-----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, PKl6fYH1AIbXv8WUWWq4EbvmtTsH78sx+YLbboVy/0HyiuKxRNq3qrc3Q8e7yv1n nlprqZpC0u/tQ9E1BYUrtw== /in/edgar/work/0001019687-00-000950/0001019687-00-000950.txt : 20000717 0001019687-00-000950.hdr.sgml : 20000717 ACCESSION NUMBER: 0001019687-00-000950 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000531 FILED AS OF DATE: 20000714 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIMULATIONS PLUS INC CENTRAL INDEX KEY: 0001023459 STANDARD INDUSTRIAL CLASSIFICATION: [7373 ] IRS NUMBER: 954595609 FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 333-05600-LA FILM NUMBER: 672898 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 0001.txt 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 May 31, 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 (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 July 12, 2000, was 3,385,831. SIMULATIONS PLUS, INC. FORM 10-QSB FOR THE QUARTERLY PERIOD ENDED MAY 31, 2000 Table of Contents
Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheet at May 31, 2000 (unaudited) 3 Consolidated Statements of Operations for the three and nine months ended May 31, 2000 and 1999 (unaudited) 4 Consolidated Statements of Cash Flows for the nine months ended May 31, 2000 and 1999 (unaudited) 5 Notes to Consolidated Financial Statements (unaudited) 6 Item 2. Management's Discussion and Analysis or Plan of Operations General 9 Results of Operations 13 Liquidity and Capital Resources 19 PART II. OTHER INFORMATION Item 1. Legal Proceedings 21 Item 2. Changes in Securities 21 Item 3. Defaults upon Senior Securities 21 Item 4. Submission of Matters to a Vote of Security Holders 21 Item 5. Other Information 21 Item 6. Exhibits and Reports on Form 8-K 21 Signature 22 Exhibit Index 23
2 SIMULATIONS PLUS, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET May 31, 2000 (Unaudited)
ASSETS Current assets: Cash and cash equivalents (note 2) $ 113,462 Accounts receivable, net of allowance for doubtful accounts of $14,078 442,763 Prepaid expenses 32,149 Inventory 160,497 -------------- Total current assets 748,871 -------------- Capitalized computer software development costs, net of accumulated amortization (note 3) 556,193 Furniture and equipment, net (note 4) 116,766 Other assets 15,862 -------------- Total assets $ 1,437,692 ============== LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities: Advance line of credit 89,969 Accounts payable 255,381 Accrued payroll and other expenses 437,254 Accrued warranty and service costs 48,077 Current portion of capitalized lease obligations 17,203 -------------- Total current liabilities 847,884 -------------- Capitalized lease obligations, net of current portion 10,210 -------------- Total liabilities 858,094 -------------- Shareholders' equity Preferred stock: $.001 par value, authorized 10,000,000 shares, issued and outstanding 0 0 Common stock: $.001 par value, authorized 20,000,000 shares, issued and outstanding 3,385,831 (note 5) 3,386 Additional paid-in capital 4,632,281 Accumulated deficit (4,056,069) -------------- Total shareholders' equity 579,598 -------------- Total liabilities and stockholders' equity $ 1,437,692 ============== The accompanying footnotes are an integral part of these statements. 3
SIMULATIONS PLUS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS For the three and nine months ended May 31, 2000 and 1999 (Unaudited)
Three months ended Nine months ended ------------------------------ ------------------------------ 05/31/00 05/31/99 05/31/00 05/31/99 -------------- -------------- -------------- -------------- Net sales $ 742,520 $ 929,002 $ 2,648,385 $ 2,587,926 Cost of sales 349,226 382,955 955,178 1,171,850 -------------- -------------- -------------- -------------- Gross profit 393,294 546,047 1,693,207 1,416,076 -------------- -------------- -------------- -------------- Operating expenses: Selling, general & administrative 490,809 552,283 1,612,508 1,693,871 Research and development 69,706 55,552 234,204 127,222 -------------- -------------- -------------- -------------- Total operating expenses 560,515 607,835 1,846,712 1,821,093 -------------- -------------- -------------- -------------- Loss from operations (167,221) (61,788) (153,505) (405,017) Other income (expenses): Income from grant 0 75,000 0 150,000 Interest revenue 57 223 371 5,170 Interest expense (4,009) (5,300) (12,772) (15,431) Gain on disposal of assets 2,436 0 1,831 0 -------------- -------------- -------------- -------------- Income (loss) before provision for income taxes (168,737) 8,135 (164,075) (265,278) Provision (benefit) for income taxes 0 0 0 0 -------------- -------------- -------------- -------------- Net income (loss) $ (168,737) $ 8,135 $ (164,075) $ (265,278) ============== ============== ============== ============== Basic net income (loss) per common share $ (0.05) $ 0.00 $ (0.05) $ (0.08) ============== ============== ============== ============== Diluted net income (loss) per common share $ (0.05) $ 0.00 $ (0.05) $ (0.08) ============== ============== ============== ============== Weighted average # of common shares Outstanding 3,385,629 3,389,689 3,380,609 3,375,518 ============== ============== ============== ============== The accompanying footnotes are an integral part of these statements. 4
