Simulations Plus, Inc. (the "Company" or "Simulations Plus") and its wholly owned subsidiary, Words+, Inc. ("Words+") produce two types of products: (1) Simulations Plus, incorporated in 1996, develops and produces simulation software for use in pharmaceutical research and for education, and also provides contract research services to the pharmaceutical industry, and (2) Words+, founded in 1981, produces computer software and specialized hardware for use by persons with disabilities, as well as a personal productivity software program called Abbreviate! for the retail market. DESCRIPTION OF SIMULATION SOFTWARE - ---------------------------------- The types of simulation software produced by the Company are based on the equations of chemistry and physics that describe or "model" the behavior of things in the real world. The Company's GastroPlus(TM) pharmaceutical software simulates the movement, dissolution/precipitation, and absorption of orally-dosed drug compounds in the human gastrointestinal tract, and with additional inputs, the blood plasma concentration-time history of the drug after it reaches the central blood circulation. The Company's QMPRPlus(TM) program estimates the value of several important physicochemical characteristics of new drug-like molecules with only the structure of the molecule as input. The Company's award-winning FutureLab(TM) science experiment simulations for middle school and high school students incorporate the equations of chemistry and physics for each experiment (optics, electrical circuits, gravity, ideal gases, acid/base titration, etc.). 7 The development of simulation software involves identifying and understanding the underlying chemistry and physics of the processes to be simulated, breaking those processes down into the lowest practical level of individual sub-processes at which the behaviors can be well-represented mathematically, developing appropriate mathematical relationships/equations, and converting them into computer subroutines. The software subroutines representing these individual processes are then assembled into an overall simulation program, with appropriate coordination between modules and design of user-friendly inputs and outputs. The predictions of this program are then compared to known results in order to determine the validity of the model and to calibrate the simulation to produce a useful tool for predicting new results. PRODUCTS - -------- The Company's pharmaceutical software provides cost-effective solutions to a number of problems in pharmaceutical research as well as in the education of pharmacy and medical students. The Company's software products and services to date are focussed on the area of pharmaceutical research known as ADME (Absorption, Distribution, Metabolism, and Excretion). The Company released its first pharmaceutical software product, GastroPlus(TM), in August 1998 and received enthusiastic interest from researchers in large pharmaceutical companies such as Astra-Zeneca, Pfizer, Pharmacia and Upjohn, The Roche Group, and SmithKline Beecham. An Optimization Module was released in November 1998 and the majority of new sales now include this module, generating additional revenue. QMPRPlus(TM) (Quantitative Molecular Permeability Relationships), a companion program to GastroPlus, takes as inputs the structures of molecules, and provides estimates for human effective permeability, octanol-water partition coefficient (logP), solubility, and diffusivity - all inputs to GastroPlus. QMPRPlus thereby extends the utility of GastroPlus into early drug discovery, during which pharmaceutical companies may not have yet made many of the molecules that have been identified as potential drug candidates. By providing estimates of physicochemical properties from structure alone, QMPRPlus, coupled with GastroPlus, allows researchers to rank order large numbers of candidate compounds in terms of their potential for human intestinal absorption. Because pharmaceutical companies are dealing with millions of compounds per year, and because the area of ADME has become a bottleneck, high throughput screening on the computer ("IN SILICO") is becoming not just a convenience, but a necessity. As of February 29, 2000, the Company's pharmaceutical software had been licensed to 29 research centers in 17 pharmaceutical and biotech companies in the U.S., Europe, and Japan, and a number of additional companies had indicated they were in the process of getting approvals to license one or more software products. In addition, the Company is in discussions with several pharmaceutical companies regarding contract study services, customized software, or both. 8 In 1998, the Company executed a License Agreement with Therapeutic Systems Research Laboratories, Inc. ("TSRL"), Ann Arbor, Michigan, to obtain exclusive rights to TSRL's technology and database, including measurements of