SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended August 31, 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
(State or other jurisdiction of Incorporation or Organization)
95-4595609
(I.R.S. Employer identification No.)
1220 W. AVENUE J
LANCASTER, CA 93534
(Address of principal executive offices including zip code)
(661) 723-7723
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE.
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $0.001 PER SHARE
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes x No
------------- ---------------
Check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
The issuer's revenues for the fiscal year ended August 31, 2001 were
approximately $3,915,000.
As of November 19, 2001, the aggregate market value of the voting stock
held by non-affiliates of the issuer was approximately $1,268,000 based upon the
average closing bid and asked price of such stock on such date.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement relating to the
2002 Annual Meeting of shareholders are incorporated herein by reference into
Part III.
SIMULATIONS PLUS, INC.
FORM 10-KSB
FOR THE FISCAL YEAR ENDED AUGUST 31, 2001
Table of Contents
Page
----
PART I.
Item 1. Description of Business 1
Item 2. Description of Property 14
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
PART II.
Item 5. Market for Common Stock and Related Stockholder Matters 15
Item 6. Management's Discussion and Analysis or Plan of Operation 16
Item 7. Financial Statements 22
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 22
PART III.
Item 9. Directors, Executive Officers, Promoters and Control Persons:
Compliance with Section 16(a) of the Exchange Act 23
Item 10. Executive Compensation 23
Item 11. Security Ownership of Certain Beneficial Owners and Management 23
Item 12. Certain Relationships and Related Transactions 23
Item 13. Exhibits and Reports on Form 8-K 23
Signatures 26
Financial Statements F-1
FORWARD-LOOKING STATEMENTS
--------------------------
The following discussion should be read in conjunction with the financial
statements and the notes thereto appearing elsewhere in this Annual Report
("Annual Report") on Form 10-KSB for the year ended August 31, 2001 (the "Form
10-KSB"). In addition to historical information, this Annual Report contains
forward-looking statements. The forward-looking statements contained herein are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those reflected in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in the section entitled "Management's Discussion and Analysis or
Plan of Operation." Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as of the
date hereof. Simulations Plus, Inc. undertakes no obligation to publicly revise
these forward-looking statements, or to reflect events or circumstances that
arise after the date hereof. Readers should carefully review the risk factors
described in other documents the Company has filed and will continue to file
from time to time with the Securities and Exchange Commission.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
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Simulations Plus, Inc. (the "Company" or "Simulations Plus") and its
wholly owned subsidiary, Words+, Inc. ("Words+") produce two classes 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
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. The Company recently
completed the development of, and has now begun to sell 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.
Two new important predicted properties were also added to QMPRPlus: plasma
protein binding and volume of distribution. 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.
1
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 assembled
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.
PHARMACEUTICAL SIMULATION SOFTWARE
--------------------------------------------------------------------------------
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, 19 of the world's 20
largest pharmaceutical companies and a number of smaller companies have licensed
the Company's 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 by geographic location,
so there was no actual financial loss. 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 that
was usually developed by another company). Although these companies are smaller
than the pharmaceutical giants, they can realize significant savings in cost and
time through accurate simulation of their drug delivery technologies, and 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 effective
permeability, octanol-water partition coefficient (logP), solubility,
diffusivity, blood-brain barrier penetration, plasma protein binding, and volume
of distribution. Most of these 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. The Company recently completed the
development of a new 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 the time 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 first week of April 2001. The Company also completed the
development of the blood-brain barrier permeation model during this fiscal year,
as well as the plasma protein binding and volume of distribution model, 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.
2
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 GastroPlus
absorption 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
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 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, which was released in June 2001,
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 have
been invited speakers at over 20 prestigious scientific meetings worldwide in
the past year alone.
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. Management also found that these studies are
very beneficial to the Company to validate and enhance its products by studying
actual data in the pharmaceutical industry and comparing with IN-SILICO results.
The company is currently negotiating two new study contracts to analyze drugs
that are now in clinical trials.
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). Although some 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 has already been implemented in a
simplified form to use in demonstrations and presentations. The prior versions
of GastroPlus dealt with absorption and pharmacokinetics (what happens to the
drug when it gets into the body). PDPlus calculates the pharmacodynamics (what
happens to the body when the drug gets into the body) for the drug - what kind
of therapeutic effect does it produce to treat a disease. This is an important
new capability because it opens up the market to researchers who deal in late
stage clinical trials, and who perform PK/PD (pharmacokinetic/pharmacodynamic)
analyses routinely. Until now, these analyses were performed using models that
treated absorption and its related process with very simplified models. With
PDPlus in GastroPlus, researchers will be able to perform highly sophisticated
3
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
pharmacodynamic effect, yet researchers have not had tools capable of assessing
these effects in the past. This additional-cost module is expected to be
released early in calendar year 2002.
(2) Multiple Particle Size Dissolution Model
--------------------------------------------
The current dissolution model in GastroPlus uses a single 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. This new model will become a part of the standard
GastroPlus simulation and will be provided to users as part of the upgrades
included in their annual license fees.
(3) QMPRPlus(TM) upgrades
-------------------------
We will add new molecular descriptors and new predicted ADMET
properties to the QMPRPlus(TM) program, and we will add the ability for
researchers to add their own data to refine the predictions for ADMET
properties. We are negotiating with several companies to develop additional
models based on their experimental data. 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.
(4) 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 GPCR's can prevent the flow of certain molecules into and out
of the cell, 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 GPCR's in the computer will enable researchers to identify likely
new drug molecules that could bind to them prior to actually synthesizing the
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 at some time in the future when
resources and priorities allow. Because of accounting standards, and the
postponement of development activities on this program, the Company was required
to expense $126,296 in the 2nd quarter of FY2001 to write off all of the
previously capitalized software development costs for HelixGen.
MARKETING AND DISTRIBUTION:
The Company markets its pharmaceutical simulation software products,
and research services based on its simulations, to pharmaceutical and biotech
companies, and to various companies that serve them, through attendance and
presentations at scientific meetings, exhibits at trade shows, seminars at
pharmaceutical companies and government agencies, through its web pages on the
Internet, and to its compiled database of prospect and customer names. The
Company's scientific team is also its sales and marketing team. The Company
believes that this is more effective than a separate sales team for several
reasons: (1) customers appreciate talking directly with developers who can
answer a wide range of technical questions about methods and features, (2) our
scientists benefit from direct customer contact through gaining an appreciation
for the environment and problems of the customer, and (3) the relationships we
build through scientist-to-scientist contact are stronger than through
salesperson-to-scientist contacts. The Company also uses its web pages on the
Internet for such activities as providing product information, providing
software updates, and as a forum for user feedback and information exchange.
4
In August 1998, the Company signed a distribution agreement with Teijin
Systems Technology Ltd. (TST), a division of Teijin Limited of Tokyo, Japan. On
April 1, 2001 TST merged with the Infocom Corporation of Japan. Although a new
agreement has not yet been signed, for the interim, the companies have continued
to operate more or less as before. One exception is that now Infocom pays the
travel costs for Simulations Plus personnel to assist in Infocom's marketing and
sales activities in Japan. Under the terms of the TST agreement, TST received
exclusive distribution rights to Simulations Plus' GastroPlus(TM) and
QMPRPlus(TM) software for pharmaceutical research and education in Japan. Sales
in Japan have been strong, increasing approximately 67% during fiscal 2001 over
such sales in fiscal 2000, accounting for approximately 22% of all FY 2001
pharmaceutical software revenues. There are now over ten Japanese companies
using Simulations Plus software.
PRODUCTION:
The Company's major pharmaceutical software products are designed and
developed by its development team at its Lancaster, California facility. The
chief materials and components used in the manufacture of simulation software
products include CD-ROMs and instruction manuals, which are also produced
in-house. Robotic CD burner technology along with in-house graphic art and
engineering talent enable the Company to run this production in the most cost
efficient way.
COMPETITION:
In providing simulation-software-based screening, testing and research
services to the pharmaceutical industry, and in marketing simulation software
for these purposes, the Company competes against a number of established
companies that provide screening, testing and research services and products to
these industries that are not based on simulation software. There are also
software companies whose products do not compete directly, but are sometimes
closely related. The Company's competitors in this field include companies with
financial, personnel, research and marketing resources that are greater than
those of the Company. While management believes there is currently no
significant competitive threat to GastroPlus or QMPRPlus, competition should be
expected at some time in the future. The Company is aware of a few other
companies that are presently developing simulation software or
simulation-software-based services to the pharmaceutical industries for the
purposes of screening compounds.
Major pharmaceutical companies conduct drug discovery and development
efforts through their internal development staffs and through outsourcing some
of this work. Smaller companies need to outsource a greater percentage of this
research.
The Company is not aware of any significant competition in the area of
gastrointestinal absorption simulation. The Company is aware of one other
company Lion Biosciences AG in Germany, which recently acquired Trega
Biosciences of San Diego, that offers an absorption simulation called iDEA(TM).
Information obtained by the Company indicates that this simulation requires
specific experimental data that must be obtained through experiments with actual
compound material for accurate results. The Company believes it has identified
all former and current pharmaceutical companies who have licensed the iDEA
software, including the original consortium members that participated in its
development when it was part of Navicyte and Trega. At this time, every such
company has licensed GastroPlus in at least one, if not all, of its divisions.
The Company believes the key factors in competing in this field are its
ability to develop simulation software and related products and services to
effectively predict the ADME-related behaviors of new drug-like compounds, its
ability to develop and maintain a proprietary database of results of physical
experiments that will serve as a basis for simulated studies, and its ability to
develop and maintain relationships with research and development departments of
pharmaceutical companies and government agencies. There can be no assurances
that the Company will be successful in providing these key factors.
5
EDUCATIONAL SIMULATION SOFTWARE
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PRODUCTS:
The Company's educational software products, which have won awards from
educational software testers, include simulations of laboratory experiments for
Physical Science and Chemistry courses under the umbrella name FutureLab(TM).
The Company released its first three FutureLab(TM) titles in May 1997 (OPTICS
FOR PHYSICAL SCIENCE, GRAVITY FOR PHYSICAL SCIENCE, and CIRCUITS FOR PHYSICAL
SCIENCE), and a new title, IDEAL GAS FOR CHEMISTRY in November 1997, all for
Windows-based computers. In August 1998, after a conversion effort that took
over one year for some labs, the Company released new versions of all of these
titles as well as UNIVERSAL GRAVITATION FOR PHYSICAL SCIENCE for both Windows
and Macintosh computers. Macintosh computers are said to account for 40% or more
of the educational market.
