SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 2002 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1937
For the transition period from _________ to _________
Commission file number: 000-21665
SIMULATIONS PLUS, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-4595609
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1220 W. AVENUE J
LANCASTER, CA 93534
(Address of principal executive offices including zip code)
(661) 723-7723
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes x No
-------------- --------------
The number of shares outstanding of the Issuer's common stock, par value $0.001
per share, as of July 03, 2002, was 3,408,331.
SIMULATIONS PLUS, INC.
FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED MAY 31, 2002
Table of Contents
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet at May 31, 2002 (unaudited) 1
Consolidated Statements of Operations for the three and nine
months ended May 31, 2002 and 2001 (unaudited) 2
Consolidated Statements of Cash Flows for the nine months
ended May 31, 2002 and 2001 (unaudited) 3
Notes to Consolidated Financial Statements (unaudited) 4
Item 2. Management's Discussion and Analysis or Plan of Operations
General 6
Results of Operations 13
Liquidity and Capital Resources 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signature 19
Item 1. Financial Statements
--------------------
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
May 31, 2002
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents (note 2) $ 83,046
Accounts receivable, net of allowance for
doubtful accounts of $10,469 638,547
Prepaid expenses 25,088
Inventory 200,455
------------
Total current assets 947,136
------------
Capitalized computer software development costs,
net of accumulated amortization (note 3) 323,964
Furniture and equipment, net (note 4) 61,067
Other assets 13,257
------------
Total assets $ 1,345,424
============
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable 102,400
Accrued payroll and other expenses 335,708
Accrued compensation due to officer-directors 218,916
Accrued warranty and service costs 43,270
Current portion of capitalized lease obligations 12,459
------------
Total current liabilities 712,753
------------
Capitalized lease obligations, net of current portion 12,224
------------
Total liabilities 724,977
------------
Shareholders' equity
Preferred stock: $.001 par value, authorized
10,000,000 shares, none issued and outstanding 0
Common stock: $.001 par value, authorized
20,000,000 shares, issued and outstanding 3,408,331 (note 5) 3,409
Additional paid-in capital 4,654,756
Accumulated deficit (4,037,718)
------------
Total shareholders' equity 620,447
------------
Total liabilities and shareholders' equity $ 1,345,424
============
The accompanying footnotes are an integral part of these statements.
1
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and nine months ended May 31, 2002 and 2001
(Unaudited)
Three months ended Nine months ended
---------------------------------------------------------
05/31/02 05/31/01 05/31/02 05/31/01
------------ ------------ ------------ ------------
Net sales $ 1,119,967 $ 974,166 $ 3,233,877 $ 3,094,915
Cost of sales 373,064 399,817 1,078,706 1,306,149
------------ ------------ ------------ ------------
Gross profit 746,903 574,349 2,155,171 1,788,766
------------ ------------ ------------ ------------
Operating expenses:
Selling, general & administration 540,337 549,606 1,534,793 1,582,470
Research and development 94,929 87,161 270,452 269,762
------------ ------------ ------------ ------------
Total operating expenses 635,266 636,767 1,805,245 1,852,232
------------ ------------ ------------ ------------
Income (loss) from operations 111,637 (62,418) 349,926 (63,466)
Other income (expenses):
Interest revenue 1 24 16 75
Interest expense (2,601) (5,496) (12,468) (17,230)
------------ ------------ ------------ ------------
Income (loss) before provision for income taxes 109,037 (67,890) 337,474 (80,621)
Provision (benefit) for income taxes 0 0 0 0
------------ ------------ ------------ ------------
Net income (loss) $ 109,037 $ (67,890) $ 337,474 $ (80,621)
============ ============ ============ ============
Basic net income (loss) per common share $ 0.03 $ (0.02) $ 0.10 $ (0.02)
============ ============ ============ ============
Diluted net income (loss) per common share $ 0.03 $ (0.02) $ 0.10 $ (0.02)
============ ============ ============ ============
Basic weighted average # of common
shares outstanding 3,408,331 3,392,434 3,408,331 3,388,056
============ ============ ============ ============
Diluted weighted average # of common
shares outstanding 3,408,331 3,392,434 3,408,331 3,388,056
============ ============ ============ ============
The accompanying footnotes are an integral part of these statements.
