-----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, LFRAYphHMnv1I7kfBFlKw4zJ8RZhBY8+LTj8ptpPzWAlOfkKsDWCfJDySTA0MBmZ hpoqRxuvOVGj4DPXGAKl/w== 0001019687-99-000799.txt : 19991215 0001019687-99-000799.hdr.sgml : 19991215 ACCESSION NUMBER: 0001019687-99-000799 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19990831 FILED AS OF DATE: 19991214 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: 10KSB SEC ACT: SEC FILE NUMBER: 333-05600-LA FILM NUMBER: 99774119 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 10KSB 1 SIMULATIONS PLUS, INC. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-KSB [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended August 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 (State or other jurisdiction of Incorporation or Organization) 95-4595609 (I.R.S. Employer 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) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE. SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, PAR VALUE $0.001 PER SHARE 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 _____ Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] The issuer's revenues for the fiscal year ended August 31, 1999 were approximately $3,467,000. As of December 9, 1999, the aggregate market value of the voting stock held by non-affiliates of the issuer was approximately $2,731,000 based upon the average closing bid and asked price of such stock on such date. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's definitive Proxy Statement relating to the 2000 Annual Meeting of shareholders are incorporated herein by reference into Part III. SIMULATIONS PLUS, INC. FORM 10-KSB FOR THE FISCAL YEAR ENDED AUGUST 31, 1999 Table of Contents Page ---- PART I. Item 1. Description of Business 1 Item 2. Description of Property 12 Item 3. Legal Proceedings 12 Item 4. Submission of Matters to a Vote of Security Holders 12 PART II. Item 5. Market for Common Stock and Related Stockholder Matters 13 Item 6. Management's Discussion and Analysis or Plan of Operation 14 Item 7. Financial Statements 20 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 20 PART III. Item 9. Directors, Executive Officers, Promoters and Control Persons: Compliance with Section 16(a) of the Exchange Act 21 Item 10. Executive Compensation 21 Item 11. Security Ownership of Certain Beneficial Owners and Management 21 Item 12. Certain Relationships and Related Transactions 21 Item 13. Exhibits and Reports on Form 8-K 22 Signatures 24 Forward-Looking Statements The following discussion should be read in conjunction with the financial statements and the notes thereto appearing elsewhere in this Annual Report ("Annual Report") on Form 10-KSB for the year ended August 31, 1999 (the "Form 10-KSB"). In addition to historical information, this Annual Report 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 Operation." 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 the Company has filed and will continue to file from time to time with the Securities and Exchange Commission. PART I ITEM 1. DESCRIPTION OF BUSINESS 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, formed 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, absorption, and clearance of drug compounds in the human gastrointestinal tract. 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). 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. 1 PHARMACEUTICAL SIMULATION SOFTWARE ================================================================================ PRODUCTS: The Company's pharmaceutical software provides cost-effective solutions to a number of problems in pharmaceutical research as well as in the education of pharmacy and medical students. The Company's software products and services to date are focussed on the area of pharmaceutical research known as ADME (Absorption, Distribution, Metabolism, and Excretion). In August 1998, the Company released its first product GastroPlus(TM), which incorporates an absorption model that runs under Windows NT(TM), Windows 95(TM), or Windows 98(TM). The program includes a variety of specialized analysis functions in addition to the basic absorption and pharmacokinetics simulation. The Parameter Sensitivity Analysis feature allows researcher to rapidly assess the importance of various physicochemical and formulation variables on the absorption and pharmacokinetic behavior of a drug. The Stochastic Simulation feature allows researchers to model the effects of statistically distributed values for a variety of physiological and other parameters over a large population. Sales of GastroPlus(TM) began in late August and early September 1998, with sales to large pharmaceutical companies such as Astra-Zeneca, Pfizer, Pharmaceia and Upjohn, The Roche Group, and SmithKline Beecham. An additional (extra-cost) Optimization Module was released in November 1998 and is receiving enthusiastic interest from pharmaceutical researchers, with the majority of new sales now including this module. The second optional module, IVIV Correlation, has taken longer than expected to develop; however, it is now in an advanced stage in development and is expected to be released in early 2000. Two other modules are also in development, and both are expected to be released in mid 2000. These extra-cost modules may increase the average sale price for an annual license. The Company is actively working over 50 leads for additional sales. The Company executed a License Agreement with Therapeutic Systems Research Laboratories, Inc. ("TSRL"), under which the Company was granted exclusive rights to TSRL's proprietary absorption simulation technology, including a database of 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 (past President of the American Association of Pharmaceutical Scientists and world-renowned expert in drug absorption) and Dr. John Crison. The Company believes that the strategic advantage of exclusive access to TSRL's technology and expertise in absorption modeling, combined with the Company's now well-developed and growing expertise in absorption and pharmacokinetics simulation, have resulted in GastroPlus(TM) becoming recognized as a unique simulation and analysis capability within the pharmaceutical industry. The Company is aware that other companies began to develop similar software, however, there has not been any significant direct competition for GastroPlus(TM) at this time. The Company has developed and is now selling a companion program to GastroPlus(TM) called QMPRPlus(TM) (Quantitative Molecular Permeability Relationships). QMPRPlus(TM) takes as inputs the structures of molecules, and provides estimates for human effective permeability, octanol-water partition coefficient (logP), solubility, and diffusivity - all inputs required by GastroPlus(TM). QMPRPlus(TM) thereby extends the utility of GastroPlus(TM) into early drug discovery, during which pharmaceutical companies may not have even made many of the molecules that have been identified as potential drug candidates. By providing estimates of physicochemical properties from structure alone, QMPRPlus(TM) coupled with GastroPlus(TM) allows researchers to rank order large numbers of candidate compounds in terms of human intestinal absorption. Those identified as having good absorption can be given high priority in the dedication of resources for synthesis and experimental testing, while those with low predicted absorption can be given lower priority or can be eliminated. Because pharmaceutical companies are dealing with millions of compounds per year, and because the area of ADME has become a bottleneck, high throughput screening on the computer ("IN SILICO") is becoming not just a convenience, but a necessity. 2 The Company continues to develop the science of simulation and mathematical modeling for ADME-related research, and to add new and improved features to its software products to make them ever more powerful and vital to the pharmaceutical industry. Among the Company's goals in this area are to provide comprehensive, highly accurate simulations as well as related software and services that can save a great deal of time and money in the development of pharmaceutical products, and to reduce the need for animal testing in the future. CONTRACT RESEARCH SERVICES: The Company offers contract research services to the pharmaceutical industry in the area of gastrointestinal absorption and related technologies. The Company received two study contracts in the first quarter of FY 1999 (the fiscal year ended August 31, 1999) from major pharmaceutical companies. An additional larger study contract was received from one of these customers in the second quarter. These contracts mark the beginning of a new source of revenues for the Company, as well as a means to introduce the Company's software products to new customers (both companies purchased GastroPlus(TM) after their initial study contracts were completed). Management expects the number and size of study contracts, which can include custom software development, to continue to increase during the new fiscal year. PRODUCT DEVELOPMENT: In the area of simulation software for pharmaceutical research, the Company is currently pursuing the development of additional modules for GastroPlus(TM) and a companion program called QMPRPlus(TM), as well as HelixGen(TM) -- software to predict the receptor structure of certain transmembrane proteins. IVIV Correlation Module - ----------------------- The IVIV Correlation Module, currently in development, provides 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 an oral dose (IN VIVO) to the rate at which the oral dose is observed to dissolve in a laboratory experiment (IN VITRO). The IVIV Correlation module will also provide a means for pharmaceutical researchers to solve for the values of certain important pharmacokinetic parameters from blood concentration-time data taken after an intravenous injection or infusion of a drug product. The IVIV Correlation Module is expected to be released during the second quarter of FY 2000. QMPRPlus(TM) - ------------ The first version of QMPRPlus(TM) loaded data in the form of 2-dimensional structures; however, the Company has recently added 3-dimensional structures and is expected to release a new version early in the second quarter of FY2000. The molecular descriptors in the first version included less than 30 descriptors, while the upcoming release now calculates nearly 150 descriptors. The mathematical models now include more powerful artificial neural network (ANN) models for logP and solubility. Absorption Systems Caco-2 Permeability Module - --------------------------------------------- The Company is also developing an optional module for QMPRPlus(TM) to predict permeability from data collected IN VITRO in Caco-2 cells. The Company signed a license agreement with Absorption Systems LP of Exton, Pennsylvania, for data on 330 compounds tested by Absorption Systems in Caco-2 cell cultures, and is using this database to build the optional module, which is expected to be released in the second quarter of FY2000. 3 Metabolism and Efflux Module - ---------------------------- The Metabolism and Efflux Module will extend the simulation within GastroPlus(TM) to include greater detail for the effects of certain metabolic processes on drug molecules, and the effects of certain proteins in intestinal cells that return ("efflux") a drug molecule to the intestinal contents. Metabolism refers to the action of certain enzymes, present within the intestinal cells, the blood, and in the liver, that change a drug molecule either by cleaving part of it away or by adding other atoms to it. This effect usually renders a drug molecule ineffective, but sometimes can turn a molecule into a useful drug product after the original molecule (in this case called a "prodrug") has been absorbed. Efflux refers to a process wherein a drug molecule enters an intestinal cell, but is later returned to the interior of the intestine by an efflux protein. Both metabolism and efflux are important processes for certain types of drug molecules, so 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. The Company expects to release the Metabolism and Efflux Module during the second quarter of fiscal year 2000. HelixGen(TM) - ------------ HelixGen(TM) is a program that predicts the 3-dimensional geometry (i.e., the position of each atom) 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. Drugs that bind to these sites can prevent the flow of molecules into and out of the cell, and in so doing may relieve pain, reduce tremors, improve memory, or other such nerve-related functions. The ability to predict the geometry of these proteins will enable researchers to identify likely new drug molecules that could bind to these sites in the computer, prior to actually synthesizing molecules for experimental testing. Development of HelixGen was largely postponed in order to focus on GastroPlus(TM) and QMPRPlus(TM). Full development of the program is expected to resume in early FY 2000. MARKETING AND DISTRIBUTION: The Company markets its pharmaceutical simulation software products, and research services based on its simulations, to pharmaceutical and biotech companies, and to the research companies that serve them, through attendance and presentations at scientific meetings, exhibits at trade shows, seminars at pharmaceutical companies and government agencies, advertising in selected publications, and through its web pages on the Internet. The Company is building an in-house sales and marketing team for its products and services and will also explore sales and marketing agreements with firms that provide research services and equipment that are complementary to the Company's existing and proposed (i.e., in development) pharmaceutical products and services. The Company also uses its web pages on the Internet for such activities as providing product information, providing software updates, and as a forum for user feedback and information exchange. The Company will also explore distribution through university bookstores for the Academic version of GastroPlus(TM) for students in pharmacy and medicine. In August 1998, The Company signed a distribution agreement with Teijin Systems Technology Ltd. (TST), a division of Teijin Limited of Tokyo, Japan. Under the terms of the agreement, TST received exclusive distribution rights to Simulations Plus' GastroPlus(TM) and QMPRPlus(TM) software for pharmaceutical research and education in Japan. PRODUCTION: The Company's major products are designed and developed by its development team at its Lancaster, California facility. The chief materials and components used in simulation software products include CD-ROMs and instruction books. CD-ROM production is performed in-house for low-volume products, and is contracted to third parties for high volume products. 4 COMPETITION: In providing simulation-software-based screening, testing and research services to the pharmaceutical industry, and in marketing simulation software for these purposes, the Company competes against a number of established companies that provide screening, testing and research services and products to these industries that are not based on simulation software. The Company's competitors in this field include companies with financial, personnel, research and marketing resources that are greater than those of the Company. While there is currently no significantly competitive product to GastroPlus(TM) or QMPRPlus(TM), competition can be expected at some time in the future. Major pharmaceutical companies conduct these efforts through their internal development staffs and through outsourcing some of this work. Smaller companies need to outsource a greater percentage of this research. The Company is aware of a few other companies that are presently developing simulation software or simulation-software-based services to the pharmaceutical industries for the purposes of screening compounds, but is not aware of the development of any directly competitive software to GastroPlus(TM) or QMPRPlus(TM). The Company is not aware of any significant competition in the area of gastrointestinal absorption simulation. The Company is aware of one company in England that produces animation software for education in pharmacy and medicine, but is not aware of any commercial effort by any company to produce and sell a gastrointestinal absorption simulation program for pharmaceutical research. The Company is aware of one other company called Trega (with a subsidiary called Navicyte) that is developing an absorption simulation, but information obtained by the Company indicates that this simulation is not a product for sale, but rather is incorporated into larger development efforts as part of a consortium approach. Information obtained by the Company indicates that Navicyte has five customers, of which three have since licensed GastroPlus(TM). The Company believes the key factors in competing in this field are its ability to develop simulation software and related products and services to effectively predict the ADME-related behaviors of new drug-like compounds, its ability to develop and maintain a proprietary database of results of physical experiments that will serve as a basis for simulated studies, and its ability to develop and maintain relationships with research and development departments of pharmaceutical companies and government agencies. There can be no assurances that the Company will be successful in providing these key factors. EDUCATIONAL SIMULATION SOFTWARE ================================================================================ PRODUCTS: The Company's initial educational software products, which have won awards from educational software testers, include simulations of laboratory experiments for Physical Science and Chemistry courses under the umbrella name FutureLab(TM). The Company released its first three FutureLab(TM) titles in May 1997 (OPTICS FOR PHYSICAL SCIENCE, GRAVITY FOR PHYSICAL SCIENCE, and CIRCUITS FOR PHYSICAL SCIENCE), and a new title, IDEAL GAS FOR CHEMISTRY in November 1997, all for Windows-based computers. In August 1998, after a conversion effort that took over one year for some labs, the Company released new versions of all of these titles as well as UNIVERSAL GRAVITATION FOR PHYSICAL SCIENCE for both Windows and Macintosh computers. Macintosh computers account for 40-50% of the educational market. An additional educational simulation, TITRATION FOR CHEMISTRY, was released in September 1999. 5 FutureLab(TM) educational software programs simulate science experiments for high school and college level science and engineering classes. These simulations enable students to conduct experiments on a personal computer instead of in a traditional laboratory, thereby increasing safety, decreasing costs, and providing expanded learning opportunities by allowing simulations of situations not possible in a traditional laboratory environment. FutureLab(TM) software has received recognition from Computers in Physics magazine, which declared it a winner in its Eighth Annual Software Contest, as well as from two educational institutions who perform rigorous educational software evaluation. PRODUCT DEVELOPMENT: In the area of educational simulations, the Company decided to freeze R&D activities after finishing the latest title, TITRATION FOR CHEMISTRY. Current sales and the remainder of a grant from National Science Foundation could not provide support for continued development of educational software. MARKETING AND DISTRIBUTION: The Company markets its science experiment simulation software products through software resellers and its Internet web page. As of August 1998, the Company has reduced its marketing efforts in this area in order to concentrate more of its resources on the pharmaceutical software market. The Company is relying on its resellers to provide the majority of the marketing and sales efforts for its educational software products. FutureLab Sales have continued through these distributors. PRODUCTION: The Company's educational software products were designed and developed by its development team at its Lancaster, California facility. The Company contracts the production of CD-ROMs to third parties for high volume products and low-volume production is performed in-house. The chief materials and components used in simulation software products include CD-ROMs and instruction books. COMPETITION: The educational software industry in which the Company operates is competitive. The Company competes against publishers and suppliers of textbook educational materials that have been, and will continue to be, the primary educational resource used in these markets. The Company also competes against educational software publishers who provide software products that are interactive but most are not true simulation software. Most education software publishers compete in the grades below 9th grade, addressing primarily reading and math skills. The Company competes primarily in the middle school, high school, and college markets addressing primarily science and math subjects. A smaller number of software publishers are addressing these markets, although existing competitors may broaden their product lines to these markets, and additional competitors may enter these markets. The Company is aware of several companies publishing various types of educational simulation software including HyperCube, Glencore, Corel, Logal Educational Software and Systems, and Knowledge Revolution. Logal is the only company of which the Company is currently aware that is producing a range of educational simulation software that competes directly with the Company's current and planned educational simulation software products. The Company expects that high school and college science and math textbook publishers and other companies may also be developing simulation software products and that additional competitors may enter this field. Information gathered by the Company at conferences for science teachers and school administrators indicates that these customers and potential customers prefer the Company's products over those offered by Logal almost unanimously, for those titles which have been released by the Company to date. 6 DISABILITY PRODUCTS ================================================================================ PRODUCTS: 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+ also produces computer access products that enable physically disabled persons to operate a computer. 