FutureLab(TM) educational software programs simulate science
experiments for high school and college level science and engineering classes.
These simulations enable students to conduct experiments on a personal computer
instead of in a traditional laboratory, thereby increasing safety, decreasing
costs, and providing expanded learning opportunities by allowing simulations of
situations not possible in a traditional laboratory environment. FutureLab(TM)
software has received recognition from Computers in Physics magazine, which
declared it a winner in its Eighth Annual Software Contest, as well as from two
educational institutions who perform rigorous educational software evaluation.
PRODUCT DEVELOPMENT:
In the area of educational simulations, the Company decided to freeze
R&D activities after finishing the latest title, TITRATION FOR CHEMISTRY.
Current sales from FutureLab continue through a network of over 30 distributors;
however, revenues are not sufficient to provide support for continued
development of educational software.
MARKETING AND DISTRIBUTION:
The Company markets its science experiment simulation software products
through software resellers and its Internet web page. As of August 1999, the
Company reduced its marketing efforts in this area in order to concentrate its
resources on the pharmaceutical software market. The Company is relying on its
resellers to provide the majority of the marketing and sales efforts for its
educational software products. FutureLab sales have continued through these
distributors.
PRODUCTION:
The Company's educational software products were designed and developed
by its development team at its Lancaster, California facility. The chief
materials and components used in simulation software products include CD-ROMs
and instruction books which are produced in-house.
COMPETITION:
The educational software industry in which the Company operates is
competitive. The Company competes against publishers and suppliers of textbook
educational materials that have been, and will continue to be, the primary
educational resource used in these markets. The Company also competes against
educational software publishers who provide software products that are
interactive, but most are not true simulation software. Most educational
software publishers compete in the grades below 9th grade, addressing primarily
reading and math skills. The Company competes primarily in the middle school,
high school, and college markets addressing primarily science and math subjects.
A smaller number of software publishers are addressing these markets, although
existing competitors may broaden their product lines to these markets, and
additional competitors may enter these markets.
6
DISABILITY PRODUCTS
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PRODUCTS:
The Company's wholly owned subsidiary, Words+, Inc. has been in
business since 1981. Words+ is a technology leader in designing and developing
augmentative and alternative communication (AAC) computer software and hardware
devices for persons who cannot speak due to physical disabilities. Words+ also
produces computer access products that enable physically disabled persons to
operate a personal computer, as well as to communicate, through movements as
slight as the blink of an eye. Words+ developed and produces the software for
the computerized communication system used by world-famous theoretical
astrophysicist Professor Stephen Hawking, Lucasian Professor of Mathematics at
the University of Cambridge in England, and the author of the best-selling book
A BRIEF HISTORY OF TIME. Words+ markets its products throughout the United
States and to other countries through a direct sales staff and independent
dealers and resellers. Words+ introduced a fully integrated, portable,
lightweight personal-computer-based communication system that is meeting
favorable market acceptance. In fiscal 2001, Words+ developed a dedicated device
version of its Freedom 2000 communication system that satisfies Medicare's
requirements for a communication system that does not have normal computer
functions. Orders for this system are now being shipped. This system, designated
Freedom 2001E, and based on Panasonic notebook computers, provides only
communication functionality, and is not able to be used as a standard computer.
This is a requirement of Medicare, which has a policy of not funding computers.
The Company believes this is an unfortunate policy, because disabling the
standard computer functions of the system actually results in a higher cost and
less functionality for the user. Management believe that Medicare will someday
realize that having computer functions such as e-mail and Internet access are
also forms of communication and if they can be provided at no additional cost,
they should not be disabled in the best interests of the disabled user.
E Z Keys for Windows(TM)
------------------------
One of the Company's primary software products is E Z KEYS FOR WINDOWS
("E Z KEYS(TM)"), which is a program that operates on a Windows-based personal
computer. When coupled with specially designed input devices, E Z KEYS enables
even severely physically disabled persons to operate a personal computer, to
generate voice messages through a voice synthesizer, and to operate most
Windows-based software application programs. Input motion by the user can be
through a standard keyboard, joystick, or mouse, or it can be as slight as the
blink of an eye, or even simple eye movement by persons who cannot blink. E Z
KEYS is one of the two Words+ programs used by Professor Stephen Hawking for
computer access and communication. In May 1997, the Company released E Z KEYS
FOR WINDOWS 95, the current version of which is also compatible with Windows 98.
The company is now developing a version for Windows XP, with functionality that
management believes will be unique in this new environment.
Talking Screen for Windows(TM)
------------------------------
TALKING SCREEN FOR WINDOWS ("TALKING SCREEN(TM)") is a software program
that operates on a Windows-based personal computer and is designed for personS,
usually children, who cannot read and write at the level necessary to adequately
operate E Z KEYS. TALKING SCREEN provides a system of pages of pictographic and
photographic symbols by which the user can produce speech output messages
through a voice synthesizer, play recorded sounds and video files, and operate
controllers for lights, electrical appliances and other equipment. Like E Z
KEYS, TALKING SCREEN can be operated through a wide range of alternative input
devices. A Windows XP version of Talking Screen is expected to be released early
in calendar 2002.
7
Freedom 2000(TM)
----------------
Freedom 2000 allows persons with disabilities who read at a
second-grade level and above to speak and write through alternative input
methods (rather than traditional keyboard and mouse). Freedom 2000 with E Z KEYS
gives the users the ability not only to speak and write, but also to play games
and control various items in their environment, such as TV's and telephones.
High level users are also able to deliver lectures to large groups, use the
Internet, and send e-mail. A lighter weight version of the Freedom 2000, called
Freedom 2000 LITE(TM), was introduced in October 1999. Although it has a smaller
display, the 4.0 lb. Freedom 2000 LITE is more attractive to ambulatory users
than the 8.0 lb. Freedom 2000.
Freedom 2001E(TM) - Dedicated Device
------------------------------------
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 eliminated 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 2001, to meet the requirements of
the Medicare policy for dedicated communication systems. Because of the change
of policy, management believes that orders for some ALS patients, who would have
been funded by family or other independent means, were delayed in early 2001 to
wait until the July 1 date had passed. Orders have increased since that date,
and management believes this was an industry-wide phenomenon caused by the
policy changes.
TuffTalker(TM)
--------------
TuffTalker is the ideal communication system for users who want
computer access virtually anywhere. It is fully encased in magnesium alloy and
has a shock-mounted hard disk drive that can withstand the rigors of the typical
AAC environment while delivering superior computer performance in a compact,
completely mobile package with touch screen access. The Company announced the
TuffTalker in July 2000 and it currently generates approximately 10% of AAC
revenue. The TuffTalker replaced the previously discontinued Pegasus LITE.
TuffTalker Plus(TM)
-------------------
TuffTalker Plus is a fully integrated, highly rugged ("militarized")
communication system that offers users extreme durability, power, and
convenience. It features a large active matrix color liquid crystal display
(LCD) with a convenient, easy-to-use touch screen. The LCD is also
anti-reflective, making it easy to view in bright sunlight. It also features
switch inputs for use with Morse Code, Joystick, Headmouse, Tracker 2000, single
or multiple switches, or IST Switch.
MessageMate
-----------
Since 1992, the Company produces a highly successful series of products
called MessageMates, which are hand-held, dedicated communication devices that
store recorded speech or sound on integrated circuit chips. The user plays these
recorded sounds by touching one of the keys on the membrane keyboard, or by
using a switch (such as the IST Switch described below) and scanning to select a
position on the keyboard. MessageMates are small, lightweight (1 to 1.75 lbs.),
easy-to-use communication devices with up to ten minutes of recorded messages.
They are known for their extremely rugged design and long battery life, and
sales have increased year after year. The MessageMate 20 holds twenty messages,
the MessageMate 40 holds forty messages, the Multi-Level MessageMate holds up to
144 messages, and the Mini-MessageMate holds eight messages. Since MessageMates
use recorded messages and sounds, they can be used in any language. The Company
has significant sales of MessageMates in foreign markets, including Japan, and
sales of MessageMates in foreign markets have been increasing.
8
In December 1999, the Company completed the development of and released
a new Message Builder feature for the MessageMate, which is an enhancement of
the existing MessageMate product. It enables users to select prerecorded words
or phrases one at a time, and then plays the entire message formed by them.
Infrared/Sound/Touch (IST) Switch
---------------------------------
Many Words+ customers cannot operate a keyboard or mouse. For some of
these persons, the Company has designed and produces a special device called the
Infrared/Sound/Touch Switch ("IST Switch"), that enables the person to operate a
personal computer or a dedicated communication device with the slightest
movement or pressure, including, for example, eye blink, or just eye movement.
The IST is activated by infrared reflection, touch, or sound, and transmits a
momentary "on" signal to the computer upon detecting these signals. This switch
has been in production in ever-improving forms since 1983, and thousands of
physically disabled persons around the world have used it.
Miscellaneous
-------------
Words+ also sells a number of other miscellaneous and peripheral
devices, some of which it designs and produces and others it buys and resells.
These include:
o Micro CommPac - Company-designed and produced communication
hardware package designed for use with a notebook computer
that provides switch interface and audio amplification.
o Simplicity Wheelchair Mount - Company-designed and produced
wheelchair mount for portable computers and other devices.
o Mayer-Johnson symbols - produced by the Mayer-Johnson company
of San Diego, these pictographic symbols are used in
electronic form with the Company's Talking Screen for Windows
software.
o Imaginart symbols - produced by the Imaginart company of
Bisbee, Arizona, these symbols are printed as adhesive-backed
paper symbols and are often used with MessageMates.
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 has begun developing versions of its software
products for the new Microsoft XP operating system. 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.
MARKETING AND DISTRIBUTION:
The Company markets augmentative and alternative communication products
through a network of employee representatives and independent dealers and
resellers.
At the present time the Company has 36 sales representatives worldwide:
2 salary/commission salespersons - 1 in California and 1 in Maryland, 10
independent distributors and 10 independent resellers in the U.S., and 14 sales
representatives overseas - 4 in Australia, and 1 each in Canada, England,
Ireland, Norway, The Netherlands, New Zealand, Japan, Korea, Finland and
Malaysia. The Company also has four inside sales/support persons who answer
telephone inquiries on the Company's 800 line and who provide technical support.
Additional outside sales persons and independent dealers and resellers are being
actively recruited at this time.
9
The Company directs its marketing efforts to speech pathologists,
occupational therapists, rehabilitation engineers, special education teachers,
disabled persons and relatives of disabled persons. The Company maintains a
mailing list of over 7,100 persons made up of these professionals, consumers and
relatives and mails various marketing materials to this list. These materials
include the Company's catalog of products and announcements regarding new and
enhanced products.
