SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 2001 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1937
For the transition period from _________ to _________
Commission file number: 000-21665
SIMULATIONS PLUS, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-4595609
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) identification No.)
1220 W. AVENUE J
LANCASTER, CA 93534-2902
(Address of principal executive offices including zip code)
(661) 723-7723
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the Issuer's common stock, par value $0.001
per share, as of April 10, 2001, was 3,385,831.
SIMULATIONS PLUS, INC.
FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 2001
Table of Contents
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet at February 28, 2001 (unaudited) 1
Consolidated Statements of Operations for the three and six months
ended February 28, 2001 and February 29, 2000 (unaudited) 2
Consolidated Statements of Cash Flows for the six months
ended February 28, 2001 and February 29, 2000 (unaudited) 3
Notes to Consolidated Financial Statements (unaudited) 4
Item 2. Management's Discussion and Analysis or Plan of Operations
General 7
Results of Operations 11
Liquidity and Capital Resources 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 20
Signature 21
Item 1. Financial Statements
--------------------
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
February 28, 2001
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents (note 2) $ 18,087
Accounts receivable, net of allowance for
doubtful accounts of $13,337 687,265
Prepaid expenses 27,338
Inventory 241,382
------------
Total current assets 974,072
------------
Capitalized computer software development costs,
net of accumulated amortization (note 3) 385,386
Furniture and equipment, net (note 4) 94,896
Other assets 11,567
------------
Total assets $ 1,465,921
============
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Advance line of credit $ 99,084
Accounts payable 293,352
Accrued payroll and other expenses 510,506
Accrued warranty and service costs 44,663
Deferred revenue 4,028
Current portion of capitalized lease obligations 12,903
------------
Total current liabilities 964,536
------------
Capitalized lease obligations, net of current portion 28,045
------------
Total liabilities 992,581
------------
Shareholders' equity
Preferred stock: $0.001 par value, authorized
10,000,000 shares, no shares issued and outstanding 0
Common stock: $0.001 par value, authorized
20,000,000 shares, issued and outstanding 3,385,831 (note 5) 3,386
Additional paid-in capital 4,632,281
Accumulated deficit (4,162,327)
------------
Total shareholders' equity 473,340
------------
Total liabilities and stockholders' equity $ 1,465,921
============
The accompanying footnotes are an integral part of these statements.
1
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and six months ended February 28, 2001 and February 29, 2000
(Unaudited)
Three months ended Six months ended
------------------------------------------------------------
02/28/01 02/29/00 02/28/01 02/29/00
------------ ------------ ------------ ------------
Net sales $ 1,062,426 $ 1,091,949 $ 2,120,749 $ 1,905,865
Cost of sales 428,082 384,687 906,332 644,052
------------ ------------ ------------ ------------
Gross profit 634,344 707,262 1,214,417 1,261,813
------------ ------------ ------------ ------------
Operating expenses:
Selling, general & administration 532,288 580,084 1,032,864 1,083,600
Research and development 93,447 74,686 182,601 164,498
------------ ------------ ------------ ------------
Total operating expenses 625,735 654,770 1,215,465 1,248,098
------------ ------------ ------------ ------------
Income (loss) from operations 8,609 52,492 (1,048) 13,715
Other income (expenses):
Interest revenue 39 80 51 314
Interest expense (5,601) (4,348) (11,734) (8,763)
Gain (loss) on sale of asset 0 (605) 0 (605)
------------ ------------ ------------ ------------
Income (loss) before provision
for income taxes 3,047 47,619 (12,731) 4,661
Provision (benefit) for income taxes 0 0 0 0
------------ ------------ ------------ ------------
Net income (loss) $ 3,047 $ 47,619 $ (12,731) $ 4,661
============ ============ ============ ============
Basic net income (loss) per common share $ 0.00 $ 0.01 $ (0.00) $ 0.00
============ ============ ============ ============
Diluted net income (loss) per common share $ 0.00 $ 0.01 $ (0.00) $ 0.00
============ ============ ============ ============
Basic weighted average # of common
shares outstanding 3,385,831 3,384,203 3,385,831 3,380,403
============ ============ ============ ============
Diluted weighted average # of common
shares outstanding 3,436,161 3,384,203 3,385,831 3,380,403
============ ============ ============ ============
The accompanying footnotes are an integral part of these statements.