SIMULATIONS PLUS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS For the nine months ended May 31, 2000 and 1999
(Unaudited) Nine months ended ---------------------------- Cash flows from operating activities: 05/31/00 05/31/99 -------------- ------------ Net loss $ (164,075) $ (265,278) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization of furniture and equipment 50,171 59,801 Amortization of capitalized software development costs 133,783 178,118 Gain on disposals of furniture & equipment 1,059 0 (Increase) decrease in: Accounts receivable 127,583 (223,005) Inventory 32,677 131,446 Other assets 1,990 8,716 Income tax receivable 0 28,941 Increase (decrease) in: Accounts payable 11,334 (140,739) Accrued payroll and other expenses 7,216 173,696 Accrued warranty and service costs (22,684) 20,705 -------------- ------------ Net cash provided by (used in) operating activities 179,054 (27,599) -------------- ------------ Cash flows from investing activities: Purchase of furniture and equipment (2,490) (6,182) Capitalized computer software development cost (93,986) (139,103) -------------- ------------ Net cash used in investing activities (96,476) (145,285) -------------- ------------ Cash flows from financing activities: Increase in book overdraft 0 176 Proceeds from line of credit 141 0 Payments on line of credit 0 (7,300) Payments on capitalized lease obligations (24,595) (24,328) Proceeds from the exercise of stock options 3,015 0 Proceeds from lease payable 0 6,182 -------------- ------------ Net cash used in financing activities (21,439) (25,270) -------------- ------------ Net increase (decrease) in cash 61,139 (198,154) Cash and cash equivalents, beginning of period 52,323 98,154 -------------- ------------ Cash and cash equivalents, end of period $ 113,462 $ 0 ============== ============ Supplemental Information for the period ended 05/31/200 & 1999 Subscription agreement for issuance of Common Stock for tenant improvements $ 33,531 Equipment purchases by lease $ 16,086 The accompanying footnotes are an integral part of these statements. 5
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 May 31, 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 equivalent. 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, 6 when it was determined that the capitalized amount relating to educational software was greater than net realizable value. Note 4: FURNITURE AND EQUIPMENT - ------- Furniture and equipment consist of the following: Equipment $ 66,271 Computer equipment 264,357 Furniture and fixtures 45,036 Leasehold improvements 39,433 Demo Equipment 25,173 Rental Equipment 44,797 -------------- 485,067 Less accumulated depreciation 368,301 -------------- $ 116,766 ============== Note 5: STOCKHOLDERS' EQUITY - ------- STOCK OPTION PLAN On February 25, 2000, the Company held its Annual Meeting at which the shareholders approved an amendment to the Company's 1996 Stock Option Plan (the "Option Plan") to increase the number of shares underlying options that may be granted under the plan from 500,000 to 1,000,000 shares. As of November 30, 1999, there were no shares available for grant under the Option Plan. The Board believed that adding shares to the Option Plan is in the best interests of the Company because it will permit the Company to attract and retain employees by providing them with appropriate equity incentives. On April 17, 2000, the Company issued 252,000 shares to various employees at an exercise price of the fair market value at the date of grant with five-year vesting periods. As of May 31, 2000, total 750,086 shares were issued to various employees, of which 2,300 shares were exercised. 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. To date, these Warrants have not been exercised. ISSUANCE OF BRIDGE LENDERS WARRANT In December 1996 and January 1997, the Company issued to the Bridge Lenders 280,000 Warrants (the "Bridge Warrants") to purchase Common Stock. The Bridge 7 Warrants are exercisable at $2.50 per share and expire five years from the date of grant. To date, these Warrants have not been exercised. SUBSCRIPTION AGREEMENT In November 1999, 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 1999. 