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, 2002 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 9, 2002, was 3,408,331.
SIMULATIONS PLUS, INC.
FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 2002
Table of Contents
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet at February 28, 2002 (unaudited) 1
Consolidated Statements of Operations for the three and six months
ended February 28, 2002 and February 28, 2001 (unaudited) 2
Consolidated Statements of Cash Flows for the six months
ended February 28, 2002 and February 28, 2001 (unaudited) 3
Notes to Consolidated Financial Statements (unaudited) 4
Item 2. Management's Discussion and Analysis or Plan of Operations
General 6
Results of Operations 11
Liquidity and Capital Resources 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signature 19
Item 1. Financial Statements
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
February 28, 2002
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents (note 2) $ 126,724
Accounts receivable, net of allowance for
doubtful accounts of $14,363 670,150
Prepaid expenses 27,749
Inventory 214,410
------------
Total current assets 1,039,033
------------
Capitalized computer software development costs,
net of accumulated amortization (note 3) 321,528
Furniture and equipment, net (note 4) 71,902
Other assets 13,257
------------
Total assets $ 1,445,720
============
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Advance line of credit $ 99,966
Accounts payable 194,262
Accrued payroll and other expenses 334,297
Accrued compensation due to officer-directors 233,916
Accrued warranty and service costs 43,826
Current portion of capitalized lease obligations 13,369
------------
Total current liabilities 919,636
------------
Capitalized lease obligations, net of current portion 14,675
------------
Total liabilities 934,311
------------
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 3,408,331 (note 5) 3,409
Additional paid-in capital 4,654,756
Accumulated deficit (4,146,756)
------------
Total shareholders' equity 511,409
------------
Total liabilities and stockholders' equity $ 1,445,720
============
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, 2002 and February 28, 2001
(Unaudited)
Three months ended Six months ended
--------------------------- ---------------------------
02/28/02 02/28/01 02/28/02 02/28/01
------------ ------------ ------------ ------------
Net sales $ 1,106,622 $ 1,062,426 $ 2,113,910 $ 2,120,749
Cost of sales 333,098 428,082 705,642 906,332
------------ ------------ ------------ ------------
Gross profit 773,524 634,344 1,408,268 1,214,417
------------ ------------ ------------ ------------
Operating expenses:
Selling, general & administration 469,248 532,288 994,456 1,032,864
Research and development 81,534 93,447 175,524 182,601
------------ ------------ ------------ ------------
Total operating expenses 550,782 625,735 1,169,980 1,215,465
------------ ------------ ------------ ------------
Income (loss) from operations 222,742 8,609 238,288 (1,048)
Other income (expenses):
Interest income 8 39 15 51
Interest expense (4,819) (5,601) (9,867) (11,734)
------------ ------------ ------------ ------------
Income (loss) before provision
217,931 3,047 228,436 (12,731)
for income taxes
Provision for income taxes 0 0 0 0
------------ ------------ ------------ ------------
Net income (loss) $ 217,931 $ 3,047 $ 228,436 $ (12,731)
============ ============ ============ ============
Basic net income (loss) per common share $ 0.06 $ 0.00 $ 0.07 $ (0.00)
============ ============ ============ ============
Diluted net income (loss) per common share $ 0.06 $ 0.00 $ 0.06 $ (0.00)
============ ============ ============ ============
Basic weighted average # of common
shares outstanding 3,408,331 3,385,831 3,408,331 3,385,831
============ ============ ============ ============
Diluted weighted average # of common
shares outstanding 3,571,564 3,436,161 3,571,564 3,385,831
============ ============ ============ ============
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, 2002 and February 28, 2001
(Unaudited)
Six months ended
-----------------------
02/28/02 02/28/01
---------- ----------
Cash flows from operating activities:
Net income (loss) $ 228,436 $ (12,731)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization of furniture and equipment 28,940 30,972
Amortization of capitalized software development costs 69,704 230,835
(Increase) decrease in:
Accounts receivable (225,750) (144,696)
Inventory (32,052) (83,065)
Other assets (2,726) 12,873
Increase (decrease) in:
Accounts payable (70,043) 54,294
Accrued payroll and other expenses (183) (22,037)
Accrued payroll for officer-directors 39,833 23,500
Accrued warranty and service costs (1,630) 643
Deferred revenue (2,593) (34,840)
---------- ----------
Net cash provided by operating activities 31,936 55,748
---------- ----------
Cash flows from investing activities:
Purchase of furniture and equipment (9,570) 0
Capitalized computer software development cost (56,931) (66,448)
---------- ----------
Net cash used in investing activities (66,501) (66,448)
---------- ----------
Cash flows from financing activities:
Borrowed from line of credit, net 1,007 3
Payments on capitalized lease obligations (6,370) (8,751)
---------- ----------
Net cash used in financing activities (5,363) (8,748)
---------- ----------
Net decrease in cash (39,928) (19,448)
Cash and cash equivalents, beginning of period 166,652 37,535
---------- ----------
Cash and cash equivalents, end of period $ 126,724 $ 18,087
========== ==========
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. 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
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 $126,296 in
fiscal year 2001 when it was required to write off as an impairment loss related
to capitalized software costs for HelixGen, and included in cost of sales.