2
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended May 31, 2002 and 2001
(Unaudited)
Nine months ended
-----------------------
Cash flows from operating activities: 05/31/02 05/31/01
---------- ----------
Net Income (loss) $ 337,474 $ (80,621)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization of furniture and equipment 43,310 46,274
Amortization of capitalized software development costs 101,034 283,109
(Increase) decrease in:
Accounts receivable (194,147) (43,272)
Inventory (18,097) (65,570)
Other assets (65) 9,899
Increase (decrease) in:
Accounts payable (161,905) (6,113)
Deferred revenue (5,836) (27,206)
Accrued payroll and other expenses 4,471 4,511
Accrued payroll for officer-directors 24,833 --
Accrued warranty and service costs (2,186) 149
---------- ----------
Net cash provided by operating activities 128,886 121,160
---------- ----------
Cash flows from investing activities:
Purchase of furniture and equipment (13,105) 0
Capitalized computer software development cost (90,697) (104,994)
---------- ----------
Net cash used in investing activities (103,802) (104,994)
---------- ----------
Cash flows from financing activities:
Payments on line of credit, net (98,959) (62)
Payments on capitalized lease obligations (9,731) (12,266)
Proceeds from exercise of stock options 0 22,500
---------- ----------
Net cash provided by (used in) financing activities (108,690) 10,172
---------- ----------
Net increase (decrease) in cash (83,606) 26,338
Cash and cash equivalents, beginning of period 166,652 37,535
---------- ----------
Cash and cash equivalents, end of period $ 83,046 $ 63,873
========== ==========
The accompanying footnotes are an integral part of these statements.
3
SIMULATIONS PLUS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1: GENERAL
-------
As contemplated by the Securities and Exchange Commission under Item 310(b) of
Regulation S-B, the accompanying financial statements and footnotes have been
condensed and therefore do not contain all disclosures required by generally
accepted accounting principles. The interim financial data are unaudited;
however, in the opinion of Simulations Plus, Inc. (the "Company"), the interim
data include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results for the interim periods. Results
for interim periods are not necessarily indicative of those to be expected for
the full year.
Note 2: CASH AND CASH EQUIVALENTS
-------
The Company maintains cash deposits at banks located in California. Deposits at
each bank are insured by the Federal Deposit Insurance Corporation up to
$100,000. As of May 31, 2002, the Company had no uninsured cash. The Company has
not experienced any losses in such accounts and believes it is not exposed to
any significant credit risk on cash and cash equivalents.
Note 3: CAPITALIZED COMPUTER SOFTWARE DEVELOPMENT COSTS
-------
Software development costs are capitalized in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Cost of
Computer Software to be Sold, Leased, or Otherwise Marketed." Capitalization of
software development costs begins upon the establishment of technological
feasibility and is discontinued when the product is available for sale. The
establishment of technological feasibility and the ongoing assessment for
recoverability of capitalized software development costs require considerable
judgment by management with respect to certain external factors including, but
not limited to, technological feasibility, anticipated future gross revenue,
estimated economic life, and changes in software and hardware technologies.
Capitalized software development costs are comprised primarily of salaries and
direct payroll related costs and the purchase of existing software to be used in
the Company's software products.
Amortization of capitalized software development costs is provided on a
product-by-product basis on the straight-line method over the estimated economic
life of the products, not exceeding three years. Management periodically
compares estimated net realizable value by product with the amount of software
development costs capitalized for that product to ensure the amount capitalized
is recoverable through revenues. Any excess of development costs to expected net
realizable value is expensed at that time. The Company expensed $126,296 in the
fiscal year 2001 when it was required to write off as an impairment loss related
to capitalized software costs for HelixGen(TM), and included in cost of sales.
4
Note 4: FURNITURE AND EQUIPMENT
-------
Furniture and equipment as of May 31, 2002 consisted of the following:
Equipment $ 104,236
Computer equipment 311,905
Furniture and fixtures 45,036
Leasehold improvements 38,215
----------
499,392
Less accumulated depreciation (438,325)
----------
$ 61,067
==========
Note 5: STOCKHOLDERS' EQUITY
-------
STOCK OPTION PLAN
As of May 31, 2002, a total of 1,193,399 shares have been issued to various
employees at an exercise price of the fair market value or higher at the date of
grant with five-year vesting periods. Also, a total of 5,206 shares have been
issued to outside members of the Board of Directors at exercise prices ranging
from $1.50 to $5.25 with a three-year vesting period. As of today, 2,300 options
have been exercised.
Note 6: INCOME TAXES
-------
The Company uses the liability method of accounting for income taxes pursuant to
SFAS No. 109 "Accounting for Income Taxes."
Note 7: EARNINGS PER SHARE
-------
Effective February 28, 1998, the Company adopted SFAS No. 128 "Earnings Per
Share."