drug permeability from nearly 60 laboratory experiments to measure the intestinal permeability of drug compounds in human and/or rat small intestines. The Company is also receiving consulting assistance in the development of the simulation model from TSRL staff, including Dr. Gordon Amidon and Dr. John Crison. The Company believes that the strategic advantage of exclusive access to TSRL's technology and expertise, combined with the Company's now well-developed and growing expertise in absorption and pharmacokinetics simulation, have resulted in GastroPlus becoming recognized as a unique simulation and analysis capability within the pharmaceutical industry. The Company is aware that other companies began to develop similar software; however, management believes there has not been any significant direct competition for GastroPlus at this time. CONTRACT RESEARCH SERVICES - -------------------------- The Company offers contract research services to the pharmaceutical industry in the area of gastrointestinal absorption, pharmacokinetics, and related technologies. The Company has performed three study contracts for major pharmaceutical companies, and is currently in discussions with several for additional studies. These studies provide an additional source of revenue for the Company, as well as a means to introduce the Company's software products to new customers. Management expects the number and size of study contracts to continue to increase in future. PRODUCT DEVELOPMENT - ------------------- In the area of simulation software for pharmaceutical research, the Company is currently pursuing the development of additional modules for GastroPlus and QMPRPlus, as well as a third program called HelixGen(TM), which predicts the 3-dimensional receptor structure of certain transmembrane proteins. The Company is also pursuing the development of another core product called DDDPlus(TM) (Dose Disintegration and Dissolution Plus), which will simulate the disintegration and dissolution of tablets and capsules in IN VITRO experiments. Other development efforts include: 1. The addition of animal physiologies to its GastroPlus(TM) software, which will allow researchers to model absorption and pharmacokinetics for several animal species in addition to the current human model. This addition is expected to be released during the third quarter of fiscal 2000. 2. The IVIV Correlation Module for GastroPlus(TM) will provide IN VITRO-IN VIVO correlation capabilities to pharmaceutical researchers. IN VITRO-IN VIVO correlation in this context refers to the ability to determine the relationship between the concentration-time curve of a drug product in the blood after oral dose (IN VIVO) to the rate at which the oral dose is observed to dissolve in a laboratory experiment (IN VITRO). Release of this module has been delayed because of the extensive travel schedule of those scientific team members involved in its development. Release is now expected during the third quarter of fiscal 2000. 9 3. The Company has recently completed the development of 3-dimensional models for certain predicted physicochemical properties (logP, solubility, and permeability) for its QMPRPlus(TM) software. These models are not yet included in the version that is shipping (version 1.1.4), but will be included in an upgrade version that is expected to be released in the third quarter of fiscal 2000. The 3D models show improved prediction for logP and solubility. 4. The Absorption Systems Caco-2 Permeability Module will be an optional module for QMPRPlus to predict permeability from data collected IN VITRO in Caco-2 cells. The Company signed a license agreement with Absorption Systems LP of Exton, Pennsylvania, for data on 330 compounds tested by Absorption Systems in Caco-2 cell cultures, and is using this database to build the optional module, which is expected to be released in the second or third quarter of FY2000. The Company has been working to build a correlation model with this data for a number of months; however, the models obtained to date are not considered of sufficient quality to release. The continuation of this effort is under evaluation at this time. If it is concluded that models with sufficient accuracy to be of economic value to the Company's customers cannot be realized, the effort will be terminated. 5. The Metabolism and Efflux Module will extend the simulation within GastroPlus to include greater detail for the effects of certain metabolic processes on drug molecules, and the effects of certain proteins in intestinal cells that return ("efflux") a drug molecule to the intestinal contents. There is considerable interest within the pharmaceutical industry in modeling (simulating) the mechanisms by which these processes occur during and subsequent to intestinal absorption of the drug molecules. Progress has been made during this quarter on this module, and a prototype version is now running. Additional program modifications and verification are needed before the module will be released. The Company expects to release the Metabolism and Efflux Module during the third quarter of fiscal year 2000. 