The Company participates in industry conferences held throughout the
U.S. and in other countries that are attended by speech pathologists,
occupational and physical therapists, special education teachers, parents and
consumers. The Company and others in the industry demonstrate their products at
these conferences and present technical papers that describe the application of
their technologies and research studies on the effectiveness of their products.
The Communication Aids Manufacturers Association (CAMA) organizes tours of
representatives of companies in this field that travel throughout the country
providing seminars and workshops for professionals, consumers and parents in the
field. The Company advertises in selected publications of interest to persons in
this market.
The Company estimates that for approximately 50% of its sales of
augmentative and alternative communication software and hardware, some or all of
the purchase price is provided by third parties such as Medicaid, Medicare,
school special education budgets, private insurance or other governmental or
charitable assistance. Medicare began providing coverage of augmentative
communication devices on January 1, 2001. An estimated 50,000 people in need of
AAC technology are thought to be eligible for Medicare coverage.
The Company's personnel provide advice and assistance to customers and
prospective customers on obtaining third-party financial assistance for
purchasing the Company's products. Third party funding has grown slowly but
continuously for 20 years. The recent addition of Medicare coverage for AAC
devices is the largest single increase in third party funding in the Company's
history, and is expected to result in significant growth in the overall AAC
market in the U.S.
PRODUCTION:
Disability software products are either loaded onto computer hard disk
drives by the Company or copied to diskettes or CD-ROM, which is performed
in-house. Microprocessors that are part of dedicated devices are purchased by
the Company and incorporated into its products, such as MessageMates, by the
Company. Most software customers also buy their notebook personal computers from
the Company, which the Company purchases at wholesale prices and resells at a
markup. Cases, printed circuit boards, labels and other components of products
such as MessageMates and CommPacs are designed by the Company. The Company
outsources the extrusion, machining and manufacturing of certain components. All
final assembly and testing are done by the Company at its facility.
The Company's products are shipped from its Lancaster, California
facility either directly to the customer or to the salesperson, dealer or
reseller. For major products, the outside salesperson, dealer or reseller either
delivers the product or visits the customer after delivery to provide training.
COMPETITION:
The AAC industry in which the Company operates is highly competitive
and some of the Company's competitors have greater financial and personnel
resources than the Company. The industry is made up of six major competitors
including the Company, and a number of smaller ones. The Company believes that
the five other major competitors each have revenues ranging from $3 Million to
$20 Million, so that there are no large companies in this industry.
10
The Company believes that the competition in this industry is based
primarily on the quality of products, quality of customer training and technical
support, and quality and size of sales forces. Price is a competitive factor but
the Company believes price is not as important to the customer as obtaining the
product most suited to the customer, along with strong after-sale support. The
Company believes that it is a leader in the industry in developing and producing
the most technologically advanced products and in providing quality customer
training and technical support. The prices of the Company's products are among
the highest in the industry and the Company has one of the smallest sales forces
and dealer networks in the industry. The Company believes it is positioned to
continue to be a leader in the development and production of the highest quality
technology and that it will be able to develop one of the strongest sales forces
in the industry by continuing to increase the number of sales representatives or
distributors. The Company believes that potential exists for significant
increases in the sales of its disability products. However, there are few
barriers to entry in the form of proprietary or patented technology or trade
secrets in this industry. While the Company believes that cost of product
development and the need for specialized knowledge and experience in this
industry would present some deterrence for new competition, other companies may
enter this industry, including companies with substantially greater financial
resources than the Company. Furthermore, companies already in this industry may
increase their market share through increased technology development and
marketing efforts.
PERSONAL PRODUCTIVITY SOFTWARE
--------------------------------------------------------------------------------
PRODUCT - ABBREVIATE!:
At the COMDEX show in November 1997, Words+ released a low cost
productivity software program called ABBREVIATE!. The Company extracted the
"abbreviation expansion" technology incorporated into the E Z KEYS software used
by Professor Stephen Hawking and thousands of others around the world, and
turned it into a program that can be used by anyone with the ability to use a
standard keyboard. ABBREVIATE! was named PC Week magazine's "Tool of the Week"
in their December 1, 1997 issue, and won Win95 magazine's Editor's Choice Award
in March 1998. While many word processors provide a similar "Quick Correct"
feature, the advantage ABBREVIATE! has over such features is that it runs in the
background and works with virtually all Windows applications, and in all
versions of Windows, including Windows XP. Thus, ABBREVIATE! allows the user to
create a personal library of frequently-used abbreviations, each with its own
special keystroke combination, for use in virtually any program, e.g., e-mail,
word processing, database, spreadsheet, and Internet chat rooms, search engines,
and message boards. ABBREVIATE! enjoys steady ongoing sales to medical
transcriptionists through several distributors. This document was prepared using
ABBREVIATE!. As an example, typing the following:
"The avg scit in teh phl ind has a graduate deg in chemy, bioy, or
physics."
could result (with Abbreviate!) in producing:
"The average scientist in the pharmaceutical industry has a graduate
degree in chemistry, biology, or physics."
Or typing "pff" could produce
"Please feel free to contact us again if we can be of help in any way."
11
MARKETING AND DISTRIBUTION:
The Company is currently selling ABBREVIATE! through a variety of
Internet channels, including its own web site (www.abbreviate.cc), and through
distributors. The Company has also contacted large software manufacturers and
distributors in an effort to secure distribution agreements for ABBREVIATE!.
PRODUCTION AND DISTRIBUTION:
THE ABBREVIATE! personal productivity software program is currently
manufactured at the Company's Lancaster, California facility. If sales volume
warrants and higher volume capacity is required, the Company will investigate
outside sources for fulfillment.
COMPETITION:
A few products compete with ABBREVIATE! in the retail market; however,
the Company is not aware of any other product that works with virtually any
software in Windows 95/98/NT/XP without the need to create special links to the
software. The Company has priced ABBREVIATE! significantly less than competitors
SmarType and InstantText. The Company enlisted the help of several medical
transcriptionists as beta testers for the product, and the feedback received
from those testers and additional medical transcriptionists, who are familiar
with competitive products, has been favorable.
TRAINING AND TECHNICAL SUPPORT
--------------------------------------------------------------------------------
The Company believes customer training and technical support are
important factors in customer satisfaction for both its pharmaceutical and
disability products, and the Company believes it is an industry leader in
providing customer training and technical support. For pharmaceutical software,
the Company provides in-house seminars at the customer's site to demonstrate
GastroPlus and QMPRPlus. During FY 2001 and 2000, the company delivered such
seminars in numerous locations around the world. The Company has delivered a
series of seminars in Japan to over 200 scientists from over 40 different
companies. The Company also conducted on-site seminars to many hundreds of
scientists at a large number of pharmaceutical and related research companies in
the U.S. and Europe. These seminars serve as initial training in the event the
potential customer decides to license or evaluate our software. Strong technical
support is provided after the sale in the form of on-site training (at
customer's expense), telephone, fax, and e-mail assistance to users, as well as
an ongoing process of software upgrades to ensure the product remains at the
cutting edge of technology. Software licenses are on an annual basis, and
include all upgrades to the modules licensed by the customer during the license
year.
For Disability Products, the Company's salesperson, dealer or reseller
provides initial training to the customer for major systems -- typically two to
four hours. This training is typically provided not only to the user of the
product but also to the person's speech pathologists, teachers, parents and
others who will be assisting the user. This initial training for the purchase of
full systems is often provided as a part of the price of the product. The
Company and its dealers charge a fee for additional training and service calls.
Technical support for both Simulation Software and Disability Products
is provided by the Company's inside sales and support staff based at its
headquarters facilities in Lancaster, California. The Company provides free
telephone support offering unlimited toll-free numbers in the U.S. and Canada,
and E-mail support for all of its simulation software and disability products
worldwide.
12
EMPLOYEES
--------------------------------------------------------------------------------
As of August 31, 2001, the Company employed 32 full-time and 2
part-time employees, including 7 in research and development, 5 in marketing and
sales, 12 in administration and accounting, 9 in production and 1 in repair.
Four current employees hold Ph.D.'s and one is a Ph.D. candidate in their
respective science or engineering disciplines and three additional employees
hold one or more Master's degrees. With only one exception, the entire senior
management team and Board of Directors hold graduate degrees. The Company
believes that its future success will depend, in part, on its ability to
continue to attract, hire and retain qualified personnel. The competition for
such personnel in the pharmaceutical industry and in the augmentative and
alternative communication device and computer software industry is intense. None
of the Company's employees is represented by a labor union, and the Company has
never experienced a work stoppage. The Company believes that its relations with
its employees are good.
13
ITEM 2. DESCRIPTION OF PROPERTIES
The Company moved its office location from Palmdale, California to
Lancaster, California in July 1998, expanding its office space from
approximately 11,800 square feet to approximately 15,600 square feet. The lease
on the office space currently occupied by the Company expired on August 31,
2001. The Company renewed for an additional two-year term with 4% increase each
year from the previous year.
ITEM 3. LEGAL PROCEEDINGS
While the Company may from time to time be involved in various claims,
lawsuits or disputes with third parties, the Company is not a party to any
significant litigation and is not aware of any significant pending or threatened
litigation against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal 2001.
14
PART II
ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is currently traded on the OTC Bulletin
Board under the symbol "SIMU". According to records of the Company's transfer
agent, the Company had about 60 stockholders of record and 800 beneficial owners
as of August 31, 2001. The following table sets forth the low and high sale
prices for the Common Stock on the OTCBB for each of the last two fiscal years.
The quotations quoted for the over the counter market reflect inter-dealer
prices, without retail mark-up, mark-down or commission, and may not represent
actual transactions. The Company has not paid cash dividends on its common
stock. The Company currently intends to retain its earnings for future growth,
therefore does not anticipate paying cash dividends in the foreseeable future.
Any further determination as to the payment of dividends will be at the
discretion of the Company's Board of Directors and will depend among other
things, on the Company's financial condition, results of operations, capital
requirements and such other factors as the Board of Directors deem relevant.
LOW SALES PRICE HIGH SALES PRICE
--------------- ----------------
Fiscal 2001:
Quarter ended August 31, 2001 .......... 1.180 1.550
Quarter ended May 31, 2001 ............. 1.350 2.250
Quarter ended February 29, 2001 ........ 1.250 2.437
Quarter ended November 30, 2000 ........ 1.500 3.812
Fiscal 2000:
Quarter ended August 31, 2000 .......... 1.625 2.625
Quarter ended May 31, 2000 ............. 2.250 5.187
Quarter ended February 28, 2000 ........ 1.850 3.687
Quarter ended November 30, 1999 ........ 1.500 2.500
15
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following sets forth selected items from the Company's statements
of operations (in thousands) and the percentages that such items bear to net
sales for the fiscal years ended August 31, 2001 ("FY2001"), August 31, 2000
("FY2000") and August 31, 1999 ("FY99").