5
Item 2. Management's Discussion and Analysis or Plan of Operations
----------------------------------------------------------
FORWARD-LOOKING STATEMENTS
The following discussion should be read in conjunction with the financial
statements and the notes thereto appearing elsewhere in this quarterly report on
Form 10-QSB for the quarter ended May 31, 2002 (the "Form 10-QSB"). In addition
to historical information, this Form 10-QSB contains forward-looking statements.
The forward-looking statements contained herein are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
reflected in the forward-looking statements. Factors that might cause such
differences include, but are not limited to, those discussed in the section
entitled "Management's Discussion and Analysis or Plan of Operations." Readers
are cautioned not to place undue reliance on these forward-looking statements,
which reflect management's analysis only as of the date hereof. Simulations
Plus, Inc. undertakes no obligation to publicly revise these forward-looking
statements, or to reflect events or circumstances that arise after the date
hereof. Readers should carefully review the risk factors described in other
documents that the Company has filed and will continue to file from time to time
with the Securities and Exchange Commission.
GENERAL
BUSINESS
--------
Simulations Plus, Inc. (the "Company" or "Simulations Plus") and its wholly
owned subsidiary, Words+, Inc. ("Words+") produce two types of products: (1)
Simulations Plus, incorporated in 1996, develops and produces simulation
software for use in pharmaceutical research and for education, and also provides
contract research services to the pharmaceutical industry, and (2) Words+,
founded in 1981, produces computer software and specialized hardware for use by
persons with disabilities, as well as a personal productivity software program
called "Abbreviate!" for the retail market.
DESCRIPTION OF SIMULATION SOFTWARE
----------------------------------
The development of simulation software involves (1) identifying and
understanding the underlying chemistry, physics, biology, and physiology of the
processes to be simulated, (2) breaking those processes down into the lowest
practical level of individual sub-processes at which the behaviors can be
well-represented mathematically, (3) developing appropriate mathematical
relationships/equations, and (4) converting them into computer subroutines. The
software subroutines representing these individual processes are then integrated
into an overall simulation program, with appropriate coordination between
modules and design of user-friendly interface for inputs and outputs. The
predictions of these programs are then compared to known results in order to
calibrate the simulations and to demonstrate the validity of the models as
useful tools for predicting new results.
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.
6
The Company's GastroPlus(TM) pharmaceutical software simulates the movement,
dissolution/precipitation, chemical/metabolic degradation and absorption of
orally-dosed drug compounds in the gastrointestinal tract of humans and several
laboratory animal species, and with additional inputs, it also simulates the
blood plasma concentration-time history of the drug after it reaches the central
circulation. In 2001, the Company completed the development of, and is now
selling licenses for, an important new extension module for GastroPlus called
the Metabolism and Transporter Module. This module extends the basic simulation
to include enzyme-specific metabolism in both the liver and in intestinal walls,
as well as the effects of transporter proteins that line the intestinal tract
and serve to promote or inhibit drug absorption.
A second type of software consists of statistically significant models that
allow prediction of various properties of a chemical compound from just its
molecular structure. These models are not simulations, but instead are formed
from a variety of mathematical functions and relationships, including linear,
nonlinear, and artificial neural network models.
The Company's QMPRPlus(TM) program is the second type of program, and it
provides estimates for the values of several important physicochemical
characteristics of new drug-like molecules with only the structures of the
molecules as input. Recent additions to this program include the prediction of
permeability in a special line of cells called MDCK cells. This predictive model
was developed during the past fiscal year under a funded collaboration with the
Affymax Research Institute, at that time a division of Glaxo Wellcome. The
Company recently announced the release of a powerful "4D Data Mining" module for
QMPRPlus, which further extends the utility of the software. Both the MDCK
module and the 4D Data Mining module are additional-cost options to the program.
GastroPlus and QMPRPlus are used by almost every major and a number of smaller
pharmaceutical companies in the U.S., Europe, and Japan. The number of licensee
continues to grow each quarter, and revenues reflect the cumulative effect of
annual license renewals added to new sales.
The Company is now completing the development of two new additional-cost
modules, one for GastroPlus and one for QMPRPlus. PDPlus(TM) is a module for
GastroPlus that will enable the program to be used for pharmacodynamic modeling
coupled with the core simulation. The Training Module for QMPRPlus will allow
users to build their own artificial neural network models using a highly
sophisticated, state-of-the-art model-building engine that automates the process
of finding the most effective artificial neural network models for a particular
database, using the fast descriptor engine that is part of QMPRPlus.
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, universal
gravitation, ideal gases, 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 have continued
through distributors in the U.S., U.K. Australia, and New Zealand.