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. Words+ developed and produces the software for the computerized communication system used by the world-famous theoretical physicist, Professor Stephen Hawking, Lucasian Professor of Mathematics at the University of Cambridge in England, and the author of the best-selling book A BRIEF HISTORY OF TIME. Words+ markets its products throughout the United States and to other countries through a direct sales staff and independent dealers. Words+ introduced a fully integrated, portable, lightweight personal-computer-based communication system that is meeting favorable market acceptance. E Z Keys for Windows(TM) - ------------------------ One of the Company's primary software products is E Z KEYS FOR WINDOWS ("E Z KEYS(TM)"), which is a program that operates on a Windows-based personal computer. When coupled with specially-designed input devices, E Z KEYS enables even severely disabled persons to operate a personal computer, to generate voice messages through a voice synthesizer, and to operate most Windows-based software application programs. Input motion by the user can be as slight as the blink of an eye, or simple eye movement by persons who cannot blink. E Z KEYS is one of the two Words+ programs used by Professor Stephen Hawking for computer access and communication. In May 1997, the Company released E Z KEYS FOR WINDOWS 95, the current version of which is also compatible with Windows 98. Talking Screen for Windows(TM) - ------------------------------ TALKING SCREEN FOR WINDOWS ("TALKING SCREEN(TM)") is a software program that operates on a Windows-based personal computer and is designed for persons, usually children, who cannot read and write at the level necessary to adequately operate E Z KEYS. TALKING SCREEN provides a system of pages of pictographic and photographic symbols by which the user can produce speech output messages through a voice synthesizer, play recorded sounds and video files, and operate controllers for lights, electrical appliances and other equipment. Like E Z KEYS, TALKING SCREEN can be operated through a wide range of alternative input devices. Freedom 2000 - ------------ Words+ released a new communication system called Freedom 2000 in February 1998. It allows persons with disabilities who read at a second-grade level and above to speak and write through alternative input methods (rather than traditional keyboard and mouse). Freedom 2000 with E Z KEYS gives the users the ability not only to speak and write, but also to play games and control various items in their environment, such as TV's and telephones. High level users are also able to deliver lectures to large groups, use the Internet, and send e-mail. New orders for Words+ products in FY99 were at record levels and Freedom 2000 orders constitute a significant portion of these new orders. A lighter weight version of the Freedom 2000, called Freedom 2000 LITE, was introduced in October 1998. Although it has a smaller display, the 4.0 lb Freedom 2000 LITE is more attractive to ambulatory users than the 8.0 lb Freedom 2000. 7 MessageMate - ----------- The Company produces a series of products called MessageMates, which are hand-held, dedicated communication devices that store recorded speech or sound on integrated circuit chips. The user plays these recorded sounds by touching one of the keys on the membrane keyboard if they are able to use a keyboard, or by using a switch (such as the IST Switch described below) and scanning to select a position on the keyboard. MessageMates are small, lightweight (1 to 1.75 lbs.), easy-to-use communication devices with up to ten minutes of recorded messages. They are known for their extremely rugged design and long battery life. The MessageMate 20 holds twenty messages, the MessageMate 40 holds forty messages, and the Mini-MessageMate holds eight messages. Since MessageMates use recorded messages, they can be used in any language. The Company has significant sales of MessageMate in foreign markets and sales of MessageMates in foreign markets are increasing. Infrared/Sound/Touch (IST) Switch - --------------------------------- Many Words+ customers cannot operate a keyboard or mouse. For some of these persons, the Company has designed and produces a special device called the Infrared/Sound/Touch Switch ("IST Switch"), that enables the person to operate a personal computer or a dedicated communication device with the slightest movement or pressure, including, for example, eye blink, or just eye movement. The IST is activated by infrared reflection, touch, or sound, and transmits a momentary "on" signal to the computer upon detecting these signals. This switch has been in production in ever-improving forms since 1983, and thousands of physically disabled persons around the world have used it. Miscellaneous - ------------- Words+ also sells a number of other miscellaneous and peripheral devices, some of which it designs and produces and others it buys and resells. These include: o Micro CommPac - Communication hardware package designed for use with a notebook computer that provides switch interface and audio amplification. o U-Control - Wireless infrared remote control device that allows the user to control functions and appliances in the home and work environment such as lights, stereo and television equipment, and other appliances. o Simplicity Wheelchair Mount - Company-designed and produced wheelchair mount for portable computers and other devices. PRODUCT DEVELOPMENT: 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. The Company is currently developing a new Message Builder feature for the MessageMate, which is an enhancement of the existing MessageMate product. It enables users to select prerecorded words or phrases one at a time, and then play the entire message formed by them. The Company expects to release this new version in the second quarter of FY 2000. MARKETING AND DISTRIBUTION: The Company markets augmentative and alternative communication products through a network of employee representatives and independent dealers. At the present time the Company has seven independent dealers in the U.S., four in Australia and one each in Canada, England, Norway, The Netherlands, New Zealand, Japan, Finland and Malaysia. The Company also has three salary-commission sales persons in the U.S.: one each in Southern California, Maine, and Maryland, and the Company employs four inside sales/support persons who answer telephone inquiries on the Company's 800 line and who provide technical support. Additional outside sales persons are being actively recruited at this time. 8 The Company directs its marketing efforts to speech pathologists, occupational therapists, special education teachers, disabled persons and relatives of disabled persons. The Company maintains a mailing list of over 37,000 persons made up of these professionals, consumers and relatives and mails various marketing materials to this list. These materials include the Company's catalog of products and announcements regarding new and enhanced products. The Company participates in industry conferences held throughout the U.S. and in other countries that are attended by speech pathologists, occupational and physical therapists, special education teachers, parents and consumers. The Company and others in the industry demonstrate their products at these conferences and present technical papers that describe the application of their technologies and research studies on the effectiveness of their products. The Communication Aids Manufacturers Association (CAMA) organizes tours of representatives of companies in this field that travel throughout the country providing seminars and workshops for professionals, consumers and parents in the field. The Company advertises in selected publications of interest to persons in this market. The Company estimates that for approximately 50% of its sales of augmentative and alternative communication software and hardware, some or all of the purchase price is provided by third parties such as Medicaid, school special education budgets, private insurance or other governmental or charitable assistance. The Company's personnel provide advice and assistance to customers and prospective customers on obtaining third-party financial assistance for purchasing the Company's products. No assurances can be given that such third party support will continue to be available for the purchase of the Company's products. PRODUCTION: Disability software products are either loaded onto hard drives by the Company or copied to diskettes or CD-ROM, which is contracted to third parties for high-volume production and is performed in-house for low-volume production. Microprocessors that are part of dedicated devices are purchased by the Company and incorporated into its products by the Company. Many software customers buy their notebook personal computers from the Company, which the Company purchases at wholesale prices and resells at a markup. Cases, printed circuit boards, labels and other components of products such as MessageMate and CommPac are designed by the Company. The Company outsources the extrusion, machining and manufacturing of certain components. All final assembly and testing are done by the Company at its facility. The Company's products are shipped from its Lancaster, California facility either directly to the customer or to the salesperson or dealer. The outside salesperson or dealer either delivers the product or visits the customer after delivery to provide training. COMPETITION: The augmentative and alternative communication industry in which the Company operates is highly competitive and some of the Company's competitors have greater financial and personnel resources than the Company. The industry is made up of six major competitors including the Company, and a number of smaller ones. The Company believes that the five other major competitors each have revenues ranging from $3 Million to $20 Million so that there are no large companies in this industry. Two of these companies primarily produce personal-computer-based software systems for Apple Macintosh and the others produce dedicated communication devices and/or paper products. 9 The Company believes that the competition in this industry is based primarily on the quality of products, quality of customer training and technical support, and quality and size of sales forces. Price is a competitive factor but the Company believes price is not as important to the customer as obtaining the product most suited to the customer along with strong after-sale support. The Company believes that it is a leader in the industry in developing and producing the most technologically advanced products and in providing quality customer training and technical support. The prices of the Company's products are among the highest in the industry and the Company has one of the smallest sales forces and dealer networks in the industry. The Company believes it is positioned to continue to be a leader in the development and production of the highest quality technology and that it will be able to develop one of the strongest sales forces in the industry by increasing the number of sales representatives or distributors. The Company believes that the sales of its products can increase significantly due to these factors and the expected continuing expansion of the size of this market. However, there are few barriers to entry in the form of proprietary or patented technology or trade secrets in this industry. While the Company believes that cost of product development and the need for specialized knowledge and experience in this industry would present some deterrence for new competition, other companies may enter this industry, including companies with substantially greater financial resources than the Company. Furthermore, companies already in this industry may increase their market share through increased technology development and marketing efforts. PERSONAL PRODUCTIVITY SOFTWARE ================================================================================ PRODUCT - ABBREVIATE!: Words+ released a productivity software program called ABBREVIATE! in November 1997 at COMDEX. The Company extracted the abbreviation technology incorporated into the E Z KEYS FOR WINDOWS software used by Professor Stephen Hawking and thousands of others around the world, and turned it into a program that can be used by anyone with the ability to use a standard keyboard. While many word processors provide a similar "Quick Correct" feature, the advantage ABBREVIATE! has over such features is that it runs in the background and works with almost all Windows applications. Thus, ABBREVIATE! allows the user to create a personal library of frequently-used abbreviations, each with its own special keystroke combination, for use in virtually any Windows-based program, e.g., fax, e-mail, word processing, database, Internet chat rooms, and spreadsheets. The Company is currently pursuing distribution relationships with a number of major software manufacturers for ABBREVIATE!. Abbreviate! was named PC Week magazine's "Tool of the Week" in their December 1, 1997 issue, and won Win95 magazine's Editor's Choice Award in March 1998. MARKETING AND DISTRIBUTION: The Company is currently selling the program itself through a variety of Internet channels, including its own web site (www.abbreviate.com), and through distributors. The Company is also contacting large software manufacturers and distributors in an effort to secure distribution agreements for ABBREVIATE!. While sales have been constant at a low level, no assurance can be given as to whether this product will be successful. PRODUCTION AND DISTRIBUTION: THE ABBREVIATE! personal productivity software program is currently manufactured at the Company's Lancaster, California facility. If sales volume warrants and higher volume capacity is required, the Company will investigate outside sources for fulfillment. COMPETITION: A few products compete with ABBREVIATE! in the retail market; however, the Company is not aware of any other product that works with virtually any software in Windows 95/98 without the need to create special links to the software. A version for Windows NT is expected to be released in the second quarter of FY2000. The Company has priced ABBREVIATE! significantly less than competitors SmarType and InstantText. The Company enlisted the help of several medical transcriptionists as beta testers for the product, and the feedback received from those testers and additional medical transcriptionists, who are familiar with competitive products, has been very favorable. 10 TRAINING AND TECHNICAL SUPPORT ================================================================================ The Company believes customer training and technical support are important factors in customer satisfaction for its pharmaceutical and disability products and the Company believes it is an industry leader in providing customer training and technical support. For pharmaceutical software, the Company provides in-house seminars at the customer's site to demonstrate GastroPlus(TM) and QMPRPlus(TM). During FY 1998 and 1999, the company delivered such seminars in seveRAl locations around the U.S. and in Japan. The Company has delivered a series of seminars in Japan to over 150 scientists from over 40 different companies. The Company also conducted on-site seminars at approximately 55 pharmaceutical and related research companies in the U.S. and Europe. These seminars serve as initial training in the event the potential customer decides to license the software. Strong technical support is provided after the sale in the form of in-house training at customer's cost, telephone, fax, and e-mail assistance to users, as well as an ongoing process of software upgrades to ensure the product remains at the cutting edge of technology. Software licenses are on an annual basis, and include all upgrades to the modules licensed by the customer during the license year. For Disability Products, the Company's salesperson or dealer provides initial training to the customer -- typically two to four hours on major products and one to two hours on certain other products. This training is typically provided not only to the user of the product but also to the person's speech pathologists, teachers, parents and others who will be helping the user. This initial training is provided as a part of the price of the product. The Company and its dealers charge a fee for additional training and service calls. Technical support for both Simulation Software and Disability Products is provided by the Company's inside sales and support staff based at its headquarters facilities in Lancaster, California. The Company provides no-charge toll telephone support offering unlimited toll-free numbers and E-mail support for all of its simulation software and disability products. EMPLOYEES ================================================================================ As of August 31, 1999, the Company employed 32 full-time and 2 part-time employees, including 6 in research and development, 7 in marketing and sales, 12 in administration and accounting, 8 in production and 1 in repair. Three current employees hold Ph.D.'s in their respective science or engineering disciplines and four additional employees hold Master's degrees. The Company believes that its future success will depend, in part, on its ability to continue to attract, hire and retain qualified personnel. The competition for such personnel in the augmentative and alternative communication device and computer software industry is intense. None of the Company's employees is represented by a labor union, and the Company has never experienced a work stoppage. The Company believes that its relations with its employees are good. In August 1998 the Company decided to focus on pharmaceutical software and to minimize educational software development. A layoff of a number of educational software developers, and temporary salary reductions for senior management, were instituted in order to protect the assets of shareholders by reducing expenses. 11 ITEM 2. DESCRIPTION OF PROPERTIES The Company moved its office location from Palmdale, California to Lancaster, California in July 1998, expanding its office space from approximately 11,800 square feet to approximately 15,600 square feet. The lease on the office space currently occupied by the Company will expire in August 2001. The Company realized a savings of approximately $40,000 per year through the lease it negotiated on this new property. ITEM 3. LEGAL PROCEEDINGS The Company is not a party to any significant litigation and is not aware of any significant pending or threatened litigation against the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of fiscal 1999. 12 PART II ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's Common Stock began trading on the Nasdaq SmallCap Market ("Nasdaq") on June 18, 1997 under the symbol "SIMU". At the closing on July 2, 1999, the Company's Common Stock was delisted from Nasdaq and is currently exchanged on the OTC Bulletin Board. According to records of the Company's transfer agent, the Company had at least 18 stockholders of record and 818 beneficial owners as of August 31, 1999. The following table sets forth the low and high sale prices for the Common Stock as reported by Nasdaq and subsequent to delisting on the OTC or each of the last two fiscal years.
LOW SALES PRICE HIGH SALES PRICE --------------- ---------------- Fiscal 1999: Quarter ended August 31, 1999.................... 1.500 2.750 Quarter ended May 31, 1999....................... 2.375 3.750 Quarter ended February 28, 1999.................. 0.875 4.000 Quarter ended November 30, 1998.................. 1.000 2.375 Fiscal 1998: Quarter ended August 31, 1998.................... 1.500 5.250 Quarter ended May 31, 1998....................... 3.500 7.375 Quarter ended February 28, 1998.................. 4.250 8.500 Quarter ended November 30, 1997.................. 5.000 5.750
13 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following sets forth selected items from the Company's statements of operations (in thousands) and the percentages that such items bear to net sales for the fiscal years ended August 31, 1999 ("FY99"), August 31, 1998 ("FY98") and August 31, 1997 ("FY97").