4
Note 4: FURNITURE AND EQUIPMENT
-------
Furniture and equipment as of February 28, 2002 consisted of the following:
Equipment $ 104,236
Computer equipment 308,370
Furniture and fixtures 45,036
Leasehold improvements 38,215
----------
495,857
Less accumulated depreciation (423,955)
----------
$ 71,902
==========
Note 5: STOCKHOLDERS' EQUITY
-------
STOCK OPTION PLAN
As of February 28, 2002, 1,193,899 shares have been issued to various employees
at an exercise price equal to the fair market value of the Company's stock price
at the date of grant with five-year vesting periods. Also, a total of 5,206
shares have been issued to the Board of Directors at exercise prices equal to
the fair market value of the Company's stock price at the date of grant ranging
from $1.50 to $5.25 with a three-year vesting period. As of today, 2,300 options
have been exercised.
Note 6: Income Taxes
-------
The Company uses 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."
5
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 development of simulation software involves (1) identifying and
understanding the underlying chemistry, physics, biology, and physiology of the
processes to be simulated, (2) breaking those processes down into the lowest
practical level of individual sub-processes at which the behaviors can be
well-represented mathematically, (3) developing appropriate mathematical
relationships/equations, and (4) converting them into computer subroutines. The
software subroutines representing these individual processes are then integrated
into an overall simulation program, with appropriate coordination between
modules and design of user-friendly interface for inputs and outputs. The
predictions of these programs are then compared to known results in order to
calibrate the simulations and to demonstrate the validity of the models as
useful tools for predicting new results.
6
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/metabolic
degradation and absorption of orally-dosed drug compounds in the
gastrointestinal tract of humans and several laboratory animal species, and with
additional inputs, it also simulates the blood plasma concentration-time history
of the drug after it reaches the central circulation. In 2001, the Company
completed the development of, and is now selling licenses for, an important new
extension module for GastroPlus called the Metabolism and Transporter Module.
This module extends the basic simulation to include enzyme-specific metabolism
in both the liver and in intestinal walls, as well as the effects of transporter
proteins that line the intestinal tract and serve to promote or inhibit drug
absorption.
The Company's QMPRPlus(TM) program estimates the values of several
important physicochemical characteristics of new drug-like molecules with only
the structures of the molecules as input. Recent additions to this program
include the prediction of permeability in a special line of cells called MDCK
cells. This predictive model was developed during the past fiscal year under a
funded collaboration with the Affymax Research Institute, at that time a
division of GlaxoSmithKline. Two new important predicted properties were also
added to QMPRPlus: plasma protein binding and volume of distribution.
GastroPlus and QMPRPlus are used by almost every major and a number of smaller
pharmaceutical companies in the U.S., Europe, and Japan.
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.), and allow students to design and conduct
their own experiments in a virtual laboratory environment. Although development
of FutureLab software was discontinued in 1998, low-level sales continue through
distributors in the U.S., U.K. Australia, and New Zealand.