2
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended February 28, 2001 and February 29, 2000
(Unaudited)
Six months ended
------------------------
02/28/01 02/29/00
------------------------
Cash flows from operating activities:
Net income (loss) $ (12,731) $ 4,661
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization of furniture and equipment 30,972 33,003
Amortization of capitalized software development costs 230,835 62,149
(Increase) decrease in:
Accounts receivable (144,696) 84,913
Inventory (83,065) 40,326
Other assets 12,873 10,841
Increase (decrease) in:
Accounts payable 54,294 (94,478)
Accrued payroll and other expenses 1,463 (3,312)
Deferred revenue (34,840) 0
Accrued warranty and service costs 643 0
---------- ----------
Net cash provided by operating activities 55,748 138,103
---------- ----------
Cash flows from investing activities:
Purchase of furniture and equipment 0 (2,490)
Capitalized computer software development cost (66,448) (54,890)
---------- ----------
Net cash used in investing activities (66,448) (57,380)
---------- ----------
Cash flows from financing activities:
Issuance of common stock 0 2,620
Borrowed from line of credit, net 3 10,164
Payments on capitalized lease obligations (8,751) (13,089)
---------- ----------
Net cash used in financing activities (8,748) (305)
---------- ----------
Net increase (decrease) in cash (19,448) 80,418
Cash and cash equivalents, beginning of period 37,535 52,323
---------- ----------
Cash and cash equivalents, end of period $ 18,087 $ 132,741
========== ==========
The accompanying footnotes are an integral part of these statements.
3
SIMULATIONS PLUS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1: GENERAL
-------
As contemplated by the Securities and Exchange Commission under Item 310(b) of
Regulation S-B, the accompanying financial statements and footnotes have been
condensed and therefore do not contain all disclosures required by generally
accepted accounting principles. The interim financial data are unaudited;
however, in the opinion of Simulations Plus, Inc. (the "Company"), the interim
data include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results for the interim periods. Results
for interim periods are not necessarily indicative of those to be expected for
the full year.
Note 2: CASH AND CASH EQUIVALENTS
-------
The Company maintains cash deposits at banks located in California. Deposits at
each bank are insured by the Federal Deposit Insurance Corporation up to
$100,000. As of February 28, 2001, the Company had no uninsured cash. The
Company has not experienced any losses in such accounts and believes it is not
exposed to any significant credit risk on cash and cash equivalents.
Note 3: CAPITALIZED COMPUTER SOFTWARE DEVELOPMENT COSTS
-------
Software development costs are capitalized in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Cost of
Computer Software to be Sold, Leased, or Otherwise Marketed." Capitalization of
software development costs begins upon the establishment of technological
feasibility and is discontinued when the product is available for sale. The
establishment of technological feasibility and the ongoing assessment for
recoverability of capitalized software development costs require considerable
judgement by management with respect to certain external factors including, but
not limited to, technological feasibility, anticipated future gross revenue,
estimated economic life, and changes in software and hardware technologies.
Capitalized software development costs are comprised primarily of salaries and
direct payroll related costs and the purchase of existing software to be used in
the Company's software products.
Amortization of capitalized software development costs is provided on a
product-by-product basis on the straight-line method over the estimated economic
life of the products, not exceeding three years. Management periodically
compares estimated net realizable value by product with the amount of software
development costs capitalized for that product to ensure the amount capitalized
is recoverable through revenues. Any excess of development costs to expected net
realizable value is expensed at that time. The Company expensed total of
$532,925 in the fiscal years 1999 and 1998 when it was determined that the
capitalized amount relating to educational software was greater than net
realizable value.
4
The Company also expensed $126,296 in this fiscal quarter, which is ended
February 28, 2001, to write off the capitalized portion of software development
cost on one of the pharmaceutical product called HelixGen(TM). HelixGen is still
on the product development schedule; however, at this moment, the company has
decided to postpone its development in order to focus on other products.
Note 4: FURNITURE AND EQUIPMENT
-------
Furniture and equipment as of February 28, 2001 consisted of the following:
Equipment $104,236
Computer equipment 338,071
Furniture and fixtures 45,036
Leasehold improvements 39,433
---------
526,776
Less accumulated depreciation 431,880
---------
$ 94,896
=========
Note 5: STOCKHOLDERS' EQUITY
-------
ISSUANCE OF WARRANTS
In August and September 1996, the Company issued 100,000 and 150,000 warrants
associated with two notes in the amount of $200,000 and $300,000, respectively,
to purchase common stock. The warrants are exercisable at $4.00 per share and
expire five years from the date of grant. To date, these warrants have not been
exercised.
In January 1997, the Company entered into Subscription Agreements whereby the
Company issued notes in the amount of $1,100,000 and issued 280,000 warrants to
purchase common stock. The warrants are exercisable at $2.50 per share, are
subject to a 12-month-lock-up period, and expire five years from the grant date.
The notes were repaid upon the completion of the Company's stock offering. To
date, these warrants have not been exercised.
STOCK OPTION PLAN
In September 1996, the Board of Directors adopted and the shareholders approved
the 1996 Stock Option Plan (the "Option Plan") under which a total of 250,000
shares of common stock 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. Furthermore, the shareholders approved the
number of shares to be granted under the Option Plan to be 1,000,000 shares in
March 2000 and to be 1,250,000 shares in February 2001. The Option Plan
terminates in 2006, subject to earlier termination by the Board of Directors.