Year Ended August 31, --------------------------------------------------------------------- 1999 1998 1997 ------------------- -------------------- ------------------- Net sales $3,467 100.0% $2,645 100.0% $2,493 100.0% Cost of sales 1,649 47.6 1,756 66.4 1,252 50.2 Gross Profit 1,818 52.4 889 33.6 1,241 49.8 Selling, general, and administrative 2,308 66.6 2,683 101.4 2,277 91.3 Research and development 219 6.3 390 14.7 133 5.4 Total operating expenses 2,527 72.9 3,073 116.1 2,410 96.7 Income (loss) from operations (709) (20.4) (2,184) (82.5) (1,169) (46.9) Income from grant 150 4.3 150 5.7 17 0.7 Interest income 5 0.1 58 2.2 26 1.0 Interest expense 21 0.6 16 0.6 69 2.8 Financing costs - - - - 280 11.2 Loss on investment, at equity - - (75) (2.8) - - Provision for (benefit from) income taxes 2 0.1 2 0.2 (39) (1.6) Net income (loss) (577) (16.6)% (2,069) (78.2)% (1,436) (57.6)%
FY99 COMPARED WITH FY98 ================================================================================ NET SALES - --------- Net sales for FY99 increased by $822,000 or 31.1%, to $3,467,000 compared to $2,645,000 for FY98. Simulations Plus, Inc.'s sales from Pharmaceutical and educational software increased approximately $400,000, or 655.7%, and Words+, Inc.'s sales increased approximately $422,000, or 16.3% for the year. Management attributes the increase in consolidated net sales to the first sales from Pharmaceutical software launched in FY99, and to increased sales from Words+, Inc., its subsidiary. Pharmaceutical software sales contributed over 45% of the total increase in consolidated sales for the year. The increase in Words+ sales is due primarily to its Multi-Level 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 the end of FY99; however, no assurance can be given as to whether this trend will continue. 14 COST OF SALES - ------------- The consolidated cost of sales for FY99 decreased by $107,000 or 6.1% to $1,649,000 from $1,756,000 in FY98. As a percentage of sales, cost of sales was 47.6% for FY99, compared to 66.4% for FY98, indicating an 18.8% decrease. For Simulations Plus, cost of sales decreased $87,000, or 18.0%, of which the significant portion of cost of sales is the systematic amortization of capitalized software development costs, which resulted in a 19.2% decrease in amortization cost. The Company expensed $183,000 of capitalized software development costs relating to educational software in FY99 and $350,000 in FY98. There will be no further write off against revenue generated from the sales of educational software from now on. For Words+, the cost of sales decreased $20,000, or 1.6%. Management attributes the reduction in cost of sales between FY99 and FY98 to a decline in amortization costs and labor costs, which outweighed an increase in material and warranty costs. GROSS PROFIT - ------------ The consolidated gross profit increased $929,000, or 104.5%, to $1,818,000 in FY99 from $889,000 in FY98. Management attributes the 18.8% increase in gross profit margin from 33.6% in FY98 to 52.4% in FY99 primarily to the increase in net sales combined with the decline in cost of goods sold, particularly in amortization cost. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - -------------------------------------------- Selling, general and administrative expenses for FY99 decreased by $375,000, or 14.0% to $2,308,000, compared to $2,683,000 for FY98. As a percentage of net sales, selling, general and administrative expenses decreased by 34.8% to 66.6% in FY99 from 101.4% in FY98. For Simulations Plus, the selling, general and administrative expenses decreased $140,000, or 15.1% 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. Another large reduction was realized in facility lease expense after the Company moved to its current location in July 1998. A significant increase in royalty expense was experienced due to the agreement between the Company and TSRL to pay royalties on GastroPlus(TM) sales; however, reductions outweighed increases in selling, general and administrative expenses. For Words+, expenses decreased $235,000, or 13.3%, 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 the management of two companies' marketing departments into one person, and reducing advertising and newsletter printing costs. These reductions outweighed increases in other expenses such as commissions to independent sales representatives, utilities and royalties. RESEARCH AND DEVELOPMENT - ------------------------ The Company incurred approximately $415,000 of research and development costs for both companies during FY99. Of this amount, $196,000 was capitalized and $219,000 was expensed. For FY98, the Company incurred approximately $1,015,000 of research and development costs, of which approximately $625,000 was capitalized and approximately $390,000 was expensed. The 59.1% decrease in research and development expenditure from FY98 to FY99 was due to the significant reduction in educational simulation development, as well as a reduction in Words+'s R&D expenses. LOSS FROM OPERATIONS - -------------------- During FY99, the Company incurred a loss of approximately $709,000 as compared to a loss of $2,184,000 for FY98. Management attributes the reduction in net loss from operations to increased sales and decreased expenses, including Selling, General and Administrative expenses. INCOME FROM GRANT - ----------------- For FY99, the Company received the final $150,000 of a $300,000 Phase II SBIR grant from the National Science Foundation to develop software to allow physically-disabled students to perform simulated laboratory experiments on a computer. For FY98, the Company received $150,000, the first two $75,000 semi-annual payments under this grant. 15 INTEREST INCOME - --------------- Interest income for FY99 decreased to $5,000 from $58,000 in FY98. 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 Company's capital resources were used in the Company's operations. INTEREST EXPENSE - ---------------- Interest expense for FY99 increased to $21,000, or 31.3%, from $16,000 in FY98. This increase is primarily due to interest charges incurred for the Company's revolving line of credit and interest on capitalized lease obligations. LOSS ON INVESTMENT IN HEALTHWEB, INC., AT EQUITY - ------------------------------------------------ Loss on investment for FY99 was reduced to $0 from the loss of $75,000 in FY98. During FY98, the Company incurred approximately $75,000 of expenses in forming a joint venture called HealthWeb, Inc. to provide health information through its Internet web site HealthData.com. The Company holds 4,500,000 (50%) shares of the 9,000,000 shares issued in HealthWeb, Inc., which is a California corporation. Because of limited resources, the Company discontinued its support of HealthWeb, Inc. and currently HealthWeb, Inc. is in a state of non-operation. INCOME TAXES - ------------ Income taxes were $1,600 for FY99 as well as FY98. NET LOSS - -------- Net loss for FY99 decreased $1,492,000, or 72.1%, to a net loss of $577,000, compared to the net loss of $2,069,000 for FY98. Management attributes this decline primarily to the significant increases in sales, decreases in cost of sales, decreases in selling, general and administrative expenses, and decreases in research and development expenses compared to FY98. FY98 COMPARED WITH FY97 ================================================================================ NET SALES - --------- Net sales for FY98 increased by $152,000 or 6.1%, to $2,645,000 compared to $2,493,000 for FY97. Management attributes the majority of this increase primarily to two factors: (1) an approximately $40,000 increase in educational software sales, and (2) a $98,000 increase in sales of Freedom 2000, a communication system. Another $14,000 was comprised of an overall increase in IST and Simplicity sales offset by a decrease in MultiVoice and MessageMate sales. COST OF SALES - ------------- Cost of sales for FY98 increased by $504,000 or 40.2% to $1,756,000 from $1,252,000 in FY97. As a percentage of sales, cost of sales was 66.4% for the FY98, compared to 50.2% for the FY97, indicating a 16.2% increase. Management attributes this increase in cost of sales primarily to the amortization of capitalized educational software which increased by $452,000 or 1412.5% to $484,000 compared to $32,000 in FY97. The other 2.1% of this increase was the result of an overall increase in production cost. 16 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - -------------------------------------------- Selling, general and administrative expenses for FY98 increased by $406,000, or 17.8% to $2,683,000, compared to $2,277,000 for FY97. As a percentage of net sales, selling, general and administrative expenses increased by 10.1% to 101.4% in FY98 from 91.3% in FY97. Management attributes this increase primarily to the expansion of sales force in Words+, including salaries, equipment, travel expenses, and tradeshows. Other significant increase in expenses are consultation fees, higher depreciation amounts, business insurance and health insurance, wages and payroll taxes, moving expenses to the new facility, ads and associated printing costs, public relation costs and amortization costs on investments in commercial bonds. RESEARCH AND DEVELOPMENT - ------------------------ The Company incurred approximately $1,015,000 of research and development costs for FY98, of which approximately $625,000 was capitalized and $390,000 was expensed. For FY97, the Company incurred approximately $765,000 of research and development costs for FY97, of which approximately $632,000 was capitalized and approximately $133,000 was expensed. The 32.7% increase in research and development expenditure is due primarily to the unexpectedly long development time for work associated with the conversion of educational software to the C++ programming language necessary for compatibility on both Windows and Macintosh computers. INCOME FROM GRANT - ----------------- For FY98, the Company received $150,000, the first two $75,000 semi-annual payments of a $300,000 Phase II SBIR grant from the National Science Foundation to develop software to allow physically-disabled students to perform simulated laboratory experiments on a computer. For FY97, the Company received the last one-third of a Phase I SBIR grant in the amount of $17,000. INTEREST EXPENSE - ---------------- Interest expense for FY98 decreased $53,000, or 76.8% to $ 16,000. This decrease is primarily due to the interest charges incurred for the Bridge Notes and notes issued in August and September 1996 for which the Company does not have such an obligation in this fiscal year. FINANCING COSTS - --------------- Financing costs for FY98 were $0 compared to $280,000 for FY97. The $280,000 for FY97 was due to the issuance of 280,000 warrants in connection with notes payable issued in December 1996 and January 1997. This financing cost was being amortized over the term of the notes and the unamortized portion at the time of the completion of the Company's initial public offering was charged to earnings. The warrants entitled the holder to purchase one share of the Company's Common Stock for $2.50 per share. The Company issued these warrants, which had an exercise price that the Company estimated to be $1.00 less than the fair value of the Company's Common Stock at the date of grant. Accordingly, the Company recognized an additional financing cost of $280,000 in FY97. LOSS ON INVESTMENT IN HEALTHWEB, INC., AT EQUITY - ------------------------------------------------ The Company incurred approximately $75,000 of expenses in forming a joint venture called HealthWeb, Inc. to provide health information through its Internet web site HealthData.com. The Company holds 4,500,000 (50%) shares of the 9,000,000 shares issued in HealthWeb, Inc., which is a California corporation. Because of limited resources, the Company discontinued its support of HealthWeb, Inc. and currently HealthWeb, Inc. is in a state of nonoperation. INCOME TAXES - ------------ Income taxes were $1,600 for FY98. For FY97 the Company recorded a tax benefit of $39,000 because the Company received tax refund claims from government agencies. 17 NET LOSS - -------- Net loss for FY98 increased $633,000, or 44.1%, to the net loss of $2,069,000 compared to the net loss of $1,436,000 for FY97. Management attributes this decline primarily to the non-cash write off of $350,000 for capitalized educational software, the increase in selling, general and administrative expenses for aggressive sales expansion and related costs, and the loss incurred on the investment in HealthWeb, Inc. SEASONALITY ================================================================================ Sales of the Company's disability products exhibit relatively mild seasonal fluctuations. The following table sets forth net sales information for each of the Company's last 12 calendar quarters. This unaudited net sales information has been prepared on the same basis as the annual information presented elsewhere in this Form 10-KSB and, in the opinion of management, reflects all adjustments (consisting of normal recurring entries) necessary for a fair presentation of the information presented. Net sales for any quarter are not necessarily indicative of sales for any future period.
Net Sales ---------------------------------------------------------------- First Second Third Fourth Total Quarter Quarter Quarter Quarter ------- ------- ------- ------- ------- (in thousands) 1999...................................... 881 778 929 879 3,467 1998...................................... 543 560 730 812 2,645 1997...................................... 541 679 560 713 2,493
In general, management believes sales to schools are seasonal, with greater sales to schools during the Company's third and fourth fiscal quarter (March-May and June-August). There is not sufficient historical data at this time to allow a detailed analysis of the seasonality of educational simulation software. Sales of pharmaceutical simulations, which began in the first quarter of FY99, are not expected to show significant seasonal behavior. 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 the 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 interest rate was 11.0% at August 31, 1999 and 11.50% at August 31, 1998. At August 31, 1999, the outstanding balance under the revolving line of credit was approximately $90,000, and at August 31, 1998, the outstanding balance under the revolving line of credit was $97,000. 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. 18 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 being 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. In October 1997, the Company was awarded a follow-on $300,000 Phase II SBIR grant from the National Science Foundation, the purpose of which was to help fund the Company's development of educational simulation software for the school and home study markets. The grant was paid in four equal payments of $75,000 semi-annually and the Company received the final payment in June 1999. 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. Thereafter, if cash generated from operations is 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 available, that it will be in amounts and on terms acceptable to the Company. If cash flows from operations are insufficient to continue operations at the current level, and if no additional financing is obtained, then management will 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. Further, as of November 30, 1998 the market value of the Company's public float was below the $4,000,000 required for continued Nasdaq listing. On July 2, 1999, the Company was informed that its securities were being delisted from the Nasdaq effective at the close of business on July 2, 1999 because the Company did not meet the requirements for continued listing on Nasdaq. Accordingly, trading in the shares of the Company's Common Stock is now conducted on the Nasdaq's "Electronic Bulletin Board." Consequently, the liquidity of the Company's securities may be impaired, not only in the number of securities which can be bought and sold, but also through delays in the timing of the transactions, reductions in security analysts' and the new media's coverage of the Company, and lower prices for the Company's securities than otherwise may be attained. As a result of the delisting, the Company's securities are subject to Rule 15g-9 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which imposes additional sales practice requirements on broker-dealers which sell such securities to persons other than established customers and "accredited investors" (generally, individuals with net worths in excess of $1,000,000 or annual incomes exceeding $200,000, or $300,000 together with their spouses). For transactions covered by this rule, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transaction prior to the sale. Consequently, the rule may adversely affect the ability of broker-dealers to sell the Company's securities acquired hereby in the secondary market. 