-----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, IPNRNfQ+C7gTbQtjGQEtMl0TihnNgyVqvUwFd3Slerj0J30MrOv78wwfUkuE3pwJ ybuhV13cmchA+FhOBuWQrQ== 0001019687-99-000406.txt : 19990716 0001019687-99-000406.hdr.sgml : 19990716 ACCESSION NUMBER: 0001019687-99-000406 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990531 FILED AS OF DATE: 19990715 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: 99664990 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 May 31, 1999 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 WEST 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, 1999, was 3,383,531. SIMULATIONS PLUS, INC. FORM 10-QSB FOR THE QUARTERLY PERIOD ENDED MAY 31, 1999 Table of Contents PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheet at May 31, 1999 (unaudited) 3 Consolidated Statements of Operations for the three and nine months ended May 31, 1999 and 1998 (unaudited) 4 Consolidated Statements of Cash Flows for the nine months ended May 31, 1999 and 1998 (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 11 Liquidity and Capital Resources 17 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 19 Signature 20 Exhibit Index 21 2 SIMULATIONS PLUS, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET May 31, 1999 (Unaudited)
ASSETS Current assets: Cash and cash equivalents $ 0 Accounts receivable, net of allowance for doubtful accounts of $14,078 598,775 Prepaid expenses 23,564 Inventory 217,229 -------------- Total current assets 839,568 -------------- Capitalized computer software development costs, net of accumulated amortization (note 4) 784,112 Furniture and equipment, net (note 2) 170,118 Other assets 13,708 -------------- Total assets $ 1,807,506 ============== LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities: Book overdraft $ 176 Advance line of credit 89,828 Accounts payable 194,020 Accrued payroll and other expenses 359,079 Accrued warranty and service costs 69,201 Current portion of capitalized lease obligations 30,735 -------------- Total current liabilities 743,039 -------------- Capitalized lease obligations, net of current portion 12,419 -------------- Total liabilities 755,458 -------------- Shareholders' equity Preferred stock: $.001 par value, authorized 10,000,000 shares, issued and outstanding 0 (note 3) 0 Common stock: $.001 par value, authorized 20,000,000 shares, issued and outstanding 3,383,531 (note 3) 3,384 Additional paid-in capital 4,629,270 Accumulated deficit (3,580,606) -------------- Total shareholders' equity 1,052,048 -------------- Total liabilities and stockholders' equity $ 1,807,506 ==============
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, 1999 and 1998 (Unaudited)
Three months ended Nine months ended --------------------------------------------------------------------- 05/31/99 05/31/98 05/31/99 05/31/98 --------------- --------------- --------------- --------------- Net sales $ 929,002 $ 730,139 $ 2,587,926 $ 1,805,811 Cost of sales 370,536 399,807 1,124,393 1,001,434 --------------- --------------- --------------- --------------- Gross profit 558,466 330,332 1,463,533 804,377 --------------- --------------- --------------- --------------- Operating expenses: Selling, general & administrative 564,702 703,001 1,741,328 2,011,251 Research and development 55,552 42,370 127,222 305,602 --------------- --------------- --------------- --------------- Total operating expenses 620,254 745,371 1,868,550 2,316,853 --------------- --------------- --------------- --------------- Loss from operations (61,788) (415,039) (405,017) (1,512,476) Other income (expenses): Income from grant 75,000 75,000 150,000 150,000 Interest revenue 223 13,526 5,170 42,432 Interest expense (5,300) (3,425) (15,431) (9,459) --------------- --------------- --------------- --------------- Income (loss) before provision for income taxes 8,135 (329,938) (265,278) (1,329,503) Provision (benefit) for income taxes 0 0 0 0 --------------- --------------- --------------- --------------- Net income (loss) $ 8,135 $ (329,938) $ (265,278) $ (1,329,503) =============== =============== =============== =============== Basic net income (loss) per common share $ 0.00 $ (0.10) $ (0.08) $ (0.40) =============== =============== =============== =============== Diluted net income (loss) per common share $ 0.00 $ (0.10) $ (0.08) $ (0.40) =============== =============== =============== =============== Weighted average # of common shares Outstanding 3,389,689 3,350,000 3,375,518 3,350,000 =============== =============== =============== ===============
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, 1999 and 1998 (Unaudited) Nine months ended
-------------------------------- 05/31/99 05/31/98 --------------- ---------------- Cash flows from operating activities: Net loss $ (265,278) $ (1,329,503) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization of furniture and equipment 59,801 37,259 Amortization of capitalized software development costs 178,118 160,275 (Increase) decrease in: Accounts receivable (223,005) (5,713) Inventory 131,446 54,465 Other assets 8,716 (47,710) Income tax receivable 28,941 28,485 Increase (decrease) in: Accounts payable (140,739) 5,030 Accrued payroll and other expenses 173,696 32,504 Accrued warranty and service costs 20,705 (5,522) --------------- ---------------- Net cash used in operating activities (27,599) (1,070,430) --------------- ---------------- Cash flows from investing activities: Investments in HealthWeb - (1,000) Sale of investments - 428,045 Purchase of investments - (917,598) Purchase of furniture