7
PRODUCTS
--------
The Company's pharmaceutical software products provide cost-effective solutions
to a number of critical problems in pharmaceutical research, and also serve in
the education of pharmacy and medical students. The Company's pharmaceutical
software products and services to date are focused on the area of pharmaceutical
research known as ADMET (Absorption, Distribution, Metabolism, Elimination, and
Toxicity). The Company released its first pharmaceutical software product,
GastroPlus, in August 1998 and immediately received enthusiastic interest from
researchers in large pharmaceutical companies such as Astra, Glaxo Wellcome,
Pfizer, Pharmacia, The Roche Group, SmithKline Beecham and Zeneca. Since then,
the majority of the world's largest pharmaceutical companies and a steadily
growing number of smaller companies have licensed the software. Some of these
companies have merged to become single companies (e.g., AstraZeneca and
GlaxoSmithKline), which give the appearance of fewer customers, but the
Company's software is licensed on an annual basis by geographic location, so no
actual loss in sales has resulted from these mergers. In fact, several of these
mergers have resulted in increased licenses and new geographic locations.
The 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
PDPlus(TM) Module is scheduled for release during the 4th quarter of this fiscal
year.
The majority of new sales now include these additional extra-cost modules,
contributing significantly to revenue growth. GastroPlus has now become the
"gold standard" for simulation of oral drug absorption and pharmacokinetics, and
is in use throughout the industry in the U.S., Japan, and Europe. Recent sales
have included a number of drug delivery companies (companies that design the
actual tablet or capsule for a drug compound that was developed by another
company). Although these companies are considerably smaller than the
pharmaceutical giants, they can realize significant savings in cost and time
through accurate simulation of their drug delivery technologies. The Company
believes this part of the industry, which includes hundreds of companies,
represents major growth potential for GastroPlus. Another new module,
PDPlus(TM), is in beta test at this time, and release is expected during the
fourth quarter. This additional cost module will enable researchers to model
both therapeutic and toxic effects that result from the presence of a drug in
the body, and as a function of the predicted absorption rate and pharmacokinetic
behavior from the core simulation. This extends the utility of the software
farther into clinical trials, adding new departments and companies to the
potential customer list.
8
QMPRPlus (Quantitative Molecular Permeability Relationships), which can be used
as a companion program to GastroPlus or by itself, takes as inputs the
structures of molecules, and provides estimates for human intestinal
permeability, octanol-water partition coefficient (logP), solubility,
diffusivity, blood-brain barrier penetration, plasma protein binding, and volume
of distribution. The ability to predict these properties prior to running wet
lab experiments allows screening of undesirable compounds much faster and at
much lower cost than using traditional experimental methods.
Most of the estimated parameters from QMPRPlus are inputs to GastroPlus.
QMPRPlus thereby extends the utility of GastroPlus into early drug discovery,
during which pharmaceutical companies may not have even made many of the
molecules that have been identified as potential drug candidates. During the
previous fiscal year, the Company completed the development of a new intestinal
permeability model for a special line of cell culture experiments using
Manin-Darby Canine Kidney (MDCK) cells under contract to the Affymax Research
Institute, at that time a division of Glaxo Wellcome. This unique model, based
on high quality data for nearly 400 compounds, was presented at the American
Chemical Society meeting in San Diego during the first week of April 2001. The
Company also completed the development of a blood-brain barrier permeation model
during the last fiscal year, as well as models for plasma protein binding and
volume of distribution, and it updated all earlier models with enhanced
artificial neural network predictions. By providing estimates of physicochemical
properties from structure alone, QMPRPlus, by itself or coupled with GastroPlus,
allows researchers to rank order large numbers of candidate compounds in terms
of their potential for human intestinal absorption. Because pharmaceutical
companies are dealing with many millions of compounds per year, and because the
area of ADMET has become a bottleneck, high throughput screening on the computer
("IN SILICO") is becoming not just a convenience, but a necessity.