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 May 31, 1998, the Company adopted SFAS No. 128 "Earnings Per Share." All prior periods presented have been restated to confirm with SFAS No. 128. 8 Item 2. Management's Discussion and Analysis or Plan of Operations ---------------------------------------------------------- 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 May 31, 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, chemical degradation, and absorption of orally-dosed drug compounds in the gastrointestinal tract of human, dog, and rat, 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.). 9 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 ADMET (Absorption, Distribution, Metabolism, Excretion, and Toxicity). 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, 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. GastroPlus is now used in over 30 locations worldwide in activities ranging from early drug discovery to analysis of clinical trial data. 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), water 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 ADMET has become a bottleneck, high throughput screening on the computer ("IN SILICO") is becoming not just a convenience, but a necessity. As of May 31, 2000, the Company's pharmaceutical software had been licensed to 32 research centers in 19 pharmaceutical and biotech companies in the U.S., Europe, and Japan, and a number of additional companies 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. 10 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 are developing 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 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 fourth quarter of fiscal 2000. 2. 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 11 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. Significant progress has been made during this quarter on this module, and a prototype version is now running. The module has been rewritten during this quarter to provide greater flexibility for researchers to simulate metabolism both in the liver and in the intestines. Additional program modifications and verification are needed before the module will be released. The Company now expects to release the Metabolism and Efflux Module during the fourth quarter of fiscal year 2000. 3. 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. 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. Recently, a new computer was selected to replace the previously discontinued PegasusLITE product, for which the base computer, manufactured by Epson, became no longer available in mid-1999. The new computer is highly rugged, and incorporates more modern technology than the previous unit. The company expects sales to ramp up after release of this model in the fourth quarter. 12 RESULTS OF OPERATIONS COMPARISON OF THREE MONTHS ENDED MAY 31, 2000 AND 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 -------------------------------------------------------------- 05/31/00 05/31/99 ------------------------------ ------------------------------ Net sales $ 742 100.0% $ 929 100.0% Cost of sales 349 47.0 383 41.2 -------------- -------------- -------------- -------------- Gross profit 393 53.0 546 58.8 -------------- -------------- -------------- -------------- Selling, general and administrative 491 66.2 552 59.4 Research and development 69 9.3 56 6.0 -------------- -------------- -------------- -------------- Total operating expenses 560 75.5 608 65.4 -------------- -------------- -------------- -------------- Loss from operations (167) (22.5) (62) (6.7) Income from grant 0 0.0 75 8.1 Interest revenue 0 0.0 0 0.0 Interest expense (4) (0.5) (5) (0.5) Gain on disposal of assets 2 0.3 0 0.0 -------------- -------------- -------------- -------------- Net income (loss) $ (169) (22.8)% $ 8 0.9% ============== ============== ============== ==============
NET SALES The consolidated net sales decreased $187,000, or 20.1%, to $742,000 in the third fiscal quarter of 2000 from $929,000 in the third fiscal quarter of 1999. Simulations Plus, Inc.'s sales from pharmaceutical and educational software increased approximately $25,000, or 21.8%, and Words+, Inc.'s sales decreased approximately $212,000, or 26.1% for the quarter. Management attributes the decrease in consolidated net sales to decreased sales from its subsidiary, Words+, outweighed the growth in Pharmaceutical software sales. The decrease in Words+ sales is due primarily to the temporary lack of key components for the PegasusLITE(TM), for which the Company will introduce a replacement called "TuffTalk" in July 2000. COST OF SALES The Company reclassified royalty expenses 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 third quarters of 2000 and 1999. 