5
As of February 28, 2001, 989,294 shares have been issued to various employees at
an exercise price of the fair market value at the date of grant with five-year
vesting periods, also a total of 4,206 shares have been issued to the Board of
Directors at exercise prices rating from $1.50 to $5.25 with a three-year
vesting period. As of today, 2,300 options have been exercised.
The Company entered into an investor relations agreement during fiscal year 1999
for $4,000 per month and 30,000 stock options at an exercise price of $1, the
fair market value on the date of grant. As of February 28, 2001, all 30,000
stock options were exercisable.
Note 6: Income Taxes
-------
The Company used the liability method of accounting for income taxes pursuant to
SFAS No. 109 "Accounting for Income Taxes."
Note 7: Earnings Per Share
-------
Effective February 28, 1998, the Company adopted SFAS No. 128 "Earnings Per
Share." All prior periods presented have been restated to confirm with SFAS No.
128.
6
Item 2. Management's Discussion and Analysis or Plan of Operations
----------------------------------------------------------
FORWARD-LOOKING STATEMENTS
The following discussion should be read in conjunction with the financial
statements and the notes thereto appearing elsewhere in this quarterly report on
Form 10-QSB for the quarter ended February 28, 2001 (the "Form 10-QSB"). In
addition to historical information, this Form 10-QSB contains forward-looking
statements. The forward-looking statements contained herein are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those reflected in the forward-looking statements. Factors that
might cause such a difference include, but are not limited to, those discussed
in the section entitled "Management's Discussion and Analysis or Plan of
Operations." Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as of the
date hereof. Simulations Plus, Inc. undertakes no obligation to publicly revise
these forward-looking statements, or to reflect events or circumstances that
arise after the date hereof. Readers should carefully review the risk factors
described in other documents that the Company has filed and will continue to
file from time to time with the Securities and Exchange Commission.
GENERAL
BUSINESS
--------
Simulations Plus, Inc. (the "Company" or "Simulations Plus") and its wholly
owned subsidiary, Words+, Inc. ("Words+") produce two types of products: (1)
Simulations Plus, incorporated in 1996, develops and produces simulation
software for use in pharmaceutical research and for education, and also provides
contract research services to the pharmaceutical industry, and (2) Words+,
founded in 1981, produces computer software and specialized hardware for use by
persons with disabilities, as well as a personal productivity software program
called Abbreviate! for the retail market.
DESCRIPTION OF SIMULATION SOFTWARE
----------------------------------
The types of simulation software produced by the Company are based on the
equations of chemistry and physics that describe or "model" the behavior of
things in the real world. The Company's GastroPlus(TM) pharmaceutical software
simulates the movement, dissolution/precipitation, chemical degradation and
absorption of orally-dosed drug compounds in the human gastrointestinal tract of
humans, dogs and rats, and with additional inputs, the blood plasma
concentration-time history of the drug after it reaches the central circulation.
The Company's QMPRPlus(TM) program estimates the value of several important
physicochemical characteristics of new drug-like molecules with only the
structure of the molecule as input. The Company's award-winning FutureLab(TM)
science experiment simulations for middle school and high school students
incorporate the equations of chemistry and physics for each experiment (optics,
electrical circuits, gravity, ideal gases, acid/base titration, etc.).
7
The development of simulation software involves identifying and understanding
the underlying chemistry and physics of the processes to be simulated, breaking
those processes down into the lowest practical level of individual sub-processes
at which the behaviors can be well-represented mathematically, developing
appropriate mathematical relationships/equations, and converting them into
computer subroutines. The software subroutines representing these individual
processes are then assembled into an overall simulation program, with
appropriate coordination between modules and design of user-friendly inputs and
outputs. The predictions of this program are then compared to known results in
order to determine the validity of the model and to calibrate the simulation to
produce a useful tool for predicting new results.
PRODUCTS
--------
The Company's pharmaceutical software provides cost-effective solutions to a
number of problems in pharmaceutical research as well as in the education of
pharmacy and medical students. The Company's software products and services to
date are focussed on the area of pharmaceutical research known as ADMET
(Absorption, Distribution, Metabolism, Excretion, and Toxicity). The Company
released its first pharmaceutical software product, GastroPlus(TM), in August
1998 and received enthusiastic interest from researchers in large pharmaceutical
companies such as Astra-Zeneca, Pfizer, Pharmacia, The Roche Group, and
SmithKline Beecham. An Optimization Module was released in November 1998. Two
additional modules, IVIV Correlation and PKPlus(TM) were released on November 7,
2000. The majority of new sales now include these modules, generating additional
revenue.