In 1998, the Company executed a License Agreement with Therapeutic Systems
Research Laboratories, Inc. ("TSRL"), Ann Arbor, Michigan, to obtain exclusive
rights to TSRL's technology and database, including measurements of drug
permeability from nearly 60 laboratory experiments to measure the intestinal
permeability of drug compounds in human and/or rat small intestines. As a part
of this License Agreement, the Company is also entitled to ongoing consulting
assistance in the development and further enhancement of the GastroPlus
absorption simulation model from TSRL staff, including Dr. Gordon Amidon. The
Company believes that the strategic advantage of exclusive access to TSRL's
technology and expertise, combined with the Company's now well-developed
expertise in absorption and pharmacokinetics simulation, have resulted in
GastroPlus becoming the de facto standard for oral drug absorption simulation
and analysis within the pharmaceutical industry. The Company is aware that other
companies have developed competitive software; however, based on customer
feedback, management believes there is no significant competition for GastroPlus
at this time. The Company believes that the addition of the Metabolism and
Transporter Module last year, the upcoming PDPlus module, and ongoing upgrades
of the core simulation, are advances in the state-of-the-art of oral drug
absorption, pharmacokinetics, and pharmacodynamics 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 30
prestigious scientific meetings worldwide in the past two years, and they
9
continue to be invited to present at a variety of meetings worldwide. Also, the
Company conducts contracted studies for a number of companies who prefer to have
the studies run by the Company's scientists than to acquire the software and
train someone to use it.
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 a variety of
pharmaceutical and biotechnology companies. These studies provide an additional
source of revenue for the Company, as well as a means to introduce the Company's
software products to new customers. These studies are also beneficial to the
Company to validate and enhance its products by studying actual data in the
pharmaceutical industry. The company recently completed two study contracts to
analyze drugs that are now in clinical trials, and an extension to one of the
contracts is now being negotiated. Further work on the other contract had been
indicated by the customer once new experimental results are in.
PHARMACEUTICAL SIMULATIONS SOFTWARE PRODUCT DEVELOPMENT
-------------------------------------------------------
In the area of simulation software for pharmaceutical research, the Company is
pursuing the development of additional modules for GastroPlus and QMPRPlus.
Although all of our development work cannot be disclosed for competitive
reasons, some of our development efforts include:
(1) PDPlus(TM) Module
---------------------
The PDPlus Module for GastroPlus is in beta test with customers. Prior versions
of GastroPlus have dealt with absorption and pharmacokinetics (what happens to
the drug when it gets into the body). PDPlus now adds pharmacodynamics for the
drug (what happens to the body when the drug gets into the body) - i.e., what
kind of therapeutic and side effects it produces. This is an important new
capability because it opens up the market to researchers who deal in later stage
clinical trials, and who routinely perform PK/PD
(pharmacokinetic/pharmacodynamic) analyses. Until now, these analyses were
performed using models that treated absorption and its related processes with
simplified models - often so simplified that calculations were in error. With
PDPlus in GastroPlus, researchers will be able to perform highly sophisticated
simulations and analyses to determine the complex interactive effects of factors
that change the amount of drug that is absorbed, and how fast it is metabolized
after it is absorbed. These can result in significant variations in
pharmacodynamic effect. Without the ability to predict these effects, clinical
trial costs can soar when trials must be repeated to determine proper dosing
levels. PDPlus will enable researchers to better understand the complex
interplay among absorption, pharmacokinetics/metabolism, and pharmacodynamics,
and to better estimate the dosing levels to use in clinical trials prior to the
start of the trials. The Company expects to release this additional-cost module
in the fourth quarter.
10
(2) Multiple Particle Size Dissolution Model
--------------------------------------------
The current dissolution model in GastroPlus uses a single "effective" particle
size. While this model has well represented most tablets, capsules, and
suspensions we have dealt with to date, formulation researchers know that real
dosage forms do not consist of particles that are all one size. Instead, there
is a distribution of particle sizes over some range from smaller than the
average size to larger than the average size. Smaller particles dissolve faster
than larger particles. For some drugs, this results in dissolution behavior that
is not well modeled with a single effective particle size. This new model will
allow formulation researchers to assess the effects of different particle size
distributions on dissolution and absorption.
(3) QMPRPlus(TM) upgrades
-------------------------
We continue to add new molecular descriptors and new predicted ADMET properties
to QMPRPlus(TM). We have just completed the development of a new,
additional-cost "4D Data Mining" module, which is in final testing and will be
released in April 2002. We are also developing the ability for researchers to
add their own data to refine the predictions for ADMET properties. And we are in
discussions with several companies to develop additional models based on their
experimental data. If contracted for, these models may be proprietary to each
company, or they may result in additional predictions that can be licensed to
other users, as we did with the MDCK model developed under contract to Affymax.
The number of molecular descriptors has been increased in beta versions of
QMPRPlus by about 25%. These new descriptors include over 60 electrotopological
indices that the Company believes will be valuable in building new models for
pharmacokinetic and metabolism properties, as well as certain other descriptors
that will be described at a later date.
