<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 May 31, 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 July 15, 1998, was 3,350,000.
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SIMULATIONS PLUS, INC.
FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED MAY 31, 1998
Table of Contents
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Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet at May 31, 1998 (unaudited) 3
Consolidated Statements of Operations for the three and nine months
ended May 31, 1998 and 1997 (unaudited) 4
Consolidated Statements of Cash Flows for the nine months
ended May 31, 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 16
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
May 31, 1998
(Unaudited)
<TABLE>
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ASSETS
Current assets:
Cash and cash equivalents (note 2) $ 26,197
Cash investments (note 3) 489,553
Accounts receivable, net of allowance for
doubtful accounts of $15,000 380,765
Prepaid expenses 41,393
Income tax receivable 28,941
Inventory 168,333
-----------
Total current assets 1,135,182
-----------
Capitalized computer software development costs,
net of accumulated amortization (note 6) 1,087,748
Furniture and equipment, net (note 4) 289,391
Investment in HealthWeb (note 7) 1,000
Other assets 41,313
-----------
Total assets $ 2,554,634
===========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Advance line of credit $ 88,000
Accounts payable 145,572
Accrued payroll and other expenses 183,213
Accrued warranty and service costs 46,337
Current portion of capitalized lease obligations 30,635
-----------
Total current liabilities 493,757
-----------
Capitalized lease obligations, net of current portion 37,347
-----------
Total liabilities 531,104
-----------
Shareholders' equity
Common stock: $.001 par value, authorized
20,000,000 shares, issued and outstanding 3,350,000 (note 5) 3,350
Additional paid-in capital 4,595,771
Accumulated deficit (2,575,591)
-----------
Total shareholders' equity 2,023,530
-----------
Total liabilities and stockholders' equity $ 2,554,634
===========
</TABLE>
The accompanying footnotes are an integral part of these statements.
3
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SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS For the
three and nine months ended May 31, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
------------------------------ ------------------------------
05/31/98 05/31/97 05/31/98 05/31/97
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 730,139 $ 560,162 $ 1,805,811 $ 1,779,726
Cost of sales 399,807 288,513 1,001,434 856,811
----------- ----------- ----------- -----------
Gross profit 330,332 271,649 804,377 922,915
----------- ----------- ----------- -----------
Operating expenses:
Selling, general & administration 703,001 497,335 2,011,251 1,435,813
Research and development 42,370 28,885 305,602 84,761
----------- ----------- ----------- -----------
Total operating expenses 745,371 526,220 2,316,853 1,520,574
----------- ----------- ----------- -----------
Loss from operations (415,039) (254,571) (1,512,476) (597,659)
Other income (expenses):
Income from grant 75,000 0 150,000 17,159
Interest revenue 13,526 693 42,432 1,951
Financing costs 0 (105,833) 0 (187,500)
Interest expense (3,425) (40,000) (9,459) (90,480)
----------- ----------- ----------- -----------
Loss before provision for income taxes (329,938) (399,711) (1,329,503) (856,529)
Provision (benefit) for income taxes 0 0 0 (38,800)
----------- ----------- ----------- -----------
Net loss $ (329,938) $ (399,711) $(1,329,503) $ (817,729)
=========== =========== =========== ===========
Basic net loss per common share $ (0.10) $ (0.17) $ (0.40) $ (0.34)
=========== =========== =========== ===========
Diluted net loss per common share $ (0.10) $ (0.17) $ (0.40) $ (0.34)
=========== =========== =========== ===========
Weighted average # of common shares
outstanding 3,350,000 2,390,000 3,350,000 2,390,000
=========== =========== =========== ===========
</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 nine months ended May 31, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
------------------------------
Cash flows from operating activities: 05/31/98 05/31/97
----------- -----------
<S> <C> <C>
Net loss $(1,329,503) $ (817,729)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization of furniture and equipment 37,259 27,751
Amortization of capitalized software development costs 160,275 55,858
Financing costs 116,667
Amortization of loan origination fees 70,833
Deferred taxes 380
(Increase) decrease in:
Accounts receivable (5,713) (51,077)
Inventory 54,465 (76,810)
Other assets (47,710) (18,988)
Income tax receivable 28,485
Increase (decrease) in:
Accounts payable 5,030 142,968
Accrued interest 76,978
Accrued payroll and other expenses 32,504 46,179
Accrued warranty and service costs (5,522) 1,374
Income tax payable (40,780)
----------- -----------
Net cash used in operating activities (1,070,430) (466,396)
----------- -----------
Cash flows from investing activities:
Advance to officer (40,000)
Investments in HealthWeb (1,000)
Sale of investments 428,045
Purchase of investments (917,598)
Purchase of furniture and equipment (142,677) (58,671)
Capitalized computer software development cost (501,303) (481,410)
----------- -----------
Net cash used in investing activities (1,134,533) (580,081)
----------- -----------
Cash flows from financing activities:
Increase in book overdraft 27
Proceeds from line of credit 88,000 4,471
Payments on capitalized lease obligations (13,601) (14,648)
Increase in deferred offering costs (567,473)
Proceeds from notes payable 1,450,000
----------- -----------
Net cash provided by financing activities 74,399 872,377
----------- -----------
Net decrease in cash (2,130,564) (174,100)
Cash and cash equivalents, beginning of period 2,156,761 174,100
----------- -----------
Cash and cash equivalents, end of period $ 26,197 $ 0
=========== ===========
</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 May 31, 1998, the Company had no uninsured cash.