Year Ended August 31,
------------------------------------------------------------------------
2001 2000 1999
------------------------------------------------- ---------------------- ------------------------- -----------------------
Net sales $3,915 100.0% $3,629 100.0% $3,467 100.0%
------------------------------------------------- ---------- ----------- ------------ ------------ ----------- -----------
Cost of sales * 1,563 39.9 1,423 39.2 1,797 51.8
------------------------------------------------- ---------- ----------- ------------ ------------ ----------- -----------
Gross profit 2,352 60.1 2,206 60.8 1,670 48.2
------------------------------------------------- ---------- ----------- ------------ ------------ ----------- -----------
Selling, general, and administrative * 2,200 56.2 2,143 59.0 2,160 62.3
------------------------------------------------- ---------- ----------- ------------ ------------ ----------- -----------
Research and development 354 9.0 300 8.3 219 6.3
------------------------------------------------- ---------- ----------- ------------ ------------ ----------- -----------
Total operating expenses 2,554 65.2 2,443 67.3 2,379 68.6
------------------------------------------------- ---------- ----------- ------------ ------------ ----------- -----------
Loss from operations (202) (5.2) (237) (6.5) (709) (20.4)
------------------------------------------------- ---------- ----------- ------------ ------------ ----------- -----------
Income from grant - - - - 150 4.3
------------------------------------------------- ---------- ----------- ------------ ------------ ----------- -----------
Interest income - - - - 5 0.1
------------------------------------------------- ---------- ----------- ------------ ------------ ----------- -----------
Interest expense (22) (0.6) (22) (0.6) (21) (0.6)
------------------------------------------------- ---------- ----------- ------------ ------------ ----------- -----------
Gain on disposal of furniture & equip. - - 3 0.1 - -
------------------------------------------------- ---------- ----------- ------------ ------------ ----------- -----------
Provision for income taxes 2 0.1 2 0.1 2 0.1
------------------------------------------------- ---------- ----------- ------------ ------------ ----------- -----------
Net loss (226) (5.8)% (258) (7.1)% (577) (16.6)%
------------------------------------------------- ---------- ----------- ------------ ------------ ----------- -----------
* The Company reclassified royalty expense and freight-out expense as a
part of cost of sales starting with FY2000. Royalty expenses ($67,000
in FY99) and freight-out expenses ($81,000 in FY99) are restated
reflecting this change in order to provide a fair comparison between
fiscal years.
FY2001 COMPARED WITH FY2000
--------------------------------------------------------------------------------
NET SALES
---------
Net sales for FY2001 increased by $286,000 or 7.9%, to $3,915,000
compared to $3,629,000 for FY2000. Simulations Plus, Inc.'s sales from
Pharmaceutical and educational software increased approximately $246,000, or
26.3%, and Words+, Inc.'s sales increased approximately $40,000, or 1.5% for the
year. Management attributes the increase in consolidated net sales to the sales
increase in Pharmaceutical software in FY2001 compared with FY2000 and a slight
increase in Words+ sales. The increase in Pharmaceutical software sales is
attributable to a combination of annual license renewals, new customers, two new
products, four major upgrades and larger average orders per customers. The
increase in Words+ sales is due primarily to the revenue from TuffTalker(TM)
which replaced the PegasusLITE and its initial sales began in September 2000.
Approximately $240,000 was generated from TuffTalker sales during FY2001;
however, this increase was offset by reduction in other product sales, which
management believes, was caused by customers delaying purchase decisions until
Medicare/Medicaid funding could be secured under new policies for those programs
this year.
16
COST OF SALES
-------------
The consolidated cost of sales for FY2001 increased by $140,000 or 9.8%
to $1,563,000 from $1,423,000 in FY2000. As a percentage of sales, cost of sales
was 39.9% for FY2001, compared to 39.2% for FY2000, indicating a 0.7% increase.
For Simulations Plus, cost of sales increased $48,000, or 16.5%, of which the
significant portion of cost of sales is the systematic amortization of
capitalized software development costs, which resulted in a 28.1% increase in
amortization cost. Two new modules for GastroPlus, IVIV Correlation and PKPlus,
were released on November 7, 2000 and their development costs have been
amortized systematically since then. For Words+, cost of sales increased
$92,000, or 8.1%. As a percentage of sales, cost of sales was 44.8% in FY2001,
compared to 42.0% in FY2000. Management attributes the increase in cost of sales
between FY2001 and FY2000 to an increase in TuffTalker sales, which has a lower
profit margin, and a decrease in higher margin products.
GROSS PROFIT
------------
The consolidated gross profit increased $146,000, or 6.6%, to
$2,352,000 in FY2001 from $2,206,000 in FY2000. Although gross profit increased,
gross profit margin decreased 0.7%, to 60.1% in FY2001, compared to 60.8% in
FY2000, primarily due to the increase in amortization cost of pharmaceutical
software and increased material costs for Words+ products, proportionally
outweighing the increase in net sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
--------------------------------------------
Selling, general and administrative ("SG&A") expenses for FY2001
increased by $57,000, or 2.7% to $2,200,000, compared to $2,143,000 for FY2000.
As a percentage of total sales, SG&A decreased for the third straight year from
59.0% in FY2000 to 56.2% in FY2001. For Simulations Plus, SG&A expenses
increased $109,000, or 14.5%, primarily due to the $126,000 write-off of
capitalized software development cost for HelixGen in FY2001. Although HelixGen
development is still considered an on-going project, management postponed its
development to focus on development of other pharmaceutical software products.
Without this write-off expense, the selling, general and administrative expenses
for FY2001 would have decreased by $17,000, or 2.1%. For Words+, expenses
decreased $52,000, or 3.7%, due to reductions in depreciation expense, telephone
expense, insurance, and some selling expenses, such as promotion, commissions to
independent sales representatives. These reductions outweighed increases in
other expenses such as travel expense, trade shows, salaries and wages, and
payroll related expenses.
RESEARCH AND DEVELOPMENT
------------------------
The Company incurred approximately $493,000 of research and development
costs for both companies during FY2001. Of this amount, $139,000 was capitalized
and $354,000 was expensed. For FY2000, the Company incurred approximately
$432,000 of research and development costs, of which approximately $132,000 was
capitalized and approximately $300,000 was expensed. The 14.1% increase in
research and development expenditure from FY2000 to FY2001 was due to additions
to staff, resulting in increased salary expenses.
LOSS FROM OPERATIONS
--------------------
During FY2001, the Company incurred a loss from operations of
approximately $202,000, as compared to a loss of $237,000 for FY2000. Management
attributes the reduction in net loss from operations to an increase in sales
outweighed increases in cost of sales, selling, general and administrative
expenses, and research and development expense. Without the required HelixGen
write-off, the loss from operations would have been $76,000.
17
INTEREST EXPENSE
----------------
Interest expense between FY2001 and FY2000 was constant. Interest
expense is incurred due to the Company's revolving line of credit and interest
on capitalized lease obligations.
GAIN ON DISPOSAL OF FURNITURE & EQUIPMENT
-----------------------------------------
There was no gain on disposal of furniture & equipment for FY2001 while
there was such a gain in FY2000. During FY2000, the Company claimed a loss of
stolen computers to our insurance company, and the proceeds less depreciated
book value resulted in this gain of $3,000.
INCOME TAXES
------------
Income taxes were $1,600 for FY2001 as well as FY2000. This represents
the minimum corporation tax in the state of California for the two companies.
NET LOSS
--------
Net loss for FY2001 decreased $32,000, or 12.4%, to a net loss of
$226,000, compared to the net loss of $258,000 for FY2000. Management attributes
this decline primarily to the increase in sales outweighed the increases in cost
of sales, selling, general and administrative expenses, research and development
expenses, and decrease in gain on a disposal asset. Without the required
HelixGen write-off, the net loss would have been $100,000.
FY2000 COMPARED WITH FY99
--------------------------------------------------------------------------------
NET SALES
---------
Net sales for FY2000 increased by $162,000 or 4.7%, to $3,629,000
compared to $3,467,000 for FY99. Simulations Plus, Inc.'s sales from
Pharmaceutical and educational software increased approximately $474,000, or
102.8%, and Words+, Inc.'s sales decreased approximately $312,000, or 10.4% for
the year. Management attributes the increase in consolidated net sales to the
significant sales increase in Pharmaceutical software in FY2000 compared with
FY99 in which the first sales were launched. Pharmaceutical software sales
contributed over 300% of the total increase in consolidated sales for the year.
This continuous growth in pharmaceutical sales was offset by a reduction of
sales from Words+, Inc., its subsidiary. The decrease in Words+ sales is due
primarily to the discontinuation of the Pegasus LITE(TM) because of the lack of
key components. The Company announced the advanced replacement called
TuffTalker(TM) in the last quarter of FY2000 and its initial sales began in
September 2000.
COST OF SALES
-------------
The consolidated cost of sales for FY2000 decreased by $374,000 or
20.8% to $1,423,000 from $1,797,000 in FY99. As a percentage of sales, cost of
sales was 39.2% for FY2000, compared to 51.8% for FY99, indicating a 12.6%
decrease. For Simulations Plus, cost of sales decreased $153,000, or 34.4%, of
which the significant portion of cost of sales is the systematic amortization of
capitalized software development costs, which resulted in a 54.4% decrease in
amortization cost. The Company's amortization expenses for the capitalized
software development costs relating to educational software were none in FY2000
as compared to $267,000 in FY99. Although there was an increase in royalty
expense due to the agreement between the Company and TSRL for royalties on
GastroPlus sales, reductions in amortization costs outweighed increases in
royalty expense. For Words+, the cost of sales decreased $221,000, or 16.3%.
Management attributes the reduction in cost of sales between FY2000 and FY99 to
a decline in amortization costs and large volume sales on higher margin
products, which outweighed an increase in labor and production supply.