6. HelixGen is a program that predicts the 3-dimensional geometry of a special class of proteins known as G-coupled transmembrane proteins. This type of protein serves as a channel for passage of certain molecules through the walls of nerve cells and other cells, and is a target for the majority of neurogenic drugs. Full development of this program is expected to resume in FY2000, but is being delayed in order to focus resources on GastroPlus(TM), QMPRPlus(TM), and DDDPlus(TM). The Company's wholly owned subsidiary, Words+, Inc. has been in business since 1981. Words+ is a technology leader in designing and developing augmentative and alternative communication computer software and hardware devices for persons who cannot speak due to physical disabilities. Words+ products enable a disabled person to operate a computer and to communicate through a voice synthesizer, through movements as slight as the blink of an eye. The Company's most famous user is theoretical astrophysicist Professor Stephen Hawking, author of the best-selling A Brief History of Time, who has communicated through Words+ products since 1985. 10 The Company believes it has been an industry technology leader in introducing and improving augmentative and alternative communication and computer access software and devices for disabled persons and intends to continue to be at the forefront of the development of new products. The Company will continue to enhance its major software products, E Z Keys and Talking Screen, as well as its growing line of hardware products. The Company will also consider acquisitions of other products, business and companies that are complementary to its existing augmentative and alternative communication and computer access business lines. The Company completed the development of and released a new Message Builder feature for the MessageMate in December 1999, which is an enhancement of the existing MessageMate product. It enables users to select prerecorded words or phrases one at a time, and then plays the entire message formed by them. RESULTS OF OPERATIONS COMPARISON OF THREE MONTHS ENDED FEBRUARY 29, 2000 AND FEBRUARY 28, 1999. The following table sets forth the Company's consolidated statements of operations (in thousands) and the percentages that such items bear to net sales: (Due to rounding, the numbers appearing in the following table may not foot; please refer to the Company's consolidated statements of operations.) Three Months Ended ------------------------------------------------------------ 02/29/00 02/28/99 ------------------------------------------------------------ Net sales $ 1,092 100.0% $ 778 100.0% Cost of sales 368 33.7 393 50.5 ----------- ----------- ----------- ----------- Gross profit 724 66.3 385 49.5 ----------- ----------- ----------- ----------- Selling, general and administrative 596 54.6 542 69.7 Research and development 75 6.9 36 4.6 ----------- ----------- ----------- ----------- Total operating expenses 671 61.4 578 74.3 ----------- ----------- ----------- ----------- Profit (loss) from operations 53 4.9 (193) (24.8) Interest revenue 0 0 2 0.3 Interest expense (4) (0.4) (8) (1.0) Gain (loss) on disposal of asset (1) (0.1) 0 0 ----------- ----------- ----------- ----------- Net profit (loss) $ 48 4.4% $ (199) (25.6)% =========== =========== =========== ===========
NET SALES The consolidated net sales increased $314,000, or 40.4%, to $1,092,000 in the second fiscal quarter of 2000 from $778,000 in the second fiscal quarter of 1999. Simulations Plus, Inc.'s sales, from pharmaceutical and educational software, increased approximately $374,000, or 402.2%, and Words+, Inc.'s sales decreased approximately $60,000, or 8.7% for the quarter. Management attributes the increase in consolidated net sales to the sales growth in Pharmaceutical software, which is offset by a reduction of sales from its Words+ subsidiary. Pharmaceutical software sales contributed approximately 120% of the total increase in consolidated sales for the quarter. The decline in Words+ sales is due primarily to the temporary lack of key components for the Pegasus LITE(TM), for which the Company is actively seeking replacement. 