PRODUCTS
--------
The Company's pharmaceutical software provides cost-effective solutions to a
number of critical problems in pharmaceutical research, and also serves in the
education of pharmacy and medical students. The Company's software products and
services to date are focused on the area of pharmaceutical research known as
ADMET (Absorption, Distribution, Metabolism, Elimination, and Toxicity). The
Company released its first pharmaceutical software product, GastroPlus, in
August 1998 and immediately received enthusiastic interest from researchers in
large pharmaceutical companies such as Astra, Glaxo Wellcome, Pfizer, Pharmacia,
The Roche Group, SmithKline Beecham and Zeneca. Since then, the majority of the
world's largest pharmaceutical companies and a number of smaller companies have
licensed the software. Some of these companies have merged to become single
companies (e.g., AstraZeneca and GlaxoSmithKline), which give the appearance of
fewer customers, but the Company's software is licensed on an annual basis by
geographic location, so no actual loss in sales has resulted from these mergers.
In fact, several of these mergers have resulted in increased licenses and new
geographic locations.
7
An Optimization Module for GastroPlus was released in November 1998. Two
additional modules, IVIV Correlation and PKPlus(TM) were released in November
2000. The Metabolism and Transporter Module was released in June 2001. The
majority of new sales now include these additional extra-cost modules,
contributing significantly to revenue growth. GastroPlus has now become the
"gold standard" for simulation of oral drug absorption and pharmacokinetics, and
is in use throughout the industry in the U.S., Japan, and Europe. Recent sales
have included a number of drug delivery companies (companies that design the
actual tablet or capsule for a drug compound that was developed by another
company). Although these companies are considerably smaller than the
pharmaceutical giants, they can realize significant savings in cost and time
through accurate simulation of their drug delivery technologies. The Company
believes this part of the industry, which includes hundreds of companies,
represents major growth potential for GastroPlus.
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 intestinal
permeability, octanol-water partition coefficient (logP), solubility,
diffusivity, blood-brain barrier penetration, plasma protein binding, and volume
of distribution. The ability to predict these properties prior to running wet
lab experiments allows screening of undesirable compounds much faster and at
much lower cost then using traditional experimental methods.
Most of the estimated parameters from QMPRPlus are 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 the
previous fiscal year, the Company completed the development of a new intestinal
permeability model for a special line of cell culture experiments using
Manin-Darby Canine Kidney (MDCK) cells under contract to the Affymax Research
Institute, at that time a division of GlaxoSmithKline. This unique model, based
on high quality data for over 350 compounds, was presented at the American
Chemical Society meeting in San Diego during the first week of April 2001. The
Company also completed the development of the blood-brain barrier permeation
model during the last fiscal year, as well as models for plasma protein binding
and volume of distribution, and it updated all earlier models with enhanced
artificial neural network predictions. 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 many 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.
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. As a part
of this License Agreement, the Company is also entitled to ongoing consulting
assistance in the development and further enhancement of the GastroPlus
absorption simulation model from TSRL staff, including Dr. Gordon Amidon and Dr.
John Crison. The Company believes that the strategic advantage of exclusive
8
access to TSRL's technology and expertise, combined with the Company's now
well-developed and continually growing expertise in absorption and
pharmacokinetics simulation, have resulted in GastroPlus becoming the standard
for oral drug absorption simulation and analysis within the pharmaceutical
industry. The Company is aware that other companies began to develop similar
software; however, management believes there is no significant direct
competition for GastroPlus at this time. The Company believes that the addition
of the Metabolism and Transporter Module and ongoing upgrades of the core
simulation, are major advances in the state-of-the-art of oral drug absorption
and pharmacokinetics analysis. The Company's recognized expertise in oral
absorption and pharmacokinetics is evidenced by the fact that Company staff
members have been invited speakers at over 20 prestigious scientific meetings
worldwide in the past year alone, and they continue to be invited to present at
a variety of meetings worldwide.
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 continues to perform 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. These studies are also beneficial to the
Company to validate and enhance its products by studying actual data in the
pharmaceutical industry. The company is currently completing two study
contracts to analyze drugs that are now in clinical trials.