19 Securities and Exchange Commission ("Commission") regulations define a "penny stock" to be any non- Nasdaq equity security that has a market price (as therein defined) of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require delivery, prior to any transaction in a penny stock, of a disclosure schedule prepared by the Commission relating to the penny stock market. Disclosure is also required to be made about commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements are required to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. The foregoing required penny stock restrictions will not apply to the Company's securities if such securities are listed on Nasdaq and have certain price and volume information provided on a current and continuing basis or meet certain minimum tangible assets or average revenue criteria. There can be no assurance that the Company's securities will qualify for exemption from these restrictions. In any event, even if the Company's securities were exempt from such restrictions, it would remain subject to Section 15(b)(6) of the Exchange Act, which gives the Commission the authority to prohibit any person that is engaged in unlawful conduct while participating in a distribution of penny stock from associating with a broker-dealer or participating in the distribution of a penny stock, if the Commission finds that such a restriction would be in the public interest. If the Company's securities were subject to the rules on penny stocks, the market liquidity for the Company's securities would be severely adversely affected. YEAR 2000 COMPLIANCE ================================================================================ The Company has completed a comprehensive review of its computer systems to identify all software applications that could be affected by the inability of many existing computer systems to process time-sensitive data accurately beyond the year 1999 (referred to as the "Year 2000" issue). The Company is also continuing to monitor its computer systems and the adequacy of the processes and progress of third-party vendors of systems that may be affected by the Year 2000 issue. The Company is dependent on third-party computer systems and applications, particularly with respect to such critical tasks as accounting, billing and buying, planning and paying for media, and it also relies on its own computer systems. The Company completed its Year 2000 compliance program, however, the Company may experience cost overruns in the future, which could have a material adverse effect on its business, results of operations and financial condition. While management believes the Company's procedures are designed to be successful, because of the complexity of the Year 2000 issue and the interdependence of organizations using computer systems, the Company's efforts, or those of third parties with whom it interacts, may not be satisfactorily completed in a timely fashion. If the Company fails to adequately address the Year 2000 issue, then its business, results of operations and financial condition could be materially adversely affected. ITEM 7. FINANCIAL STATEMENTS The response to this item is submitted as a separate section of this Form 10KSB (see pages F-1 - F-20.) ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 20 PART III ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by Item 9 is incorporated by reference from the Company's definitive proxy statement (the "Proxy Statement") for its 2000 annual stockholders' meeting, which is hereby incorporated by reference. ITEM 10. EXECUTIVE COMPENSATION The information required by Item 10 is incorporated by reference from the Company's Proxy Statement for its 2000 annual stockholders' meeting, which is hereby incorporated by reference. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 11 is incorporated by reference from the Company's Proxy Statement for its 2000 annual stockholders' meeting, which is hereby incorporated by reference. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 12 will be contained in the Proxy Statement, which is incorporated by reference. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are filed as part of this report as required by Item 601 of Regulation S-B: 21 EXHIBIT NUMBER DESCRIPTION - ------ ----------- 3.1 Articles of Incorporation of the Registrant (1) 3.2 Amended and Restated Bylaws of the Registrant (1) 4.1 Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 hereof) and Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 hereof) 4.2 Form of Common Stock Certificate (1) 4.3 Share Exchange Agreement (1) 10.1 Simulations Plus, Inc. 1996 Stock Option Plan (the "Option Plan") and terms of agreements relating thereto (1)+ 10.2 Subscription Agreement with Patricia Ann O'Neil (1) 10.3 Security Agreement with Patricia Ann O'Neil (1) 10.4 Promissory Note made by the Registrant in favor of Patricia Ann O'Neil (1) 10.5 Warrants to purchase 150,000 shares of Common Stock of the Registrant issued to Patricia Ann O'Neil (1) 10.6 First Amendment to Agreement with Patricia Ann O'Neil (1) 10.7 Subscription Agreement with Fernando Zamudio (1) 10.8 Security Agreement with Fernando Zamudio (1) 10.9 Promissory Note made by the Registrant in favor of Fernando Zamudio (1) 10.10 Warrant to purchase 100,000 shares of Common Stock of the Registrant issued to Fernando Zamudio (1) 10.11 Employment Agreement by and between the Registrant and Walter S. Woltosz (1) + 10.12 Performance Warrant Agreement by and between the Registrant and Walter S. Woltosz + Virginia E. Woltosz (2) + 10.13 Software Acquisition Agreement by and Between the Registrant and Michael B. Bolger (1) 10.14 Sublease Agreement dated May 7, 1993 by and between the Registrant and Westholme Partners (along with Consent to Sublease and master lease agreement) (1) 10.15 Lease Agreements dated August 22, 1996 by and between Words+, Inc. and Abbey-Sierra LLC (1) 10.16 Form of 10% Amended and Restated Promissory Note issued in connection with the Registrant's Private Placement (2) 10.17 Form of Subscription Agreement relative to the Registrant's Private Placement (1) 10.18 Form of Lock-Up Agreement with Bridge Lenders (2) 10.19 Form of Indemnification Agreement (1) 10.20 Form of Lock-Up Agreement with the Woltosz' (2) 10.21 Letter of Intent by and between the Registrant and Therapeutic Systems Research Laboratories (1) 10.22 Form of Representative's Warrant to be issued by the Registrant in favor of the Representative (2) 10.23 Form of Warrant issued to Bridge Lenders (2) 10.24 License Agreement by and between the Registrant and Therapeutic Systems Research Laboratories (3) 10.25 Grant Award Letter from National Science Foundation (4) 10.26 Distribution Agreement with Teijin Systems Technology LTD. (4) 10.27 Lease Agreements by and between Simulations Plus, Inc. and Martin Properties, Inc. (4) 10.28 Software OEM Agreement for Assistive Market Developer by and between Words+, Inc. and Digital Equipment Corporation. (4) 10.29 Purchase Agreement by and between Words+, Inc. and Epson America, Inc. (4) 10.30 License Agreement with Absorption Systems, LP. (5) 10.31 Service contract with The Kriegsman Group. (5) 10.32 Letter of Engagement with Banchik & Associates. (5) 10.33 Letter of Intent for Cooperative Alliance with Absorption Systems, LP. (5) 27.1 Financial Data Schedule (5) 22 (1) Incorporated by reference to the Company's Registration Statement on Form SB-2 (Registration No. 333-6680) filed on March 25, 1997 (the "Registration Statement"). (2) Incorporated by reference to Pre-Effective Amendment No. 1 to the Registration Statement filed on May 27, 1997. (3) Incorporated by reference to the Company's Form 10-KSB for the fiscal year ended August 31, 1997. (4) Incorporated by reference to the Company's Form 10-KSB for the fiscal year ended August 31, 1998. (5) Filed herewith. + Management Contract or Compensatory Plan. (b) Reports on Form 8-K None. 23 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Palmdale, State of California, On December 14, 1999. SIMULATIONS PLUS, INC. By /s/ Momoko A. Beran ------------------------------- Momoko A. Beran CHIEF FINANCIAL OFFICER Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Registrant and in the capacities indicated on December 14, 1999. SIGNATURE TITLE /s/ Walter S. Woltosz - ---------------------------- Chairman of the Board of Directors Walter S. Woltosz and Chief Executive Officer /s/ Virginia E. Woltosz - ---------------------------- Vice President, Secretary and Virginia Woltosz Director of the Company and Words+ /s/ Dr. David Z. D'Argenio - ---------------------------- Dr. David Z. D'Argenio Director and Consultant to the Company - ---------------------------- Dr. Richard Weiss Director /s/ Momoko A. Beran - ---------------------------- Momoko A. Beran Chief Financial Officer of the Company 24 SIMULATIONS PLUS, INC. AND SUBSIDIARY CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 1999 AND 1998 SIMULATIONS PLUS, INC. AND SUBSIDIARY CONTENTS AUGUST 31, 1999 ================================================================================ Page REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 1 FINANCIAL STATEMENTS Consolidated Balance Sheet 2 Consolidated Statements of Operations 3 Consolidated Statements of Shareholders' Equity 4 Consolidated Statements of Cash Flows 5 - 6 Notes to Consolidated Financial Statements 7 - 20 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of Simulations Plus, Inc. We have audited the accompanying consolidated balance sheet of Simulations Plus, Inc. (a California corporation) and subsidiary as of August 31, 1999, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the two years in the period ended August 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Simulations Plus, Inc. and subsidiary as of August 31, 1999, and the consolidated results of their operations and their consolidated cash flows for each of the two years in the period ended August 31, 1999 in conformity with generally accepted accounting principles. /s/ SINGER LEWAK GREENBAUM & GOLDSTEIN LLP SINGER LEWAK GREENBAUM & GOLDSTEIN LLP Los Angeles, California October 29, 1999 F-1 SIMULATIONS PLUS, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET AUGUST 31, 1999 ====================================================================================================================
ASSETS CURRENT ASSETS Cash and cash equivalents $ 52,323 Accounts receivable, net of allowance for doubtful accounts of $17,830 570,346 Inventory 193,174 ----------------- Total current assets 815,843 CAPITALIZED COMPUTER SOFTWARE DEVELOPMENT COSTS, net of accumulated amortization of $1,154,424 595,990 FURNITURE AND EQUIPMENT, net 149,420 OTHER ASSETS 50,001 ----------------- TOTAL ASSETS $ 1,611,254 ================= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Line of credit $ 89,828 Accounts payable 244,047 Accrued payroll and other expenses 430,038 Accrued warranty and service costs 70,761 Current portion of capitalized lease obligations 31,982 ----------------- Total current liabilities 866,656 CAPITALIZED LEASE OBLIGATIONS, net of current portion 3,940 ----------------- Total liabilities 870,596 ----------------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Preferred stock, $0.001 par value 10,000,000 shares authorized no shares issued and outstanding - Common stock, $0.001 par value 20,000,000 shares authorized 3,383,531 shares issued and outstanding 3,384 Additional paid-in capital 4,629,268 Accumulated deficit (3,891,994) ----------------- Total shareholders' equity 740,658 ----------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,611,254 ================= The accompanying notes are an integral part of these financial statements.
F-2 SIMULATIONS PLUS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED AUGUST 31, ====================================================================================================================
1999 1998 ---------------- ---------------- NET SALES $ 3,466,805 $ 2,645,159 COST OF SALES 1,648,510 1,755,905 ---------------- ---------------- GROSS PROFIT 1,818,295 889,254 ---------------- ---------------- OPERATING EXPENSES Selling, general, and administrative 2,308,828 2,683,282 Research and development 218,514 390,446 ---------------- ---------------- Total operating expenses 2,527,342 3,073,728 ---------------- ---------------- LOSS FROM OPERATIONS (709,047) (2,184,474) ---------------- ---------------- OTHER INCOME (EXPENSE) Interest income 5,388 58,215 Income from grant 150,000 150,000 Interest expense (21,406) (16,447) Loss in investment of Healthweb, Inc., at equity - (74,933) ---------------- ---------------- Total other income (expense) 133,982 116,835 ---------------- ---------------- LOSS BEFORE PROVISION FOR INCOME TAXES (575,065) (2,067,639) PROVISION FOR INCOME TAXES 1,600 1,600 ---------------- ---------------- NET LOSS $ (576,665) $ (2,069,239) ================ ================ BASIC LOSS PER SHARE $ (0.17) $ (0.62) ================ ================ DILUTED LOSS PER SHARE $ (0.17) $ (0.62) ================ ================ WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING 3,377,543 3,350,000 ================ ================ The accompanying notes are an integral part of these financial statements.
F-3 SIMULATIONS PLUS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED AUGUST 31, =============================================================================================================
Additional Common Stock Paid-in Accumulated Shares Amount Capital Deficit Total --------- --------- ------------ -------------- ------------- BALANCE, AUGUST 31, 1997 3,350,000 $ 3,350 $ 4,595,771 $ (1,246,090) $ 3,353,031 NET LOSS (2,069,239) (2,069,239) --------- --------- ------------ -------------- ------------- BALANCE, AUGUST 31, 1998 3,350,000 3,350 4,595,771 (3,315,329) 1,283,792 ISSUANCE OF COMMON STOCK FOR LEASEHOLD IMPROVEMENTS 33,531 34 33,497 33,531 NET LOSS (576,665) (576,665) --------- --------- ------------ -------------- ------------- BALANCE, AUGUST 31, 1999 3,383,531 $ 3,384 $ 4,629,268 $ (3,891,994) $ 740,658 ========= ========= ============ ============== ============= The accompanying notes are an integral part of these financial statements. F-4
SIMULATIONS PLUS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED AUGUST 31, ====================================================================================================================
1999 1998 ---------------- ---------------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (576,665) $ (2,069,239) Adjustments to reconcile net loss to net cash provided by (used in) operating activities Depreciation and amortization of furniture and equipment 80,497 67,794 Amortization of capitalized software development costs 423,267 564,299 Loss in investment of Healthweb, Inc., at equity - 74,933 (Increase) decrease in Accounts receivable (194,576) (719) Income tax receivable 28,941 28,485 Inventory 155,501 (172,570) Other assets (4,013) (10,992) Increase (decrease) in Accounts payable (90,712) 194,217 Accrued payroll and other expenses 244,655 34,674 Accrued warranty and service costs 22,265 (3,363) ---------------- ---------------- Net cash provided by (used in) operating activities 89,160 (1,292,481) ---------------- ---------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of furniture and equipment - (20,858) Capitalized computer software development cost (196,130) (640,706) Advances to Healthweb, Inc., at equity - (74,933) ---------------- ---------------- Net cash used in investing activities (196,130) (736,497) ---------------- ---------------- CASH FLOWS FROM FINANCING ACTIVITIES Payments on line of credit (7,300) 97,128 Payments on capitalized lease obligations (31,561) (26,757) ---------------- ---------------- Net cash provided by (used in) financing activities (38,861) 70,371 ---------------- ---------------- Net decrease in cash and cash equivalents (145,831) (1,958,607) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 198,154 2,156,761 ---------------- ---------------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 52,323 $ 198,154 ================ ================ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION During the years ended August 31, 1999 and 1998, the Company paid $1,600 and $1,600, respectively, in income taxes and $21,406 and $16,447, respectively, in interest. The accompanying notes are an integral part of these financial statements.
