<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCAHNGE ACT OF 1934
For the quarterly period ended February 28, 1998 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECRITIES
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.)
40015 SIERRA HIGHWAY, B-110
PALMDALE, CA 93550
(Address of principal executive offices including zip code)
(805) 266-9294
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the Issuer's common stock, par value $0.001
per share, as of April 14, 1998, was 3,350,000.
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SIMULATIONS PLUS, INC.
FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 1998
Table of Contents
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet at February 28, 1998 (unaudited) 3
Consolidated Statements of Operations for the three and six months
ended February 28, 1998 and 1997 (unaudited) 4
Consolidated Statements of Cash Flows for the six months
ended February 28, 1998 and 1997 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis or Plan of Operations
General 9
Results of Operations 11
Liquidity and Capital Resources 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signature 18
Exhibit Index 19
</TABLE>
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SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
February 28, 1998
(Unaudited)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents (note 2) 97,354
Investments (note 3) 792,862
Accounts receivable, net of allowance for
doubtful accounts of $15,000 311,549
Prepaid Expenses 37,119
Income tax receivable 51,596
Inventory 190,982
----------
Total Current Assets 1,481,462
==========
Capitalized computer software development costs,
net of accumulated amortization (note 7) 950,557
Furniture and equipment, net (note 4) 309,465
Other assets 7,313
----------
2,748,797
----------
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable 113,920
Accrued payroll and other expenses 162,059
Accrued warranty and service costs 44,292
Current portion of capitalized lease obligations 29,550
----------
Total Current Liabilities 349,821
----------
Capitalized lease obligations, net of current portion 45,508
----------
Total Liabilities 395,329
==========
Shareholders' equity
Common stock: $.001 par value, authorized
20,000,000 shares, issued and outstanding 3,350,000
(note 5 & 6) 3,350
Additional paid-in capital 4,595,771
Accumulated retained deficit (2,245,654)
----------
Total shareholders' equity 2,353,467
----------
2,748,797
==========
</TABLE>
The accompanying footnotes are an integral part of these statements.
3
<PAGE> 4
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and six months ended February 28, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
-------------------------- -------------------------
02/28/98 02/28/97 02/28/98 02/28/97
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales 532,609 677,748 1,075,672 1,219,564
Cost of sales 272,264 314,728 601,627 568,298
---------- ---------- ---------- ----------
Gross Profit 260,345 363,020 474,045 651,266
---------- ---------- ---------- ----------
Operating expenses:
Selling, General & Administration 696,364 433,441 1,308,250 938,478
Research and Development 125,949 25,350 263,232 55,876
---------- ---------- ---------- ----------
Total Operating Expenses 822,313 458,791 1,571,482 994,354
========== ========== ========== ==========
Loss from operations (561,968) (95,771) (1,097,437) (343,088)
Other income (expenses):
Income from grant 0 0 75,000 17,159
Interest revenue 8,498 1,105 28,906 1,258
Financing costs 0 (81,667) 0 (81,667)
Interest expense (3,005) (33,170) (6,034) (50,480)
---------- ---------- ---------- ----------
Loss before provision for Income taxes (556,475) (209,503) (999,565) (456,818)
Provision (benefit) for income taxes 0 0 0 (38,800)
---------- ---------- ---------- ----------
Net loss (556,475) (209,503) (999,565) (418,018)
========== ========== ========== ==========
Basic loss per share (0.17) (0.10) (0.30) (0.19)
========== ========== ========== ==========
Diluted loss per share (0.17) (0.10) (0.30) (0.19)
========== ========== ========== ==========
Weighted Ave. # of common shares outstanding 3,350,000 2,200,000 3,350,000 2,200,000
</TABLE>
The accompanying footnotes are an integral part of these statements.