13 The consolidated cost of sales decreased $34,000, or 8.9%, to $349,000 in the third fiscal quarter of 2000 from $383,000 in the third fiscal quarter of 1999. The percentage of cost of sales increased by 5.8%. For Simulations Plus, the cost of sales increased $22,000, or 35.2%, of which the significant portion of the cost of sales is the systematic amortization of capitalized software cost, which resulted in 33.5% increase in amortization cost. This high increase in amortization cost is due to the fact that there was an omission in calculating amortization expense during the first and second quarter of fiscal year 2000 for two newly released products. For Words+, the cost of sales decreased $56,000, or 17.5%. Management attributes the change in percentage of cost of sales between the third fiscal quarter of 2000 and 1999 primarily to reduction in Warranty cost. Since the Company introduced the rugged Panasonic Computer in October 1999, the failure rate is less than 1% and has resulted in less warranty related costs. GROSS PROFIT The consolidated gross profit decreased $153,000, or 28.0 %, to $393,000 in the third fiscal quarter of 2000 from $546,000 in the third fiscal quarter of 1999. Management attributes the 5.8% decrease in gross profit between the third fiscal quarter of 2000 and 1999 to the lower sales from Words+ and high increase in amount of amortized software expenses caused by an adjusting entry, which outweighed a significant Warranty cost reduction in Words+ operations. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES The consolidated selling, general and administrative expenses decreased $61,000, or 11.1%, to $491,000 in the third fiscal quarter of 2000 from $552,000 in the third fiscal quarter of 1999. For Simulations Plus, the selling, general and administrative expenses decreased $51,000, or 24.4% primarily due to the reduction in printing, advertising expenses by utilizing in-house equipment and manpower, reduction in insurance expenses by changing insurance underwriters, and reduction in professional fees. These reductions outweighed the increases in salaries and payroll related expense such as 401k and payroll tax expenses. For Words+, expenses decreased $10,000, or 3.2%, due to reductions in the employee field sales force and their payroll related expenses by obtaining more independent sales representatives in various states, reducing telephone expense significantly by changing long distant carrier as well as reducing insurance expenses by changing insurance underwriters. These reductions outweighed increases in trade show expense and increases in other administrative expenses such as utility expense and facility lease expense. RESEARCH AND DEVELOPMENT The Company incurred approximately $108,000 of research and development costs for both companies during the third quarter of 2000. Of this amount, $39,000 was capitalized and $69,000 was expensed in this period. In the third quarter of 1999, the Company incurred $108,000 of research and development costs, of which 14 $52,000 was capitalized and $56,000 was expensed. There was no change in research and development expenditure from the third quarter of 2000 to the third quarter of 1999. LOSS FROM OPERATIONS During the third fiscal quarter of 2000, the Company incurred a loss of approximately $167,000, as compared to a loss of $62,000 for the same period in the fiscal year 1999. Management attributes the increase in net loss from operations to decreased sales and increased Research & Development expense outweighed decreased Cost of sales and Selling, General and Administrative expenses. INCOME FROM GRANT During the third fiscal quarter of 1999, the Company earned the final $75,000 of a $300,000 Phase II SBIR grant from the National Science Foundation. The final report was filed in May 1999 and the Company received the final payment in early June 1999. In the third fiscal quarter of 2000, there was no grant income. INTEREST EXPENSE Interest expense for the third fiscal quarter of 2000 decreased by $1,000, to $4,000 from $5,000 in the third fiscal quarter of 1999. This decrease is attributable primarily to the reduction in interest amortization expense in lease obligations. GAIN ON DISPOSAL OF ASSET During the third fiscal quarter of 2000, the Company recorded a net gain of $2,000 when the insurance claim was settled for stolen equipment. The gain was calculated as net proceeds minus book value. There was no such gain in the fiscal 1999. NET INCOME OR (LOSS) The consolidated net loss for the three months ended May 31, 2000 increased by $177,000, to a loss of ($169,000) in the third fiscal quarter of 2000 compared to a profit of $8,000 in the third fiscal quarter of 1999. Management attributes this decrease primarily to the decrease in sales, decrease in grant income, and increase in research & development expense, which outweighed reductions in cost of sales, selling, general and administrative expenses compared to the three months ended May 31, 1999. COMPARISON OF NINE MONTHS ENDED MAY 31, 2000 AND 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.) 15