and equipment (6,182) (142,677) Capitalized computer software development cost (139,103) (501,303) --------------- ---------------- Net cash used in investing activities (145,285) (1,134,533) --------------- ---------------- Cash flows from financing activities: Increase in book overdraft 176 - Proceeds from line of credit - 88,000 Payments on line of credit (7,300) - Payments on capitalized lease obligations (24,328) (13,601) Proceeds from lease payable 6,182 - --------------- ---------------- Net cash provided by (used in) financing activities (25,270) 74,399 --------------- ---------------- Net decrease in cash (198,154) (2,130,564) Cash and cash equivalents, beginning of period 198,154 2,156,761 --------------- ---------------- Cash and cash equivalents, end of period $ 0 $ 26,197 =============== ================ Supplemental Information: (Note 3) Subscription agreement for issuance of Common Stock for tenant improvements $ 33,531 Tenant improvements by subscription agreement for Common Stock $ 33,531
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: FURNITURE AND EQUIPMENT Furniture and equipment consist of the following: Equipment $ 50,184 Computer equipment 293,748 Furniture and fixtures 45,036 Leasehold improvements 39,433 Demo Equipment 25,173 Rental Equipment 44,797 ---------- 498,371 Less accumulated depreciation 328,253 ---------- $ 170,188 ========== NOTE 3: STOCKHOLDERS' EQUITY AUTHORIZATION OF PREFERRED STOCK On March 26, 1999, the Company held its Annual Meeting at which the shareholders approved an amendment to the Company's Articles of Incorporation to authorize 10,000,000 shares, par value $0.001, of Preferred Stock. The purpose of this amendment is to authorize shares of Preferred Stock, which may be designated and issued from time to time by the Board of Directors for a variety of corporate purposes including future private or public offerings to raise additional capital, to pay Company debts or to facilitate corporate acquisitions, stock splits effected in the form of stock dividends, and other general corporate purposes. 6 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. A Warrant registration statement was filed with the Securities and Exchange Commission and was declared effective on March 4, 1999. This registration will remain effective for 120 days, ending July 1, 1999. 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 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. A warrant registration statement was filed with the Securities and Exchange Commission and was declared effective on March 4, 1999. This registration will remain effective for 120 days, ending July 1, 1999. STOCK OPTION PLAN On January 2, 1998, the Company issued incentive stock options to various employees to purchase an aggregate of 50,000 shares of the Company's Common Stock at an exercise price of $4.25 which approximated the fair market value at the date of grant. The options vest over five equal annual installments starting from the date of grant. As of May 31, 1999, 12,458 shares were forfeited and reissued along with a remaining 200,000 shares to various employees at an exercise price of $1.31 per share, which was the fair market value at the date of grant, October 30, 1998, with five year vesting periods. The Annual Meeting of shareholders on March 26, 1999 approved an amendment to the Company's 1996 Stock Option Plan to increase the shares available for issuance from 250,000 to 500,000 shares. In November, the Company entered into an agreement, whereby the Company issues stock options as a part of compensation, with Banchik and Associates in exchange for investor relation services. Accordingly, the Company issued stock options to Banchik and Associates to purchase 30,000 shares of the Company's Common Stock at an exercise price of $1.00 which was the fair market value at the date of the service agreement. The options vest at a rate of 5,000 per calendar quarter at the beginning of the period. 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. 7 NOTE 4: 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 judgment by management with respect to certain external factors, including, but not limited to, technological feasibility, anticipated future gross revenues, 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 to exceed three years). Management periodically compares estimated net realizable value by product to the amount of software development costs capitalized for that product to ensure the amount capitalized is not in excess of the amount to be recovered through revenues. Any such excess of capitalized software development costs to the expected net realizable value is expensed at that time. NOTE 5: Income Taxes The Company used the liability method of accounting for income taxes pursuant to SFAS No. 109 "Accounting for Income Taxes." NOTE 6: 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, 1999 (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 a difference 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 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. The Company is currently developing and producing simulation software for pharmaceutical research, and is producing simulation software for science courses for the middle school, high school, community college, and university markets. The Company 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. The types of simulation software under development 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, absorption, and clearance of drug compounds in the human gastrointestinal tract. The Company's QMPRPlus(TM) program estimates the values of several important chemical characteristics with only the structure of the molecule as input. The Company's FutureLab(TM) science experiment simulations incorporate the equations of chemistry and physics for each experiment (optics, electrical circuits, gravity, ideal gases, acid/base titration, etc.) 