QMPRPlus (Quantitative Molecular Permeability Relationships), which can be used
as a companion program to GastroPlus or by itself, takes as inputs the
structures of molecules, and provides estimates for human effective
permeability, octanol-water partition coefficient (logP), solubility, and
diffusivity - all inputs to GastroPlus. QMPRPlus thereby extends the utility of
GastroPlus into early drug discovery, during which pharmaceutical companies may
not have even made many of the molecules that have been identified as potential
drug candidates. During this quarter, the Company completed the development of a
new permeability model for MDCK cells under contract to Affymax, a division of
GlaxoSmithKline. This unique model, based on high quality data for over 300
compounds from Affymax laboratories, was presented at the American Chemical
Society meeting in San Diego during the week of April 2, 2001. The Company also
completed the development of a blood-brain barrier permeation model, and updated
all earlier models with enhanced artificial neural network prediction, further
enhancing the value of QMPRPlus(TM) to its customers. By providing estimates of
physicochemical properties from structure alone, QMPRPlus, by itself or coupled
with GastroPlus, allows researchers to rank order large numbers of candidate
compounds in terms of their potential for human intestinal absorption. Because
pharmaceutical companies are dealing with millions of compounds per year, and
because the area of ADMET has become a bottleneck, high throughput screening on
the computer ("IN SILICO") is becoming not just a convenience, but a necessity.
8
As of February 28, 2001, the Company had a total of nearly 70 individual
software licenses at 25 pharmaceutical companies in 8 counties on three
continents. In addition, the Company is in discussions with several
pharmaceutical companies regarding contract study services, customized software,
or both. The Company continues to enjoy a very high renewal rate for its annual
licenses, with most customers adding modules and/or licenses at the time of
renewal.
In 1998, the Company executed a License Agreement with Therapeutic Systems
Research Laboratories, Inc. ("TSRL"), Ann Arbor, Michigan, to obtain exclusive
rights to TSRL's technology and database, including measurements of drug
permeability from nearly 60 laboratory experiments to measure the intestinal
permeability of drug compounds in human and/or rat small intestines. The Company
is also receiving consulting assistance in the development of the simulation
model from TSRL staff, including Dr. Gordon Amidon and Dr. John Crison. The
Company believes that the strategic advantage of exclusive access to TSRL's
technology and expertise, combined with the Company's now well-developed and
growing expertise in absorption and pharmacokinetics simulation, have resulted
in GastroPlus becoming recognized as a unique simulation and analysis capability
within the pharmaceutical industry. The Company is aware that other companies
began to develop similar software; however, management believes there has not
been any significant direct competition for GastroPlus at this time. GastroPlus
is now used in almost every major pharmaceutical company, and many smaller
companies, throughout the world.
CONTRACT RESEARCH SERVICES
--------------------------
The Company offers contract research services to the pharmaceutical industry in
the area of gastrointestinal absorption, pharmacokinetics, and related
technologies. The Company has performed five study contracts for both major and
smaller pharmaceutical companies. These studies provide an additional source of
revenue for the Company, as well as a means to introduce the Company's software
products to new customers. Management expects the number and size of study
contracts, which can include custom software development, to continue to
increase in the future.
PRODUCT DEVELOPMENT
-------------------
In the area of simulation software for pharmaceutical research, the Company is
currently pursuing the development of additional modules for GastroPlus and
QMPRPlus, as well as a third program called HelixGen(TM), which predicts the
3-dimensional receptor structure of certain transmembrane proteins. The Company
is also pursuing the development of another core product called DDDPlus(TM)
(Dose Disintegration and Dissolution Plus), which will simulate the
disintegration and dissolution of tablets and capsules in IN VITRO experiments.
These development efforts include:
9
(1) Metabolism and Transporter Module
-------------------------------------
The Metabolism and Transporter Module will extend the simulation within
GastroPlus to include greater detail for the effects of certain metabolic
processes on drug molecules, the effects of certain proteins in intestinal cells
that either return ("efflux") a drug molecule back to the intestinal contents or
serve to move ("transport") the drug molecule rapidly into or through intestinal
cells. Metabolism refers to the actions of certain enzymes, present primarily
within intestinal cells, blood, and 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. Transporter proteins are proteins which serve to
carry a drug molecule rapidly into and/or through, or back out of ("efflux") an
intestinal cell, resulting in a significant increase or decrease in
permeability. Metabolism and transport are all 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 drug
molecules. The Metabolism and Transporter Module is in final testing and release
is expected during the third quarter of fiscal year 2001.
(2) HelixGen(TM)
----------------
HelixGen 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 has been postponed in order to focus on the
improvements to GastroPlus and QMPRPlus described above. Development of the
program is expected to resume in FY 2001. Because of accounting standards, and
the postponement of development activities on this program, the Company was
required to expense $126,296 in this fiscal quarter to write off all of the
previously capitalized software development costs for HelixGen.
(3) DDDPlus(TM)
---------------
The Company initiated the Consortium for Dissolution Prediction in April 2000.