F-5 SIMULATIONS PLUS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) FOR THE YEARS ENDED AUGUST 31, ================================================================================ SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES The Company entered into capital lease obligations of $6,183 and $6,473 during the years ended August 31, 1999 and 1998, respectively, and transferred $46,693 of computer hardware from inventory to furniture and equipment during the year ended August 31, 1998. During the year ended August 31, 1999, the Company issued 33,531 shares of common stock in exchange for $33,531 of leasehold improvements. The accompanying notes are an integral part of these financial statements. F-6 SIMULATIONS PLUS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AUGUST 31, 1999 ================================================================================ NOTE 1 - SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES Organization ------------ Simulations Plus, Inc. was incorporated on July 17, 1996. On August 29, 1996, the shareholders of Words+, Inc. exchanged their 2,000 shares of Words+, Inc. common stock for 2,200,000 shares of Simulations Plus, Inc. common stock, and Words+, Inc. became a wholly-owned subsidiary of Simulations Plus, Inc. (collectively, the "Company"). The effect of the stock-for-stock exchange is presented retroactively in the accompanying consolidated financial statements. All intercompany accounts and transactions have been eliminated. Lines of Business ----------------- The Company designs and develops computer software and manufactures augmentative communication devices and computer access products that provide a voice for those who cannot speak and allow physically-disabled persons to operate a standard computer. In addition, the Company designs and develops pharmaceutical simulation software to promote cost-effective solutions to a number of problems in pharmaceutical research and in the education of pharmacy and medical students. The Company also developed and sells interactive, educational software programs that simulate science experiments conducted in high school science classes. Basis of Presentation --------------------- The accompanying financial statements have been prepared in accordance with generally accepted accounting principles which contemplate continuation of the Company as a going concern. However, the Company has sustained substantial losses from operations in recent years. 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. Thereafter, if cash generated from operations is 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 available, that it will be in amounts and on terms acceptable to the Company. If cash flows from operations are insufficient to continue operations at the current level, and if no additional financing is obtained, then management will restructure the Company in a way to preserve its pharmaceutical and disability businesses while maintaining expenses within operating cash flows. F-7 SIMULATIONS PLUS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AUGUST 31, 1999 ================================================================================ NOTE 1 - SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Estimates --------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents ------------------------- For purposes of the statements of cash flows, the Company considers all highly-liquid investments purchased with original maturities of three months or less to be cash equivalents. Inventory --------- Inventory is stated at the lower of cost (first-in, first-out basis) or market and consists primarily of computers and peripheral computer equipment. Furniture and Equipment ----------------------- Furniture and equipment, including equipment under capital leases, are recorded at cost, less accumulated depreciation and amortization. Depreciation and amortization are provided using the straight-line method over the estimated useful lives as follows: Equipment 5 years Computer equipment 3 to 7 years Furniture and fixtures 5 to 7 years Leasehold improvements 5 years Maintenance and minor replacements are charged to expense as incurred. Gains and losses on disposals are included in the results of operations. Advertising ----------- The Company expenses advertising costs as incurred. Advertising costs for the years ended August 31, 1999 and 1998 were $3,656 and $66,537, respectively. Research and Development Costs ------------------------------ Research and development costs are charged to expense as incurred until technological feasibility has been established. These costs consist primarily of salaries and direct payroll related costs. F-8 SIMULATIONS PLUS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AUGUST 31, 1999 ================================================================================ NOTE 1 - SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 with 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 expected net realizable value is expensed at that time. As of August 31, 1999 and 1998, the Company expensed $182,925 and $350,000, respectively, of capitalized software development costs relating to educational software. Revenue Recognition ------------------- The Company recognizes revenues related to software licenses and software maintenance in accordance with the American Institute of Certified Public Accountants ("AICPA") Statements of Position No. 97-2, "Software Revenue Recognition." Product revenue is recorded at the time of shipment, net of estimated allowances and returns. Post-contract customer support ("PCS") obligations are insignificant; therefore, revenue for PCS is recognized at the time of shipment, and the costs of providing such support services are accrued and amortized over the obligation period. The Company provides, for a fee, additional training and service calls to its customers and recognizes revenue at the time the training or service call is provided. F-9 SIMULATIONS PLUS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AUGUST 31, 1999 ================================================================================ NOTE 1 - SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Income Taxes ------------ The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The provision for income taxes represents the tax payable for the period and the change during the period in deferred tax assets and liabilities. Fair Value of Financial Instruments ----------------------------------- The Company measures its financial assets and liabilities in accordance with generally accepted accounting principles. For certain of the Company's financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, accrued payroll and other expenses, and accrued warranty and service costs, the carrying amounts approximate fair value due to their short maturities. The amounts shown for capitalized lease obligations also approximate fair value because current interest rates offered to the Company for leases of similar maturities are substantially the same. Stock Options and Warrants -------------------------- During 1995, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123, "Accounting for Stock-Based Compensation," which defines a fair value based method of accounting for stock-based compensation. However, SFAS No. 123 allows an entity to continue to measure compensation cost related to stock and stock options issued to employees using the intrinsic method of accounting prescribed by Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees." Entities electing to remain with the accounting method of APB 25 must make pro forma disclosures of net income and earnings per share, as if the fair value method of accounting defined in SFAS No. 123 had been applied. The Company has elected to account for its stock-based compensation to employees under APB 25. F-10 SIMULATIONS PLUS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AUGUST 31, 1999 ================================================================================ NOTE 1 - SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Net Loss per Share ------------------ The Company reports earnings per share in accordance with SFAS No. 128, "Earnings per Share." Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of common shares available. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. Because the Company has incurred net losses, basic and diluted loss per share are the same. Concentrations and Uncertainties -------------------------------- International sales accounted for 19% and 12% of net sales for the years ended August 31, 1999 and 1998, respectively. Amounts due from Medicaid represented 24% of the net accounts receivable balance at August 31, 1999. The Company operates in the computer software industry which is highly competitive and changes rapidly. The Company's operating results could be significantly affected by its ability to develop new products and find new distribution channels for new and existing products. The Company does not manufacture certain of its components including the computer that is used in one of the Company's products. Such computer is sourced by the Company from a single vendor. The Company also uses a number of pictographic symbols that are used in its software products which are licensed from a third party. The inability of the Company to obtain computers used in its products or to renew its licensing agreement to use pictographic symbols could negatively impact the Company's financial position, results of operations, and cash flows. Comprehensive Income -------------------- For the year ended August 31, 1999, the Company adopted SFAS No. 130, "Reporting Comprehensive Income." This statement establishes standards for reporting comprehensive income and its components in a financial statement. Comprehensive income as defined includes all changes in equity (net assets) during a period from non-owner sources. Examples of items to be included in comprehensive income, which are excluded from net income, include foreign currency translation adjustments and unrealized gains and losses on available-for-sale securities. Comprehensive income is not presented in the Company's financials statements since the Company did not have any of the items of comprehensive income in any period presented. F-11 SIMULATIONS PLUS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AUGUST 31, 1999 ================================================================================ NOTE 1 - SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Recently Issued Accounting Pronouncements ----------------------------------------- SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," is effective for financial statements with fiscal years beginning after June 15, 1999. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. This statement is not applicable to the Company. SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise," is effective for financial statements with the first fiscal quarter beginning after December 15, 1998. This statement is not applicable to the Company. SFAS No. 135, "Rescission of FASB Statement No. 75 and Technical Corrections," is effective for financial statements with fiscal years beginning February 1999. This statement is not applicable to the Company. In June 1999, the FASB issued SFAS No. 136, "Transfer of Assets to a Not-for-Profit Organization or Charitable Trust that Raises or Holds Contributions for Others." This statement is not applicable to the Company. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities." The Company does not expect adoption of SFAS No. 137 to have a material impact, if any, on its financial position or results of operations. 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. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents. F-12 SIMULATIONS PLUS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AUGUST 31, 1999 ================================================================================ NOTE 3 - FURNITURE AND EQUIPMENT Furniture and equipment at August 31, 1999 consisted of the following: Equipment $ 50,185 Computer equipment 338,308 Furniture and fixtures 45,036 Leasehold improvements 39,434 ------------ 472,963 Less accumulated depreciation and amortization 323,543 ------------ TOTAL $ 149,420 ============ Depreciation and amortization expense was $80,497 and $67,794 for the years ended August 31, 1999 and 1998, respectively. NOTE 4 - COMMITMENTS AND CONTINGENCIES Leases ------ The Company leases certain facilities for its corporate and operations offices under a non-cancelable operating lease agreement that expires in 2001. The Company also leases certain office and computer equipment under non-cancelable capital lease arrangements. Future minimum lease payments under non-cancelable capital and operating leases with initial or remaining terms of one year or more are as follows: Year Ending Operating Capital August 31, Leases Leases ------------ ------------ 2000 $ 131,040 $ 35,526 2001 140,400 5,583 ------------ ------------ $ 271,440 41,109 ============ Less amount representing interest 5,187 ------------ 35,922 Less current portion 31,982 ------------ LONG-TERM PORTION $ 3,940 ============ Included in furniture and equipment is capitalized leased equipment of $126,421 with accumulated depreciation of $102,290 at August 31, 1999. F-13 SIMULATIONS PLUS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AUGUST 31, 1999 ================================================================================ NOTE 4 - COMMITMENTS AND CONTINGENCIES (CONTINUED) Leases (Continued) ------ Rent expense was $157,257 and $173,209 for the years ended August 31, 1999 and 1998, respectively. Employee Agreement ------------------ The Company entered into an employment agreement with its President that expired August 31, 1999. In November 1999, the Board of Directors approved an extension until August 31, 2002 with the same terms. The employment agreement provides for an annual salary of $150,000 and an annual bonus based on the Company's performance not to exceed $150,000. The agreement also provides that the Company may terminate the agreement upon 30 days written notice if termination is without cause. The Company's only obligation would be to pay its President the greater of a) 12 months salary or b) the remainder of the term of the employment agreement from the date of notice of termination. License Agreement ----------------- The Company entered into an agreement with Therapeutic Systems Research Laboratory ("TSRL") to jointly develop a computer simulation of the absorption of drug compounds in the gastrointestinal tract. Upon execution of a definitive License Agreement, TSRL received a one-time payment of $75,000, plus a royalty of 20% of net sales of the absorption simulation. For the year ended August 31, 1999, the Company paid royalties of $46,511. Listing on Stock Exchange ------------------------- 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, 1999 and 1998, the Company has ceased to meet one of the requirements for continued listing, namely the Company's net tangible assets as of August 31, 1999 and 1998 were $754,000 and $1,284,000, respectively, which is below the $2,000,000 required by the NASDAQ. Further, as of November 16, 1999, the market value of the Company's public float was below the $4,000,000 required for continued NASDAQ listing. The Company was unable to increase its net tangible assets and the market value of its public float to meet the NASDAQ's requirements for continued listing. The Company's securities were delisted from NASDAQ effective at the closing of July 2, 1999. Trading, if any, of the shares of common stock now need to be conducted in the over-the-counter markets in the so-called "pink sheets" or on the NASDAQ's "Electronic Bulletin Board." Consequently, the liquidity of the Company's securities could be impaired, not only in the number of securities which could 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 might be attained. F-14 SIMULATIONS PLUS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AUGUST 31, 1999 ================================================================================ NOTE 5 - INCOME TAXES A reconciliation of the expected income tax (benefit) computed using the federal statutory income tax rate to the Company's effective income tax rate is as follows:
1999 1998 ------------ ------------- Income tax computed at federal statutory tax rate (34.0)% (34.0)% State taxes, net of federal benefit 0.1 0.1 Change in valuation allowance 34.0 34.0 ------------ ------------- TOTAL 0.1% 0.1% ============ =============
Significant components of the Company's deferred tax assets and liabilities for income taxes at August 31 consisted of the following:
1999 1998 ------------- ------------- Deferred tax assets Accrued payroll and other expenses $ 159,959 $ 40,989 Accrued warranty and service costs 28,304 19,318 Net operating loss carryforward 1,527,770 1,456,886 Other - 22,667 ------------- ------------- 1,716,033 1,539,860 Valuation allowance 1,474,384 1,202,018 ------------- ------------- 241,649 337,842 ------------- ------------- Deferred tax liabilities Fixed assets (3,253) (9,958) Capitalized computer software development costs (238,396) (327,884) ------------- ------------- (241,649) (337,842) ------------- ------------- NET DEFERRED TAX ASSET $ - $ - ============= ==============
The Company's valuation allowance increased by $272,366 during the year ended August 31, 1999. At August 31, 1999, the Company had federal and state net operating loss carryforwards of approximately $3,900,000 and $2,000,000, respectively, that expire throughout the year 2019. F-15 SIMULATIONS PLUS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AUGUST 31, 1999 ================================================================================ NOTE 5 - INCOME TAXES (CONTINUED) The components of the income tax provision for the years ended August 31 were as follows: 1999 1998 ----------- ----------- Current Federal $ - $ - State 1,600 1,600 ----------- ----------- 1,600 1,600 ----------- ----------- Deferred Federal - - State - - ----------- ----------- - - ----------- ----------- TOTAL $ 1,600 $ 1,600 =========== =========== NOTE 6 - SHAREHOLDERS' EQUITY Warrants -------- In August and September 1996, the Company entered into two Subscription Agreements whereby the Company issued 100,000 and 150,000 warrants, respectively, to purchase shares of common stock. The warrants are exercisable at $4.00 per share and expire five years from the date of grant. In January 1997, the Company entered into Subscription Agreements whereby the Company issued notes in the amount of $1,100,000 and issued 280,000 warrants to purchase common stock. The warrants are exercisable at $2.50 per share, are subject to a 12-month-lock-up period, and expire five years from the grant date. The notes were repaid upon the completion of the Company's stock offering. Stock Option Plan ----------------- In September 1996, the Board of Directors adopted and the shareholders approved the 1996 Stock Option Plan (the "Option Plan") under which a total of 250,000 shares of common stock has been reserved for issuance. In March 1999, the shareholders approved an increase in the number of shares that may be granted under the Option Plan to 500,000. The Option Plan terminates in 2006, subject to earlier termination by the Board of Directors. F-16 SIMULATIONS PLUS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AUGUST 31, 1999 ================================================================================ NOTE 6 - SHAREHOLDERS' EQUITY (CONTINUED) Stock Option Plan (Continued) ----------------- The following summarizes the stock option transactions:
Weighted- Average Exercise Number Price of Shares Per Share ----------- ----------- Outstanding, August 31, 1997 - $ - Granted 50,000 $ 4.25 Expired/canceled (6,260) $ 4.25 ----------- Outstanding, August 31, 1998 43,740 $ 4.25 Granted 263,990 $ 1.35 Expired/canceled (13,410) $ 2.04 ----------- OUTSTANDING, AUGUST 31, 1999 294,320 $ 1.74 =========== EXERCISABLE, AUGUST 31, 1999 7,722 $ 4.25 ===========
The weighted-average remaining contractual life of options outstanding issued under the Plan is 9.11 years at August 31, 1999. The exercise prices for the options outstanding at August 31, 1999 ranged from $1.31 to $4.25, and the information relating to these options was as follows:
Weighted- Weighted- Weighted- Average Average Average Remaining Exercise Exercise Stock Stock Contractual Price Price Exercise Options Options Life of Options of Options of Options Price Outstanding Exercisable Outstanding Outstanding Exercisable ---------------- ----------- ----------- --------------- ---------- ----------- $ 1.31 - 1.50 257,066 - 9.49 years $ 1.35 $ - $ 1.51 - 4.50 37,254 7,722 6.47 years $ 4.25 $ 4.25 ----------- ----------- 294,320 7,722 =========== ===========
F-17 SIMULATIONS PLUS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AUGUST 31, 1999 ================================================================================ NOTE 6 - SHAREHOLDERS' EQUITY (CONTINUED) Stock Option Plan (Continued) ----------------- The Company has adopted only the disclosure provisions of SFAS No. 123. It applies APB 25 and related interpretations in accounting for its plans and does not recognize compensation expense for its stock-based compensation plans other than for restricted stock and options issued to outside third parties. If the Company had elected to recognize compensation expense based upon the fair value at the grant date for awards under this plan consistent with the methodology prescribed by SFAS No. 123, the Company's net loss and loss per share would be reduced to the pro forma amounts indicated below for the years ended August 31, 1999 and 1998:
1999 1998 --------------- ---------------- Net loss As reported $ (576,665) $ (2,069,239) Pro forma $ (595,196) $ (2,069,239) Basic and diluted loss per common share As reported $ (0.17) $ (0.62) Pro forma $ (0.17) $ (0.62)
The fair value of these options was estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for the years ended August 31, 1999 and 1998: dividend yields of 0% and 0%, respectively; expected volatility of 100% and 65%, respectively; risk-free interest rates of 6% and 5%, respectively; and expected life of five and five years, respectively. The weighted-average fair value of options granted during the years ended August 31, 1999 and 1998 was $0.97 and $4.25, respectively, and the weighted-average exercise price was $1.35 and $4.25, respectively. For options granted during the year ended August 31, 1999 where the exercise price equaled the stock price at the date of the grant, the weighted-average fair value of such options was $1.16, and the weighted-average exercise price of such options was $1.50. For options granted during the year ended August 31, 1999 where the exercise price was greater than the stock price at the date of the grant, the weighted-average fair value of such options was $0.93, and the weighted-average exercise price of such options was $1.31. No options were issued during the year ended August 31, 1999 where the exercise price was less than the stock price at the date of the grant. F-18 SIMULATIONS PLUS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AUGUST 31, 1999 ================================================================================ NOTE 6 - SHAREHOLDERS' EQUITY (CONTINUED) Stock Option Plan (Continued) ----------------- The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. Other Stock Options ------------------- As of August 31, 1999, the Company granted the Board of Directors a total of 3,206 stock options at exercise prices ranging from $1.50 to $5.25. During the year ended August 31, 1999, the Company entered into an investor relations agreement for $4,000 per month and 30,000 stock options at an exercise price of $1.00, which equaled the fair market value on the date of grant. As of August 31, 1999, 15,000 of these options were exercisable. NOTE 7 - RELATED PARTY TRANSACTIONS As of August 31, 1999, included in accrued compensation due to officer was $122,250, which represents accrued salary due to the Company's President. The amount due does not accrue interest and is included in the "accrued payroll and other expense" account. As of August 31, 1999, included in accrued compensation due to officer was $25,500, which represents accrued salary due to the Company's Vice President of Human Resources. The amount due does not accrue interest and is included in the "accrued payroll and other expense" account. In connection with the Company's stock offering, the Company agreed to grant to its President 300,000 warrants to purchase up to 300,000 shares of the Company's common stock. The number of warrants to be granted will be based on net income for the year ended August 31, 1999, but cannot exceed 300,000 warrants. Since the Company did not meet the net income requirement, the warrants were not granted. F-19 SIMULATIONS PLUS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AUGUST 31, 1999 ================================================================================ NOTE 8 - LINE OF CREDIT The Company has available an unsecured $100,000 revolving line of credit from a bank with interest payable on a monthly basis at prime (8% at August 31, 1999), plus 3%. The line is personally guaranteed by the Company's President. As of August 31, 1999, the amount drawn against the line of credit was $89,828. NOTE 9 - LINES OF BUSINESS For internal reporting purposes, management segregates the Company into two divisions as follows:
Simulations Plus, Inc. Words+, Inc. Eliminations Total -------------- -------------- ------------- -------------- Net sales $ 461,306 $ 3,005,499 $ - $ 3,466,805 Income (loss) from operations $ (896,189) $ 187,142 $ - $ (709,047) Identifiable assets $ 1,449,960 $ 713,414 $ (552,120) $ 1,611,254 Capital expenditures $ - $ - $ - $ - Depreciation and amortization $ 38,660 $ 41,837 $ - $ 80,497
Most corporate expenses, such as legal and accounting expenses and public relation expenses are included in Simulations Plus, Inc. Segment information is not shown for the year ended August 31, 1998 because the Simulations software business was not material to the operations of the Company. NOTE 10 - YEAR 2000 ISSUE The Company has conducted a comprehensive review of its computer systems to identify the systems that could be affected by the Year 2000 Issue and has developed an implementation plan to resolve the Issue. The Issue is whether computer systems will properly recognize date-sensitive information when the year changes to 2000. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. The Company is dependent on computer processing in the conduct of its business activities. Based on the review of the computer systems, management does not believe the cost of implementation will be material to the Company's financial position and results of operations. F-20 EX-10.30 2 ABSORPTION SYSTEMS LICENSE AGREEMENT ABSORPTION SYSTEMS LICENSE AGREEMENT THIS AGREEMENT ("Agreement") is made as of July 26, 1999 ("Effective Date") by and between: ABSORPTION SYSTEMS LP ("ASLP"), a Pennsylvania limited partnership, with its principal office at Oaklands Corporate Center, 440 Creamery Way, Suite C, Exton, Pennsylvania 19341; and SIMULATIONS PLUS, INC. ("SPI"), a California corporation with its principal office at 1220 W. Avenue J, Lancaster, California 93534. BACKGROUND - ---------- A. SPI is the vendor of certain pharmaceutical development software ("SPI Software") that is sold in functional units consisting of a base unit ("Base") and optional add-on units that provide additional functionality ("Modules"). Each set of Base and Modules that are logically connected is referred to herein as a "Package." As of the Effective Date of this Agreement, SPI markets two Packages, one containing the "QMPRPlus" Base (the "QMPRPlus Package") and one containing the "GastroPlus" Base (the "GastroPlus Package"). B. ASLP is engaged in the testing of chemical compounds in drug development ("Compounds") for membrane permeability properties and describing those properties in numerical form ("Data"). ASLP has prepared Data for 330 Compounds ("Compounds"), which Data has been organized in a spreadsheet format along with chemical structure information for each of the Compounds (the "Database"). ASLP represents that the data contained in the Database were generated through experiments conducted at ASLP in accordance with experimental protocols and laboratory practices that would be deemed of high quality by reputable scientists familiar with such protocols and practices. ASLP further represents that it is the sole owner of the database and has the right to enter into this Agreement with respect to its use without the approval of any other party. C. Under this Agreement, ASLP shall give to SPI access to the Database for use by SPI in the development of mathematical models to be incorporated into one of the optional Modules. The intended function of this Module (the ASLP Caco-2 "Permeability Module") will be to predict the membrane permeability properties of other chemical structures. The ASLP Caco-2 Permeability Module is intended to be offered as an optional module for the QMPR Plus Package. The QMPRPlus Package may later be offered in the form of an optional Module for GastroPlus, in which case the ASLP Caco-2 Permeability Module will be offered as an optional sub-module within the QMPRPlus Module. D. The Compounds are all commonly or publicly available (" Public Domain Compounds"). It is understood that ASLP will test and generate data for Compounds that are the property or trade secrets of third parties ("Proprietary Compounds"). No data relating to Proprietary Compounds will be licensed to SPI hereunder and no such Data will be incorporated into the Modules. E. The parties are contemplating forming a joint venture pursuant to a definitive joint venture agreement that is yet to be negotiated (the "Prospective Joint Venture"). The Prospective Joint Venture shall be deemed outside the scope of and separate from this Agreement, except as otherwise expressly provided for in the definitive joint venture agreement. If the Prospective Joint Venture is formed, the parties anticipate that ASLP will license the bioavailability data relating to certain Proprietary Compounds to it. TERMS - ----- In consideration of the above recitals (which are deemed a material part of this Agreement) and the grant, payments and mutual agreements set forth herein, and intending to be legally bound hereby, the parties hereto agree as follows: 1. DEFINITIONS In addition to the terms defined elsewhere in this Agreement, the following terms shall have the following meanings. 1.1. "Affiliate" shall mean, with respect to a particular party hereto, any entity that (i) owns more than 50% of the outstanding voting securities or similar interests of such party, (ii) more that 50% of whose outstanding voting securities or similar interests are owned by such party or (iii) more than 50% of whose outstanding voting securities or similar securities are owned, directly or indirectly, by another entity that also owns, directly or indirectly, more than 50% of the outstanding voting securities or similar interests of such party. 1.2. "Base" shall mean a unit of Software that is available for license to SPI's users, and which may be used with Modules. A Module may not be used without a Base, but a Base may be used without a Module. 1.3. "Confidential Information" shall mean the proprietary and trade secret information of the parties as stated in this Agreement. 1.4. "Hardware" shall mean computer equipment that is capable of running or operating Software. 1.5. "Net Sale Price" shall mean gross revenues received by SPI or any Affiliate from a non-Affiliate third party attributable to the Sale of any SPI Software Package in which an ASLP Module is bundled or the Sale of any Base unit with which an ASLP Module is marketed and any services provided in support or in connection with such Package or Base unit, less qualifying costs directly attributable to such Sales and actually allowed, identified on the invoice or other documentation and borne by SPI. Such qualifying costs shall be limited to the following: (i) discounts in amounts customary in the trade for quantity purchases, cash payments, prompt payments and for wholesalers and distributors; (ii) credits or refunds, not exceeding the original or customary billing or invoice amount for claims or returns; (iii) prepaid transportation insurance premiums; (iv) prepaid outbound transportation expenses; and (v) sales, value added and use taxes imposed by a government agency on SPI related to such Sales. 1.8. "Sale" shall mean a transaction in which consideration is received by SPI regardless of whether the transaction is classified as a license, a sale, a use, a rental agreement, or other type of transaction, and shall be effective upon the first occurrence of any of the following with respect to any of the Software in question: (a) SPI receives partial or full payment for an order that includes such Software, (b) SPI ships part or all of an order that includes such Software, or, (c) SPI books an order that includes such Software. 1.9. "SPI Software" shall mean Software owned by SPI. 1.10. "Software" shall mean computer programs and related documentation. 2. LICENSE GRANT; RESTRICTIONS; OTHER INTELLECTUAL PROPERTY CONCERNS 2.1. ASLP hereby grants to SPI a non-exclusive, worldwide license to use the Data, including the Data contained in the Database for the exclusive purpose of developing or enhancing mathematical models to be incorporated into the Permeability Module. 2.2. This license shall not include the right to sublicense the Data to any third party. 2.3. Except where the parties agree in a document signed by both parties, SPI may not distribute any Data or any part of the Database to any third parties under any circumstances, nor may SPI allow any third parties to have any access to any Data or any part of the Database. Under no circumstance may any Data or any part of the Database be copied or distributed to any users, distributors, independent contractors, or any entity other than SPI and ASLP. For further clarification, no Base unit or Module will contain any Data in any version. Rather, the Data will be used for creating, developing, improving or enhancing SPI's mathematical models, but will not be accessible in any Base unit or Module. 2.4. ASLP may place its copyright and proprietary rights notices on the Data and Database. SPI shall preserve ASLP's notices on the Data and Database. However, the placing of any copyright notice shall not be deemed a publication or placement in the public domain. 2.5. In all agreements with its licensees, customers and/or users, SPI shall prohibit such persons from reverse engineering the Permeability Module or otherwise attempting to recover or recreate any Data or other information from such Module. 2.6. The license granted hereunder will terminate upon termination of this Agreement, regardless of the reason for termination. Upon termination hereof, SPI shall cease using the Data and Database and shall cease making, distributing, selling or otherwise using any derivative work of such Data, including without limitation the Permeability Module. Termination of SPI's license to use Data and Database shall not terminate the rights of SPI's licensees to use the Permeability Module so long as SPI's licensees continue to adhere to the terms of their respective written license agreements with SPI. 3. ROYALTIES AND ACCOUNTING 3.1. In consideration of the license granted hereunder, SPI shall pay to ASLP a royalty on the Sale of each ASLP Caco-2 Permeability Module an amount equal to 50% of the Net Sale Price of such Module. ASLP alone will determine the sale price of the ASLP Caco-2 Permeability Module. 3.2 The above royalty rates have been agreed to by the parties with the understanding that SPI will collect a Net Sale Price in the amount of $20,000 per Base and $30,000 per ASLP Caco-2 Permeability Module. Unless otherwise authorized by ASLP in writing, SPI will not materially change the prices of the ASLP Caco-2 Permeability Module. 3.3. SPI will provide a statement and pay all royalties to ASLP by the 30th day following the end of each SPI fiscal quarter (ending November 30, February 28/29, May 31 and August 31) for all Sales during such quarter. The statement will be provided to ASLP regardless of whether any royalty is due, and will include the date of each Sale, the name and address of each buyer, the distributor or other person making the sale if other than SPI, a list of each Base, Module, Package, or other items included with the sale, and the amounts to be paid. 3.4. SPI agrees to maintain records of all transactions contemplated by this Agreement in accordance with its customary business practices. ASLP shall, at its sole expense and with auditors of its choice, be entitled to audit and examine the records maintained by SPI in connection with the transactions contemplated by this Agreement. The audits shall be made at SPI's site during customary business hours and upon reasonable prior written notice. ASLP shall be entitled to conduct no more than two audits per calendar year. ASLP may make copies of financial records of SPI reflecting transactions directly relating to any activities arising under this Agreement. Any such audits shall be paid for by ASLP, except that SPI shall reimburse ASLP for the cost of an audit if the audit shows that SPI owes ASLP 2.5% or more in royalties than SPI had accounted for with respect to the period since the previous audit by ASLP or the beginning of this Agreement if there was no prior audit. ASLP agrees that all information learned as result of such audit is SPI's Confidential Information under the confidentiality provisions of this Agreement. 3.5. Any amounts not paid within thirty (30) days of the due date shall be subject to late fees in the amount of 1.5% of outstanding amounts for such period, compounded monthly. 4. CONFIDENTIALITY 4.1. Each party shall reveal to the other party only the Confidential Information that is necessary, if any, for the other party to perform its tasks or uphold its responsibilities hereunder. The parties' respective Confidential Information may include business plans and proprietary technology not made available to the general public. 4.2. All Data, the Database, the Mathematical Models, and Source Code are automatically deemed to be Confidential Information and do not need to be marked as such. All other types of Confidential Information should be clearly marked "Confidential" or "Proprietary," but the parties recognize that most such Confidential Information is known by the parties to be Confidential Information in accordance with the nature of the information so disclosed. By way of example, all business plans, sales forecasts and discussions of new products shall be deemed Confidential Information and do not need to be marked as such. 4.3. Each receiving party shall hold the Confidential Information in confidence and shall use the highest level of care to prevent any unauthorized use or disclosure of it. Neither receiving party shall use the Confidential Information of the other for any purpose, except as contemplated hereunder. Each receiving party shall allow the disclosure of the Confidential Information of the other party only to such of its employees and independent contractors and those of its Affiliates who have a need to know such Confidential Information in the performance of their legitimate job responsibilities in connection with the use of such information as contemplated by this Agreement. Each receiving party will take reasonable steps to cause each such employee or independent contractor to abide by the confidentiality and non-use obligations imposed hereunder and will be responsible for any breach by such employees or independent contractors of such obligations. 4.4. Each receiving party agrees to use appropriate confidentiality protocols, which shall include no less than numbering and keeping an up-to-date log of each copy of Confidential Information, and requiring that each employee of a receiving party who has access to a hard copy or soft (i.e., electronic) copy of such Confidential Information sign out and sign in such copy. 4.5. The confidentiality obligations of this Agreement shall not apply to information that (i) at the time of disclosure is in the public domain, or (ii) information which becomes part of the public domain by publication or otherwise, except by any breach of this Agreement, or (iii) information which has been or is intentionally disclosed by the disclosing party to the public or, without restriction (i.e., confidentiality protections), to a third party. In the event that a court or governmental agency requests or demands that a receiving party disclose the Confidential Information of a disclosing party, the receiving party shall not be liable for making such a disclosure if the receiving party immediately notifies the disclosing party and reasonably cooperates with the disclosing party in any attempt to seek injunctive relief or other relief, provided, however, that such disclosure will not otherwise relieve the receiving party subject to such court or governmental request or demand from its continuing confidentiality and non-use obligations hereunder with respect to all of the disclosing party's Confidential Information, including the information disclosed to the court or governmental agency under this sentence. 4.6. The confidentiality obligations under this Agreement shall survive termination of this Agreement and shall have no expiration date. 5. WARRANTIES 5.1. SPI warrants that it will use its best efforts to sell the ASLP Caco-2 Permeability Module. ASLP warrants that it will use its best efforts to promote and assist in the sale of the ASLP Caco-2 Permeability Module. 5.2. Each party warrants to the other that it has the right to enter into and be bound by this Agreement. 5.3. Each party warrants to the other that its performance of this Agreement shall not cause or create a breach of any other contract or agreement to which it is bound. 5.4. Each party ("Indemnitor") agrees to indemnify the other party ("Indemnitee") for any claims brought against the Indemnitee allegedly arising out of the actions or omissions of the Indemnitor, including without limitation any claims of violation of any intellectual property or other rights of a third party. Indemnification under this Agreement is conditioned on prompt written notice of any claim, action, or demand for which indemnity is claimed; complete control of the defense and settlement thereof by the Indemnitor; and cooperation of the Indemnitee in such defense. Should the Indemnitee wish to participate in defense of the claim, it shall do so at its own expense after the Indemnitor assumes control of the defense. 6. DISCLAIMER OF WARRANTIES AND LIMITATION OF LIABILITY 6.1. THE EXPRESS WARRANTIES GIVEN IN SECTION 5 OF THIS AGREEMENT ARE GIVEN IN LIEU OF ALL OTHER EXPRESS AND IMPLIED WARRANTIES, INCLUDING BUT NOT LIMITED TO ANY IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, AND ARE THE ONLY WARRANTIES MADE WITH RESPECT TO THE TRANSACTIONS CONTEMPLATED HEREBY. 