A new Training Module is well along in development for QMPRPlus. This module
will allow researchers to build their own artificial neural network models from
their own data using a highly sophisticated, state-of-the-art process for
identifying critical descriptors and training artificial neural network models
in the most efficient way. Users can have such new models included in the output
of QMPRPlus along with the existing ADME properties. In addition, researchers
will be able to add their own data to existing models to provide a larger
database of information for known compounds, and then to retrain the models to
include this new data. Through the automation provided in the proprietary
software for this module, alpha versions of the software have demonstrated a
reduction in the time to build powerful ensemble artificial neural network
models from many weeks to one or two days, and with higher quality models than
were previously possible. The company has received strong indications of
interest from customers for this new, additional cost capability. The Company
expects to release this new module in the fourth quarter.
11
DISABILITY PRODUCT DEVELOPMENT
------------------------------
The Company's wholly owned subsidiary, Words+, Inc. has been an industry
technology leader for over 20 years in introducing and improving augmentative
and alternative communication and computer access software and devices for
disabled persons and intends to continue to be at the forefront of the
development of new products. The Company will continue to enhance its major
software products, E Z Keys and Talking Screen, as well as its growing line of
hardware products. The Company announced the release of its new version of E Z
Keys for the new Microsoft XP operating system at the "Technologies for Persons
with Disabilities Conference" in Los Angeles in late March 2002. The Company
will also consider acquisitions of other products, businesses and companies that
are complementary to its existing augmentative and alternative communication and
computer access business lines.
12
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED MAY 31, 2002 AND 2001.
The following table sets forth the Company's consolidated statements of
operations (in thousands) and the percentages that such items bear to net sales:
(Due to rounding, the numbers appearing in the following table may not foot;
please refer to the Company's consolidated statements of operations.)
Three Months Ended
----------------------------------------------------------
05/31/02 05/31/01
-------------------------- ------------------------------
Net sales $1,120 100.0% $974 100.0%
Cost of sales 373 33.3 400 41.1
----------- -------------- ------------- ---------------
Gross profit 747 66.7 574 58.9
----------- -------------- ------------- ---------------
Selling, general and administrative 540 48.2 550 56.5
Research and development 95 8.5 87 8.9
----------- -------------- ------------- ---------------
Total operating expenses 635 56.7 637 65.4
----------- -------------- ------------- ---------------
Income (loss) from operations 112 10.0 (63) (6.5)
Interest expense (3) (0.3) (5) (0.5)
----------- -------------- ------------- ---------------
Net income (loss) $109 9.7% $ (68) (7.0)%
=========== ============== ============= ===============
NET SALES
Consolidated net sales increased $146,000, or 15.0%, to $1,120,000 in the third
fiscal quarter of 2002 from $974,000 in the third fiscal quarter of 2001.
Simulations Plus, Inc.'s sales from pharmaceutical and educational software
increased approximately $200,000, or 65.5%; however, although Words+, Inc.'s
sales increased approximately 11.6% from the second quarter to the third quarter
of fiscal 2002, Words+ net sales for the third quarter decreased approximately
$54,000, or 8.0% compared to the third quarter of fiscal 2001. The significant
increase in the Company's pharmaceutical software sales is attributable to a
combination of additional license sales to existing customers, new customers,
new modules, and four major upgrades to existing products. Management attributes
the decrease in Words+ sales primarily to a decline in MessageMate sales from
the same period last year.
COST OF SALES
Consolidated cost of sales decreased $27,000, or 6.8%, to $373,000 in the third
fiscal quarter of 2002 from $400,000 in the third fiscal quarter of 2001. The
percentage of cost of sales decreased by 7.8%. For Simulations Plus, the cost of
sales decreased $18,000, or 19.3%. Management attributes the decrease in the
cost of sales primarily to a decline in royalty expense due to the fact that
more sales were generated from additional modules for GastroPlus, and sales of
QMPRPlus, which are not subject to royalty, comparing with the sales mix in the
third fiscal quarter of 2001. The percentage of cost of sales decreased by
13
16.0%. For Words+, the cost of sales decreased $9,000 or 2.8%; however the
percentage of cost of sales increased by 2.0% reflecting the product mix sold.
The percentage of sales generated by product items with lower profit margins was
greater than for items with higher profit margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Consolidated selling, general and administrative expenses decreased $10,000, or
1.8%, to $540,000 in the third fiscal quarter of 2002 from $550,000 in the third
fiscal quarter of 2001. For Simulations Plus, selling, general and
administrative expenses decreased $31,000, or 15.1% primarily due to decreased
legal and accounting expense, public relations, travel expense, and
administrative personnel wages by consolidating some tasks. For Words+, expenses
increased $21,000, or 6.1%, due to increases in selling expenses, such as
commissions and catalog expenses, contract labor, building repairs, supplies and
depreciation expense. Although there were decreases in wages and payroll-related
expenses, overall increases in expenses outweighed decreases.
