SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 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
(Address of principal executive offices including zip code)
(661) 723-7723
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes x No
-------------- --------------
The number of shares outstanding of the Issuer's common stock, par value $0.001
per share, as of July 03, 2001, was 3,408,331.
SIMULATIONS PLUS, INC.
FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED MAY 31, 2001
Table of Contents
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet at May 31, 2001 (unaudited) 1
Consolidated Statements of Operations for the three and nine months
ended May 31, 2001 and 2000 (unaudited) 2
Consolidated Statements of Cash Flows for the nine months
ended May 31, 2001 and 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 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signature 20
Item 1. Financial Statements
----------------------------
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
May 31, 2001
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents (note 2) $ 63,873
Accounts receivable, net of allowance for
doubtful accounts of $13,337 587,089
Prepaid expenses 28,622
Inventory 223,888
--------------
Total current assets 903,472
--------------
Capitalized computer software development costs,
net of accumulated amortization (note 3) 371,664
Furniture and equipment, net (note 4) 79,596
Other assets 13,257
--------------
Total assets $ 1,367,989
==============
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Advance line of credit $ 99,016
Accounts payable 232,945
Accrued payroll and other expenses 514,813
Accrued warranty and service costs 44,169
Deferred revenue 11,662
Current portion of capitalized lease obligations 12,749
--------------
Total current liabilities 915,354
--------------
Capitalized lease obligations, net of current portion 24,684
--------------
Total liabilities 940,038
--------------
Shareholders' equity
Preferred stock: $.001 par value, authorized
10,000,000 shares, none issued and outstanding 0
Common stock: $.001 par value, authorized
20,000,000 shares, issued and outstanding 3,408,331 (note 5) 3,408
Additional paid-in capital 4,654,759
Accumulated deficit (4,230,216)
--------------
Total shareholders' equity 427,951
--------------
Total liabilities and shareholders' equity $ 1,367,989
==============
The accompanying footnotes are an integral part of these statements.
1
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and nine months ended May 31, 2001 and 2000
(Unaudited)
Three months ended Nine months ended
--------------------------------------------------------------
05/31/01 05/31/00 05/31/01 05/31/00
-------------- ------------- --------------- --------------
Net sales $ 974,166 $ 742,520 $ 3,094,915 $ 2,648,385
Cost of sales 399,817 370,722 1,306,149 1,014,774
-------------- ------------- --------------- --------------
Gross profit 574,349 371,798 1,788,766 1,633,611
-------------- ------------- --------------- --------------
Operating expenses:
Selling, general & administration 549,606 469,313 1,582,470 1,552,912
Research and development 87,161 69,706 269,762 234,204
-------------- ------------- --------------- --------------
Total operating expenses 636,767 539,019 1,852,232 1,787,116
-------------- ------------- --------------- --------------
Loss from operations (62,418) (167,221) (63,466) (153,505)
Other income (expenses):
Interest revenue 24 57 75 371
Interest expense (5,496) (4,009) (17,230) (12,772)
Gain on disposal of assets 0 2,436 0 1,831
-------------- ------------- --------------- --------------
Loss before provision for income taxes (67,890) (168,737) (80,621) (164,075)
Provision (benefit) for income taxes 0 0 0 0
-------------- ------------- --------------- --------------
Net loss $ (67,890) $ (168,737) $ (80,621) $ (164,075)
============== ============= =============== ==============
Basic net loss per common share $ (0.02) $ (0.05) $ (0.02) $ (0.05)
============== ============= =============== ==============
Diluted net loss per common share $ (0.02) $ (0.05) $ (0.02) $ (0.05)
============== ============= =============== ==============
Weighted average # of common shares
outstanding 3,392,434 3,385,629 3,388,056 3,380,609
============== ============= =============== ==============
The accompanying footnotes are an integral part of these statements.