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 began selling GastroPlus(TM) in September 1998, and has continued to refine it and extend its capabilities. Sales of GastroPlus(TM) as of the end of third quarter include ten of the largest pharmaceutical firms in the world, including Pfizer, Roche, Pharmaceia 9 and Upjohn, Glaxo Wellcome, Zeneca, and Astra, and four others, including one of the largest pharmaceutical firms in Japan. An additional (extra-cost) Optimization Module was released in November 1998 and is receiving enthusiastic interest from pharmaceutical researchers. Almost all new GastroPlus(TM) licenses now include the Optimization Module, increasing the average sale price by 50%. A second optional module, IVIV Correlation, is in advanced development. It was expected to be released during the third fiscal quarter, however, the release schedule was delayed to the end of this fiscal year. Two other modules are also in development, and both are expected to be released in early 2000. The Company believes these additional modules will more than double the average price for an annual license. The Company is actively working over 600 leads for additional sales. No assurances can be given, however, that any additional sales will occur as a result of such leads. In 1997, the Company executed a License Agreement with Therapeutic Systems Research Laboratories, Inc. ("TSRL") to obtain exclusive rights to TSRL's technology and database for drug compound absorption in animal and human test subjects. Through the formation of this strategic alliance with TSRL, the development costs and time for GastroPlus were significantly reduced, and the Company's access to pharmaceutical markets was enhanced. In the area of simulation software for pharmaceutical research, the Company is currently pursuing the development of additional modules for GastroPlus(TM), such as the IVIV Correlation Module, and the Metabolism and Efflux Module. In addition, QMPRPlus(TM) has been released as a separate companion program, and will soon be available also as an optional module within GastroPlus(TM). The Company is also developing HelixGen(TM), which predicts the receptor structure of certain transmembrane proteins. The Company is exploring a number of potential relationships with other companies, and is also considering the acquisition of complementary companies to more rapidly grow its ability to serve the pharmaceutical research market. In February 1999, the Company announced that it had signed a letter of intent with Absorption Systems LP of Exton, Pennsylvania, to form a Joint Venture. The purpose of the Joint Venture is to serve a consortium called the Consortium for ADME Prediction. The acronym ADME stands for Absorption, Distribution, Metabolism, and Elimination, and is commonly used in pharmaceutical research to refer to processes that affect how a drug molecule is affected by various processes in the human body. The consortium concept has been presented to a number of companies in Europe, Japan, and the U.S. The concept has received considerable interest from companies to which it has been presented; however, there can be no assurance that the consortium will be successful. In the area of educational simulations, the Company's R&D efforts were reduced to completing the requirements for the Company's National Science Foundation (NSF) SBIR grant, which has now been completed and the final report has been submitted. In October 1997, the Company was awarded a $300,000 Phase II follow-on grant by the NSF which was funded in four equal payments of $75,000 every six months for an eighteen month period. The payments were received in October 1997, April 1998, and October 1998 at $75,000 each accordingly. The Company submitted its final report by the end of May and received the last payment in June 1999. 10 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 Cambridge University theoretical astrophysicist Professor Stephen Hawking, author of the best-selling A BRIEF HISTORY OF TIME. 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, businesses and companies that are complementary to its existing augmentative and alternative communication and computer access business lines. RESULTS OF OPERATIONS COMPARISON OF THREE MONTHS ENDED MAY 31, 1999 AND 1998. 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 ----------------------------------------------------------- 05/31/99 05/31/98 ----------------------------------------------------------- Net sales $ 929 100.0% $ 730 100.0% Cost of sales 371 39.9 400 54.8 ----------------------------------------------------------- Gross profit 558 60.1 330 45.2 ----------------------------------------------------------- Selling, general and administrative 565 60.8 703 96.3 Research and development 55 5.9 42 5.8 ----------------------------------------------------------- Total operating expenses 620 66.7 745 102.1 ----------------------------------------------------------- Loss from operations (62) (6.7) (415) (56.9) Income from grant 75 8.1 75 10.3 Interest revenue 0 0.0 14 1.9 Interest expense (5) (0.5) (3) (0.4) ----------------------------------------------------------- Net income (loss) $ 8 0.9% $ (329) (45.1)% ===========================================================