4
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SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS For the six
months ended February 28, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
--------------------------
02/28/98 02/28/97
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss (999,565) (418,018)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization of furniture and equipment 23,205 18,309
Amortization of capitalized software development costs 106,251 37,239
Financing costs 81,667
Deferred taxes 380
(Increase) decrease in:
Accounts receivable 63,502 (42,145)
Inventory 31,816 (59,334)
Other assets (9,436) 2,865
Income tax receivable 5,830
Increase (decrease) in:
Accounts payable (26,622) (55,365)
Accrued interest 39,402
Accrued payroll and other expenses 11,350 29,055
Accrued warranty and service costs (7,567) 1,374
Income tax payable (40,780)
---------- ----------
Net cash provided by (used in) operating activities (801,236) (405,351)
---------- ----------
Cash flows from investing activities:
Advance to officer (40,000)
Sale of investments 124,736
Purchase of Investments (917,598)
Purchase of furniture and equipment (142,363) (54,583)
Capitalized computer software development cost (310,088) (347,605)
---------- ----------
Net cash used in investing activities (1,245,313) (442,188)
---------- ----------
Cash flows from financing activities:
Proceeds from line of credit, net (93,539)
Payments on capitalized lease obligations (12,858) (10,889)
Increase in deferred offering costs (443,871)
Proceeds from notes payable 1,450,000
---------- ----------
Net cash provided by financing activities (12,858) 901,701
---------- ----------
Net decrease in cash (2,059,407) 54,162
Cash, beginning of period 2,156,761 174,100
========== ==========
Cash, end of period 97,354 228,262
========== ==========
</TABLE>
The accompanying footnotes are an integral part of these statements.
5
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SIMULATIONS PLUS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1: GENERAL
As contemplated by the Securities and Exchange Commission under Item 310(b) of
Regulation S-B, the accompanying financial statements and footnotes have been
condensed and therefore do not contain all disclosures required by generally
accepted accounting principles. The interim financial data are unaudited;
however, in the opinion of Simulations Plus, Inc. (the "Company"), the interim
data include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results for the interim periods. Results
for interim periods are not necessarily indicative of those to be expected for
the full year.
Note 2: CASH AND CASH EQUIVALENTS
The Company maintains cash deposits at banks located in California. Deposits at
each bank are insured by the Federal Deposit Insurance Corporation up to
$100,000. As of February 28, 1998, the Company had on deposit with a
high-quality financial institution cash and cash equivalents in the amount of
$106,312 that are uninsured. 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: INVESTMENTS
In October 1997, the Company purchased commercial notes in the aggregate amount
of $917,598 through a high-quality financial institution. These notes are all
highly rated commercial notes with the average yield of 5.942% at the time of
purchase, and mature at the different time periods. As of February 28, 1998, the
Company had $792,862 in these notes. The Company has not experienced any losses
in such notes and believes it is not exposed to any significant credit risk on
the investments.
Note 4: FURNITURE AND EQUIPMENT
Furniture and equipment consist of the following:
<TABLE>
<S> <C>
Equipment $ 42,731
Computer equipment 289,279
Furniture and fixtures 43,925
Leasehold improvements 5,900
Demo Equipment 105,012
Rental Equipment 46,693
--------
533,540
Less accumulated depreciation 224,075
--------
$309,465
========
</TABLE>
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Note 5: STOCKHOLDERS' EQUITY
Issuance of warrants
In August and September 1996, the Company issued 100,000 and 150,000 warrants
associated with two notes in the amount of $200,000 and $300,000, respectively,
to purchase common stock. The warrants are exercisable at $4.00 per share and
expire five years from the date of grant. To date, these warrants have not been
exercised.
Issuance of Bridge Lenders Warrant
In December 1996 and January 1997, the Company issued to the Bridge Lenders
280,000 Warrants (the "Bridge Warrants") to purchase Common Stock. The Bridge
Warrants are exercisable at $2.50 per share and expire five years from the date
of grant. To date, these warrants have not been exercised.
Issuance of Underwriters Warrant
The Company issued to the underwriters in the IPO, in consideration for $100, a
warrant to purchase 115,000 shares, at a per share exercise price of $6.00 per
share. The warrant is exercisable through June 17, 2001. To date, these warrants
have not been exercised.
Stock Option Plan
On January 2, 1998, the Company issued incentive stock options to purchase an
aggregate of 50,000 shares of Common Stock at the market value of $4.25 with the
vesting schedule of 5 equal annual installments starting from the date of grant.
As of January 2, 1998, 200,000 shares remained available for future grants.
Note 6: 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 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
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value by product to 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 the expected net realizable value is expensed at that time.
Note 7: Income Taxes
The Company used the liability method of accounting for income taxed pursuant to
SFAS No. 109 "Accounting for Income Taxes."