Nine Months Ended -------------------------------------------------------------- 05/31/00 05/31/99 ------------------------------ ------------------------------ Net sales $ 2,648 100.0% $ 2,588 100.0% Cost of sales 955 36.1 1,172 45.3 -------------- -------------- -------------- -------------- Gross profit 1,693 63.9 1,416 54.7 -------------- -------------- -------------- -------------- Selling, general and administrative 1,612 60.9 1,694 65.5 Research and development 234 8.8 127 4.9 -------------- -------------- -------------- -------------- Total operating expenses 1,846 69.7 1,821 70.4 -------------- -------------- -------------- -------------- Loss from operations (153) (5.8) (405) (15.6) Income from grant 0 0 150 5.8 Interest revenue 0 0 5 0.2 Interest expense (13) (0.5) (15) (0.6) Gain on disposal of assets 2 0.1 0 0.0 -------------- -------------- -------------- -------------- Net loss $ (164) (6.2)% $ (265) (10.2)% ============== ============== ============== ==============
NET SALES The consolidated net sales increased $60,000, or 2.2%, to $2,648,000 for the nine months ended May 31, 2000 compared to $2,588,000 for the nine months ended May 31, 2000. Simulations Plus, Inc.'s sales increased approximately $463,000, or 155.6%, and Words+, Inc.'s sales decreased approximately $403,000, or 17.6% for the nine months ended May 31, 2000. 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 contributed over 800% of the total increase in consolidated sales for the first nine months' operation. The decrease in Words+ sales is due primarily to the temporary lack of key components for the PegasusLITE(TM), for which the Company will introduce a replacement, called "TuffTalk" in July 2000. COST OF SALES The Company reclassified royalty expenses 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 third quarters of 2000 and 1999. The consolidated cost of sales decreased $217,000, or 18.5%, to $955,000 in the third fiscal quarter of 2000 from $1,172,000 in the third fiscal quarter of 1999. The percentage of cost of sales decreased by 9.2%. For Simulations Plus, the cost of sales increased $34,000, or 17.3%, of which the significant portion of the cost of sales is royalty, which resulted in 156.3% increase in royalty cost. There was a high increase in amortization caused by the adjustment made in the third fiscal quarter of 2000 to record an omission of amortization expense during the first and second quarter of fiscal year 2000 for two newly released products. However, this adjustment was offset by the reduction in educational software amortization since we wrote off all the remaining capitalized software for educational software by the end of fiscal year 1999. For Words+, the cost of 16 sales decreased $251,000, or 25.7%. Management attributes the change in percentage of cost of sales between the third fiscal quarter of 2000 and 1999 primarily to reduction in Warranty cost and Amortization of Capitalized software. Since the Company introduced the rugged Panasonic Computer in October 1999, the failure rate is less than 1% and has resulted in less warranty related costs. Also, capitalized development cost for Window version was completely amortized by the end of the fiscal year 1999 and there is no such expense in the fiscal year 2000. GROSS PROFIT The consolidated gross profit increased $277,000, or 19.6%, to $1,693,000 in the third fiscal quarter of 2000 from $1,416,000 in the third fiscal quarter of 1999. Management attributes the 9.2% increase in gross profit margin between the third fiscal quarter of 2000 and 1999 to a reduction in amortization expense of capitalized software for both the companies and a significant Warranty cost reduction, which outweighed the increase in royalty cost. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES The consolidated selling, general and administrative expenses decreased $82,000, or 4.8%, to $1,612,000 for the nine months ended May 31, 2000 from $1,694,000 for the nine months ended May 31, 1999. For Simulations Plus, the selling, general and administrative expenses decreased $31,000, or 5.2% primarily due to the reduction in printing, advertising expenses by utilizing in-house equipment and manpower, reduction in insurance expenses by changing insurance underwriters, and reduction in professional fees. These reductions outweighed the increases in salaries and payroll related expense such as 401k and payroll tax expenses and travel expense associating with more sales activities. For Words+, expenses decreased $51,000, or 4.6%, due to reductions in