11 COST OF SALES The Company reclassified royalty expense as a part of cost of sales starting with this fiscal year. Accordingly, last year's cost of sales was restated reflecting this change in order to provide a fair comparison between the second fiscal quarters of 2000 and 1999. The consolidated cost of sales decreased $25,000, or 6.4%, to $368,000 in the second fiscal quarter of 2000 from $393,000 in the second fiscal quarter of 1999. The percentage of cost of sales decreased by 16.8%. For Simulations Plus, the cost of sales increased $25,000, or 37.8%. A significant portion of the cost of sales is the systematic amortization of capitalized software cost, which decreased by 42.1 % in the second fiscal quarter of 2000 compared to the second fiscal quarter of 1999. This reduction is due to the fact that all remaining capitalized software development costs for educational software were expensed during fiscal 1999. However, the increase in royalty expense, which depends on sales, outweighed the reduction in amortization cost, resulting in the net increase. For Words+, the cost of sales decreased $50,000, or 15.2%. Management attributes the percentage decrease in cost of sales for Words+ primarily to the fact that a significant portion of sales was generated by product items with higher profit margins. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Consolidated selling, general and administrative expenses increased $54,000, or 10.0%, to $596,000 in the second fiscal quarter of 2000 from $542,000 in the second fiscal quarter of 1999. For Simulations Plus, the selling, general and administrative expenses increased $41,000, or 20.0%, primarily due to increased commission expense associated with sales, starting a 401(k) benefit plan for employees, and increases in payroll, payroll taxes, and rent. Although there are reductions in expenses, such as legal/accounting expense and telephone expense, overall increases outweighed reductions. For Words+, SG&A expenses increased $13,000, or 3.9%, for similar reasons as Simulations Plus, due to 401(k) employee benefit expenses, payroll, payroll taxes, rent, insurance, and outsourcing some work in research & development, which outweighed other reductions in selling, general and administrative expenses. RESEARCH AND DEVELOPMENT The Company incurred approximately $106,000 of research and development costs for both companies during the second quarter of 2000. Of this amount, $31,000 was capitalized and $75,000 was expensed in this period. In the second quarter of 1999, the Company incurred $80,000 of research and development costs, of which $44,000 was capitalized and $36,000 was expensed. The increase of $26,000, or 32.5% in research and development expenditure from the second quarter of 1999 to the second quarter of 2000 was due to the fact that research and development expenditures for the second quarter of 1999 reported only actual wages and did not include accrued salaries, while the second quarter of 2000 included accrued salaries in research and development. This recording error was discovered in the third quarter of 1999 and corrected accordingly. 12 INTEREST REVENUE Interest revenue for the second fiscal quarter of 2000 decreased to $80 from $2,000 in the second fiscal quarter of 1999. This decrease is primarily due to the interest earned on investment activities in commercial notes through a highly-qualified financial institution being reduced because portions of the capital resources were used in the Company's operations. INTEREST EXPENSE Interest expense for the second fiscal quarter of 2000 decreased by $4,000, to $4,000 from $8,000 in the second fiscal quarter of 1999. This decrease is attributable primarily to the adjustment of $6,000 that has been made in the second quarter of 1999 to correct the error in the previous quarter regarding interest on a revolving line of credit. Without this adjustment, the interest expense shows a $2,000 increase in the second fiscal quarter of 2000 compared to the second fiscal quarter of 1999. LOSS ON SALE OF ASSET During the second fiscal quarter of 2000, the Company recorded net loss of $605 when an insurance claim was settled for equipment that had been stolen away during travel for marketing. The loss was calculated as net proceeds minus book value. NET PROFIT The consolidated net profit for the three months ended February 29, 2000 increased by $247,000, or 124.1%, to $48,000 in the second fiscal quarter of 2000 compared to the net loss of $199,000 in the second fiscal quarter of 1999. Management attributes this increase primarily to the significant increase in pharmaceutical software sales and decline in cost of sales, outweighing the increase in selling, general and administrative expenses, and research and development expense, compared to the three months ended February 28, 1999. 