11 NET SALES The consolidated net sales increased $199,000, or 27.3%, to $929,000 in the third fiscal quarter of 1999 from $730,000 in the third fiscal quarter of 1998. Simulations Plus, Inc.'s sales from pharmaceutical and educational software increased approximately $105,000, or 839.4%, and Words+, Inc.'s sales increased approximately $94,000, or 13.1% for the quarter. Management attributes the increase in consolidated net sales to the first sales from Pharmaceutical software launched in FY 1999, and to increased sales from its Words+ subsidiary. Pharmaceutical software sales contributed over 45% of the total increase in consolidated sales for the quarter. The increase in Words+ sales is due primarily to its MultiLevel MessageMate and Freedom 2000 communication products being well received by the marketplace. The Company has noticed a steady increase in Words+ orders that began in February 1998 and continues through today; however, no assurance can be given as to whether this trend will continue. COST OF SALES The consolidated cost of sales decreased $29,000, or 7.3%, to $371,000 in the third fiscal quarter of 1999 from $400,000 in the third fiscal quarter of 1998. The percentage of cost of sales decreased by 14.9%. For Simulations Plus, the cost of sales increased $20,000, or 59.1%, of which the significant portion of the cost of sales is the systematic amortization of capitalized software cost, which resulted in 59.7 % increase in amortization cost. For Words+, the cost of sales decreased $50,000, or 13.6%. Management attributes the change in percentage of cost of sales between the third fiscal quarter of 1999 and 1998 is primarily due to significant cost reduction in Material cost. GROSS PROFIT The consolidated gross profit increased $228,000, or 69.1%, to $558,000 in the third fiscal quarter of 1999 from $330,000 in the third fiscal quarter of 1998. Management attributes the 14.9% increase in gross profit between the third fiscal quarter of 1999 and 1998 to the higher sales on a fixed amount of amortized software expenses and a significant Material cost reduction in Words+ operations. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES The consolidated selling, general and administrative expenses decreased $138,000, or 19.6%, to $565,000 in the third fiscal quarter of 1999 from $703,000 in the third fiscal quarter of 1998. For Simulations Plus, the selling, general and administrative expenses decreased $16,000, or 7.0% primarily due to the downsizing of educational software development activities as the Company reduced staff, significant reduction in educational software marketing expenses, and other associated overhead costs. These reductions outweighed the increases in other administrative expense such as legal and accounting expenses and consultant fees. For Words+, expenses decreased $122,000, or 25.9%, due to reductions in the employee field sales force and their payroll related expenses, reducing trade shows and travel expenses, reducing marketing cost by consolidating two companies' marketing departments into one, and reducing newsletter printing costs. These reductions outweighed increases in selling expenses such as commissions to independent sales representatives and freight-out expense, as well as increases in other administrative expenses such as depreciation expense and facility lease expense. 12 RESEARCH AND DEVELOPMENT The Company incurred approximately $107,000 of research and development costs for both companies during the third quarter of 1999. Of this amount, $52,000 was capitalized and $55,000 was expensed in this period. In the third quarter of 1998, the Company incurred $233,000 of research and development costs, of which $191,000 was capitalized and $42,000 was expensed. The 54.1% decrease in research and development expenditure from the third quarter of 1998 to the third quarter of 1999 was due to significant reduction in development of educational simulation software, as well as a reduction in Words+'s R&D expense. LOSS FROM OPERATIONS During the third fiscal quarter of 1999, the Company incurred a loss of approximately $62,000 as compared to a loss of $415,000 for the same period in the fiscal year 1998. Management attributes the reduction in net loss from operations to increased sales and decreased expenses, including 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 1998, the Company received the second $75,000 payment under this grant. INTEREST REVENUE Interest revenue for the third fiscal quarter of 1999 decreased to $0 from $14,000 in the third fiscal quarter of 1998. 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 third fiscal quarter of 1999 increased by $2,000, to $5,000 from $3,000 in the third fiscal quarter of 1998. This increase is caused by the interest on a revolving line of credit and increase in interest on the capitalized lease obligations. NET INCOME OR (LOSS) The consolidated net profit for the three months ended May 31, 1999 increased by $337,000, to a profit of $8,000 in the third fiscal quarter of 1999 compared to a loss of ($329,000) in the third fiscal quarter of 1998. Management attributes this increase primarily to the significant increase in sales, decrease in cost of sales, and decrease in selling, general and administrative expenses, which outweighed an increase in research and development expense compared to the three months ended May 31, 1998. 13 COMPARISON OF NINE MONTHS ENDED MAY 31, 1999 AND 1998. 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.)