6.2. ASLP shall in no event be liable for any loss of profit or goodwill, or other indirect, special, consequential or incidental damages suffered by SPI or others. SPI shall in no event be liable for any loss of profit or goodwill, or other indirect, special, consequential or incidental damages suffered by ASLP or others. 6.3. ASLP's liability for direct damages to SPI or others shall not exceed the amount actually received by ASLP from SPI for the specific Permeability Module licensed to a third party that is the subject matter of the alleged damages. SPI's liability for direct damages to ASLP or others shall not exceed the amount actually received by SPI from sales of the specific Permeability Module licensed to a third party that is the subject matter of the alleged damages. 7. TERM AND TERMINATION 7.1. This Agreement is effective as of the Effective Date, and shall continue for an initial term of one (1) year, and shall automatically renew for periods of one (1) year each. 7.2. This Agreement may be terminated by either party by sending written notice that is received by the other party no less than three (3) months prior to the end of the then current term. 7.3. Failure by any party to comply with any term or condition under this Agreement ("defaulting party") shall entitle the other party ("non-defaulting party") to give the defaulting party written notice of such default. If the defaulting party has not cured such default within 30 days of the date of the notice, the non-defaulting party shall be entitled to terminate this Agreement effective immediately upon sending of written notice. The rights under this provision are in addition to all other rights the non-defaulting party may have, and the failure to enforce such rights shall not be deemed to be a waiver of those rights. 7.4. In the event of termination of this Agreement, SPI shall immediately thereafter cease all use of the Data and Database and return to ASLP or destroy all copies of the Data and Database in SPI's possession or under its control (and certify to ASLP that it has done so), and ASLP shall return to SPI or destroy all copies of any information relating to Mathematical Models, Source Code, Marketing Information, or other information of a similar nature in ASLP's possession or under its control (and certify to SPI that it has done so) unless SPI shall have provided written permission for ASLP to retain such information. 7.5. Any termination of this Agreement shall not terminate the responsibilities to pay any monies due or owing. 8. GENERAL PROVISIONS 8.1. Neither party may assign this Agreement and any licenses hereunder, without the prior written agreement of the other party, which may be withheld by such party in its sole discretion and for any reason. This Agreement shall be binding upon the parties and their heirs, successors and permitted assigns. 8.2. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania. The parties hereby consent to the jurisdiction of any court located in the Commonwealth of Pennsylvania to hear any controversy arising under this Agreement and hereby waive any claim or objection to such forum based on inconvenience, provided the location and time of such hearings allow the parties to make reasonable arrangements to attend such hearings. 8.3. The parties to this Agreement are independent contractors. Neither party under this Agreement shall be deemed an employee or employer of the other. Neither party shall have the right to control the employees or agents of the other. This Agreement shall not be construed as a partnership agreement, and the parties to this Agreement are not partners. Except as to certain rights otherwise set forth herein, this Agreement is not exclusive to either party. Neither party has authority to enter into agreements on behalf of the other. Neither party is authorized to bind the other in any way. Each party shall be solely responsible for its own employees, including the withholding of taxes and payment of any benefits for such employees. 8.4. If any of the provisions of this Agreement are declared to be invalid or unenforceable, such provisions shall be severed from this Agreement and the other provisions shall remain in full force and effect. 8.4. This Agreement is solely between the parties to this Agreement. This Agreement may not be construed to create any third-party beneficiary rights in any other individual, partnership, corporation, or other entity. 8.6. All provisions of this Agreement that provide rights or create responsibilities for the parties after termination of this Agreement shall survive the termination of this Agreement for any reason. Such provisions that survive termination include without limitation provisions regarding payment, confidentiality, intellectual property, choice of law and this provision. IN WITNESS WHEREOF, the parties, intending to be legally bound, have caused this Agreement to be executed by their duly authorized agents, as of the date first written above. ABSORPTION SYSTEMS LP BY: ABSORPTION SYSTEMS GROUP LLC ITS GENERAL PARTNER By: /s/ Patrick M. Dentinger ---------------------------------- Patrick M. Dentinger, President & CEO SIMULATIONS PLUS, INC. ITS CHAIRMAN AND CHIEF AND CHIEF EXECUTIVE OFFICER By: /s/ Walter S. Woltosz ---------------------------------- Walter S. Woltosz, Chairman, President & CEO EX-10.31 3 SERVICE CONTRACT WITH THE KRIEGSMAN GROUP THE KRIEGSMAN GROUP January 8, 1999 CONFIDENTIAL Mr. Walter Woltosz President and CEO Simulations Plus, Inc. 1220 W. Avenue J Lancaster, California 93534 RE: SIMULATIONS PLUS, INC. (THE "COMPANY") Dear Mr. Woltosz: This will confirm our understanding that the Company has agreed to retain the services of The Kriegsman Group ("Kriegsman") to render advice and assistance to the Company with respect to planning, structuring, and funding a proposed financing by the Company (hereinafter referred to as the "Financing") as described below. The Financing shall consist of: Up to $25 million, preferably in the form of common stock or convertible preferred stock. Kriegsman shall have the exclusive right for a period of 180 days, or any extension thereof as provided for herein (the "Term") from the date this letter is signed by you to accomplish the Financing and during that period will use its best efforts to do so. Kriegsman agrees to use his best efforts to raise a minimum of $1.2 million within 60 days. The Company will have the option of terminating this agreement at any time after 60 days if such financing is not completed within 60 days. Specifically, Kriegsman's efforts will include: * Assisting in the review and revision of offering documents; * Identifying and contacting prospective lenders/investors; * Assisting in the presentation of the Company to financing sources; * Analyzing offers and contacting prospective lenders/investors; * Assisting with closing the financing as soon as practicable. If (i) the Financing or (ii) any part thereof, or (iii) any other Capital Transaction, as that term is defined herein, (the events described in (i), (ii) or (iii) are collectively referred to herein as a "Fee Event") is concluded or contractually committed to within the Term the Company will pay Kriegsman a fee, in cash, calculated: (i) if equity including any convertible securities, six percent (6%) of all funds raised or committed, or (ii) if debt, three percent (3%) of all senior debt and six percent (6%) of all subordinated debt raised, or (iii) if not debt or equity, then seven percent (7%) of the value of the consideration received by the Company. Kriegsman's fee shall be due and payable upon the closing of the Fee Event. If, after the Term and prior to the expiration of one year from the conclusion of the Term, a Fee Event occurs, where the provider of funding is a person or entity Introduced to the Company by Kriegsman or under the control of or Introduced to the Company by a person or entity Introduced to the Company by Kriegsman, then in that event Kriegsman shall be entitled to a fee on the same terms and conditions as set forth above. As used in this letter the term "Capital Transaction" shall mean any issuance or sale of securities or issuance of debt, any lease transaction (not including routine equipment leases), any acquisition, merger, sale, strategic alliance or partnership or any other transaction in which the Company or its shareholders receive consideration or funding out of the ordinary course of business. At the conclusion of the Term, Kriegsman shall provide to the Company a list of all persons or entities Introduced to the Company by Kriegsman. The term "Introduced" with respect to any investor as used herein shall include Kriegsman sending a copy of the Company's business plan to such investor. The Company agrees to inform Kriegsman of any Fee Event which occurs during the Term and for one year thereafter. For the services provided, the Company shall pay Kriegsman $6,000 on the execution hereof and $6,000 per month in advance on the seventh (7th) day of the month for five (5) consecutive months beginning February 7, 1999 and continuing each month thereafter during the term hereof including any extension of the term hereof. Such sum shall be credited against amounts due Kriegsman at the closing of a fee event. In the event the Financing or other Fee Event does not occur, the retainers paid by the Company are non-refundable. In addition to the above referenced consideration Kriegsman shall receive at the closing of any Fee Event in which he is entitled to the cash fee described above a warrant to purchase 50,000 shares of the common stock of the Company for each one million dollars received by the Company in any such fee event. The exercise price shall be 120% of the fair market value of the common stock at the time the warrant is issued, with the presumption that the Last Sale Price (the price paid by the investor) represents such fair market value unless the Company shall propose some other market value based upon reasonable proof that such other value is more appropriate. The warrant shall be exercisable over a five year period and shall contain clauses standard to an underwriter's warrant used in connection with a registered public offering of securities. The Company agrees to reserve a sufficient amount of its common stock to cover the exercise of the warrant. The Term hereof shall automatically be extended for successive periods of 60 days each unless prior to the end of initial Term or any extension thereof either party gives written notice to the other of their intention not to extend the term hereof. In addition to the fees described above, the Company will reimburse Kriegsman for reasonable out-of-pocket expenses incurred by Kriegsman in raising the financing. Expenses in excess of $500 per month must be pre-approved by the Company. The Company agrees to indemnify and hold harmless Kriegsman from and against any and all losses, claims, damages, liabilities, judgments, charges and expenses (including all legal or other expenses reasonably incurred by Kriegsman) in connection with investigating or defending against or providing evidence in any litigation, whether commenced or threatened, in connection with any claim, action or proceeding whether or not resulting in any liability, to which Kriegsman may become subject under any other statute, at common law or otherwise, caused by, or arising out of any service under this agreement, provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage or liability is found in a final judgment by a court to have resulted from Kriegsman's gross negligence, willful misconduct or malfeasance. Kriegsman shall be entitled to employ counsel separate from the Company and from any other part in such action. In such event, the reasonable fees and disbursements of such separate counsel, as incurred, shall be paid by the Company. If the Company or its officers, directors, shareholders or affiliates suffer or incur any loss, claim, damage, liability or expense by reason of Kriegsman's gross negligence, willful misconduct or malfeasance, the Company and any such persons have the same rights of indemnification from Kriegsman as are given by the Company to Kriegsman hereunder. This agreement constitutes the entire agreement between us, and it may not be modified except in writing signed by all parties hereto. This agreement shall be governed by and construed in accordance with the laws of the State of California. Any dispute arising from the interpretation, validity or performance of this agreement or any of its terms and provisions shall be submitted to binding arbitration before the American Arbitration Association in the State of California. Should action be brought to enforce this agreement, the prevailing party shall be entitled to recover from the other reimbursement for reasonable attorney's fees. If the foregoing meets with your approval, please sign and date the enclosed copy of this letter and return it to the undersigned. Sincerely, AGREED: THE KRIEGSMAN GROUP SIMULATIONS PLUS, INC. By: /s/ Steven A. Kriegsman By: /s/ Walter Woltosz ----------------------------------- ----------------------------------- Steven A. Kriegsman/President Walter Woltosz/President and CEO Date: 01/08/99 Date: 01/11/99 SAK:krh c: Jack Myers EX-10.32 4 BANCHIK & ASSOCIATES - LETTER OF ENGAGEMENT Banchik & Associates Consultants to Emerging Public Companies November 9, 1998 Mr. Walt Woltosz Chairman and Chief Executive Officer SIMULATIONS PLUS, INC. 1220 West Avenue J RE: LETTER OF ENGAGEMENT Lancaster, CA 93534-2902 Commencement of Investor Relations ---------------------------------- Dear Mr. Woltosz: We are preparing to embark upon a program of investor relations activities on behalf of Simulations Plus, Inc. "The Company". By separate cover and documentation previously submitted, entitled "Investor Relations Engagement Proposal", dated November 6, 1998, we have detailed our intended activities. The ultimate objective of such Program is to achieve an efficient market for The Company's securities, thereby contributing to shareholder liquidity. We propose that the official commencement date of our activities be November 15, 1998, subject to the acceptance of the terms outlined herein and our receipt of the agreed funds. In this relationship, Banchik & Associates agrees to comply fully with all securities regulations, industry guidelines and applicable laws. Additionally, our firm shall maintain the confidentiality of all information of the Company that has not been cleared by the Company for public release. The Company agrees to indemnify, defend (if requested by Banchik & Associates, and then with counsel reasonably acceptable to Banchik & Associates) and hold Banchik & Associates, including its shareholders, officers and employees, harmless from and against any and all losses, claims, damages, expenses or liabilities which Banchik & Associates may incur as the result of the performance of its obligations and duties under this engagement letter with the exception, however, of any matter arising from the negligent acts of Banchik & Associates. The Company agrees that it shall be deemed to have cleared all press releases, reports or other information which are prepared by Banchik & Associates but disseminated to the public by the Company. The Company agrees that all information, representations, reports or data furnished by it to Banchik & Associates for its use in connection with the services to be performed by it under the engagement letter shall not include any material misstatement of a material fact, or omit to state any material fact, necessary for the services to be performed by Banchik & Associates to not be misleading under the circumstances under which such services are provided. To commence with the above mentioned investor relations program, as described in detail in the "Investor Relations Engagement Proposal" dated November 6, 1998, we respectfully request that you accept this engagement by signing below and facilitate the initial payment for our receipt on or before five days prior to the commencement of this engagement. Pursuant to the Budget section in the Proposal, the initial payment shall include the fees ($2,000.00) for the last half of the month of November 1998. In addition, the signed letter of engagement should be returned with the stock option/stock appreciation rights grant conforming to that proposed in the Budget section in the Investor Relations Engagement Proposal, dated November 6, 1997. In the event that this grant cannot be issued within the time frame required for the commencement of the engagement, we request that a letter be sent indicating that a conforming grant will be forthcoming within 90 days of the commencement of the engagement. The Company will be billed on the first of each month thereafter the sum of $4,000.00 for professional fees plus itemized expenses incurred the previous month as described in the Investor Relations Engagement Proposal dated November 6, 1998. These invoices are due within ten (10) days of receipt. Commitments to venders and others outside of Banchik & Associates for the purchase of goods and services related to our carrying out the subject activities will first be approved by The Company. Either party may terminate this engagement by providing one month's written notice to the other and delivering same by registered mail. Should the terms outlined herein meet with your approval, please sign and enter the date as provided below. Retain a copy for your files and send an original and a check in the amount of $2,000.00. On behalf of my associates and myself, I wish to thank you for your confidence in us and for retaining our firm. We look forward to working with you now and in the future toward mutually beneficial goals. Respectfully submitted, Banchik & Associates /s/ Doris Banchik - -------------------------- Doris Banchik Principal Accepted for SIMULATIONS PLUS, INC. /s/ Walter Woltosz - -------------------------- Walt Woltosz Date Chairman and Chief Executive Officer Banchik & Associates Consultants to Emerging Public Companies 686 Alamo Pintado Road, Suite B Solvang, California 93463 Telephone: (805) 688-2340 Fax: (805) 688-4090 - -------------------------------------------------------------------------------- November 6, 1998 Mr. Ron Creeley, Vice President Simulations Plus, Inc. 1220 West Avenue J Lancaster, CA 93534 RE: INVESTOR RELATIONS ENGAGEMENT PROPOSAL Dear Ron: It was truly a great pleasure to meet with you and Walt on Tuesday. You have a compelling story with real promise and I would be delighted to work with you in creating an efficient market for your securities. As discussed in our meeting, I genuinely believe that your story and investment appeal is buried in your current investor relations materials and as such is creating no value for you. In addition, I think that the Company would benefit from casting the pharmaceutical software business as a biotech play of sorts and definitely the lead dog among your businesses. In this way the Company's near-term valuation will not be subject to the "sale" of software, which at $20,000 per sale, is not the kind of event about which the Street would get excited. As a biotech type story, the focus is on the size of the potential market and your unique advantage in capturing that market; your sales then become a proxy for your credibility among the large pharmaceutical houses. That, in any event, is my recommendation. Certainly if you make a profit, the investors will be pleased, but as with any groundbreaking product, you might be better off tying your valuation to longer-term promise. Another reason for taking the "biotech" route is that the market for aggressive growth securities under $5.00 is very limited. I have noticed that the small caps are coming back into favor, but slowly and with caution. As a biotech type play, your market cap and revenue become less important than your cash flow, which for Simulations Plus, would be a positive. I would be less enthusiastic about your near term prospects as an aggressive growth story. I understand that your current objective is to increase liquidity in the Company's stock in an effort to improve the Company's access to reasonably priced capital. It is with this objective in mind that I submit my proposal for investor relations consulting services. As requested, I have prepared a detailed three-month plan and an associated budget. The budget assumes that the day to day investor relations work will continue to be handled by the Company's support staff. You have also requested that I submit a budget based on your staffing an investor relations position as well. I have offered you some guidance in that regard, but could not be specific without knowing the qualifications of the individual. The investor relations effort that I am recommending should begin with a very thorough analysis of the business and the path to building shareholder value. As discussed, we need to identify that which is being exploited by the Company in building value. This exercise should conclude with a concise and compelling investment thesis, a set of reasonable expectations, and an internal earnings model. This work would then be used to create certain investor communications tools, including a professional corporate profile, two levels of presentation and, a compelling investor package. The investment thesis then becomes the guide for all communications between the Company and the Street, including press releases, letters to shareholders, annual reports and oral communications. A second