13 COMPARISON OF SIX MONTHS ENDED FEBRUARY 29, 2000 AND FEBRUARY 28, 1999. The following table sets forth the Company's consolidated statements of operations (in thousands) and the percentages that such items bear to net sales: (Due to rounding, the numbers appearing in the following table may not foot; Please refer to the Company's consolidated statements of operations.) Six Months Ended ------------------------------------------------------------ 02/29/00 02/28/99 ------------------------------------------------------------ Net sales $ 1,906 100.0% $ 1,659 100.0% Cost of sales 606 31.8 789 47.6 ------------------------------------------------------------ Gross profit 1,300 68.2 870 52.4 ------------------------------------------------------------ Selling, general and administrative 1,122 58.9 1,141 68.8 Research and development 164 8.6 72 4.3 ------------------------------------------------------------ Total operating expenses 1,286 67.5 1,213 73.1 ------------------------------------------------------------ Profit (loss) from operations 14 0.7 (343) (20.7) Income from grant 0 0 75 4.5 Interest revenue 0 0 5 0.3 Interest expense (8) (0.4) (10) (0.6) Gain (loss) on disposal of asset (1) (0.1) 0 0 ------------------------------------------------------------ Net profit (loss) $ 5 0.3% $ (273) (16.5)% ============================================================
NET SALES The consolidated net sales increased $247,000, or 14.9%, to $1,906,000 for the six months ended February 29, 2000 compared to $1,659,000 for the six months ended February 28, 1999. Simulations Plus, Inc.'s sales, from pharmaceutical and educational software, increased approximately $438,000, or 243.3%, and Words+, Inc.'s sales decreased approximately $191,000, or 12.9% for the six months ended February 29, 2000. Management attributes the increase in consolidated net sales to the significant sales growth in Pharmaceutical software, which is offset by a reduction of sales from its Words+ subsidiary. Pharmaceutical software sales contributed over 180% of the total increase in consolidated sales for the six months ended February 29, 1000. The decline in Words+ sales is due primarily to the temporary lack of key components for the Pegasus LITE(TM), for which the Company is actively seeking replacement. COST OF SALES The Company reclassified royalty expense as a part of cost of sales starting with this fiscal year. Accordingly, last year's cost of sales was restated reflecting this change in order to provide a fair comparison of results of operations between the six months ended in February 29, 2000 and February 28, 1999. The consolidated cost of sales decreased $183,000, or 23.2%, to $606,000 for the six months ended February 29, 2000 from $789,000 for the six months ended February 28, 1999. The percentage of cost of sales decreased by 15.8%. For Simulations Plus, the cost of sales increased $12,000, or 8.8%. A significant portion of the cost of sales is the systematic amortization of capitalized software cost, which decreased by 38.5% in the six months ended February 29, 2000 compared to the six months ended February 28, 1999. This reduction is due to the fact that all remaining capitalized software development costs for educational software were expensed during fiscal 1999. However, the increase in royalty expense, which depends on sales, outweighed the reduction in amortization cost, resulting in the net increase. For Words+, the cost of sales decreased $195,000, or 29.6%. The percentage change of cost of sales between the six months ended February 28, 1999 and February 29, 2000 is a decrease of 8.5%. Management attributes the percentage decrease in cost of sales for Words+ primarily to the fact that a significant portion of sales was generated by product items with higher profit margins. 14 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Consolidated selling, general and administrative expenses decreased $19,000, or 1.7%, to $1,122,000 for the six months ended February 29, 2000 from $1,141,000 for the six months ended February 28, 1999. For Simulations Plus, selling, general and administrative expenses increased $20,000, or 5.1%, primarily due to increased commission expense associated with sales, starting a 401(k) benefit plan for employees, and increases in payroll, payroll taxes, and rent. Although there were slight reductions in some expenses, such as legal/accounting expense and telephone expense, overall increases in selling, general and administrative expenses outweighed the reductions. For Words+, the expenses decreased $39,000, or 5.2%, due to reductions in commission based on sales, reductions in the employee field sales force, their travel expenses, and their payroll-related expenses, and reducing marketing cost by consolidating the management of two companies' marketing departments into one person. These reductions outweighed increases in other expense categories such as facility lease, insurance expense, 401(k) expense, and contract labor costs. RESEARCH AND DEVELOPMENT The Company incurred approximately $220,000 of research and development costs for both companies for the six months ended February 29, 2000. Of this amount, $56,000 was capitalized and $164,000 was expensed in this period. In the same period of 1999, the Company incurred $166,000 of research and development costs, of which $94,000 was capitalized and $72,000 was expensed. The increase of 54,000, or 32.5%, in research and development expenditure for the six months ended February 29, 2000 compared to the same period of 1999 was due to the fact that research and development expenditures for the six months ended February 28, 1999 reported only actual wages and did not include accrued salaries, while the six months ended February 29, 2000 included accrued salaries in research and development. This recording error was discovered in the third quarter of 1999 and corrected accordingly. 