the employee field sales force and their payroll related expenses and travel expenses by obtaining more independent sales representatives in various states, reducing telephone expense significantly by changing long distant carrier as well as reducing insurance expenses by changing insurance underwriters. These reductions outweighed increases in catalog printing expense and increases in other administrative expenses such as utility expense, 401k expense and facility lease expense. RESEARCH AND DEVELOPMENT The Company incurred approximately $329,000 of research and development costs for both companies for the nine months ended May 31,1999. Of this amount, $95,000 was capitalized and $234,000 was expensed in this period. In the same period of 1999, the Company incurred $273,000 of research and development costs, of which $146,000 was capitalized and $127,000 was expensed. The 17.0% increase in research and development expenditures for the nine months ended May 31, 2000 compared to the same period of 1999 was due to the increase in research & development salary increase. 17 LOSS FROM OPERATIONS The Company incurred a net loss from operations of approximately $153,000, as compared to a loss of $405,000 for the same period in the fiscal year 1999. Management attributes the decrease in net loss from operations to increased sales and to the decreased Cost of sales and Selling, general and administrative expenses outweighed increased Research & Development expense. INCOME FROM GRANT During the third fiscal quarter of 1999, the Company received the third and the final payment of $150,000, $75,000 each, 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 nine months ended May 31, 2000 decreased to $0 from $5,000 for the nine months ended May 31, 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 the most of the capital resources were used in the Company's operations. INTEREST EXPENSE Interest expense for the nine months ended May 31, 2000 decreased by $2,000, or 13.3%, to $13,000 from $15,000 for the nine months ended May 31, 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. GAIN ON DISPOSAL OF ASSET During the second and third fiscal quarters of 2000, the Company recorded a net gain of $2,000 when insurance claims were settled for stolen equipment. The gain was calculated as net proceeds minus book value. There was no such gain in the fiscal 1999. NET LOSS Net loss for the nine months ended May 31, 2000 decreased by $101,000, or 38.1%, to $164,000 for the nine months ended May 31, 2000 compared to $265,000 for the nine months ended May 31, 1999. Management attributes this decrease primarily to the decrease in cost of sales and decrease in selling, general and administrative expenses outweighing the decrease in sales, decrease in grant income and increase in research and development expense compared to the nine months ended May 31, 1999. 18 LIQUIDITY AND CAPITAL RESOURCES The Company has available a $100,000 revolving line of credit. 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 May 31, 2000 was $90,000. 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 fiscal 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, 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, 1000 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 Security Exchange Act of 1934, as amended (the "Exchange Act"), which imposes additional sales practice requirements on broker-dealers which sell such 19 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 purchases 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. 20 PART II. OTHER INFORMATION Item 1. Legal Proceedings ----------------- In the normal course of business, the Company is subject to various lawsuits and claims. The Company believes that the final outcomes of these matters, either individually or in the aggregate, will not have a material effect on the financial statements. Item 2. Changes in Securities --------------------- None. Item 3. Defaults Upon Senior Securities ------------------------------- None. Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- None. Item 5. Other Information ----------------- None. Item 6. Exhibits and Reports on form 8-K -------------------------------- (a) Exhibits: 27. Financial Data Schedule. (b) Reports on Form 8-K None. 21 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. Date: July 14, 2000 Simulations Plus, Inc. By: /s/ Momoko Beran ----------------------- Momoko Beran Chief Financial Officer 22 EX-27 2 0002.txt FINANCIAL DATA SCHEDULE
5 1 9-MOS AUG-31-2000 SEP-01-1999 MAY-31-2000 113,462 0 442,763 0 160,497 748,871 672,959 0 1,437,692 847,884 0 0 0 3,386 576,212 1,437,692 2,648,385 2,648,385 955,178 2,801,890 0 0 12,772 (164,075) 0 (164,075) 0 0 0 (164,075) (.05) (.05)
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