18
GROSS PROFIT
------------
The consolidated gross profit increased $536,000, or 32.1%, to
$2,206,000 in FY2000 from $1,670,000 in FY99. Management attributes the 12.6%
increase in gross profit margin from 48.2% in FY99 to 60.8% in FY2000 primarily
to the increase in net sales combined with the decline in cost of goods sold,
particularly in amortization cost.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
--------------------------------------------
SG&A expenses for FY2000 decreased by $17,000, or 0.8% to $2,143,000,
compared to $2,160,000 for FY99. For Simulations Plus, SG&A expenses increased
$19,000, or 2.6% primarily due to an increase in selling expenses, such as
travel, trade conference expense and commission expense, however these increases
are offset by a decrease in legal fees. All other expenses were maintained
fairly constant. For Words+, SG&A expenses decreased $36,000, or 2.5%, due to
reductions in the employee field sales force and their payroll-related expenses,
and reductions in trade shows and travel expenses, while expanding independent
dealers and resellers nationwide. These reductions outweighed increases in other
expenses such as commissions to independent sales representatives and catalog
printing costs. All other overhead expenses remained relatively constant.
RESEARCH AND DEVELOPMENT
------------------------
The Company incurred approximately $432,000 of research and development
costs for both companies during FY2000. Of this amount, $132,000 was capitalized
and $300,000 was expensed. For FY99, the Company incurred approximately $415,000
of research and development costs, of which approximately $196,000 was
capitalized and approximately $219,000 was expensed. The 4.1% increase in
research and development expenditure from FY99 to FY2000 was due to additions to
staff and increases in salaries.
LOSS FROM OPERATION
-------------------
During FY2000, the Company incurred a loss of approximately $237,000 as
compared to a loss of $709,000 for FY99. Management attributes the reduction in
net loss from operations to a combination of increased sales, decreased cost of
sales, and more efficient operations as reflected in reduced selling, general
and administrative expenses.
INCOME FROM GRANT
-----------------
For FY2000, the Company did not receive any grant income. For FY99 the
Company received the final $150,000 of a $300,000 Phase II SBIR grant from the
National Science Foundation to develop software to allow physically-disabled
students to perform simulated laboratory experiments on a computer. This grant
resulted in the development of our FutureLab educational software.
INTEREST INCOME
---------------
Interest income for FY2000 decreased to $0 from $5,000 in FY99. This
decrease is primarily due to the interest earned on investment activities in
commercial notes through a highly qualified financial institution being reduced
because portions of the Company's capital resources were used in the Company's
operations.
INTEREST EXPENSE
----------------
Interest expense for FY2000 increased to $22,000, or 4.8%, from $21,000
in FY99. This slight increase is primarily due to interest charges incurred for
the Company's revolving line of credit and interest on capitalized lease
obligations.
19
GAIN ON DISPOSAL OF FURNITURE & EQUIPMENT
-----------------------------------------
Gain on disposal of furniture & equipment for FY2000 was $3,000 while
there was no such gain in FY99. During FY2000, the Company claimed a loss of
stolen computers to our insurance company, and the results of proceeds less
depreciated book value resulted in this gain of $3,000.
INCOME TAXES
------------
Income taxes were $1,600 for FY2000 as well as FY99. This represents
the minimum corporation tax in the state of California for the two companies.
NET LOSS
--------
Net loss for FY2000 decreased $319,000, or 55.3%, to a net loss of
$258,000, compared to the net loss of $577,000 for FY99. Management attributes
this decline primarily to increases in sales, decreases in cost of sales, and
more efficient operations as evidenced in decreases in selling, general and
administrative expenses which outweighed the increases in research and
development expenses compared to FY99.
SEASONALITY
--------------------------------------------------------------------------------
Sales of the Company's pharmaceutical and disability products exhibit
very little discernable seasonal fluctuation. The following table sets forth net
sales information for each of the Company's last 12 calendar quarters. In each
of the last three years, the highest quarters and the lowest quarters have been
in three different quarters. This unaudited net sales information has been
prepared on the same basis as the annual information presented elsewhere in this
Annual Report on Form 10-KSB and, in the opinion of management, reflects all
adjustments (consisting of normal recurring entries) necessary for a fair
presentation of the information presented. Net sales for any quarter are not
necessarily indicative of sales for any future period.
Net Sales
--------------------------------------------- ------------------------------------------------------------------------
First Second Third Fourth Total
FY Quarter Quarter Quarter Quarter
--------------------------------------------- -------------- ------------- -------------- -------------- -------------
(in thousands)
--------------------------------------------- ------------------------------------------------------------------------
2001 . . . . . . . . . . . . . . . . . . . 1,058 1,062 974 821 3,915
--------------------------------------------- -------------- ------------- -------------- -------------- -------------
2000 . . . . . . . . . . . . . . . . . . . 814 1,092 743 980 3,629
--------------------------------------------- -------------- ------------- -------------- -------------- -------------
1999 . . . . . . . . . . . . . . . . . . . 881 778 929 879 3,467
--------------------------------------------- -------------- ------------- -------------- -------------- -------------
In general, management believes sales to schools are seasonal, with
greater sales to schools during the Company's third and fourth fiscal quarter
(March-May and June-August). Sales of pharmaceutical simulations, which began in
the first quarter of FY99, are not expected to show significant seasonal
behavior.
20
LIQUIDITY AND CAPITAL RESOURCES
--------------------------------------------------------------------------------
The Company's principal sources of capital have been cash flows from
its operations, a bank line of credit, a government grant, cash loans from the
officers on an as-needed basis, accruing and not paying 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%.
The interest rate was 9.5% at August 31, 2001 and 12.5% at August 31, 2000. At
August 31, 2001, the outstanding balance under the revolving line of credit was
approximately $99,000, and it was the same at August 31, 2000. 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 being accrued and
will be paid at such future time as management deems the Company's cash flow and
cash reserves are sufficient to make such payment without adverse effects to the
Company's financial position. As of this time, only the Company's CEO and CFO
are receiving reduced salaries, with the unpaid amounts being accrued. As of
August 31, 2001, the amount of accrued and unpaid salaries due to the Company's
executive officers was $336,000.
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 at least the next 13 months. Thereafter, if cash generated from
operations is insufficient to satisfy the Company's capital requirements, the
Company may have to sell additional equity or debt securities or obtain expanded
credit facilities. In the event such financing is needed in the future, there
can be no assurance that such financing will be available to the Company, or, if
available, that it will be in amounts and on terms acceptable to the Company. If
cash flows from operations are insufficient to continue operations at the
current level, and if no additional financing is obtained, then management will
restructure the Company in a way to preserve its pharmaceutical and disability
businesses while maintaining expenses within operating cash flows.
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 new
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 worths in
excess of $1,000,000 or annual incomes exceeding $200,000, or $300,000 together
with their spouses). For transactions covered by this rule, a broker-dealer must
make a special suitability determination for the purchaser and have received the
purchaser's written consent to the transaction prior to the sale. Consequently,
the rule may adversely affect the ability of broker-dealers to sell the
Company's securities acquired hereby in the secondary market.
21
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.
ITEM 7. FINANCIAL STATEMENTS
The response to this item is submitted as a separate section of this Form 10KSB
(see pages F-1 F-21.)
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
22
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 9 is incorporated by reference from
the Company's definitive proxy statement (the "Proxy Statement") for its 2002
annual shareholders' meeting.
ITEM 10. EXECUTIVE COMPENSATION
The information required by Item 10 is incorporated by reference from the
Company's Proxy Statement for its 2002 annual shareholders' meeting.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 11 is incorporated by reference from
the Company's Proxy Statement for its 2002 annual shareholders' meeting.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 12, which is incorporated by reference
from the Company's Proxy Statement for its 2002 annual shareholders' meeting.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report as required by
Item 601 of Regulation S-B:
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 Articles of Incorporation of the Registrant (1)
3.2 Amended and Restated Bylaws of the Registrant (1)
4.1 Articles of Incorporation of the Registrant (incorporated by reference
to Exhibit 3.1 hereof) and Bylaws of the Registrant (incorporated by
reference to Exhibit 3.2 hereof)
4.2 Form of Common Stock Certificate (1)
4.3 Share Exchange Agreement (1)
10.1 Simulations Plus, Inc. 1996 Stock Option Plan (the "Option Plan") and
terms of agreements relating thereto (1)+
10.2 Subscription Agreement with Patricia Ann O'Neil (1)
10.3 Security Agreement with Patricia Ann O'Neil (1)
10.4 Promissory Note made by the Registrant in favor of Patricia Ann O'Neil
(1)
10.5 Warrants to purchase 150,000 shares of Common Stock of the Registrant
issued to Patricia Ann O'Neil (1)
10.6 First Amendment to Agreement with Patricia Ann O'Neil (1)
10.7 Subscription Agreement with Fernando Zamudio (1)
10.8 Security Agreement with Fernando Zamudio (1)
23
10.9 Promissory Note made by the Registrant in favor of Fernando Zamudio (1)
10.10 Warrant to purchase 100,000 shares of Common Stock of the Registrant
issued to Fernando Zamudio (1)
10.11 Employment Agreement by and between the Registrant and Walter S.
Woltosz (1) +
10.12 Performance Warrant Agreement by and between the Registrant and Walter
S. Woltosz + Virginia E. Woltosz (2) +
10.13 Software Acquisition Agreement by and Between the Registrant and
Michael B. Bolger (1)
10.14 Sublease Agreement dated May 7, 1993 by and between the Registrant and
Westholme Partners (along with Consent to Sublease and master lease
agreement) (1)
10.15 Lease Agreements dated August 22, 1996 by and between Words+, Inc. and
Abbey-Sierra LLC (1)
10.16 Form of 10% Amended and Restated Promissory Note issued in connection
with the Registrant's Private Placement (2)
10.17 Form of Subscription Agreement relative to the Registrant's Private
Placement (1)
10.18 Form of Lock-Up Agreement with Bridge Lenders (2)
10.19 Form of Indemnification Agreement (1)
10.20 Form of Lock-Up Agreement with the Woltosz' (2)
10.21 Letter of Intent by and between the Registrant and Therapeutic Systems
Research Laboratories (1)
10.22 Form of Representative's Warrant to be issued by the Registrant in
favor of the Representative (2)
10.23 Form of Warrant issued to Bridge Lenders (2)
10.24 License Agreement by and between the Registrant and Therapeutic Systems
Research Laboratories (3)
10.25 Grant Award Letter from National Science Foundation (4)
10.26 Distribution Agreement with Teijin Systems Technology LTD. (4)
10.27 Lease Agreements by and between Simulations Plus, Inc. and Martin
Properties, Inc. (4)
10.28 Software OEM Agreement for Assistive Market Developer by and between
Words+, Inc. and Digital Equipment Corporation. (4)
10.29 Purchase Agreement by and between Words+, Inc. and Epson America, Inc.
(4)
10.30 License Agreement with Absorption Systems, LP. (5)
10.31 Service contract with The Kriegsman Group. (5)
10.32 Letter of Engagement with Banchik & Associates. (5)
10.33 Letter of Intent for Cooperative Alliance with Absorption Systems, LP.
(5)
10.34 OEM/Remarketing Agreement between Words+, Inc. and Eloquent Technology,
Inc. (6)
10.35 Lease Option Agreement by and between Simulations Plus, Inc. and Martin
Properties, Inc. (8)
10.36 Auto Rental Lease Agreement by and between Simulations Plus, Inc. and
Walter and Virginia Woltosz (8)
99.1 Press Release dated February 27, 2001. (7)
--------------------------------------------------------------------------------
(1) Incorporated by reference to the Company's Registration Statement on
Form SB-2 (Registration No. 333-6680) filed on March 25, 1997 (the
"Registration Statement").