RESEARCH AND DEVELOPMENT
The Company incurred approximately $129,000 of research and development costs
for the two companies during the third quarter of 2002. Of this amount, $34,000
was capitalized and $95,000 was expensed in this period. In the third quarter of
2001, the Company incurred $126,000 of research and development costs, of which
$39,000 was capitalized and $87,000 was expensed. The increase of $3,000, or
2.3% in research and development expenditure from the third quarter of 2001 to
the third quarter of 2002 was primarily due to a small increase in wages and
payroll-related expenses.
INTEREST EXPENSE
Interest expense for the third fiscal quarter of 2002 decreased by $2,000, to
$3,000 from $5,000 in the third fiscal quarter of 2001. This decrease is
attributable primarily to paying off the balance on our revolving line of credit
during the third fiscal quarter of 2002. This eliminated all debt with the
exception of long term leases and accrued salaries.
NET INCOME (LOSS)
The consolidated net income for the three months ended May 31, 2002 increased by
$177,000, to a profit of $109,000 in the third fiscal quarter of 2002 compared
to a loss of ($68,000) in the third fiscal quarter of 2001. Management
attributes this increase primarily to strong increases in sales, continued
decreases in cost of sales, selling, general and administrative expenses, and
interest expense, which outweighed increases in research and development
expenses.
14
COMPARISON OF NINE MONTHS ENDED MAY 31, 2002 AND 2001.
The following table sets forth the Company's consolidated statements of
operations (in thousands) and the percentages that such items bear to net sales:
(Due to rounding, the numbers appearing in the following table may not foot;
please refer to the Company's consolidated statements of operations.)
Nine Months Ended
--------------------------------------------------------
05/31/02 05/31/01
-------------------------- ----------------------------
Net sales $3,234 100.0% $3,095 100.0%
Cost of sales 1,079 33.4 1,306 42.2
---------- --------------- ------------- --------------
Gross profit 2,155 66.6 1,789 57.8
---------- --------------- ------------- --------------
Selling, general and administrative 1,535 47.5 1,582 51.1
Research and development 270 8.3 270 8.7
---------- --------------- ------------- --------------
Total operating expenses 1,805 55.9 1,852 59.8
---------- --------------- ------------- --------------
Profit (loss) from operations 350 10.8 (63) (2.0)
Interest expense (13) (0.4) (17) (0.5)
---------- --------------- ------------- --------------
Net income (loss) $337 10.4% $ (80) (2.6)%
========== =============== ============= ==============
NET SALES
Consolidated net sales increased $139,000 or 4.5%, to $3,234,000 for the nine
months ended May 31, 2002 compared to $3,095,000 for the nine months ended May
31, 2001. Simulations Plus, Inc.'s sales increased approximately $550,000, or
61.2%; however Words+, Inc.'s sales decreased approximately $411,000, or 18.7%
for the nine months ended May 31, 2002. Management attributes the increase in
pharmaceutical software sales to a combination of new customers, new modules,
and license renewals because of major upgrades to existing products, and fees
received for product training and contracted studies. Management attributes the
decrease in Words+ sales primarily to the tragic incidents on September 11,
personnel changes in two key sales representatives, decline in MessageMate
sales, and overall sluggish economy during this time period.
COST OF SALES
Consolidated cost of sales decreased $227,000, or 17.4%, to $1,079,000 for the
nine months ended May 31, 2002 from $1,306,000 for the nine months ended May 31,
2001. The percentage of cost of sales decreased by 8.8%. For Simulations Plus,
the cost of sales decreased $153,000, or 41.4%. A significant part of the
decrease in cost of sales was due to the fact that the Company was required to
expense $126,296 in the second fiscal quarter of 2001 for the capitalized
development cost of HelixGen (because its development was postponed) while there
is no such impairment in the third fiscal quarter of 2002. Royalty expense,
which is another significant portion of cost of sales, increased due to
increased sales; however, the decrease in amortization cost outweighed this
increase. For Words+, the cost of sales decreased $74,000, or 7.9%. Expressed as
a percentage of sales, the change in cost of sales for Words+ between the nine
months operations ended May 31, 2002 and 2001 was an increase of 5.7%.