Note 3: CASH 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 May 31, 1998, the
Company had $489,553 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
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Furniture and equipment consist of the following:
Equipment $ 44,003
Computer equipment 290,848
Furniture and fixtures 43,925
Leasehold improvements 5,900
Demo Equipment 97,836
Rental Equipment 44,797
--------
527,309
Less accumulated depreciation 237,918
--------
$289,391
========
</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 Initial Public Offering ("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 various
employees to purchase an aggregate of 50,000 shares of the Company's Common
Stock at an exercise price of $4.25 which approximated the fair market value at
the date of grant. The options vest over five 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.
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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 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: Investment in HealthWeb
The Company formed HealthWeb, Inc.; a joint venture with privately held ATC
Corp., Vienna, Va. The venture is developing an Internet Web site called
HealthData.com, which will collect and provide information on health, fitness,
and longevity. The Company and ATC Corp. Chief Executive Officer, Yong T. Lee,
each own 1 million shares of HealthWeb Inc.
Note 8: Income Taxes
The Company used the liability method of accounting for income taxed pursuant to
SFAS No. 109 "Accounting for Income Taxes."
Note 9: 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 10: 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.
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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 May 31, 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 completed for three of the five titles and the remaining two are expected
to be completed by the end of July. Orders for FutureLab title continue to
increase slowly, and the list of resellers continues to grow. The development
team has begun to 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, which was first released in April 1998,
9
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predicts the rate and location of absorption of drug compounds in the human
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. A number of improvements have been added to
the program as a result of comments received from Beta testers and from the
company's in-house testing. An improved version of GastroPlus is scheduled to be
released in July. Marketing efforts have begun, with company representatives
attending a number of pharmaceutical conferences during this quarter, and a list
of over 100 qualified leads has been developed to date.
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, and its
access to pharmaceutical markets enhanced.
The Company has not yet completed the development of HelixGen(TM) and has not
yet offered it for sale; however, the GastroPlus program was released in April
1998 and is available for sale.
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 through May shows higher number
and June 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!
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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. The
company is currently seeking a partnership with a large retail software company
for the Abbreviate! product. No assurance can be given as to whether this new
product will be successful.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED MAY 31, 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
---------------------------------------------
05/31/98 05/31/97
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<S> <C> <C> <C> <C>
Net sales $ 730 100.0% $ 560 100.0%
Cost of sales 400 54.8 289 51.6
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Selling, general and administrative 703 96.3 497 88.7
Research and development 42 5.8 29 5.2
---------------------------------------------
Total operating expenses 745 102.1 526 93.9
---------------------------------------------
Loss from operations (415) (56.9) (255) (45.5)
Income from grant 75 10.3 0 0
Interest revenue 14 1.9 1 0.2
Financing costs 0 0 (106) (18.9)
Interest expense (3) (0.4) (40) (7.1)
---------------------------------------------
Net loss $(329) (45.1)% $(400) (71.3)%
=============================================
</TABLE>
Net Sales
Net sales increased $170,000, or 30.4%, to $730,000 in the third fiscal quarter
of 1998 from $560,000 in the third fiscal quarter of 1997. Words+, Inc.'s sales
increased approximately $178,000 for the quarter, but this increase was offset
by $8,000 of sales decline in Simulations Plus educational simulation software.
Management attributes the increase in Words+ sales primarily to the expanded
field sales force, and to its MultiLevel MessageMate and Freedom 2000
communication products being well received by the marketplace. The Company has
noticed an increase in Words+ orders commencing in February 1998 continuing
through today, 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 12 months.