PHARMACEUTICAL SIMULATIONS SOFTWARE PRODUCT DEVELOPMENT
-------------------------------------------------------
In the area of simulation software for pharmaceutical research, the Company is
pursuing the development of additional modules for GastroPlus and QMPRPlus.
Although all of our development work cannot be disclosed for competitive
reasons, some of our development efforts include:
(1) PDPlus(TM) Module
----------------------
The PDPlus Module for GastroPlus is nearly completed. Prior versions of
GastroPlus have dealt with absorption and pharmacokinetics (what happens to the
drug when it gets into the body). PDPlus calculates the pharmacodynamics for the
drug (what happens to the body when the drug gets into the body) - i.e., what
kind of therapeutic (or adverse) effect does it produce. This is an important
new capability because it opens up the market to researchers who deal in later
stage clinical trials, and who routinely perform PK/PD
(pharmacokinetic/pharmacodynamic) analyses. Until now, these analyses were
performed using models that treated absorption and its related processes with
simplified models - often so simplified that calculations were in error. With
PDPlus in GastroPlus, researchers will be able to perform highly sophisticated
simulations and analyses to determine the complex interactive effects of factors
that change the amount of drug that is absorbed and how fast it is metabolized
after it is absorbed. These can result in significant variations in
9
pharmacodynamic effect. Without the ability to predict these effects, clinical
trial costs can soar when trials must be repeated to determine proper dosing
levels. PDPlus will enable researchers to better understand the complex
interplay among absorption, pharmacokinetics, and pharmacodynamics, and to
better estimate the dosing levels to use in clinical trials prior to the start
of the trials. The Company expects to release this additional-cost module in the
first half of calendar 2002.
(2) Multiple Particle Size Dissolution Model
---------------------------------------------
The current dissolution model in GastroPlus uses a single "effective" particle
size. While this model has well represented most tablets, capsules, and
suspensions we have dealt with to date, formulation researchers know that real
dosage forms do not consist of particles that are all one size. Instead, there
is a distribution of particle sizes over some range from smaller than the
average size to larger than the average size. Smaller particles dissolve faster
than larger particles. For some drugs, this results in dissolution behavior that
is not well modeled with a single effective particle size. This new model will
allow formulation researchers to assess the effects of different particle size
distributions on dissolution and absorption.
(3) QMPRPlus(TM) upgrades
-------------------------
We continue to add new molecular descriptors and new predicted ADMET properties
to QMPRPlus(TM). We have just completed the development of a new,
additional-cost "4D Data Mining" module, which is in final testing and will be
released in April 2002. We are also developing the ability for researchers to
add their own data to refine the predictions for ADMET properties. And we are in
discussions with several companies to develop additional models based on their
experimental data. If contracted for, these models may be proprietary to each
company, or they may result in additional predictions that can be licensed to
other users, as we did with the MDCK model developed under contract to Affymax.
DISABILITY PRODUCT DEVELOPMENT
------------------------------
The Company's wholly owned subsidiary, Words+, Inc. has been an industry
technology leader for over 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 announced the release of its new version of
E Z Keys for the new Microsoft XP operating system at the "Technologies for
Persons with Disabilities Conference" in Los Angeles in late March 2002. 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.
10
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED FEBRUARY 28, 2002 AND FEBRUARY 28, 2001.
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
-----------------------------------------------
02/28/02 02/28/01
---------------------- ----------------------
Net sales $ 1,107 100.0% $ 1,062 100.0%
Cost of sales 333 30.1 428 40.3
---------------------- ----------------------
Gross profit 774 69.9 634 59.7
---------------------- ----------------------
Selling, general and administrative 469 42.4 532 50.1
Research and development 82 7.4 94 8.9
---------------------- ----------------------
Total operating expenses 551 49.8 626 58.9
---------------------- ----------------------
Income from operations 223 20.1 8 0.8
Interest expense (5) (0.5) (5) (0.5)
---------------------- ----------------------
Net income $ 218 19.7% $ 3 0.3%
====================== ======================
NET SALES
Consolidated net sales increased $45,000, or 4.2%, to $1,107,000 in the second
fiscal quarter of 2002 (FY02) from $1,062,000 in the second fiscal quarter of
2001 (FY01). Simulations Plus, Inc.'s sales, from pharmaceutical and educational
software and services, increased approximately $181,000, or 48.6%; however,
Words+, Inc.'s sales decreased approximately $136,000, or 19.9% for the quarter.