2
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended May 31, 2001 and 2000
(Unaudited)
Nine months ended
--------------------------
Cash flows from operating activities: 05/31/01 05/31/00
---------- ----------
Net loss $ (80,621) $(164,075)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization of furniture and equipment 46,274 50,171
Amortization of capitalized software development costs 283,109 133,783
Gain on disposals of furniture & equipment 0 1,059
(Increase) decrease in:
Accounts receivable (43,272) 127,583
Inventory (65,570) 32,677
Other assets 9,899 1,990
Increase (decrease) in:
Accounts payable (6,113) 11,334
Deferred revenue (27,206) 0
Accrued payroll and other expenses 4,511 7,216
Accrued warranty and service costs 149 (22,684)
---------- ----------
Net cash provided by operating activities 121,160 179,054
---------- ----------
Cash flows from investing activities:
Purchase of furniture and equipment 0 (2,490)
Capitalized computer software development cost (104,994) (93,986)
---------- ----------
Net cash used in investing activities (104,994) (96,476)
---------- ----------
Cash flows from financing activities:
Borrowed from line of credit, net 0 141
Payments on line of credit, net (62) 0
Payments on capitalized lease obligations (12,266) (24,595)
Proceeds from exercise of stock options 22,500 3,015
---------- ----------
Net cash provided by (used in) financing activities 10,172 (21,439)
---------- ----------
Net increase in cash 26,338 61,139
Cash and cash equivalents, beginning of period 37,535 52,323
---------- ----------
Cash and cash equivalents, end of period $ 63,873 $ 113,462
========== ==========
Supplemental Information for the period ended 05/31/2000
Equipment purchases by lease $ 0 $ 16,086
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 May 31, 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
judgment 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 a 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 the fiscal quarter ended February 28,
2001, to write off the capitalized portion of software development cost on one
pharmaceutical software product called HelixGen(TM). HelixGen remains on the
product development schedule; however, at this time, the company has decided to
postpone its development in order to focus on its other core products.
Note 4: FURNITURE AND EQUIPMENT
-------
Furniture and equipment as of May 31, 2001 consisted of the following:
Equipment $104,236
Computer equipment 268,100
Furniture and fixtures 45,036
Leasehold improvements 38,214
---------
455,586
Less accumulated depreciation 375,990
---------
$ 79,596
=========
Note 5: STOCKHOLDERS' EQUITY
-------
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 was reserved for issuance. In March 1999, the
shareholders approved an increase in the number of shares that could 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.
As of May 31, 2001, a total of 1,234,794 shares have been issued to various
employees at an exercise price of the fair market value or higher at the date of
grant with five-year vesting periods. Also, a total of 4,206 shares have been
issued to outside members of the Board of Directors at exercise prices ranging
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. The agreement was terminated mutually as
of March 31, 2001, and 22,500 stock options were exercised on May 4, 2001. The
remainder of 7,500 stock options was forfeited.
5
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 date of
grant. To date, these warrants have not 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 May 31, 1998, the Company adopted SFAS No. 128 "Earnings Per Share."
All prior periods presented have been restated to conform to 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 May 31, 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
differences include, but are not limited to, those discussed in the section
entitled "Management's Discussion and Analysis or Plan of Operations." Readers
are cautioned not to place undue reliance on these forward-looking statements,
which reflect management's analysis only as of the date hereof. Simulations
Plus, Inc. undertakes no obligation to publicly revise these forward-looking
statements, or to reflect events or circumstances that arise after the date
hereof. Readers should carefully review the risk factors described in other
documents that the Company has filed and will continue to file from time to time
with the Securities and Exchange Commission.
GENERAL
BUSINESS
--------
Simulations Plus, Inc. (the "Company" or "Simulations Plus") and its wholly
owned subsidiary, Words+, Inc. ("Words+") produce two types of products: (1)
Simulations Plus, incorporated in 1996, develops and produces simulation and
mathematical modeling 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/metabolic
degradation and absorption of orally-dosed drug compounds in the human
gastrointestinal tract of humans and several laboratory animal species, and with
additional inputs, the blood plasma concentration-time history of the drug after
it reaches the central circulation. The Company is now completing the
development of an important new extension module for GastroPlus, called the
Metabolism and Transporter Module. This module will extend the basic simulation
to include enzyme-specific metabolism in both the liver and the gastrointestinal
tract, as well as to include 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 value of several important physicochemical
7
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.), and allow students to design
and conduct their own experiments in a virtual laboratory environment.
The development of simulation software involves identifying and understanding
the underlying chemistry, physics, biology, and physiology 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 these programs are then
compared to known results in order to determine the validity of the models and
to calibrate the simulations to produce useful tools 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 focused on the area of pharmaceutical research known as ADMET
(Absorption, Distribution, Metabolism, Excretion, and Toxicity). The Company
released its first pharmaceutical software product, GastroPlus, 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 Metabolism and Transporter Module is expected to be released early in
the 4th quarter of this fiscal year. The majority of new sales now include
additional modules, generating additional revenue. GastroPlus has 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 that was usually developed by another
company). Although these companies are smaller than the pharmaceutical giants,
they can realize significant cost and timesaving through accurate simulation of
their drug delivery technologies, and the Company believes this part of the
industry 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 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. The Company recently completed the development of a new
8
permeability model for a special line of cell culture experiments using
Manin-Darby Canine Kidney (MDCK) cells under contract to the Affymax Research
Institute, a division of GlaxoSmithKline. This unique model, based on high
quality data for over 300 compounds from Affymax's 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 predictions, further enhancing the value of QMPRPlus 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.