Nine Months Ended ----------------------------------------------------------- 05/31/99 05/31/98 ----------------------------------------------------------- Net sales $ 2,588 100.0% $ 1,806 100.0% Cost of sales 1,124 43.4 1,001 55.4 ----------------------------------------------------------- Gross profit 1,464 56.6 805 44.6 ----------------------------------------------------------- Selling, general and administrative 1,741 67.3 2,011 111.4 Research and development 127 4.9 306 16.9 ----------------------------------------------------------- Total operating expenses 1,868 72.2 2,317 128.3 ----------------------------------------------------------- Loss from operations ( 404) (15.6) ( 1,512) (83.7) Income from grant 150 5.8 150 8.3 Interest revenue 5 0.2 42 2.3 Interest expense (15) (0.6) (9) (0.5) ----------------------------------------------------------- Net loss $ (264) (10.2)% $ (1,329) (73.6)% ===========================================================
NET SALES The consolidated net sales increased $782,000, or 43.3%, to $2,588,000 for the nine months ended May 31, 1999 compared to $1,806,000 for the nine months ended May 31, 1998. Words+, Inc.'s sales increased approximately $519,000 and Simulations Plus, Inc.'s sales increased approximately $263,000, of which $238,000 were from Pharmaceutical software sales. Management attributes the increase primarily to the first sales from its new Pharmaceutical software business launched in the FY 1999, and to increased sales from its Words+ subsidiary. Pharmaceutical software sales contributed over 30% of the total increase in consolidated sales for the first nine months' operation. The increase in Words+ sales is due primarily to its MultiLevel MessageMate and Freedom 2000 communication products being well received by the marketplace. The Company has noticed an increase in Words+ orders that began in February 1998 and continues through today; however, no assurance can be given as to whether this trend will continue. 14 COST OF SALES The consolidated cost of sales increased $123,000, or 12.3%, to $1,124,000 for the nine months ended May 31, 1999 from $1,001,000 for the nine months ended May 31, 1998, however, the percentage of cost of sales decreased by 12.1%. For Simulations Plus, the cost of sales increased $57,000, or 55.3%, of which the significant portion of the cost of sales is the systematic amortization of capitalized software cost, which resulted in a 53.5% increase in amortization cost. For Words+, the cost of sales increased $66,000, or 7.3%. The change in percentage of cost of sales between the nine months operations ended May 31, 1999 and 1998 decreased by 8.6%. Management attributes the percentage decrease in cost of sales primarily to efficiency in labor and material costs outweighing increases in warranty costs. GROSS PROFIT The consolidated gross profit increased $659,000, or 81.9%, to $1,464,000 in the third fiscal quarter of 1999 from $805,000 in the third fiscal quarter of 1998. Management attributes the 12.0% increase in gross profit margin between the third fiscal quarter of 1999 and 1998 to higher sales on a fixed amount of amortized software expenses, and a significant Material cost reduction and Labor cost efficiency in Words+ operations. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES The consolidated selling, general and administrative expenses decreased $270,000, or 13.4%, to $1,741,000 for the nine months ended May 31, 1999 from $2,011,000 for the nine months ended May 31, 1998. For Simulations Plus, the selling, general and administrative expenses decreased $89,000, or 12.4%, primarily due to the downsizing of educational software development activities as the Company reduced staff, significant reduction in educational software marketing expenses, and other associated overhead costs. For Words+, the expenses decreased $181,000, or 14.0% due to the reduction of the employee field sales force and their payroll related expense, reducing marketing cost by consolidating two companies' marketing department into one, reducing newsletter printing costs, and reducing advertising costs for the Company's Abbreviate! product. These reductions outweighed the increases in other expense categories such as commissions to the independent sales representatives, freight-out expense, depreciation expense, facility lease, trade shows and travel expense costs. RESEARCH AND DEVELOPMENT The Company incurred approximately $273,000 of research and development costs for both companies for the nine months ended May 31,1999. Of this amount, $146,000 was capitalized and $127,000 was expensed in this period. In the same period of 1998, the Company incurred $807,000 of research and development costs, of which $501,000 was capitalized and $306,000 was expensed. The 66.2% decrease in research and development expenditures for the nine months ended May 31, 1999 compared to the same period of 1998 was due to significant reduction in development of educational simulation software and reduction in Words+'s R&D expense. 