15 INCOME FROM GRANT During the first six months of 1999, the Company received the third $75,000 payment of a $300,000 Phase II SBIR grant from the National Science Foundation (the "NSF") to further develop the FutureLab(TM) series. There is no grant income for fiscal year 2000. INTEREST REVENUE Interest revenue for the six months ended February 29, 2000 decreased to $300 from $5,000 for the six months ended February 28, 1999. This decrease is primarily due to the interest earned on investment activities in commercial notes through a highly-qualified financial institution being reduced because portions of the capital resources were used in the Company's operations. INTEREST EXPENSE Interest expense for the six months ended February 29, 2000 decreased by $2,000, or 20.0%, to $8,000 from $10,000 for the six months ended February 28, 1999. This decrease is attributable primarily to the reduction in interest amortization expense in lease obligations, some of which are at the end of their lease terms. LOSS ON SALE OF ASSET During the second fiscal quarter of 2000, the Company recorded a net loss of $605 when the insurance claim was settled for stolen equipment. The loss was calculated as net proceeds minus book value. There was no such expense in the fiscal 1999. NET PROFIT The consolidated net profit for the six months ended February 29, 2000 increased by $278,000, or 101.8%, to $5,000 for the six months ended February 29, 2000 compared to the net loss of $273,000 for the six months ended February 28, 1999. Management attributes this increase primarily to the significant increase in pharmaceutical software sales, decline in cost of sales, and decline in selling, general and administrative expenses outweighing the increase in research and development expense compared to the six months ended February 28, 1999. LIQUIDITY AND CAPITAL RESOURCES The Company's principal sources of capital have been cash flows from its operations, a bank line of credit, a government grant, cash loans from the officers on an as-needed basis, accruing and not paying full salaries to certain executive officers and managers, and remaining proceeds from the Company's initial public offering. 16 The Company has available a $100,000 revolving line of credit from a bank. Interest is payable on a monthly basis at the bank's prime rate plus 3.0%. The outstanding balance under the revolving line of credit as of February 29, 2000 was $100,000. The revolving line of credit is not secured by any of the assets of the Company but is personally guaranteed by Mr. Walter S. Woltosz, the Company's Chief Executive Officer, President and Chairman of the Board of Directors. Beginning in August 1998, certain executive officers and managers accepted reduced salaries on a temporary basis in order to protect the cash assets of the Company. The unpaid portions of salaries have been accrued and were paid to most employees during the second quarter of 2000. In order to preserve the Company's cash flow and cash reserves, portions of certain key executives' salaries continue to be accrued until the Company obtains sufficient funds to make such payments without adverse effects to the Company's cash position. The Company believes that existing capital and anticipated funds from operations and accruing portions of the salaries for some senior managers will be sufficient to meet its anticipated cash needs for working capital and capital expenditures for at least the next 13 months. However, if anticipated funds from operations are insufficient to satisfy the Company's capital requirements, the Company may have to sell additional equity or debt securities or obtain expanded credit facilities. In the event such financing is needed in the future, there can be no assurance that such financing will be available to the Company, or, if cash flows from operations are insufficient to continue operations at the current level, and if no additional financing is obtained, then management may restructure the Company in a way to preserve its pharmaceutical and disability businesses while maintaining expenses within operating cash flows. In order to maintain quotation of its securities on the NASDAQ SmallCap Market ("NASDAQ"), the Company has to maintain certain minimum financial requirements. As of August 31, 1998, the Company ceased to meet one of the requirements for continued listing, namely the Company's net tangible assets as of