As of May 31, 2001, the Company had a total of more than 70 individual software
licenses at 25 pharmaceutical companies in 9 countries on 3 continents (several
mergers have affected the number of companies over the years without reducing
the number of licenses). 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. The combination of the annual license business model, the steady
development of new additional cost modules for both core products, and new sales
all serve to compound the Company's growth.
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 receiving consulting assistance
in the development and further enhancement 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 continually
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. The Company
believes that the addition of the Metabolism and Transporter Module and the
accompanying upgrade of the core simulation in Version 3.0, to be released early
in the 4th quarter, are a major advance 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 are now invited speakers at numerous scientific meetings worldwide.
9
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, and currently has outstanding quotations for
additional studies at the request of several customers. 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 known as
G-protein coupled receptors (GPCR's). These development efforts include:
(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 transporter proteins in
intestinal cells that either return a drug molecule back to the intestinal
contents ("efflux"), or serve to move the drug molecule rapidly into intestinal
cells ("influx"). Metabolism refers to the actions of certain enzymes, present
primarily within intestinal cells, blood, and liver, that changes 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 as a drug, 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
that 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 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 early in the fourth quarter of fiscal year 2001 (release was
announced on June 27, 2001).
(2) HelixGen(TM)
----------------
HelixGen is a program that is designed to predict the 3-dimensional geometry
(i.e., the position of each atom) of a special class of transmembrane proteins
known as G-protein coupled receptors (GPCR's). 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,
10
and in so doing may relieve pain, reduce tremors, improve memory, or affect
other such nerve-related functions. The ability to predict the geometry of these
proteins in the computer will enable researchers to identify likely new drug
molecules that could bind to these sites prior to actually synthesizing
molecules for experimental testing. Development of HelixGen was 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 the 2nd 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
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.
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 has begun developing versions of its software
products for the new Microsoft XP operating system, which is expected to be
released later this year. 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 initiated coverage of
augmentative and alternative communication (AAC) devices. In addition, effective
July 1, 2001, the agency is eliminating the 24-month waiting period previously
required for amyotrophic lateral sclerosis (ALS - or "Lou Gehrig's disease")
patients to receive Medicare benefits. These important developments are expected
to result in a significant increase in the overall AAC market in the U.S., as
potentially tens of thousands of patients will be eligible to receive funding
for communication devices. Words+ has developed a unique version of its Freedom
2000 communication system, called the Freedom 2001E, to meet the requirements of
the Medicare policy for dedicated communication systems.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED MAY 31, 2001 AND 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.)
11
Three Months Ended
---------------------------------------------------------------
05/31/01 05/31/00
---------------------------------------------------------------
Net sales $974 100.0% $742 100.0%
Cost of sales 400 41.1 370 49.9
---------------------------------------------------------------
Gross profit 574 58.9 372 50.1
---------------------------------------------------------------
Selling, general and administrative 550 56.5 469 63.2
Research and development 87 8.9 70 9.4
---------------------------------------------------------------
Total operating expenses 637 65.4 539 72.6
---------------------------------------------------------------
Loss from operations (63) (6.5) (167) (22.5)
Interest expense (5) (0.5) (4) (0.5)
Gain on disposal of assets 0 0 2 0.3
---------------------------------------------------------------
Net loss $(68) (7.0)% $(169) (22.8)%
===============================================================
NET SALES
Consolidated net sales increased $232,000, or 31.3%, to $974,000 in the third
fiscal quarter of 2001 from $742,000 in the third fiscal quarter of 2000.
Simulations Plus, Inc.'s sales from pharmaceutical and educational software
increased approximately $162,000, or 113.2%, and Words+, Inc.'s sales increased
approximately $70,000, or 11.7% for the quarter. Management attributes the
increase in consolidated net sales to strong and continuous growth in
Pharmaceutical software sales and Words+, Inc.'s revenue generated from its
"TuffTalker" product, which replaced its predecessor, PegasusLITE(TM) in July
2000.
COST OF SALES
The Company reclassified freight-out expenses as a part of cost of sales
starting with this fiscal year. Accordingly, last year's cost of sales was
restated reflecting this change in order to provide a fair comparison between
the third quarters of 2001 and 2000.