The increase in the Company's leading pharmaceutical software sales is
attributable to a combination of additional license sales to existing customers,
new customers, new modules, and four major upgrades to existing products.
Management attributes the decrease in Words+ sales primarily to personnel
changes in two key sales representatives, delays in assistive technology orders
by a number of school districts and state agencies nationwide, and overall
slowing in the economy during this time period.
COST OF SALES
Consolidated cost of sales decreased $95,000, or 22.2%, to $333,000 in the
second fiscal quarter of FY02 from $428,000 in the second fiscal quarter of
FY01. The percentage of cost of sales decreased by 10.2%. For Simulations Plus,
the cost of sales decreased $122,000, or 114.6%. A significant portion of the
cost of sales is the systematic amortization of capitalized software cost, which
resulted in an 82.5% decrease in amortization cost. This decrease is due to the
fact that the Company was required to expense $126,296 in the second fiscal
quarter of FY01 for the capitalized development cost of HelixGen because its
development had been postponed. Without this charge last year, cost of sales for
11
Simulations Plus would have increased by $4,000. For Words+, the cost of sales
increased $27,000, or 11.7%. Management attributes the percentage increase in
cost of sales for Words+ primarily to the fact that the percentage of sales
generated by product items with lower profit margins was greater than the items
with higher profit margins. In addition, there was a temporary reduction in the
cost of a significant component of the Freedom2000 during the second fiscal
quarter of 2001, resulting in temporary higher gross margin during that quarter
as compared with this year's second quarter.
GROSS PROFIT
The consolidated gross profit increased $140,000, or 22.1%, to $774,000 in the
second quarter of FY02 from $634,000 in the second quarter of FY01. Management
attributes this increase to a significant increase in pharmaceutical software
sales, while there is a decrease in cost of sales because of the HelixGen write
off last year, resulting in significant increase in gross profit for these
sales. This increase outweighed the decrease in gross profit generated from
Words+ products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Consolidated selling, general and administrative expenses decreased $63,000, or
11.8%, to $469,000 in the second quarter of FY02 from $532,000 in the second
quarter of FY01. For Simulations Plus, selling, general and administrative
expenses decreased $39,000, or 20.4% primarily due to decreases in legal fees,
public relations, and administrative personnel wages by consolidating some
tasks. Although there are increases in insurance expense and overseas taxes
associated with sales, overall reductions in expenses outweighed increases. For
Words+, expenses decreased $24,000, or 7.0%, due to a decrease in travel,
telephone, repairs, and wages. These decreases outweighed increases in other
expenses such as catalogs, commissions and depreciation expenses, resulting in
an overall lower selling, general and administrative expense than last year.
RESEARCH AND DEVELOPMENT
The Company incurred approximately $116,000 of research and development costs
for both companies during the second quarter of FY02. Of this amount, $35,000
was capitalized and $81,000 was expensed in this period. In the second quarter
of FY01, the Company incurred $128,000 of research and development costs, of
which $34,000 was capitalized and $94,000 was expensed. The decrease of $12,000,
or 9.0%, in research and development expenditure from the second quarter of FY01
to the second quarter of FY02 was due to one research and development staff
member who left the company and was not replaced, thus decreasing wages and
associated payroll expenses.
12
INTEREST EXPENSE
Interest expense for the second quarter of FY02 and FY01 are the same. The
interest expense was related to the Company's revolving line of credit with its
bank.
NET INCOME
The consolidated net income for the three months ended February 28, 2002
increased by $215,000, or 7,166.7%, to $218,000 in the second quarter of FY02
compared to $3,000 in the second quarter of FY01. Management attributes this
increase primarily to the significant increase in pharmaceutical software sales
while lowering all expenses.
COMPARISON OF SIX MONTHS ENDED FEBRUARY 28, 2002 AND FEBRUARY 28, 2001.