Note 8: Related Party Transactions
In connection with the company's IPO, the Company agreed to grant to its
president warrants to purchase up to 300,000 shares of the Company's common
stock. The number of warrants to be granted will be based on net income for the
year ended August 31, 1998, but cannot exceed 300,000 shares. All such warrants
granted will be exercisable for a period of five years at an exercise price of
$5.00 per share. Any difference between the price of the Company common stock
and the exercise price of $5.00 per share on the measurement date will be
recorded as an expense in accordance with APB25.
Note 9: Earnings Per Share
Effective February 28, 1998, the Company adopted SFAS No. 128 "Earning Per
Share." All prior periods presented have been restated to confirm with SFAS No.
128.
8
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Item 2. Management's Discussion and Analysis or Plan of Operations
The following discussion should be read in conjunction with the financial
statements and the notes thereto appearing elsewhere in this quarterly report on
Form 10-QSB for the quarter ended February 28, 1998 (the "Form 10-QSB"). In
addition to historical information, this Form 10-QSB contains forward-looking
statements. The forward-looking statements contained herein are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those reflected in the forward-looking statements. Factors that
might cause such a difference include, but are not limited to, those discussed
in the section entitled "Management's Discussion and Analysis or Plan of
Operations." Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as of the
date hereof. Simulations Plus, Inc. undertakes no obligation to publicly revise
these forward-looking statements, or to reflect events or circumstances that
arise after the date hereof. Readers should carefully review the risk factors
described in other documents that the Company has filed and will continue to
file from time to time with the Securities and Exchange Commission.
GENERAL
Simulations Plus, Inc. ("Simulations Plus" or the "Company") was incorporated in
1996 to develop, market and support software for the educational and
pharmaceutical industries, and to continue the operations of its wholly-owned
subsidiary, Words+, Inc., which was incorporated in 1981. Words+, Inc. develops,
markets and supports hardware and software products for persons with severe
disabilities.
Simulations Plus's existing products consist of five of its expanding series of
FutureLabTM educational simulation software titles, which were first released in
May 1997. These are Circuits for Physical Science, Gravity for Physical Science,
Universal Gravitation for Physical Science, Optics for Physical Science and
Ideal Gas for Chemistry. The Company is currently developing additional new
titles as well as converting the original titles from Visual Basic for Windows
only to Visual C++ for both Macintosh and Windows platforms. The conversion
effort, begun in May 1997, has taken significantly longer than anticipated, but
is now nearing completion. Final beta testing of hybrid CD-ROM's for several
titles is currently underway on both Macintosh and Windows computers. Upon
completion, the development team will accelerate the development of new titles
to expand the Company's Educational Simulation Software product line.
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.
Simulations Plus is also involved in the development of simulation software for
the pharmaceutical industry. Two programs are currently under development:
HelixGen(TM) and GastroPlus(TM). HelixGen predicts the shape of the receptor
sites of certain transmembrane proteins for the purpose of analytically
determining whether new candidate drug compounds will bind to those sites.
GastroPlus predicts the rate and location of absorption
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of new candidate drug compounds in the human gastro-intestinal tract for the
purpose of determining whether new candidate drug compounds will be absorbed
into the blood stream from the gastro-intestinal tract. GastroPlus entered beta
testing with Parke-Davis, Novartis, and three additional large pharmaceutical
firms who have asked to remain unnamed during this quarter. Among the Company's
goals in the area of pharmaceutical software are to provide comprehensive,
highly accurate simulations and related data correlations that can save a great
deal of time and money in the development of pharmaceutical products, and to
reduce the need for animal testing in the future. No assurance can be given as
to whether the Company's goals in this area will be realized.
In 1997, the Company executed a License Agreement with Therapeutic Systems
Research Laboratories, Inc. ("TSRL") to have exclusive rights to TSRL's
technology and database for drug compound absorption in animal and human test
subjects. Through the formation of this strategic alliance with TSRL, the
development costs and time for GastroPlus were significantly reduced.
The Company has not yet completed the development of any of its pharmaceutical
simulations programs, and has not yet offered any for sale; however, the
GastroPlus program is expected to be released during April 1998.