The purpose of this consortium is to develop a predictive software simulation
called DDDPlus, which will simulate the disintegration and dissolution of
tablets and capsules in an IN VITRO (laboratory) experiment. The Company has
received indications of interest in joining this consortium from several
companies, and is continuing to pursue its formation. Initial computer program
development was begun in early calendar 2000, but has been on hold because of
higher priorities with GastroPlus and QMPRPlus. Work on both the Consortium for
Dissolution Prediction and the DDDPlus program are expected to resume in 2001.
Walter Woltosz, the Chief Executive Officer of the Company was invited to make a
presentation directly related to this area of technology at the Dissolution
Testing conference in the Washington, D.C., area on November 30-December 1,
2000.
10
DISABILITY PRODUCT DEVELOPMENT
------------------------------
The Company's wholly owned subsidiary, Words+, Inc. has been an industry
technology leader for nearly 20 years 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.
As of January 1, 2001, the U.S. Medicare program has initiated coverage of
augmentative and alternative communication (AAC) devices. In addition, the
agency is eliminating the 24-month waiting period previosly required for
amyotrophic lateral sclerosis (ALS - or "Lou Gehrig's disease") patients to
receive Medicare benefits. These important developments are expected to increase
the overall AAC market in the U.S. considerably, as potentially tens of
thousands of patients will be able to receive funding for communication devices.
Words+ has developed a unique version of its Freedom 2000 communication system
to meet the requirements of the Medicare policy for communication systems.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED FEBRUARY 28, 2001 AND FEBRUARY 29, 2000.
The following table sets forth the Company's consolidated statements of
operations (in thousands) and the percentages that such items bear to net sales:
(Due to rounding, the numbers appearing in the following table may not foot;
please refer to the Company's consolidated statements of operations.)
Three Months Ended
---------------------------------------------------------
02/28/01 02/29/00
---------------------------------------------------------
Net sales $ 1,062 100.0% $ 1,092 100.0%
Cost of sales 428 40.3 385 35.3
---------------------------------------------------------
Gross profit 634 59.7 707 64.7
---------------------------------------------------------
Selling, general and administrative 532 50.1 579 53.0
Research and development 94 8.9 75 6.9
---------------------------------------------------------
Total operating expenses 626 58.9 654 59.9
---------------------------------------------------------
Income from operations 8 0.8 53 4.9
Interest expense (5) (0.5) (4) (0.4)
Loss on disposal of asset 0 0.0 (1) (0.1)
---------------------------------------------------------
Net income (loss) $ 3 0.3% $ 48 4.4%
=========================================================
11
NET SALES
Consolidated net sales decreased $30,000, or 2.7%, to $1,062,000 in the second
fiscal quarter of 2001 from $1,092,000 in the second fiscal quarter of 2000.
Simulations Plus, Inc.'s sales, from pharmaceutical and educational software,
decreased approximately $94,000, or 20.1%, and Words+, Inc.'s sales increased
approximately $64,000, or 10.3% for the quarter. Management attributes the
decrease in consolidated net sales to the sales growth in Words+ subsidiary
which is offset by a reduction of sales from Pharmaceutical software. The
increase in Words+ sales is due primarily to the introduction of the Company's
new product, TuffTalker(TM) which replaces its predecessor, Pegasus LITE. During
the second fiscal quarter of FY2000, the Company experienced a 402% increase in
Pharmaceutical product sales comparing with the year before due to a large
global order from one large pharmaceutical company. This fiscal quarter, that
company did not renew their licenses on a global basis, but has directed each
geographic location to renew from its own funds, if it wishes. The Company has
received renewals from some of this customer's sites, but not all of them. This
year, additional sales to a number of other companies offset most of the
decrease in sales from the large order received last year.
COST OF SALES
The Company reclassified freight-out expense as a part of cost of sales starting
at the end of last fiscal year. Accordingly, last year's cost of sales was
restated reflecting this change in order to provide a fair comparison between
the second fiscal quarters of 2001 and 2000.
Consolidated cost of sales increased $43,000, or 11.2%, to $428,000 in the
second fiscal quarter of 2001 from $385,000 in the second fiscal quarter of
2000. The percentage of cost of sales increased by 5.0%. For Simulations Plus,
the cost of sales increased $106,000, or 114.6%. A significant portion of the
cost of sales is the systematic amortization of capitalized software cost, which
resulted in 474.6% increase in amortization cost. This increase is due to the
fact that the Company was required to expense $126,296 in this fiscal quarter
for the capitalized development cost of HelixGen because its development has
been postponed. Without this charge, cost of sales for Simulations Plus would
have decreased by $20,000. For Words+, the cost of sales decreased $63,000, or
21.4%. Management attributes the percentage decrease in cost of sales for Words+
primarily to a temporary price reduction in a significant component of its
Freedom2000 resulting in reduced material cost.