The consolidated cost of sales increased $30,000, or 8.1%, to $400,000 in the
third fiscal quarter of 2001 from $370,000 in the third fiscal quarter of 2000,
however the percentage of cost of sales decreased by 8.8%. For Simulations Plus,
the cost of sales increased $9,000, or 10.5%, associated with higher sales
volume. The percentage of cost of sales decreased by 28.9% due primarily to the
12
decrease in the systematic amortization of capitalized software cost. For
Words+, the cost of sales increased $21,000 or 7.0%, however the percentage of
cost of sales decreased by 2.0%. Increases in labor cost and warranty expense
were offset by decreases in freight-out expense, resulting in a fairly constant
percentage of cost of sales between the third fiscal quarters of 2001 and 2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Consolidated selling, general and administrative expenses increased $81,000, or
17.3%, to $550,000 in the third fiscal quarter of 2001 from $469,000 in the
third fiscal quarter of 2000. For Simulations Plus, selling, general and
administrative expenses increased $45,000, or 28.9% primarily due to increases
in payroll expense and payroll-related expenses, such as 401k, payroll tax and
insurances, and legal and accounting expense. For Words+, expenses increased
$36,000, or 11.2%, due to increases in selling expenses, such as commissions and
travel expenses, and increase in wages and payroll-related expenses.
RESEARCH AND DEVELOPMENT
The Company incurred approximately $126,000 of research and development costs
for the both companies during the third quarter of 2001. Of this amount, $39,000
was capitalized and $87,000 was expensed in this period. In the third quarter of
2000, the Company incurred $108,000 of research and development costs, of which
$38,000 was capitalized and $70,000 was expensed. The increase of $18,000, or
16.7% in research and development expenditure from the third quarter of 2000 to
the third quarter of 2001 was due to expanded staff in research and development,
thus increasing wages and associated payroll expenses.
LOSS FROM OPERATIONS
During the third fiscal quarter of 2001, the Company incurred a loss of
approximately $63,000, as compared to a loss of $167,000 for the same period in
the fiscal year 2000. Management attributes the decrease in net loss from
operations to increased sales which outweighed increased cost of sales, selling,
general and administrative expenses and research and development expenses
INTEREST EXPENSE
Interest expense for the third fiscal quarter of 2001 increased by $1,000, to
$5,000 from $4,000 in the third fiscal quarter of 2000. This increase is
attributable primarily to financial charges on credit card purchases.
GAIN ON DISPOSAL OF ASSETS
During the third fiscal quarter of 2000, the Company recorded a net gain of
$2,000 when an insurance claim was settled for stolen equipment. The gain was
calculated as net proceeds minus book value. There was no such gain in the
fiscal 2001.
13
NET LOSS
The consolidated net loss for the three months ended May 31, 2001 decreased by
$101,000, to a loss of $68,000 in the third fiscal quarter of 2001 compared to a
loss of $169,000 in the third fiscal quarter of 2000. Management attributes this
decrease primarily to increased sales which outweighed increases in cost of
sales, selling, general and administrative expenses, research and development
expenses and interest expense.
COMPARISON OF NINE MONTHS ENDED MAY 31, 2001 AND 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.)
Nine Months Ended
------------------------------------------------------------
05/31/01 05/31/00
------------------------------------------------------------
Net sales $3,095 100.0% $2,648 100.0%
Cost of sales 1,306 42.2 1,015 38.3
------------------------------------------------------------
Gross profit 1,789 57.8 1,633 61.7
------------------------------------------------------------
Selling, general and administrative 1,582 51.1 1,553 58.6
Research and development 270 8.7 234 8.8
------------------------------------------------------------
Total operating expenses 1,852 59.8 1,787 67.5
------------------------------------------------------------
Loss from operations (63) (2.0) (154) (5.8)
Interest expense (17) (0.5) (13) (0.5)
Gain on disposal of assets 0 0 2 0.1
------------------------------------------------------------
Net loss $(80) (2.6)% $(164) (6.2)%
============================================================
NET SALES
Consolidated net sales increased $447,000 or 16.9%, to $3,095,000 for the nine
months ended May 31, 2001 compared to $2,648,000 for the nine months ended May
31, 2000. Simulations Plus, Inc.'s sales increased approximately $138,000, or
18.1%, and Words+, Inc.'s sales increased approximately $309,000, or 16.4% for
the nine months ended May 31, 2001. Management attributes the increase in
consolidated net sales to the continuous strong sales growth in pharmaceutical
software and Words+, Inc.'s revenue generated from its "TuffTalker" product,
which replaced its predecessor, PegasusLITE(TM) in July 2000.