Words+, Inc. products consist of a catalog of software and hardware products
designed to provide communication and computer access for persons with severe
disabilities. The Company's most famous user is theoretical astrophysicist
Professor Stephen Hawking, author of the best-selling A Brief History of Time.
The Company's Pegasus LITE communication device received a Computerworld
Smithsonian Finalist Award in June 1997.
Words+, Inc. released a new communication system called Freedom 2000 in February
1998. It 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. Users are also able to
deliver lectures to large groups, use the Internet, and send e-mail. No
assurance can be given as to whether this new product will be successful.
Words+, Inc., however, new orders during March reached the highest levels in
many months, and Freedom 2000 orders constituted a significant portion of these
new orders.
Words+ released a new personal productivity software product called Abbreviate!
in November 1997, which was named PC Week's Tool of the Week in their December 1
issue, and won Win95 magazine's Editor's Choice Award in March 1998. An
Abbreviate! Website has been set up as www.abbreviate.com from which Internet
users can order the software or download an evaluation copy. The Company has
begun to realize sales of Abbreviate!, however revenues to date have been
nominal. No assurance can be given as to whether this new product will be
successful.
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RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED FEBRUARY 28, 1998 AND 1997.
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.)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------
02/28/98 02/28/97
--------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $533 100.0% $678 100.0%
Cost of sales 272 51.0 315 46.5
--------------------------------------------------
Selling, general and administrative 693 130.0 433 63.9
Research and development 129 24.2 25 3.7
--------------------------------------------------
Total operating expenses 822 154.2 458 67.6
--------------------------------------------------
Loss from operations ( 561) (105.3) ( 95) ( 14.0)
Interest revenue 8 1.5 1 0.2
Financing costs (82) (12.1)
Interest expense (3) (0.6) (33) (4.9)
--------------------------------------------------
Net loss $(556) (104.3)% $(210) (31.0)%
==================================================
</TABLE>
Net Sales
Net sales decreased $145,000, or 21.4%, to $533,000 in the second fiscal quarter
of 1998 from $678,000 in the second fiscal quarter of 1997. Words+, Inc.'s sales
decreased approximately $167,000 but this decline is offset by $22,000 of sales
generated from Simulations Plus educational simulation software. Management
attributes the decrease primarily to the introduction of new products by the
Company and by new competitors in the industry. Management believes some
customers delayed their purchasing decisions while they evaluated new products
during the second fiscal quarter of 1998. The Company has noticed an increase in
orders commencing in February 1998, however, no assurance can be given as to
whether this trend will continue. Sales of educational simulation software have
been slower than expected, in spite of enthusiastic responses from teachers and
administrators at the many conferences the Company has exhibited at over the
last 6 months. Management believes that the slow response is characteristic of
the educational market, and that buying in the educational market is seasonal,
with the strongest buying occurring during the Spring and Summer.
Cost of Sales
Cost of sales decreased $43,000, or $13.7%, to $272,000 in the second fiscal
quarter of 1998 from $315,000 in the second fiscal quarter of 1997. For Words+,
the change in percentage of cost of sales between the second fiscal quarter of
1998 and 1997 is less than 1%. However, for Simulations Plus, the sales of
educational simulation software have not yet increased to a level to cover the
systematic amortization of capitalized software cost.
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The amortization cost increased $35,000, or 184.2%, to $54,000 in the second
fiscal quarter of 1998 from $19,000 in the second fiscal quarter of 1997.
Management attributes this increase of amortization cost as the primary reason
for the decrease in the Company's gross margin.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $260,000, or 60.1%, to
$693,000 in the second fiscal quarter of 1998 from $433,000 in the second fiscal
quarter of 1997 primarily due to the expansion of the Company's simulation
software development and marketing activities as the Company added staff, and
other associated overhead costs, and due to the expansion of the sales force for
Words+. Marketing activities for the Company's new Abbreviate! software also
contributed to increased selling expenses following its November 1997
introduction. A portion of the increase was due to higher professional fees
necessary to be a public company, increases in salaries and wages, and increased
printing, trade shows and advertising costs.