(2) Incorporated by reference to Pre-Effective Amendment No. 1 to the
Registration Statement filed on May 27, 1997.
24
(3) Incorporated by reference to the Company's Form 10-KSB for the fiscal
year ended August 31, 1997.
(4) Incorporated by reference to the Company's Form 10-KSB for the fiscal
year ended August 31, 1998.
(5) Incorporated by reference to the Company's Form 10-KSB for the fiscal
year ended August 31, 1999.
(6) Incorporated by reference to the Company's Form 10-KSB for the fiscal
year ended August 31, 2000.
(7) Incorporated by reference to the Company's Form 8-K filed on March 1,
2001.
(8) Filed herewith.
(b) Reports on Form 8-K
On February 27, 2001, Simulations Plus, Inc. issued a press release
announcing certain estimated results of operations for the fiscal year
ending August 31, 2001. Following the press release, Form 8-K was filed
on March 1, 2001.
25
SIGNATURES
In accordance with Section 13or15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Lancaster, State of
California, on November 29, 2001.
SIMULATIONS PLUS, INC.
By /s/ Momoko A. Beran
-----------------------
Momoko A. Beran
CHIEF FINANCIAL OFFICER
In accordance with Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of Registrant and in the
capacities indicated on November 29, 2001.
SIGNATURE TITLE
/s/ Walter S. Woltosz
---------------------------- Chairman of the Board of Directors
Walter S. Woltosz and Chief Executive Officer
/s/ Virginia E. Woltosz
---------------------------- Senior Vice President, Secretary and
Virginia Woltosz Director of the Company and Words+
/s/ Dr. David Z. D'Argenio
----------------------------
Dr. David Z. D'Argenio Director and Consultant to the Company
----------------------------
Dr. Richard Weiss Director
/s/ Momoko A. Beran
----------------------------
Momoko A. Beran Chief Financial Officer of the Company
26
SIMULATIONS PLUS, INC.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
AUGUST 31, 2001 AND 2000
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONTENTS
AUGUST 31, 2001
--------------------------------------------------------------------------------
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-1
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheet F-2 F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Shareholders' Equity F-5
Consolidated Statements of Cash Flows F-6 F-7
Notes to Consolidated Financial Statements F-8 F-21
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Simulations Plus, Inc.
We have audited the accompanying consolidated balance sheet of Simulations Plus,
Inc. (a California corporation) and subsidiary as of August 31, 2001, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the two years in the period ended August 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Simulations Plus, Inc. and
subsidiary as of August 31, 2001, and the results of their operations and their
cash flows for each of the two years in the period ended August 31, 2001 in
conformity with accounting principles generally accepted in the United States of
America.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
October 24, 2001
F-1
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
AUGUST 31, 2001
--------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 166,652
Accounts receivable, net of allowance for doubtful
accounts of $13,857 444,400
Inventory 182,358
-----------
Total current assets 793,410
CAPITALIZED COMPUTER SOFTWARE DEVELOPMENT COSTS, net
of accumulated amortization of $1,568,905 334,301
PROPERTY AND EQUIPMENT, net 91,268
OTHER ASSETS 38,280
-----------
TOTAL ASSETS $1,257,259
===========
The accompanying notes are an integral part of these financial statements.
F-2
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
AUGUST 31, 2001
--------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit $ 98,959
Accounts payable 264,305
Accrued payroll and other expenses 311,904
Accrued compensation due to officer 213,416
Accrued warranty and service costs 45,456
Deferred revenue 5,836
Current portion of capitalized lease obligations 13,214
------------
Total current liabilities 953,090
CAPITALIZED LEASE OBLIGATIONS, net of current portion 21,200
------------
Total liabilities 974,290
------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock, $0.001 par value
10,000,000 shares authorized
no shares issued and outstanding --
Common stock, $0.001 par value
20,000,000 shares authorized
3,408,331 shares issued and outstanding 3,409
Additional paid-in capital 4,654,756
Accumulated deficit (4,375,196)
------------
Total shareholders' equity 282,969
------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,257,259
============
The accompanying notes are an integral part of these financial statements.
F-3
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED AUGUST 31,
--------------------------------------------------------------------------------
2001 2000
------------ ------------
NET SALES $ 3,914,583 $ 3,629,551
COST OF SALES 1,562,830 1,423,391
------------ ------------
GROSS PROFIT 2,351,753 2,206,160
------------ ------------
OPERATING EXPENSES
Selling, general, and administrative 2,199,611 2,142,948
Research and development 354,090 299,875
------------ ------------
Total operating expenses 2,553,701 2,442,823
------------ ------------
LOSS FROM OPERATIONS (201,948) (236,663)
------------ ------------
OTHER INCOME (EXPENSE)
Interest income 109 382
Interest expense (22,161) (22,327)
Gain on disposal of property and equipment -- 2,606
------------ ------------
Total other income (expense) (22,052) (19,339)
------------ ------------
LOSS BEFORE PROVISION FOR INCOME TAXES (224,000) (256,002)
PROVISION FOR INCOME TAXES 1,600 1,600
------------ ------------
NET LOSS $ (225,600) $ (257,602)
============ ============
BASIC AND DILUTED LOSS PER SHARE $ (0.07) $ (0.08)
============ ============
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING 3,394,299 3,384,968
============ ============
The accompanying notes are an integral part of these financial statements.
F-4
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED AUGUST 31,
---------------------------------------------------------------------------------------------------
Common Stock Additional
--------------------------- Paid-in Accumulated
Shares Amount Capital Deficit Total
------------ ------------ ------------ ------------ ------------
BALANCE, AUGUST 31, 1999 3,383,531 $ 3,384 $ 4,629,268 $(3,891,994) $ 740,658
EXERCISE OF STOCK OPTIONS 2,300 2 3,010 3,012
NET LOSS (257,602) (257,602)
------------ ------------ ------------ ------------ ------------
BALANCE, AUGUST 31, 2000 3,385,831 3,386 4,632,278 (4,149,596) 486,068
EXERCISE OF STOCK OPTIONS 22,500 23 22,478 22,501
NET LOSS (225,600) (225,600)
------------ ------------ ------------ ------------ ------------
BALANCE, AUGUST 31, 2001 3,408,331 $ 3,409 $ 4,654,756 $(4,375,196) $ 282,969
============ ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
F-5
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED AUGUST 31,
----------------------------------------------------------------------------------------
2001 2000
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(225,600) $(257,602)
Adjustments to reconcile net loss to net cash
provided by operating activities
Depreciation and amortization of property and equipment 65,300 82,778
Amortization of capitalized software development costs 228,551 178,374
Gain on disposal of property and equipment -- (2,606)
Impairment of capitalized software development costs 126,296 --
(Increase) decrease in
Accounts receivable 98,169 27,777
Inventory (24,041) 34,857
Other assets 13,498 (1,777)
Increase (decrease) in
Accounts payable 25,247 (4,989)
Accrued payroll and other expenses 16,274 79,008
Accrued warranty and service costs 1,436 (26,741)
Deferred revenue (33,032) 38,868
---------- ----------
Net cash provided by operating activities 292,098 147,947
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale of property and equipment -- 3,665
Purchases of property and equipment (30,700) (6,232)
Capitalized computer software development costs (139,375) (132,157)
---------- ----------
Net cash used in investing activities (170,075) (134,724)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from line of credit 11,649 59,000
Payments on line of credit (11,771) (49,747)
Payments on capitalized lease obligations (15,285) (40,276)
Proceeds from the exercise of stock options 22,501 3,012
---------- ----------
Net cash provided by (used in) financing activities 7,094 (28,011)
---------- ----------
Net increase (decrease) in cash and cash equivalents 129,117 (14,788)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 37,535 52,323
---------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 166,652 $ 37,535
========== ==========
The accompanying notes are an integral part of these financial statements.
F-6
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED AUGUST 31,
--------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
During the years ended August 31, 2001 and 2000, the Company paid $1,600 and
$1,600, respectively, in income taxes and $22,161 and $22,327, respectively, in
interest.
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
The Company entered into capital lease obligations of $54,053 during the year
ended August 31, 2000.
The accompanying notes are an integral part of these financial statements.
F-7
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2001
--------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND LINES OF BUSINESS
Organization
------------
Simulations Plus, Inc. was incorporated on July 17, 1996. On August 29,
1996, the shareholders of Words+, Inc. exchanged their 2,000 shares of
Words+, Inc. common stock for 2,200,000 shares of Simulations Plus,
Inc. common stock, and Words+, Inc. became a wholly owned subsidiary of
Simulations Plus, Inc. (collectively, the "Company"). The effect of the
stock-for-stock exchange is presented retroactively in the accompanying
consolidated financial statements.
Lines of Business
-----------------
The Company designs and develops computer software and manufactures
augmentative communication devices and computer access products that
provide a voice for those who cannot speak and allow physically
disabled persons to operate a standard computer. In addition, the
Company designs and develops pharmaceutical simulation software to
promote cost-effective solutions to a number of problems in
pharmaceutical research and in the education of pharmacy and medical
students. The Company also developed and sells interactive, educational
software programs that simulate science experiments conducted in high
school science classes.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of
Simulations Plus, Inc. and its wholly owned subsidiary, Words+, Inc.
All significant intercompany accounts and transactions are eliminated
in consolidation.
Revenue Recognition
-------------------
The Company recognizes revenues related to software licenses and
software maintenance in accordance with the American Institute of
Certified Public Accountants ("AICPA") Statements of Position No. 97-2,
"Software Revenue Recognition." Product revenue is recorded at the time
of shipment, net of estimated allowances and returns. Post-contract
customer support ("PCS") obligations are insignificant; therefore,
revenue for PCS is recognized at the time of shipment, and the costs of
providing such support services are accrued and amortized over the
obligation period. The Company provides, for a fee, additional training
and service calls to its customers and recognizes revenue at the time
the training or service call is provided.