12
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Consolidated selling, general and administrative expenses decreased $47,000, or
8.1%, to $532,000 in the second fiscal quarter of 2001 from $579,000 in the
second fiscal quarter of 2000. For Simulations Plus, selling, general and
administrative expenses decreased $55,000, or 22.3% primarily due to decreases
in commission expense, professional fees such as legal/accounting fees and
public relations. Although there are increases in overseas taxes associated with
sales, printing, and insurance expense, overall reductions in expenses
outweighed the increases. For Words+, expenses increased $8,000, or 2.1%, due to
an increase in trade shows, travel, insurance, and wages. These increases
outweighed decreases in other expenses such as catalog, promotion, and telephone
expenses, resulting in selling, general and administrative expense remaining the
same as last year overall.
RESEARCH AND DEVELOPMENT
The Company incurred approximately $128,000 of research and development costs
for both companies during the second quarter of 2001. Of this amount, $34,000
was capitalized and $94,000 was expensed in this period. In the second quarter
of 2000, the Company incurred $106,000 of research and development costs, of
which $31,000 was capitalized and $75,000 was expensed. The increase of $22,000,
or 20.8% in research and development expenditure from the second quarter of 2000
to the second quarter of 2001 was due to expanded staff in research and
development, thus increasing wages and associated payroll expenses.
INTEREST EXPENSE
Interest expense for the second fiscal quarter of 2001 increased by $1,000, to
$5,000 from $4,000 in the second fiscal quarter of 2000. This increase is
attributable primarily to payments made to the revolving line of credit.
LOSS ON SALE OF ASSET
During the second fiscal quarter of 2000, the Company recorded net loss of $605
when the insurance claim was settled for stolen equipment. The loss was
calculated as net proceeds minus book value. There was no such expense in fiscal
2001.
NET INCOME
The consolidated net income for the three months ended February 28, 2001
decreased by $45,000, or 93.8%, to $3,000 in the second fiscal quarter of 2001
compared to $48,000 in the second fiscal quarter of 2000. Management attributes
this increase primarily to the decrease in pharmaceutical software sales and
increase in research and development costs outweighing a decrease in cost of
goods sold and selling, general and administrative expenses.
13
COMPARISON OF SIX MONTHS ENDED FEBRUARY 28, 2001 AND FEBRUARY 29, 2000.
The following table sets forth the Company's consolidated statements of
operations (in thousands) and the percentages that such items bear to net sales:
(Due to rounding, the numbers appearing in the following table may not foot;
please refer to the Company's consolidated statements of operations.)
Six Months Ended
-----------------------------------------------------------
02/28/01 02/29/00
-----------------------------------------------------------
Net sales $ 2,121 100.0% $ 1,906 100.0%
Cost of sales 906 42.7 644 33.8
-----------------------------------------------------------
Gross profit 1,215 57.3 1,262 66.2
-----------------------------------------------------------
Selling, general and administrative 1,033 48.7 1,084 56.9
Research and development 183 8.6 164 8.6
-----------------------------------------------------------
Total operating expenses 1,216 57.3 1,248 65.5
-----------------------------------------------------------
Income (loss) from operations (1) 0.0 14 0.7
Interest expense (12) (0.1) (8) (0.4)
Gain (loss) on disposal of asset 0 0.0 (1) (0.1)
-----------------------------------------------------------
Net income (loss) $ (13) (0.1)% $ 5 0.3%
===========================================================
NET SALES
Consolidated net sales increased $215,000, or 11.3%, to $2,121,000 for the six
months ended February 28, 2001 compared to $1,906,000 for the six months ended
February 29, 2000. Simulations Plus, Inc.'s sales, from pharmaceutical and
educational software, decreased approximately $24,000, or 3.9%, and Words+,
Inc.'s sales increased approximately $239,000, or 18.6% for the six months ended
February 28, 2001. Management attributes the increase in consolidated net sales
to the significant sales growth in Words+ subsidiary products, which is offset
by a slight reduction in sales of pharmaceutical and educational software and
services. The increase in Words+ sales is due primarily to the introduction of
the new TuffTalker(TM) product, replacing its predecessor, Pegasus LITE.
Pharmaceutical product sales were reduced due to the fact that a large
pharmaceutical company global order last year was not renewed as a global order
this year, but individual sites will decide to renew on their own. Increased
sales to new customers offset most of the decrease from this one large order.
COST OF SALES
The Company reclassified freight-out expense as a part of cost of sales starting
at the end of last fiscal year. Accordingly, last year's cost of sales was
restated reflecting this change in order to provide a fair comparison between
the six months ended in February 28, 2001 and February 29, 2000.
14
Consolidated cost of sales increased $262,000, or 40.7%, to $906,000 for the six
months ended February 28, 2001 from $644,000 for the six months ended February
29, 2000. The percentage of cost of sales increased by 8.9%. For Simulations
Plus, the cost of sales increased $132,000, or 91.6%. A significant portion of
the cost of sales is the systematic amortization of capitalized software cost,
which resulted in a 271.4% increase in amortization cost. This increase is due
to the fact that the Company was required to expense $126,296 in this fiscal
quarter for the capitalized development cost of HelixGen because its development
was postponed. Without this charge, the cost of sales for Simulations Plus would
have been only $6,000. For Words+, the cost of sales increased $130,000, or
26.1%. The change in percentage of cost of sales between the six months
operations ended February 28, 2001 and February 29, 2000 is an increase of 2.4%.