COST OF SALES
The Company reclassified freight-out expenses as a part of cost of sales
starting with this fiscal year. Accordingly, last year's cost of sales was
restated reflecting this change in order to provide a fair comparison between
the third quarters of 2001 and 2000.
14
Consolidated cost of sales increased $291,000, or 28.7%, to $1,306,000 in the
third fiscal quarter of 2001 from $1,015,000 in the third fiscal quarter of
2000. The percentage of cost of sales increased by 3.9%. For Simulations Plus,
the cost of sales increased $140,000, or 61.2%. Part of the increase in
amortization was due to the fact that the Company was required to expense
$126,296 in the second fiscal quarter for the capitalized development cost of
HelixGen because its development was postponed. For Words+, the cost of sales
increased $151,000, or 19.2% due to sales increase. The change in percentage of
cost of sales between the nine months operations ended May 31, 2001 and 2000 is
an increase of 1.0% indicating that a relatively constant margin has been
maintained.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Consolidated selling, general and administrative expenses increased $29,000, or
1.9%, to $1,582,000 for the nine months ended May 31, 2001 from $1,553,000 for
the nine months ended May 31, 2000. For Simulations Plus, selling, general and
administrative expenses increased $19,000, or 3.3% primarily due to increases in
printing, advertising, legal and accounting fees, overseas taxes associated with
sales, and salaries and payroll-related expenses such as 401k, insurance and
payroll tax expenses. These increases outweighed decreased travel expenses which
were realized in part by obtaining free airfares using mileage points, and
reduction in public relations fees. For Words+, expenses increased $10,000, or
1.1%, due to increases in salaries and wages and payroll-related expenses. These
increases were offset by reducing telephone expense significantly by changing
long distance carriers, resulting in relatively constant overall expenses.
RESEARCH AND DEVELOPMENT
The Company incurred approximately $375,000 of research and development costs
for both companies for the nine months ended May 31, 2001. Of this amount,
$105,000 was capitalized and $270,000 was expensed in this period. In the same
period of 2000, the Company incurred $329,000 of research and development costs,
of which $95,000 was capitalized and $234,000 was expensed. The increase of
$46,000, or 14.0% in research and development expenditures for the nine months
ended May 31, 2001 compared to the same period of 2000 was due to expanded
research and development staff, thus increasing wages and associated payroll
expenses.
LOSS FROM OPERATIONS
The Company incurred a net loss from operations of approximately $63,000, as
compared to a loss of $154,000 for the same period in the fiscal year 2000.
Management attributes the decrease in net loss from operations to increased
sales which outweighed increased cost of sales and selling, general and
administrative expenses, and research and development expense.
15
INTEREST EXPENSE
Interest expense for the nine months ended May 31, 2001 increased by $4,000, or
30.8%, to $17,000 from $13,000 for the nine months ended May 31, 2000. This
increase is attributable primarily to financial charges on credit card
purchases.
GAIN ON DISPOSAL OF ASSET
During the second and third fiscal quarters of 2000, the Company recorded a net
gain of $2,000 when insurance claims were settled for stolen equipment. The gain
was calculated as net proceeds minus book value. There was no such gain in
fiscal 2001.
NET LOSS
Net loss for the nine months ended May 31, 2001 decreased by $84,000, or 51.2%,
to a loss of $80,000 for the nine months ended May 31, 2001 compared to a loss
of $164,000 for the nine months ended May 31, 2000. Management attributes this
decrease primarily to increased sales which outweighed increases in cost of
sales, selling, general and administrative expenses, research and development
expense, and interest expense.
16
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 May 31, 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 May 31,
2001, the amount of accrued and unpaid salaries due to the Company's executive
officers and managers was $352,000.
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.
17
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 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.
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
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In the normal course of business, the Company is subject to
various lawsuits and claims. The Company believes that the
final outcomes of these matters, either individually or in the
aggregate, will not have a material effect on the financial
statements. 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
------- ---------------------------------------------------
None.
Item 5. Other Information
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None.
Item 6. Exhibits and Reports on form 8-K
------- --------------------------------
(a) Exhibits
None
(b) Reports on Form 8-K
None.
19
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: July 03, 2001 Simulations Plus, Inc.
By: /s/ Momoko Beran
-----------------------
Momoko Beran
Chief Financial Officer
20