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
-----------------------------------------------
02/28/02 02/28/01
---------------------- ----------------------
Net sales $ 2,114 100.0% $ 2,121 100.0%
Cost of sales 706 33.4 906 42.7
---------------------- ----------------------
Gross profit 1,408 66.6 1,215 57.3
---------------------- ----------------------
Selling, general and administrative 994 47.0 1,033 48.7
Research and development 176 8.3 183 8.6
---------------------- ----------------------
Total operating expenses 1,170 55.3 1,216 57.3
---------------------- ----------------------
Income (loss) from operations 238 11.3 (1) 0.0
Interest expense (10) (0.5) (12) (0.1)
---------------------- ----------------------
Net income (loss) $ 228 10.8% $ (13) (0.1)%
====================== ======================
NET SALES
Consolidated net sales decreased $7,000, or 0.3%, to $2,114,000 for the six
months ended February 28, 2002 compared to $2,121,000 for the six months ended
February 28, 2001. Simulations Plus, Inc.'s sales from pharmaceutical software
and services and educational software increased approximately $350,000, or
58.9%, however, Words+, Inc.'s sales decreased approximately $357,000, or 23.4%
for the six months ended February 28, 2002. Management attributes the increase
in pharmaceutical software sales to a combination of new customers, new modules,
and license renewals because of major upgrades to existing products, and fees
received for product training. Management attributes the decrease in Words+
sales primarily to the tragic incidents on September 11, personnel changes in
two key sales representatives, delays in assistive technology orders from
numerous school districts and state agencies, and overall slowing in the economy
during this time period.
13
COST OF SALES
Consolidated cost of sales decreased $200,000, or 22.1%, to $706,000 for the six
months ended February 28, 2002 from $906,000 for the six months ended February
28, 2001. The percentage of cost of sales decreased by 9.3%. For Simulations
Plus, the cost of sales decreased $135,000, or 49.0%. A significant portion of
the cost of sales is the systematic amortization of capitalized software cost,
which resulted in a 72.9% decrease in amortization cost. This decrease is
primarily due to the fact that the Company was required to expense $126,296 in
the second fiscal quarter of last year for the capitalized development cost of
HelixGen because its development was postponed. For Words+, the cost of sales
decreased $65,000, or 10.4%. Expressed as a percentage, the change in cost of
sales for Words+ between the six months operations ended February 28, 2002 and
February 28, 2001 is an increase of 7.0%. Management attributes this percentage
increase primarily to increased sales of lower margin items during the first six
months compared to the same period of the previous fiscal year. There was a
temporary reduction in the cost of a significant component of the Freedom2000
during the second fiscal quarter of 2001, resulting in a temporary higher gross
margin.
GROSS PROFIT
The consolidated gross profit increased $193,000, or 15.9%, to $1,408,000 for
the six months ended February 28, 2002 from $1,215,000 for the six months ended
February 28, 2001. Management attributes this increase to a significant increase
in pharmaceutical software and services sales, while there is a decrease in its
cost of sales largely caused by last year's HelixGen write-off, resulting in
significantly increased gross profit for these sales. This increase outweighed
the decrease in gross profit generated by Words+ products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Consolidated selling, general and administrative expenses decreased $39,000, or
3.8%, to $994,000 for the six months ended February 28, 2002 from $1,033,000 for
the six months ended February 28, 2001. For Simulations Plus, selling, general
and administrative expenses decreased $52,000, or 13.7% primarily due to
decreases in depreciation, legal fees and public relations. Although there are
increases in overseas taxes associated with sales, consultant fees, and travel
expense, overall reductions in expenses outweighed increases. For Words+,
expenses increased $13,000, or 2.1%, primarily due to increases in catalog
printing, trade shows, contract labor, insurance, and commissions outweighing
reduction in other expenses such as travel expenses, salaries/wages and related
payroll tax, postages, and telephone expense.