15
Management attributes this percentage increase for Words+ primarily to decreased
sales of higher margin items and increased sales of lower margin items during
the first nine months of FY 2002.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Consolidated selling, general and administrative expenses decreased $47,000, or
3.0%, to $1,535,000 for the nine months ended May 31, 2002 from $1,582,000 for
the nine months ended May 31, 2001. For Simulations Plus, selling, general and
administrative expenses decreased $82,000, or 14.2% primarily due to decreases
in depreciation expense, accounting and legal fees, public relations, salaries
and payroll-related expenses such as 401k, and payroll tax expenses. These
decreases outweighed increased expenses for insurance and trade shows. For
Words+, expenses increased $35,000, or 3.5%, due to increases in selling
expenses, such as catalogs and commissions, contract labor, depreciation
expense, insurance, and building repairs. These increases outweighed a reduction
in travel expenses, wages, and related expenses such as payroll tax and 401k
expenses, and utilities.
RESEARCH AND DEVELOPMENT
The Company incurred approximately $354,000 of research and development costs
for both companies for the nine months ended May 31, 2002. Of this amount,
$84,000 was capitalized and $270,000 was expensed in this period. In the same
period of 2001, the Company incurred $375,000 of research and development costs,
of which $105,000 was capitalized and $270,000 was expensed. The decrease of
$21,000, or 5.6% in research and development expenditures for the nine months
ended May 31, 2002 compared to the same period of 2001 was due to one staff
member who left the company and has not yet been replaced, thus decreasing wages
and payroll related expenses.
INTEREST EXPENSE
Interest expense for the nine months ended May 31, 2002 decreased by $4,000, or
23.5%, to $13,000 from $17,000 for the nine months ended May 31, 2001. This
decrease is attributable primarily to a decrease in interest on the Company's
revolving line of credit from paying off its balance in March 2002.
NET INCOME (LOSS)
Net income for the nine months ended May 31, 2002 increased by $417,000 to a
profit of $337,000 for the nine months ended May 31, 2002 compared to a loss of
$80,000 for the nine months ended May 31, 2001. Management attributes this
increase primarily to the significant increase in pharmaceutical software and
services revenues while lowering all expenses.
16
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of capital have been cash flows from its
operations, a bank line of credit, and accruing and not paying portions of
salaries to certain executive officers and managers.
The Company has available a $100,000 revolving line of credit from a bank.
Interest is payable on a monthly basis at the bank's prime rate plus 3.0%. At
May 31, 2002, the outstanding balance was completely paid off (in March 2002),
and it was $99,000 at May 31, 2001. 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. The Company now has no debt other than long-term leases and
accrued salaries.
Beginning in August 1998, certain executive officers and managers accepted
reduced salaries on a temporary basis in order to protect the cash assets of the
Company. The unpaid portions of salaries were accrued and will be paid at such
future time as management deems the Company's cash flow and cash reserves are
sufficient to make such payment without adverse effects to the Company's
financial position. The amount of such accrued and unpaid salaries, as of May
31, 2002, due to the Company's executive officers and one manager was $353,000.
Effective as of March 1, 2002, all employees and officers salaries have been
restored to their full salary levels. A small portion of accrued salaries was
paid during the third quarter. Additional accrued amounts will be paid as
described above.
The Company believes that existing capital and anticipated funds from operations
will be sufficient to meet its anticipated cash needs for working capital and
capital expenditures for the foreseeable future. If cash generated from
operations becomes insufficient to satisfy the Company's capital requirements,
the Company may have to sell additional equity or debt securities or obtain
expanded credit facilities. In the event such financing is needed in the future,
there can be no assurance that such financing will be available to the Company,
or, if available, that it will be in amounts and on terms acceptable to the
Company. If cash flows from operations became insufficient to continue
operations at the current level, and if no additional financing was obtained,
then management would restructure the Company in a way to preserve its
pharmaceutical and disability businesses while maintaining expenses within
operating cash flows.
17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
In the normal course of business, the Company is subject to
various lawsuits and claims. The Company believes that the
final outcomes of these matters, either individually or in the
aggregate, will not have a material effect on the financial
statements. The Company is not involved in any such litigation
at this time.
Item 2. Changes in Securities
---------------------
None.
Item 3. Defaults Upon Senior Securities
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None.
Item 5. Other Information
-----------------
None.
Item 6. Exhibits and Reports on form 8-K
--------------------------------
(a) Exhibits
None
(b) Reports on Form 8-K
None.
18
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: July 03, 2002 Simulations Plus, Inc.
By: /s/ Momoko Beran
-----------------------------------
Momoko Beran
Chief Financial Officer