Research and Development
The Company incurred approximately $251,000 of research and development costs
during the second quarter of 1998. Of such amount, $122,000 was capitalized and
$129,000 was expensed in this period. In the second quarter of 1997, the Company
incurred $241,000 of research and development costs, of which $216,000 was
capitalized and $25,000 was expensed. The small increase of 4.2% in research and
development expenditure from the second quarter of 1997 to the second quarter of
1998 was due to the fact that the Company maintained approximately the same
level of development work during these quarters.
Interest Revenue
Interest revenue for the second fiscal quarter of 1998 increased to $8,000 from
$1,000 in the second fiscal quarter of 1997. This increase is primarily due to
the interest earned on unexpended funds received from the Company's initial
public offering (the "IPO") which occurred in June 1997.
Financing Costs
Financing costs for the second fiscal quarter of 1998 was $0 compared to $82,000
for the second fiscal quarter of 1997. The decrease is due to the amortization
of loan origination fees of $35,000 and the value attributed to the 280,000
warrants issued in December 1996 and January 1997 of $280,000, which was
amortized over the term of the loans.
Interest Expense
Interest expense for the second fiscal quarter of 1998 decreased by $30,000, or
90.9%, to $3,000 from $33,000 in the second fiscal quarter of 1997. This
decrease is attributable primarily to the Company having repaid all of its
outstanding debts in June 1997 except
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capitalized lease obligations. The interest expense of $3,000 in the second
fiscal quarter of 1998 represents the interest portion of the Company's
capitalized lease obligations.
Net Loss
Net loss for the three months ended February 28, 1998 increased by $346,000, or
164.8%, to $556,000 in the second fiscal quarter of 1998 compared to $210,000 in
the second fiscal quarter of 1997. Management attributes this increase primarily
to the decrease in Sales, the increase in Selling, General and Administrative
expenses, and increase in Research and Development expense compared to the three
months ended February 28, 1997.
COMPARISON OF SIX MONTHS ENDED FEBRUARY 28, 1998 AND 1997.
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.)
<TABLE>
<CAPTION>
Six Months Ended
-------------------------------------------------
02/28/98 02/28/97
-------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $1,076 100.0% $1,220 100.0%
Cost of sales 602 56.0 569 46.6
-------------------------------------------------
Selling, general and administrative 1,305 121.3 938 76.9
Research and development 266 24.7 56 4.6
-------------------------------------------------
Total operating expenses 1,571 146.0 994 81.5
-------------------------------------------------
Loss from operations ( 1,097) (102.0) ( 343) ( 28.1)
Income from grant 75 7.0 17 1.4
Interest revenue 29 2.7 1 0.1
Financing costs (82) (6.7)
Interest expense (6) (0.5) (50) (4.1)
Provision (benefit) for taxes 0 0 (39) (3.2)
-------------------------------------------------
Net loss $(999) (92.8)% $(418) (34.3)%
=================================================
</TABLE>
Net Sales
Net sales decreased $144,000, or 11.8%, to $1,076,000 for the six months ended
February 28, 1998 compared to $1,220,000 for the six months ended February 28,
1997. Words+, Inc.'s sales decreased approximately $166,000 but this decline is
offset by $22,000 of sales generated from Simulations Plus educational
simulation software. Management attributes the decrease primarily to the
introduction of new products by the Company and by new competitors in the
industry. Management believes some customers delayed their purchasing decisions
while they evaluated new products during the second fiscal quarter of 1998. The
Company has noticed an increase in orders commencing in February 1998, however,
no assurance can be given as to whether this trend will continue. Sales of
educational simulation software have been slower than expected, in spite of
enthusiastic responses from teachers and administrators at the many conferences
the Company has
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exhibited at over the last 6 months. Management believes that the slow response
is characteristic of the educational market, and that buying in the educational
market is seasonal, with the strongest buying occurring during the Spring and
Summer.
Cost of Sales
Cost of sales for the six months ended February 28, 1998 increased $33,000, or
$5.8%, to $602,000 compared to $569,000 for the six months ended February 28,
1997. Management attributes this increase primarily to the amortization of
capitalized software. The sales of educational simulation software have not yet
increased to a level to cover the systematic amortization of capitalized
software cost. The amortization cost increased $32,000, or 43.3%, to $106,000
for the six months ended February 28, 1998 from $74,000 for the six months ended
February 28, 1997.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $367,000, or 39.1%, to
$1,305,000 for the six months ended February 28, 1998 from $938,000 for the six
months ended February 28, 1997 primarily due to the expansion of the Company's
simulation software development and marketing activities as the Company added
staff and other associated overhead costs, and due to the expansion of the sales
force for Words+. Marketing activities for the Company's new Abbreviate!
software also contributed to increase selling expenses following its November
1997 introduction. A portion of the increase was due to higher professional fees
necessary to be a public company, increases in salaries and wages, and increased
printing and advertising costs.