14
RESEARCH AND DEVELOPMENT
The Company incurred approximately $226,000 of research and development costs
for both companies for the six months ended February 28, 2002. Of this amount,
$50,000 was capitalized and $176,000 was expensed in this period. In the same
period of 2001, the Company incurred $249,000 of research and development costs,
of which $66,000 was capitalized and $183,000 was expensed. The decrease of
$23,000, or 9.2% in research and development expenditure from the six months
operations in the fiscal year 2001 to 2002 was due to one research and
development staff member who left the company has not yet been replaced, thus
decreasing wages and payroll related expenses.
INTEREST EXPENSE
Interest expense for the six months ended February 28, 2002 decreased by $2,000,
or 16.7%, to $10,000 from $12,000 for the six months ended February 28, 2001.
This decrease is attributable primarily to a decrease in interest rate on the
Company's revolving line of credit.
NET INCOME
Consolidated net profit for the six months ended February 28, 2002 increased by
$241,000, to a net profit of $228,000 for the six months ended February 28, 2002
compared to the net loss of $13,000 for the six months ended February 28, 2001.
Management attributes this increase primarily to the significant increase in
pharmaceutical software and services sales while lowering all expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of capital have been cash flows from its
operations, a bank line of credit, and accruing and not paying portions of
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%. At
February 28, 2002, the outstanding balance under the revolving line of credit
was approximately $100,000, and it was $99,000 at February 28, 2001. This amount
was completely paid off in March 2002, eliminating the Company's largest
external debt. 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 were 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. The amount of such accrued and unpaid salaries due to the
Company's executive officers and one manager was $393,000. Effective as of March
1, 2002, all employees and officers salaries have been restored to their full
levels. Accrued amounts will be paid as described above.
15
The Company believes that existing capital and anticipated funds from operations
will be sufficient to meet its anticipated cash needs for working capital and
capital expenditures for the foreseeable future. If cash generated from
operations becomes 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 became insufficient to continue
operations at the current level, and if no additional financing was obtained,
then management would restructure the Company in a way to preserve its
pharmaceutical and disability businesses while maintaining expenses within
operating cash flows.
Since July 2, 1999, trading in the shares of the Company's Common Stock has been
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 media's coverage
of the Company, and lower prices for the Company's securities than otherwise may
be attained.
Because the company's securities are listed on the bulletin board, they 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 worth in
excess of $1,000,000 or annual incomes exceeding $200,000, or $300,000 together
with their spouses). For transactions covered by this rule, a broker-dealer must
make a special suitability determination for the purchaser and have received the
purchaser's written consent to the transaction prior to the sale. Consequently,
the rule may adversely affect the ability of broker-dealers to sell the
Company's securities acquired hereby in the secondary market.
Securities and Exchange Commission ("Commission") regulations define a "penny
stock" to be any non-Nasdaq equity security that has a market price (as therein
defined) of less than $5.00 per share or with an exercise price of less than
$5.00 per share, subject to certain exceptions. For any transaction involving a
penny stock, unless exempt, the rules require delivery, prior to any transaction
in a penny stock, of a disclosure schedule prepared by the Commission relating
to the penny stock market. Disclosure is also required to be made about
commissions payable to both the broker-dealer and the registered representative
and current quotations for the securities. Finally, monthly statements are
required to be sent disclosing recent price information for the penny stock held
in the account and information on the limited market in penny stocks.
16
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.
17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
In the normal course of business, the Company may be subject to various
lawsuits and claims. The Company believes that the final outcomes of
these matters, either individually or in the aggregate, will not have a
material effect on the financial statements. The Company is not
involved in any such litigation at this time.
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 21, 2002, 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 S. Woltosz
Virginia E. Woltosz
Dr. David Z. D'Argenio
Dr. Richard Weiss
(2) Ratification of the appointment of Singer, Lewak, Greenbaum &
Goldstein, LLP as Independent public accountants.
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) 3,132,380 - 30,900 66,430 3,229,710
---------- ------------ ---------- ------------ ----------------- -------------
(2) 3,151,050 11,600 630 66,430 3,229,710
---------- ------------ ---------- ------------ ----------------- -------------
Item 5. Other Information
-----------------
None.
Item 6. Exhibits and Reports on form 8-K
--------------------------------
None.
18
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 9, 2002 By: /s/ MOMOKO BERAN
----------------------------
Momoko Beran
Chief Financial Officer