F-8
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2001
--------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Comprehensive Income
--------------------
The Company utilizes Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income." This statement
establishes standards for reporting comprehensive income and its
components in a financial statement. Comprehensive income as defined
includes all changes in equity (net assets) during a period from
non-owner sources. Examples of items to be included in comprehensive
income, which are excluded from net income, include foreign currency
translation adjustments and unrealized gains and losses on
available-for-sale securities. Comprehensive income is not presented in
the Company's financial statements since the Company did not have any
of the items of comprehensive income in any period presented.
Cash and Cash Equivalents
-------------------------
For purposes of the statements of cash flows, the Company considers all
highly liquid investments purchased with original maturities of three
months or less to be cash equivalents.
Inventory
---------
Inventory is stated at the lower of cost (first-in, first-out basis) or
market and consists primarily of computers and peripheral computer
equipment.
Capitalized Computer Software Development Costs
-----------------------------------------------
Software development costs are capitalized in accordance with SFAS No.
86, "Accounting for the Cost of Computer Software to be Sold, Leased,
or Otherwise Marketed." Capitalization of software development costs
begins upon the establishment of technological feasibility and is
discontinued when the product is available for sale. The establishment
of technological feasibility and the ongoing assessment for
recoverability of capitalized software development costs require
considerable judgment by management with respect to certain external
factors including, but not limited to, technological feasibility,
anticipated future gross revenues, estimated economic life, and changes
in software and hardware technologies. Capitalized software development
costs are comprised primarily of salaries and direct payroll related
costs and the purchase of existing software to be used in the Company's
software products.
Amortization of capitalized software development costs is provided on a
product-by-product basis on the straight-line method over the estimated
economic life of the products (not to exceed three years). Management
periodically compares estimated net realizable value by product with
the amount of software development costs capitalized for that product
to ensure the amount capitalized is not in excess of the amount to be
recovered through revenues. Any such excess of capitalized software
development costs to expected net realizable value is expensed at that
time. During the year ended August 31, 2001, the Company recognized
$126,296 as an impairment loss related to capitalized software costs in
excess of the amount to be recovered through revenues. The impairment
loss is included in selling, general, and administrative expenses.
F-9
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2001
--------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and Equipment
----------------------
Property and equipment, including equipment under capital leases, are
recorded at cost, less accumulated depreciation and amortization.
Depreciation and amortization are provided using the straight-line
method over the estimated useful lives as follows:
Equipment 5 years
Computer equipment 3 to 7 years
Furniture and fixtures 5 to 7 years
Leasehold improvements 5 years
Maintenance and minor replacements are charged to expense as incurred.
Gains and losses on disposals are included in the results of
operations.
Fair Value of Financial Instruments
-----------------------------------
The Company measures its financial assets and liabilities in accordance
with generally accepted accounting principles. For certain of the
Company's financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable, accrued payroll and other
expenses, and accrued warranty and service costs, the carrying amounts
approximate fair value due to their short maturities. The amounts shown
for capitalized lease obligations also approximate fair value because
current interest rates offered to the Company for leases of similar
maturities are substantially the same.
Advertising
-----------
The Company expenses advertising costs as incurred. Advertising costs
for the years ended August 31, 2001 and 2000 were $3,281 and $34,997,
respectively.
Research and Development Costs
------------------------------
Research and development costs are charged to expense as incurred until
technological feasibility has been established. These costs consist
primarily of salaries and direct payroll related costs.
Income Taxes
------------
The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which
requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred
income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end based on enacted tax laws
and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances
are established, when necessary, to reduce deferred tax assets to the
amount expected to be realized. The provision for income taxes
represents the tax payable for the period and the change during the
period in deferred tax assets and liabilities.
F-10
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2001
--------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Net Loss per Share
------------------
The Company reports loss per share in accordance with SFAS No. 128,
"Loss per Share." Basic loss per share is computed by dividing loss
available to common shareholders by the weighted-average number of
common shares available. Diluted loss per share is computed similar to
basic loss per share except that the denominator is increased to
include the number of additional common shares that would have been
outstanding if the potential common shares had been issued and if the
additional common shares were dilutive. Because the Company has
incurred net losses, basic and diluted loss per share are the same.
Stock Options and Warrants
--------------------------
The Financial Accounting Standards Board ("FASB") issued SFAS No. 123,
"Accounting for Stock-Based Compensation," which defines a fair value
based method of accounting for stock-based compensation. However, SFAS
No. 123 allows an entity to continue to measure compensation cost
related to stock and stock options issued to employees using the
intrinsic method of accounting prescribed by Accounting Principles
Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to
Employees." Entities electing to remain with the accounting method of
APB 25 must make pro forma disclosures of net income and earnings per
share, as if the fair value method of accounting defined in SFAS No.
123 had been applied. The Company has elected to account for its
stock-based compensation to employees under APB 25.
Estimates
---------
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could
differ from those estimates.
Concentrations and Uncertainties
--------------------------------
International sales accounted for 29% and 18% of net sales for the
years ended August 31, 2001 and 2000, respectively. Amounts due from
Medicaid represented 22% of the net accounts receivable balance at
August 31, 2001.
The Company operates in the computer software industry which is highly
competitive and changes rapidly. The Company's operating results could
be significantly affected by its ability to develop new products and
find new distribution channels for new and existing products.
F-11
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2001
--------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Concentrations and Uncertainties (Continued)
--------------------------------
The Company does not manufacture certain of its components including
the computer that is used in one of the Company's products. Such
computer is sourced by the Company from a single vendor. The Company
also uses a number of pictographic symbols that are used in its
software products which are licensed from a third party. The inability
of the Company to obtain computers used in its products or to renew its
licensing agreement to use pictographic symbols could negatively impact
the Company's financial position, results of operations, and cash
flows.
Recently Issued Accounting Pronouncements
-----------------------------------------
In July 2001, the FASB issued SFAS No. 141, "Business Combinations."
This statement addresses financial accounting and reporting for
business combinations and supersedes APB Opinion No. 16, "Business
Combinations," and SFAS No. 38, "Accounting for Pre-Acquisition
Contingencies of Purchased Enterprises." All business combinations in
the scope of this statement are to be accounted for using one method,
the purchase method. The provisions of this statement apply to all
business combinations initiated after June 30, 2001. Use of the
pooling-of-interests method for those business combinations is
prohibited. This statement also applies to all business combinations
accounted for using the purchase method for which the date of
acquisition is July 1, 2001 or later.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets." This statement addresses financial accounting and
reporting for acquired goodwill and other intangible assets and
supersedes APB Opinion No. 17, "Intangible Assets." It addresses how
intangible assets that are acquired individually or with a group of
other assets (but not those acquired in a business combination) should
be accounted for in financial statements upon their acquisition. This
statement also addresses how goodwill and other intangible assets
should be accounted for after they have been initially recognized in
the financial statements. It is effective for fiscal years beginning
after December 15, 2001. Early application is permitted for entities
with fiscal years beginning after March 15, 2001, provided that the
first interim financial statements have not been issued previously.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement applies to legal obligations
associated with the retirement of long-lived assets that result from
the acquisition, construction, development, and/or the normal operation
of long-lived assets, except for certain obligations of lessees. This
statement is not applicable to the Company.
F-12
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2001
--------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets. This statement replaces SFAS No. 121, "Accounting
for the Impairment of Log-Lived Assets and for Long-Lived Assets to be
Disposed of," the accounting and reporting provisions of APB No. 30,
"Reporting the Results of Operations Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual, and
Infrequently Occurring Events and Transactions," for the disposal of a
segment of a business, and amends Accounting Research Bulletin No. 51,
"Consolidated Financial Statements," to eliminate the exception to
consolidation for a subsidiary for which control is likely to be
temporary. The Company does not expect adoption of SFAS No. 144 to have
a material impact, if any, on its financial position or results of
operations.
NOTE 3 - 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 4 - PROPERTY AND EQUIPMENT
Property and equipment at August 31, 2001 consisted of the following:
Equipment $ 104,236
Computer equipment 298,800
Furniture and fixtures 45,036
Leasehold improvements 38,215
------------
486,287
Less accumulated depreciation and amortization 395,019
------------
TOTAL $ 91,268
============
Depreciation and amortization expense was $65,300 and $82,778 for the
years ended August 31, 2001 and 2000, respectively.
F-13
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2001
--------------------------------------------------------------------------------
NOTE 5 - LINE OF CREDIT
The Company has available an unsecured $100,000 revolving line of
credit from a bank with interest payable on a monthly basis at prime
(6.5% at August 31, 2001), plus 3%. The line is personally guaranteed
by the Company's President. As of August 31, 2001, the amount drawn
against the line of credit was $98,959.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
Leases
------
The Company leases certain facilities for its corporate and operations
offices under a non-cancelable operating lease agreement that expires
in September 2003. The Company also leases certain office and computer
equipment under non-cancelable capital lease arrangements that expire
through August 2004.
Future minimum lease payments under non-cancelable operating and
capital leases with initial or remaining terms of one year or more at
August 31, 2001 were as follows:
Year Ending Operating Capital
August 31, Leases Leases
------------ --------- ---------
2002 $146,016 $ 17,348
2003 146,016 13,531
2004 2,434 10,704
--------- ---------
$294,466 41,583
=========
Less amount representing interest 7,169
---------
34,414
Less current portion 13,214
---------
LONG-TERM PORTION $ 21,200
=========
Included in property and equipment is capitalized leased equipment of
$174,000 with accumulated depreciation of $132,111 at August 31, 2001.
Rent expense was $184,070 and $173,912 for the years ended August 31,
2001 and 2000, respectively.
Employee Agreement
------------------
The Company entered into an employment agreement with its President
that expires on August 31, 2002. The employment agreement provides for
an annual salary of $150,000 and an annual bonus based on the Company's
performance not to exceed $150,000. The agreement also provides that
the Company may terminate the agreement upon 30 days written notice if
termination is without cause. The Company's only obligation would be to
pay its President the greater of a) 12 months salary or b) the
remainder of the term of the employment agreement from the date of
notice of termination.
F-14
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2001
--------------------------------------------------------------------------------
NOTE 6 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Employee Agreement
------------------
The Company entered into an employment agreement with its President
that expires on August 31, 2002. The employment agreement provides for
an annual salary of $150,000 and an annual bonus based on the Company's
performance not to exceed $150,000. The agreement also provides that
the Company may terminate the agreement upon 30 days written notice if
termination is without cause. The Company's only obligation would be to
pay its President the greater of a) 12 months salary or b) the
remainder of the term of the employment agreement from the date of
notice of termination.