15 LOSS FROM OPERATIONS The Company incurred a net loss from operations of approximately $404,000 as compared to a loss of $1,512,000 for the same period in the fiscal year 1998. Management attributes the reduction in net loss from operations to increased sales and decreased expenses, including Selling, General and Administrative expenses. INCOME FROM GRANT During the third fiscal quarter of 1999, the Company submitted its Final Report and triggered the fourth and final payment of $75,000 of a $300,000 Phase II SBIR grant from the National Science Foundation (the "NSF") to further develop the FutureLab(TM) series. The final report was filed in May of 1999 and the final payment of $75,000 was received in early June of 1999. INTEREST REVENUE Interest revenue for the nine months ended May 31, 1999 decreased to $5,000 from $42,000 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 portions of the capital resources were used in the Company's operations. INTEREST EXPENSE Interest expense for the nine months ended May 31, 1999 increased by $6,000, or 66.7%, to $15,000 from $9,000 for the nine months ended May 31, 1998. This increase is attributable primarily to the interest incurred on a revolving line of credit which the Company utilizes from time to time for working capital needed. NET LOSS Net loss for the nine months ended May 31, 1999 decreased by $1,065,000, or 80.1%, to $264,000 for the nine months ended May 31, 1999 compared to $1,329,000 for the nine months ended May 31, 1998. Management attributes this decrease primarily to the significant increase in sales outweighing the small increase in cost of sales, decrease in selling, general and administrative expenses, and decrease in research and development expense compared to the nine months ended May 31, 1998. 16 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. 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 May 31, 1999 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 are accrued and will be paid at such future time as management deems the Company's cash flow and cash reserves are sufficient to make such payment without adverse effects to the Company's financial position. As of May 31, 1999, such accrued but unpaid salaries equaled $135,259. The Company believes that existing capital and anticipated funds from operations, cost reductions from downsizing certain segments of operations, and temporary salary reductions for senior management 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. On July 2, 1999, the Company was informed that its securities were being delisted from the Nasdaq SmallCap Market ("Nasdaq") effective at the close of business on July 2, 1999, because the Company did not meet the net tangible assets requirement required 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 the news media's coverage of the Company, and lower prices for the Company's securities than otherwise may be attained. 17 Further, 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 that sell such securities to persons other than established customers and "accredited investors" (generally, individuals with net worth 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 in the secondary market. 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 exception 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 --------------------------------------------------- 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. 19 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 15, 1999 Simulations Plus, Inc. By: /s/ Momoko Beran ---------------------------------- Momoko Beran Chief Financial Officer EX-27 2 FINANCIAL DATA SCHEDULE
5 1 9-MOS AUG-31-1999 SEP-01-1998 MAY-31-1999 0 0 598,775 0 217,229 839,568 954,230 0 1,807,506 743,039 0 0 0 3,384 1,048,664 1,807,506 2,587,926 2,587,926 1,124,393 1,868,550 (155,170) 0 15,431 (265,278) 0 (265,278) 0 0 0 (265,278) (0.08) (0.08)
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