August 31, 1998 were $1,284,000 which was below the $2,000,000 required by the Nasdaq. On July 2, 1999, the Company was informed that its securities were being delisted from the Nasdaq effective at the close of business on July 2, 1999 because the Company did not meet the requirements for continued listing on Nasdaq. Accordingly, trading in the shares of the Company's Common Stock is now conducted on the Nasdaq's "Electronic Bulletin Board." Consequently, the liquidity of the Company's securities may be impaired, not only in the number of securities which can be bought and sold, but also through delays in the timing of the transactions, reductions in security analysts' and media coverage of the Company, and lower prices for the Company's securities than otherwise may be attained. As a result of the delisting, the Company's securities are subject to Rule 15g-9 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which imposes additional sales practice requirements on broker-dealers which sell such securities to persons other than established customers and "accredited investors" (generally, individuals with net worths in excess of $1,000,000 or annual incomes exceeding $200,000, or $300,000 together with their spouses). For transactions covered by this rule, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transaction prior to the sale. Consequently, the rule may adversely affect the ability of broker-dealers to sell the Company's securities acquired hereby in the secondary market. 17 Securities and Exchange Commission ("Commission") regulations define a "penny stock" to be any non-Nasdaq equity security that has a market price (as therein defined) of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require delivery, prior to any transaction in a penny stock, of a disclosure schedule prepared by the Commission relating to the penny stock market. Disclosure is also required to be made about commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements are required to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. The foregoing required penny stock restrictions will not apply to the Company's securities if such securities are listed on Nasdaq and have certain price and volume information provided on a current and continuing basis or meet certain minimum tangible assets or average revenue criteria. There can be no assurance that the Company's securities will qualify for exemption from these restrictions. In any event, even if the Company's securities were exempt from such restrictions, it would remain subject to Section 15(b)(6) of the Exchange Act, which gives the Commission the authority to prohibit any person that is engaged in unlawful conduct while participating in a distribution of penny stock from associating with a broker-dealer or participating in the distribution of a penny stock, if the Commission finds that such a restriction would be in the public interest. If the Company's securities were subject to the rules on penny stocks, the market liquidity for the Company's securities would be severely adversely affected. 18 PART II. OTHER INFORMATION Item 1. Legal Proceedings ----------------- None. Item 2. Changes in Securities --------------------- None. Item 3. Defaults Upon Senior Securities ------------------------------- None. Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- On March 25, 2000, the Registrant held its annual meeting of shareholders. The following proposals were submitted to a vote of security holders at the meeting. (1) Election of directors Walter Woltosz Virginia Woltosz Dr. David Z. D'Argenio Dr. Richard Weiss. (2) Approval of Amendment to the Registrant's Stock Option Plan to authorize 1,000,000 shares to be available under the plan. (3) Ratification of the selection of Singer, Lewak, Greenbaum & Goldstein, LLP as their independent accountants. All of the above proposals were approved and the results of the balloting at the meeting are summarized in the following table. Broker Proposal Yes No Abstain Non-Votes Total ============================================================= 1 3,276,022 - 11,250 - 3,287,272 2 2,384,175 65,991 6,150 830,856 3,287,272 3 3,268,208 9,159 9,905 - 3,287,272 Item 5. Other Information None. 19 Item 6. Exhibits and Reports on form 8-K -------------------------------- (a) Exhibits: 27. Financial Data Schedule. (b) Reports on Form 8-K None. 20 SIGNATURE In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Simulations Plus, Inc. Date: April 11, 2000 By: /s/ MOMOKO BERAN ---------------- Momoko Beran Chief Financial Officer 21 Ex-27 Financial Data Schedule 22 EX-27 2 FINANCIAL DATA SCHEDULE
5 1 6-MOS AUG-31-2000 SEP-01-1999 FEB-29-2000 132,741 0 485,433 0 152,848 794,320 118,908 0 1,517,821 767,009 0 0 0 3,386 744,553 1,517,821 1,905,865 1,905,865 605,952 1,892,150 0 0 8,763 4,661 0 4,661 0 0 0 4,661 0 0
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