set of tasks to be accomplished in the preliminary phase focuses on determining the perceptions of the current investors. This is accomplished by telephone inter-view and generally provides important information for future communications. Existing investors are often a very good source of new buying. With the foundation tasks completed, the investor relations' work would focus on getting the story out to the right audience. I would begin with a mailing to a target list of investors in early stage pharmaceuticals and biotech companies. The preliminary list would include at least I 00 names. The mailing would be followed up by telephone contacts. At that point, much of the work would involve setting up meetings with the investment community, including brokers, small institutions and analysts. On an ongoing basis, I am recommending that your investor relations program include the drafting or refining of all standard investor relations materials, which are always subject to management approval. This would include, but not be limited to all press releases, letters to shareholders, sections of the annual reports, the MD&A of 10Q's and 10K'S. In addition, we would handle phone calls from professional investors. Lastly, I will advise you on matters ranging from business strategy to corporate finance. In my experience, this function often proves to be the most valuable and separates the real investor relations professionals from the rest of the pack. In the pages that follow, I have defined the scope of services that I would provide as your consultant. You will find a section describing my experience and a budget for your program towards the end of this document. Please know that I would be privileged to be your consultant and have great confidence in our ability to do great work together. Thank you for your consideration. A WORD ABOUT BANCHIK & ASSOCIATES Banchik & Associates works in a distinctive, exclusive partnership with its clients. This model allows us to customize our activities to the specific needs of clients at any point in time. Quite often we assume a counseling role, particularly when it comes to raising capital, dealing with untoward events and considering strategic options. Our practice is intentionally limited to a small number of very promising clients. In this way, we can work intensively with companies that can truly benefit from our involvement. This strategy has helped build our excellent reputation for client service and for bringing credible investments to the professional investment community. Our experience in sell-side equity research and investment banking sets us apart from most other investor relations firms and has proven invaluable to emerging public companies. We understand how the professional investor and financial analyst make decisions, and we use this wisdom effectively in our client work. We have both the database and critical personal relationships within the investment community to provide our clients with an effective and efficient investor relations program. SCOPE OF SERVICES The specific responsibilities and deliverables associated with this proposal include: I. SETTING THE FOUNDATION (WEEKS ONE THROUGH SIX). * Develop the investment thesis through an analysis of the business, industry and peer group - week one. * Develop or modify management presentations for specific segments of the investment community, including brokers, analysts and institutional investors competed by week six. * Produce a comprehensive corporate profile including Simulations Plus' investment thesis, business description, strategy, progress and milestone trajectory or 12 month expectations - completed draft by week four. * Create/expand/edit target mail and fax lists of current and prospective investors, investment advisors, financial analysts and financial news editors, by reviewing and analyzing the Company's existing lists and adding appropriate names from our data base and peer group investors completed by week three. * Audit ACT profile for investor relations purposes - completed by week four. * Prepare a compelling set of sample investor packages - completed by week six. * Conduct a perception study of current investors (est. 10-15 in sample) completed by week three. II. EARLY PHASE STREET WORK (WEEKS SEVEN THROUGH TWELVE). * Conduct target mailing (at least 100 names) - week seven * Follow-up telephone contact - weeks seven through nine * Investor meetings - estimate six, based on response to mailings and managements availability III. ONGOING ACTIVITIES. THESE ACTIVITIES ARE PERFORMED THROUGHOUT THE ENGAGEMENT. * Scheduling roadshows and meetings for the Company's management with appropriate investors and investor groups - average three per month. * When appropriate, establishing and producing regular investor conference calls; * Providing market intelligence and market research to effect the positioning of the company; * Preparing the Company's financial press releases, quarterly reports to shareholders, sections of the annual reports, sections of the SEC filing documents and other marketing materials; * Updating investor information packages; * Providing advice, counsel and support to management with regard to business strategy, financings, event presentation and related investor relations matters. IV. BUILDING THE INTERNAL INVESTOR RELATIONS' CAPABILITY These activities are performed in the interest of ultimately bringing the investor relations program in-house. The decision to do this varies with each client, but it is the intention of Banchik & Associates to support its clients in this effort from the beginning of the engagement. * Providing detailed descriptions of the technology and procedures behind our investor relations' practice to the senior investor relations officer; * Drafting detailed procedures for each and every investor relations' function; * Educating the in-house personnel about the capital markets and regulations; * Training the personnel to perform the required activities. ACTIVITY AND PRODUCT DETAILS 1. Investment thesis: - --------------------- This is developed as the core component of investor communications. Effectively, it is a well-developed argument for investing in the Company's securities. The investment thesis describes I the inefficiencies being exploited by the Company, relevant market forces and near-term business strategies. The investment thesis should be written within the first month of the engagement. 2. Corporate profile: - --------------------- The corporate profile is a very important written product for potential investors. It includes the investment thesis and appeals, a description of the Company's business, strategy and market, a twelve-month business plan and financial highlights. The corporate profile should be written within the six weeks of the engagement and updated quarterly thereafter. 3. Investor meetings and road shows: - ------------------------------------ These meetings and days of meetings are designed to maximize the use of both management's time and expense. The contacts for these meetings have been researched and appear to be appropriate candidates for investment in the Company. Unless specifically directed otherwise, these meetings are conducted on a one-to-one basis or on an in-house brokerage basis. The meetings are often scheduled to coincide with management's travel plans. 4. Targeted Mailings with Follow-up Telephone Contact: - ------------------------------------------------------ These mailings generally consist of the corporate profiles, but might include the Annual Report, selected press releases and 10Qs and media coverage. The target lists are carefully researched to include appropriate investment professionals and the media. Preliminarily, we recommend one targeted mailing every four months. As an adjunct, we might offer high volume producers the opportunity to follow-up with targeted small institutions. 5. Market Intelligence Reports: - ------------------------------- Market intelligence reports focus on a predefined peer group and include a summary and analysis of news, trading volumes, market makers, institutional holders and valuations. The reports conclude with specific recommendations drawn from an analysis of these data. Preliminarily, we recommend one report per six-month period. 6. Perception Study: - -------------------- A perception study generally provides important information about the investor's perceptions of the current and projected value of the Company, management's effectiveness and the quality of both the business and investor relations program strategy. Additionally, these studies can provide explanations for changes in trading activity and the need for shifts in the investor relations' program. The study is conducted through in-depth interviews with selected investors and analysts and might include individual interviews with the company's management. We recommend that this study be conducted twice a year. 7. Preparation of Recurring Written Investor Communications Materials: - ---------------------------------------------------------------------- This includes all of the recurring written investor communications materials, including, but not limited to: press releases, quarterly reports to shareholders, corporate profiles (updated one time per quarter) and selected sections of the annual report, 10Q's and 10Ks. 8. Management of the Mail, Fax and, if appropriate, Conference Call Lists: - -------------------------------------------------------------------------- This process begins with updating the existing mail, fax and conference call lists. The lists will be expanded to include peer group holders, new contacts, potential analysts and relevant media. The lists will be maintained at the Company, with input from our offices. 9. General Investor Contact: - ---------------------------- We are prepared to handle investor calls with referral to management as needed. A monthly list of contacts will be forwarded to management. In addition, we propose to develop a list of key investors, who should be contacted proactively by either our office or the client. 10. Counseling: - --------------- This is often a vital function of our program. The range of issues is quite broad, but might include such things as the management of earnings estimates, crisis management, business strategy and capital structure. The latter is an issue that arises in the course of most engagements, and often involves the recruitment of appropriate investment bankers. BUDGET In the program described above, we have tried to respond to your specific needs and have endeavored to provide a realistic set of activities that take into account the status of the Company, its current investors and the market. The budget for the proposed program would be $4,000 per month, plus a stock options or stock appreciation rights program. The proposed options or stock appreciation rights would be granted and vest as: initial grant of 40,000 options/stock appreciation rights, priced at market on the first day of the engagement; vesting at a rate of 5,000 per quarter at the beginning of the period. The options/stock appreciation rights should have an exercise period of five years. Banchik & Associates would be entitled to the vesting of the entire grant upon a 50% or greater change in client ownership during the course of the engagement. The budget as described above could be modified in the event that you provide more of the proposed services in-house. While the precise reduction would be based on the individual's qualifications and responsibilities, the lowest end of the range for our services would be $3,000 per month, with a 50 percent reduction in the grant of options or stock appreciation rights. In addition to our basic fees, you will be charged monthly for direct expenses incurred in the delivery of your program. These expenses will be billed at cost with no processing charges added. The expenses include, but are not limited to, mail, fax, telephone, wire services, data retrieval, conference calls and other dedicated out-of-pocket expenses. The most significant expenses are generally travel related for scheduled out-of-town meetings. Any unusual expenses are subject to management's approval. Generally our clients find that monthly expenses, short of travel or other big ticket items, run approximately $150.00 per month. Our procedure is to bill on the first of the month, with accumulated direct expenses for the previous month. In exchange for our unusual policy of not adding a processing fee, we ask that the invoice be paid within 10 days of receipt. This engagement is cancelable by either party with 30 days written notice. Upon the signing of the Letter of Engagement, Banchik & Associates asks for the first month's fee and a letter indicating the expected date by which the grant will be delivered. BANCHIK & ASSOCIATES' QUALIFICATIONS Banchik & Associates provides comprehensive investor relations consultation to emerging public companies. Doris Banchik, the firm's principal, has extensive experience in investment banking, public company management and investor relations, all of which is brought to bear in a customized approach to a limited number of exclusive clients. Ms. Banchik's investment banking experience includes senior equity analyst positions at Hainbrecht & Quist (San Francisco), LH Friend, Weinress & Frankson (Los Angeles) and Dabney, Resnick & Wagner (Beverly Hills). During her tenure in investment banking, Ms. Banchik analyzed hundreds of companies and served portfolio managers and buyside analysts at most of the major institutional houses in the United States. Ms. Banchik's investment banking experience is balanced by real world management experience in two publicly held companies. She served as director of finance and planning for the $50 million psychiatric services subsidiary of American Medical International (formerly NYSE:AMI) and as vice president of clinical services at Abbey Healthcare Group (formerly NASDAQ:ABBY). Ms. Banchik has been an investor relations consultant to emerging public companies since 1995. She counts among her clients National Tech Team (NASDAQ: TEAM); THQ, Inc. (NASDAQ; THQI); Research Engineers, Inc. (NASDAQ: RENG); Response Oncology, Inc. (NASDAQ: ROIX); Unique Mobility (AMX:UQM); Image Entertainment (NASDAQ: DISK); Cellegy Pharmaceuticals (NASDAQ: CLGY); Factual Data Corp. (NASDAQ: FDCC) and Sound Source Interactive (NASDAQ: SSII) Her practice is characterized and distinguished by her exclusive management of her clients' requirements. Ms. Banchik's practice is limited to five clients at any point in time. Ms. Banchik holds a BSN with Honors from Northeastern University, an MSN from Yale University and an MBA from the Harvard Business School. REFERENCES Banchik & Associates has worked with many individuals over the years. Here is an abbreviated list of contacts representing current and former clients and individuals with whom we have regular contact. RESPONSE ONCOLOGY, INC. Memphis, TN. (901) 761-7000 JOE CLARK, PRESIDENT & CEO MARY CLEMENTS, CHIEF FINANCIAL OFFICER RESEARCH ENGINEERS, INC. Yorba Linda, CA (714) 974-2500 DR. JYOTI CHATTERJEE, EXECUTIVE VICE PRESIDENT AND COO [FIRST NAME PRONOUNCED JOTI] WAYNE BLAIR, CHIEF FINANCIAL OFFICER UNIQUE MOBILITY, INC. Golden, CO (303) 278-2002 DONALD FRENCH, CHIEF FINANCIAL OFFICER JOHN GOULD, DIRECTOR OF INVESTOR RELATIONS RAY GEDDES, CHAIRMAN AND CHIEF EXECUTIVE OFFICER AERO ELECTRIC CONNECTOR, INC. Torrance, CA (310) 618-3737 BRIAN PAUL, CHIEF FINANCIAL OFFICER THQ, INC. Calabasas, CA. (818) 591-1310 BRIAN FARRELL, CHIEF EXECUTIVE OFFICER DEBRA LAKE NATIONAL TECHTEAM, INC. Dearbom, MI (313) 277-2277 LARRY MILLS, CHIEF FINANCIAL OFFICER FACTUAL DATA CORP. Loveland, CO (800) 929-3400 x 214 ROBB COPP, DIRECTOR OF MARKETING WEDBUSH MORGAN SECURITIES Los Angeles, CA (800) 628-4524 TIMARY KOLLER, VP/BROKER/MONEY MANAGER VAN KASPER & CO Newport Beach, CA (800) 718-4519 W. GORDON MCBEAN, VP INSTITUTIONAL SALES/BROKER CRUTTENDEN ROTH Newport Beach, CA (714) 440-3320 SHELLY SINGHAL, INVESTMENT BANKER It is certainly my pleasure to forward this proposal to you and look forward to your response. Very truly yours, Doris Banchik Principal EX-10.33 5 LETTER OF INTENT FOR COOPERATIVE ALLIANCE SIMULATIONS PLUS Integrating Science and Software LETTER OF INTENT FOR COOPERATIVE ALLIANCE This is a non-binding Letter of Intent between Simulations Plus, Inc., 1220 W. Avenue J, Lancaster, CA ("Simulations Plus") and Absorption Systems LP, Oaklands Corporate Center, 440 Creamery Way, Suite C, Exton, PA 19341 ("Absorption Systems"). This letter summarizes our discussions to date and reflects our mutual interest in fanning a joint venture to pursue the activities described below. Simulations Plus has expertise in the development of scientific software including simulation and data correlation software for the pharmaceutical industry. Absorption Systems has expertise in laboratory testing of candidate drug materials and other chemical compounds related to the absorption of such materials in tissue culture and under various physiological conditions. Simulations Plus and Absorption Systems believe that the combined capabilities of the two companies may provide a unique capability to the pharmaceutical industry in the area of absorption and general bioavailability. Simulations Plus and Absorption Systems desire to form a Joint Venture which combines the capabilities of both companies in such a way as to offer a new service to the pharmaceutical industry for the study and prediction of the absorption and general bioavailability of candidate new drug materials. The structure of the Joint Venture and other related matters will be set forth in a detailed and definitive agreement, which will contain terms and conditions yet to be discussed and agreed upon. Among other things, the definitive agreement will reflect the following: CONSORTIUM: The Joint Venture will create a consortium of pharmaceutical and other companies that will each provide large numbers of chemical entities for comprehensive laboratory screening, data correlation and simulation analysis. Each consortium member will contract with the Joint Venture, and in turn, the Joint Venture will contract the respective activities to both Absorption Systems and Simulations Plus. SERVICE: The Joint Venture envisions providing a service to pharmaceutical and biotech companies, whereby Absorption Systems will conduct laboratory experiments on potential drug compounds provided by the customer to create a small proprietary database for that customer's compounds. Using the data so generated, Simulations Plus will then: (1) correlate the data generated by the Absorption Systems experiments into a proprietary database and computer software to allow prediction of permeabilities and other molecular parameters for additional compounds, and (2) generate predictions for such additional compounds as the customer may desire, to be provided to the customer in the form of a report. Customers will benefit from the data generated for other customers, but no customer will have access to the raw data from any other customer. EXCLUSIVITY: Both Simulations Plus and Absorption Systems ("The Parties") possess proprietary assays, processes, know-how, software, mathematical models, and information ("intellectual property"). Pursuant to the definitive agreement, each party will license exclusively, certain of their respective intellectual property, know-how, software, expertise, etc. to the Joint Venture for the sole purpose of developing the Consortium Database and Consortium Software. This provision does not preclude Simulations Plus or Absorption Systems from performing or developing their respective intellectual property, know-how, software, expertise, or performing contract services independent of the consortium provided such activities are funded separately and are independent and do not infringe on the exclusivity of the consortium or consortium membership. OWNERSHIP OF THE INTELLECTUAL PROPERTY: In accordance with the terms set forth in the definitive agreement, the Joint Venture will be the sole owner of all biological data, mathematical models, and improvements to biological and chemical assays and software that it purchases from either Absorption Systems or Simulations Plus during its normal course of business. The Joint Venture will own all biological data, mathematical models, and improvements to biological and chemical assays and software it develops or purchases independent of Absorption Systems or Simulations Plus. Both Simulations Plus and Absorption Systems agree that this Letter of Intent is nonbinding; however, by signing this Letter of Intent, each company expresses its sincere interest in developing the Joint Venture described above. Both Simulations Plus and Absorption Systems agree that time is of the essence in forming the joint venture contemplated by this Letter of Intent. To this end, this Letter of Intent shall expire 60 days from the date of execution, unless extended in writing by both parties or superceded by a more definitive agreement. DATED THIS 9th DAY OF February, 1999 --- -------- Simulations Plus, Inc. Absorption Systems LP /s/ Walter S. Woltosz /s/ Patrick M. Dentinger - --------------------------- --------------------------- Chairman and CEO President & CEO EX-27 6 FINANCIAL DATA SCHEDULE
5 1 YEAR AUG-31-1999 SEP-01-1998 AUG-31-1999 52,323 0 570,346 0 193,174 815,843 745,410 0 1,611,254 866,656 0 0 0 3,384 737,274 1,611,254 3,466,805 3,466,805 1,648,510 4,175,852 0 0 21,406 (575,065) 1,600 (576,665) 0 0 0 (576,665) (0.17) (0.17)
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