Management attributes the percentage increase in cost of sales for Words+
primarily to increased sales of lower margin items during the first quarter
compared to the previous fiscal year, offset by a temporary reduction in the
cost of a significant component of the Freedom2000 during the second fiscal
quarter of 2001.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Consolidated selling, general and administrative expenses decreased $51,000, or
4.7%, to $1,033,000 for the six months ended February 28, 2001 from $1,084,000
for the six months ended February 29, 2000. For Simulations Plus, selling,
general and administrative expenses decreased $26,000, or 6.5% primarily due to
decreases in commission expense, travel expense, and professional fees such as
legal/accounting fees and public relations. Although there are increases in
overseas taxes associated with sales, printing, and insurance expense, overall
reductions in expenses outweighed increases. For Words+, expenses decreased
$25,000, or 3.7%, primarily due to decreases selling expenses such as sales
discounts, promotion, and catalog printing expenses outweighing other selling
expenses such as trade shows and travel expenses. Although salaries/wages,
payroll tax, 401(k) expenses, and utilities increased, reductions in telephone,
repairs/maintenance commission expenses outweighed these increases.
RESEARCH AND DEVELOPMENT
The Company incurred approximately $249,000 of research and development costs
for both companies for the six months ended February 28, 2001. Of this amount,
$66,000 was capitalized and $183,000 was expensed in this period. In the same
period of 2000, the Company incurred $220,000 of research and development costs,
of which $55,000 was capitalized and $165,000 was expensed. The increase of
$29,000, or 13.2% in research and development expenditure from the six months
operations in the fiscal year 2000 to 2001 was due to staff increases in
research and development, thus increasing wages and payroll related expenses.
15
INTEREST EXPENSE
Interest expense for the six months ended February 28, 2001 increased by $4,000,
or 50.0%, to $12,000 from $8,000 for the six months ended February 29, 2000.
This increase is attributable primarily to an increase in interest amortization
expense in new lease obligations, and interest payments made to the revolving
line of credit.
LOSS ON SALE OF ASSET
During the second fiscal quarter of 2000, the Company recorded a net loss of
$605 when an insurance claim was settled for stolen equipment. The loss was
calculated as net proceeds minus book value. There was no such expense in fiscal
2001.
NET INCOME
Consolidated net profit for the six months ended February 28, 2001 decreased by
$18,000, or 360.0%, to the net loss of $13,000 for the six months ended February
28, 2001 compared to the net income of $5,000 for the six months ended February
29, 2000. Management attributes this decrease primarily to the expense of
$126,296 in this fiscal quarter for the capitalized development cost of
HelixGen, outweighing the decrease in selling, general and administrative
expenses compared to the six months ended February 29, 2000. Without this
expense, net income would have been $113,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of capital have been cash flow from its
operations, a bank line of credit, a government grant, cash loans from the
officers on an as-needed basis, and accruing and not paying full salaries to
certain executive officers and managers.
The Company has available a $100,000 revolving line of credit from a bank.
Interest is payable on a monthly basis at the bank's prime rate plus 3.0%. The
outstanding balance under the revolving line of credit as of February 28, 2001
was $99,000. The revolving line of credit is not secured by any of the assets of
the Company but is personally guaranteed by Mr. Walter S. Woltosz, the Company's
Chief Executive Officer, President and Chairman of the Board of Directors.
Beginning in August 1998, certain executive officers and managers accepted
reduced salaries on a temporary basis in order to protect the cash assets of the
Company. The unpaid portions of salaries are accrued and will be paid at such
future time as management deems the Company's cash flow and cash reserves are
sufficient to make such payment without adverse effects to the Company's
financial position. As of this time, only the Company's CEO and CFO are
receiving reduced salaries, with the unpaid amounts being accrued. As of
February 28, 2001, the amount of accrued and unpaid salaries due to the
Company's executive officers and managers was $361,000.
16
The Company believes that existing capital and anticipated funds from operations
and temporary salary reductions for senior management will be sufficient to meet
its anticipated cash needs for working capital and capital expenditures for the
foreseeable future; however, if anticipated funds from operations are
insufficient to satisfy the Company's capital requirements, the Company may have
to sell additional equity or debt securities or obtain expanded credit
facilities. In the event such financing is needed in the future, there can be no
assurance that such financing will be available to the Company, or, if cash
flows from operations are insufficient to continue operations at the current
level, and if no additional financing is obtained, then management may
restructure the Company in a way to preserve its pharmaceutical and disability
businesses while maintaining expenses within operating cash flows.