License Agreement
-----------------
The Company entered into an agreement with Therapeutic Systems Research
Laboratory ("TSRL") to jointly develop a computer simulation of the
absorption of drug compounds in the gastrointestinal tract. Upon
execution of a definitive License Agreement, TSRL received a one-time
payment of $75,000, plus a royalty of 20% of net sales of the
absorption simulation. For the year ended August 31, 2001 and 2000, the
Company paid royalties of $110,814 and $105,922, respectively.
Listing on Stock Exchange
-------------------------
In order to maintain quotation of its securities on the NASDAQ Small
Cap Market (the "NASDAQ"), the Company has to maintain certain minimum
financial requirements. As of August 31, 2001 and 2000, the Company has
ceased to meet one of the requirements for continued listing, namely
the Company's net tangible assets as of August 31, 2001 and 2000 were
$283,000 and $486,000, respectively, which is below the $2,000,000
required by the NASDAQ. Further, as of November 16, 1999, the market
value of the Company's public float was below the $4,000,000 required
for continued NASDAQ listing. The Company was unable to increase its
net tangible assets and the market value of its public float to meet
the NASDAQ's requirements for continued listing. The Company's
securities were delisted from NASDAQ effective at the closing of July
2, 1999. Trading, if any, of the shares of common stock now need to be
conducted in the over-the-counter markets in the so-called "pink
sheets" or on the NASDAQ's "Electronic Bulletin Board." Consequently,
the liquidity of the Company's securities could be impaired, not only
in the number of securities which could be bought and sold, but also
through delays in the timing of the transactions, reductions in
security analysts' and the news media's coverage of the Company, and
lower prices for the Company's securities than otherwise might be
attained.
F-15
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2001
--------------------------------------------------------------------------------
NOTE 7 - SHAREHOLDERS' EQUITY
Warrants
--------
In August and September 1996, the Company entered into two Subscription
Agreements whereby the Company issued 100,000 and 150,000 warrants,
respectively, to purchase shares of common stock. The warrants are
exercisable at $4 per share and expire five years from the date of
grant. During August and September 2001, the warrants to purchase
100,000 and 150,000 shares of common stock expired prior to being
exercised.
In January 1997, the Company entered into Subscription Agreements
whereby the Company issued notes in the amount of $1,100,000 and issued
280,000 warrants to purchase common stock. The warrants are exercisable
at $2.50 per share, are subject to a 12-month-lock-up period, and
expire five years from the grant date. The notes were repaid upon the
completion of the Company's stock offering.
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 had been reserved for issuance.
In March 1999, the shareholders approved an increase in the number of
shares that may be granted under the Option Plan to 500,000. In
February 2000, the shareholders approved an increase in the number of
shares that may be granted under the Option Plan to 1,000,000.
Furthermore, in December 2000, the shareholders approved an increase in
the number of shares that may be granted under the Option Plan to
1,250,000. The Option Plan terminates in 2006, subject to earlier
termination by the Board of Directors.
The following summarizes the stock option transactions:
Weighted-
Average
Exercise
Number Price
of Options Per Share
---------- ---------
Outstanding, August 31, 1999 294,320 $ 1.74
Granted 568,750 $ 2.49
Exercised (2,300) $ 1.31
Expired/canceled (18,597) $ 1.98
----------
Outstanding, August 31, 2000 842,173 $ 2.24
Granted 428,000 $ 1.51
Expired/canceled (53,652) $ 2.45
----------
OUTSTANDING, AUGUST 31, 2001 1,216,521 $ 1.97
==========
EXERCISABLE, AUGUST 31, 2001 217,392 $ 2.15
==========
F-16
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2001
--------------------------------------------------------------------------------
NOTE 7 - SHAREHOLDERS' EQUITY (CONTINUED)
Stock Option Plan (Continued)
-----------------
The weighted-average remaining contractual life of options outstanding
issued under the Plan is 8.59 years at August 31, 2001. The exercise
prices for the options outstanding at August 31, 2001 ranged from $1.31
to $4.25, and the information relating to these options is as follows:
Weighted- Weighted- Weighted-
Average Average Average
Remaining Exercise Exercise
Stock Stock Contractual Price Price
Exercise Options Options Life of Options of Options of Options
Price Outstanding Exercisable Outstanding Outstanding Exercisable
------------- ----------- ----------- --------------- ----------- -----------
$ 1.31 - 2.00 753,206 112,503 8.77 years $ 1.49 $ 1.41
$ 2.01 - 3.00 432,750 86,550 8.56 years $ 2.65 $ 2.65
$ 4.01 - 4.25 30,565 18,339 4.62 years $ 4.25 $ 4.25
------------ ------------
1,216,521 217,392
============ ============
The Company has adopted only the disclosure provisions of SFAS No. 123.
It applies APB 25 and related interpretations in accounting for its
plans and does not recognize compensation expense for its stock-based
compensation plans other than for restricted stock and options issued
to outside third parties. If the Company had elected to recognize
compensation expense based upon the fair value at the grant date for
awards under this plan consistent with the methodology prescribed by
SFAS No. 123, the Company's net loss and loss per share would be
reduced to the pro forma amounts indicated below for the years ended
August 31, 2001 and 2000:
2001 2000
---------- ----------
Net loss
As reported $(225,600) $(257,602)
Pro forma $(511,704) $(429,939)
Basic and diluted loss per common share
As reported $ (0.07) $ (0.08)
Pro forma $ (0.15) $ (0.13)
The fair value of these options was estimated at the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions for the years ended August 31, 2001 and
2000: dividend yields of 0% and 0%, respectively; expected volatility
of 100% and 100%, respectively; risk-free interest rates of 5% and 6%,
respectively; and expected life of five and five years, respectively.
The weighted-average fair value of options granted during the years
ended August 31, 2001 and 2000 was $1.18 and $2.12, respectively, and
the weighted-average exercise price was $1.51 and $2.49, respectively.
F-17
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2001
--------------------------------------------------------------------------------
NOTE 7 - SHAREHOLDERS' EQUITY (CONTINUED)
Stock Option Plan (Continued)
-----------------
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion,
the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
Other Stock Options
-------------------
As of August 31, 2001, the Company granted the Board of Directors a
total of 5,206 stock options at exercise prices ranging from $1.20 to
$5.25.
During the year ended August 31, 1999, the Company entered into an
investor relations agreement for $4,000 per month and 30,000 stock
options at an exercise price of $1, which equaled the fair market value
on the date of grant. As of August 31, 2001, 22,500 of these options
were exercised in exchange for cash of $22,500.
NOTE 8 - INCOME TAXES
A reconciliation of the expected income tax (benefit) computed using
the federal statutory income tax rate to the Company's effective income
tax rate is as follows for the years ended August 31:
2001 2000
------- --------
Income tax computed at federal statutory tax rate (34.0)% (34.0)%
State taxes, net of federal benefit (5.0) 0.1
Change in valuation allowance 38.1 34.0
Other 1.6 --
------- --------
TOTAL 0.7% 0.1%
======= ========
F-18
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2001
--------------------------------------------------------------------------------
NOTE 8 - INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax assets and
liabilities for income taxes for the years ended August 31 consisted of
the following:
2001 2000
------------ ------------
Deferred tax assets
Accrued payroll and other expenses $ 208,221 $ 171,715
Accrued warranty and service costs 19,473 17,608
Net operating loss carryforward 1,593,849 1,621,262
Property and equipment 11,661 8,676
------------ ------------
Total deferred tax assets 1,833,204 1,819,261
Valuation allowance 1,619,000 1,599,352
------------ ------------
214,204 219,909
------------ ------------
Deferred tax liabilities
State taxes (70,989) --
Capitalized computer software development
costs (143,215) (219,909)
------------ ------------
Total deferred tax liabilities (214,204) (219,909)
------------ ------------
NET DEFERRED TAX ASSETS $ -- $ --
============ ============
The Company's valuation allowance increased by $19,648 during the year
ended August 31, 2001. At August 31, 2001, the Company had federal and
state net operating loss carryforwards of approximately $4,126,000 and
$2,158,000, respectively, that expire through 2021.
F-19
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2001
--------------------------------------------------------------------------------
NOTE 8 - INCOME TAXES (CONTINUED)
The components of the income tax provision for the years ended August
31 were as follows:
2001 2000
------- -------
Current
Federal $ -- $ --
State 1,600 1,600
------- -------
1,600 1,600
------- -------
Deferred
Federal -- --
State -- --
------- -------
-- --
------- -------
TOTAL $1,600 $1,600
======= =======
NOTE 9 - RELATED PARTY TRANSACTIONS
As of August 31, 2001, included in accrued compensation due to officer
was $194,083, which represents accrued salary due to the Company's
President. The amount due does not accrue interest.
As of August 31, 2001, included in accrued compensation due to officer
was $19,333, which represents accrued salary due to the Company's Vice
President of Human Resources. The amount due does not accrue interest.
F-20
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2001
--------------------------------------------------------------------------------
NOTE 10 - LINES OF BUSINESS
For internal reporting purposes, management segregates the Company into
two divisions as follows for the years ended August 31:
August 31, 2001
--------------------------------------------------------
Simulations
Plus, Inc. Words+, Inc. Eliminations Total
------------ ------------ ------------ ------------
Net sales $ 1,180,559 $ 2,734,024 $ -- $ 3,914,583
Income (loss)
from operations $ (340,539) $ 138,591 $ -- $ (201,948)
Identifiable assets $ 859,371 $ 597,494 $ (199,606) $ 1,257,259
Capital expenditures $ -- $ 30,700 $ -- $ 30,700
Depreciation and
amortization $ 47,250 $ 18,050 $ -- $ 65,300
August 31, 2001
--------------------------------------------------------
Simulations
Plus, Inc. Words+, Inc. Eliminations Total
------------ ------------ ------------ ------------
Net sales $ 935,404 $ 2,694,147 $ -- $ 3,629,551
Income (loss)
from operations $ (359,549) $ 122,886 $ -- $ (236,663)
Identifiable assets $ 1,146,550 $ 638,095 $ (318,805) $ 1,465,840
Capital expenditures $ 3,742 $ 2,490 $ -- $ 6,232
Depreciation and
amortization $ 44,238 $ 38,540 $ -- $ 82,778
Most corporate expenses, such as legal and accounting expenses and
public relations expenses, are included in Simulations Plus, Inc.
F-21