Research and Development
The Company incurred approximately $576,000 of research and development costs,
of which $310,000 was capitalized and $266,000 was expensed for the six months
ended February 28, 1998. For the six months ended February 28, 1997, the Company
incurred $404,000 of research and development costs, of which $348,000 was
capitalized and $56,000 was expensed. The 42.6% increase in research and
development expenditure from the six months ended February 28, 1997 to the same
period of 1998 was due to the expanded development work on educational and
pharmaceutical simulation software begun in September 1997.
Income from Grant
During the first fiscal quarter of 1997, the Company received the final $17,000
of a $51,000 grant (Phase I) from the National Science Foundation (the "NSF") to
develop software to allow physically-disabled students to perform simulated
laboratory experiments on a computer, which became the beginning of the
development of the FutureLab(TM) series of educational simulation software. In
the first fiscal quarter of 1998, the Company
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received the first $75,000 of a $300,000 grant (Phase II) from the NSF to
further develop the FutureLab(TM) series.
Interest Revenue
Interest revenue for the six month ended February 28, 1998 increased to $29,000
from $1 for the six months ended February 28, 1997. This increase is due to the
interest earned on funds received from IPO.
Financing Costs
Financing costs for the six months ended February 28, 1998 was $0 compared to
$82,000 for the six months ended February 28, 1997. The decrease is due to the
amortization of loan origination fees of $35,000 and the value attributed to the
280,000 warrants issued in December 1996 and January 1997 of $280,000, which was
amortized over the term of the loans.
Interest Expense
Interest expense for the six months ended February 28, 1998 decreased by
$44,000, or 88.0%, to $6,000 from $50,000 for the six months ended February 28,
1997. This decrease is attributable primarily to the Company having repaid all
of its outstanding debts in June 1997 except capitalized lease obligations. The
interest expense of $6,000 for the six months ended February 1998 represents the
interest portion of the Company's capitalized lease obligations.
Net Loss
Net loss for the six months ended February 28, 1998 increased by $581,000, or
139.0%, to $999,000 for the six months ended February 28, 1998 compared to
$418,000 for the six months ended February 28, 1997. Management attributes this
decline primarily to the decline in sales, the increase in cost of sales, the
increase in selling, general and administrative expenses, and increase in
research and development expense compared to the six months ended February 28,
1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of capital have been cash flows from its
operations, a bank line of credit, cash loans from the officers on an as-needed
basis, and proceeds from the Company's IPO.
The Company has available a $100,000 revolving line of credit from a bank.
Interest is payable on a monthly basis at the bank's prime rate plus 3.0%. The
outstanding balance under the revolving line of credit as of February 28, 1998
was $0. The revolving line of credit is not secured by any of the assets of
the Company but is
15
<PAGE> 16
personally guaranteed by Mr. Walter S. Woltosz, the Company's Chief Executive
Officer, President and Chairman of the Board of Directors.
In 1996, the Company was awarded a $51,000 Phase I SBIR grant from the National
Science Foundation, the purpose of which was to help fund the Company's
development of educational simulation software for the school and home study
markets. In October 1997, the Company was also awarded a follow-on $300,000
Phase II grant for the same purpose, which will be paid in four equal payments
of $75,000 semi-annually. The first payment on such grant was received in
October 1997. The next payment is expected in April 1998.
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 at least the next 13 months. However, if the Company's
operations do not produce the revenues anticipated by the Company, the Company
may not have sufficient funds to satisfy the Company's capital requirements and,
accordingly, 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.
16
<PAGE> 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on form 8-K
(a) Exhibits:
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
None.
17
<PAGE> 18
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Simulations Plus, Inc.
Date: April 14, 1998 By: /s/ MOMOKO BERAN
------------------------------------
Momoko Beran
Chief Financial Officer
18
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