In order to maintain quotation of its securities on the Nasdaq SmallCap Market
("Nasdaq"), the Company had to maintain certain minimum financial requirements.
As of August 31, 1998 the Company ceased to meet one of the requirements for
continued listing, namely the Company's net tangible assets as of August 31,
1998 were $1,284,000, which was below the $2,000,000 required by the Nasdaq. On
July 2, 1999, the Company was informed that its securities were being delisted
from the Nasdaq effective at the close of business on July 2, 1999 because the
Company did not meet the requirements for continued listing on Nasdaq.
Accordingly, trading in the shares of the Company's Common Stock is now
conducted on the Nasdaq's "Electronic Bulletin Board." Consequently, the
liquidity of the Company's securities may be impaired, not only in the number of
securities which can be bought and sold, but also through delays in the timing
of the transactions, reductions in security analysts' and media coverage of the
Company, and lower prices for the Company's securities than otherwise may be
attained.
As a result of the delisting, the Company's securities are subject to Rule 15g-9
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
which imposes additional sales practice requirements on broker-dealers which
sell such securities to persons other than established customers and "accredited
investors" (generally, individuals with net worths in excess of $1,000,000 or
annual incomes exceeding $200,000, or $300,000 together with their spouses). For
transactions covered by this rule, a broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser's
written consent to the transaction prior to the sale. Consequently, the rule may
adversely affect the ability of broker-dealers to sell the Company's securities
acquired hereby in the secondary market.
17
Securities and Exchange Commission ("Commission") regulations define a "penny
stock" to be any non-Nasdaq equity security that has a market price (as therein
defined) of less than $5.00 per share or with an exercise price of less than
$5.00 per share, subject to certain exceptions. For any transaction involving a
penny stock, unless exempt, the rules require delivery, prior to any transaction
in a penny stock, of a disclosure schedule prepared by the Commission relating
to the penny stock market. Disclosure is also required to be made about
commissions payable to both the broker-dealer and the registered representative
and current quotations for the securities. Finally, monthly statements are
required to be sent disclosing recent price information for the penny stock held
in the account and information on the limited market in penny stocks.
The foregoing required penny stock restrictions will not apply to the Company's
securities if such securities are listed on Nasdaq and have certain price and
volume information provided on a current and continuing basis or meet certain
minimum tangible assets or average revenue criteria. There can be no assurance
that the Company's securities will qualify for exemption from these
restrictions. In any event, even if the Company's securities were exempt from
such restrictions, it would remain subject to Section 15(b)(6) of the Exchange
Act, which gives the Commission the authority to prohibit any person that is
engaged in unlawful conduct while participating in a distribution of penny stock
from associating with a broker-dealer or participating in the distribution of a
penny stock, if the Commission finds that such a restriction would be in the
public interest. If the Company's securities were subject to the rules on penny
stocks, the market liquidity for the Company's securities would be severely
adversely affected.
18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
None.
Item 2. Changes in Securities
---------------------
None.
Item 3. Defaults Upon Senior Securities
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
On February 26, 2001, the Registrant held its annual meeting
of shareholders. The following proposals were submitted to a
vote of security holders at the meeting.
(1) Election of directors
Walter Woltosz
Virginia Woltosz
Dr. David Z. D'Argenio
Dr. Richard Weiss
(2) Approval of Amendment to the Registrant's Stock
Option Plan to authorize 1,250,000 shares to be
available under the plan.
(3) Ratification of the selection of Singer, Lewak,
Greenbaum & Goldstein, LLP as their independent.
All of the above proposals were approved and the results of
the balloting at the meeting are summarized in the following
table.
------------ ------------- ----------- ------------- ------------- ------------
Proposal Yes No Abstain Broker Total
Non-Votes
------------ ------------- ----------- ------------- ------------- ------------
(1) 3,199,345 - 46,400 - 3,245,745
------------ ------------- ----------- ------------- ------------- ------------
(2) 2,292,572 66,865 17,196 869,112 3,245,745
------------ ------------- ----------- ------------- ------------- ------------
(3) 3,214,830 18,115 12,800 - 3,245,745
------------ ------------- ----------- ------------- ------------- ------------
Item 5. Other Information
-----------------
None.
19
Item 6. Exhibits and Reports on form 8-K
--------------------------------
(a) Exhibits:
99.1 Press Release dated February 27, 2001.
(Incorporated by reference to the Company's
Form 8-K filed on March 1, 2001.)
(b) Reports on Form 8-K
On February 27, 2001, Simulations Plus, Inc. issued a
press release announcing certain estimated results of
operations for the fiscal year ending August 31,
2001. Following the press release, Form 8-K was filed
on March 1, 2001.
20
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Simulations Plus, Inc.
Date: April 16, 2001 By: /s/ MOMOKO BERAN
-----------------------
Momoko Beran
Chief Financial Officer
21