Management believes that the slow response is characteristic of the educational
market, and that buying in the educational market is subject to delays because
of budget approval cycles.
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Cost of Sales
Cost of sales increased $111,000, or $38.4%, to $400,000 in the third fiscal
quarter of 1998 from $289,000 in the third fiscal quarter of 1997. For Words+,
the change in percentage of cost of sales between the third fiscal quarter of
1998 and 1997 is improved by 2.5%. 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. 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 $206,000, or 41.5%, to
$703,000 in the third fiscal quarter of 1998 from $497,000 in the third fiscal
quarter of 1997 primarily due to 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+. 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 $233,000 of research and development costs
during the third quarter of 1998. Of such amount, $191,000 was capitalized and
$42,000 was expensed in this period. In the third quarter of 1997, the Company
incurred $162,000 of research and development costs, of which $133,000 was
capitalized and $29,000 was expensed. The 43.8 % increase in research and
development expenditure from the third quarter of 1997 to the third quarter of
1998 was due to the ongoing development of educational and pharmaceutical
simulation software.
Income from grant
During the third fiscal quarter of 1998, the Company received the second $75,000
payment of a $300,000 Phase II SBIR grant from the National Science Foundation
(the "NSF") to further develop the FutureLab(TM) series. The purpose of the
grant is to develop software to allow physically disabled students to perform
simulated laboratory experiments on a computer.
Interest Revenue
Interest revenue for the third fiscal quarter of 1998 increased to $14,000 from
$1,000 in the third fiscal quarter of 1997. This increase is primarily due to
the interest earned on investment activities in commercial notes through a
high-qualify financial institution.
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Financing Costs
Financing costs for the third fiscal quarter of 1998 was $0 compared to $106,000
for the third 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 were
amortized over the term of the loans in the 1997 fiscal year.
Interest Expense
Interest expense for the third fiscal quarter of 1998 decreased by $37,000, or
92.5%, to $3,000 from $40,000 in the third fiscal quarter of 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
$3,000 in the third fiscal quarter of 1998 represents the interest portion of
the Company's capitalized lease obligations.
Net Loss
Net loss for the three months ended May 31, 1998 decreased by $71,000, or 17.8%,
to $329,000 in the third fiscal quarter of 1998 compared to $400,000 in the
third fiscal quarter of 1997. Management attributes this decrease primarily to
the increase in sales and grant revenue outweighing the increase in selling,
general and administrative expenses, and research and development expense
compared to the three months ended May 31, 1997.
COMPARISON OF NINE MONTHS ENDED MAY 31, 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>
Nine Months Ended
-----------------------------------------------------
05/31/98 05/31/97
-----------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 1,806 100.0% $ 1,780 100.0%
Cost of sales 1,001 55.4 857 48.2
-----------------------------------------------------
Selling, general and administrative 2,011 111.4 1,436 80.7
Research and development 306 16.9 85 4.8
-----------------------------------------------------
Total operating expenses 2,317 128.3 1,521 85.5
-----------------------------------------------------
Loss from operations (1,512) (83.7) (598) (33.7)
Income from grant 150 8.3 17 1.0
Interest revenue 42 2.3 2 0.1
Financing costs 0 0 (188) (10.6)
Interest expense (9) (0.5) (90) (5.1)
Provision (benefit) for taxes 0 0 (39) (2.2)
-----------------------------------------------------
Net loss $(1,329) (73.6)% $ (818) (46.1)%
=====================================================
</TABLE>
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Net Sales
Net sales increased $26,000, or 1.5%, to $1,806,000 for the nine months ended
May 31, 1998 compared to $1,780,000 for the nine months ended May 31, 1997.
Words+, Inc.'s sales increased approximately $12,000 and sales generated from
Simulations Plus educational simulation software increased $14,000. Management
attributes the increase, starting from February 1998 through today, primarily to
the expanded field sales force, and to its MultiLevel MessageMate and Freedom
2000 communication products well received by the market place, 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 12 months. Management believes that
the slow response is characteristic of the educational market, and that buying
in the educational market is subject to delays because of budget approval
cycles.
Cost of Sales
Cost of sales for the nine months ended May 31, 1998 increased $144,000, or
$16.8%, to $1,001,000 compared to $857,000 for the nine months ended May 31,
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 $104,000, or 185.7%, to $160,000
for the nine months ended May 31, 1998 from $56,000 for the nine months ended
May 31, 1997.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $575,000, or 40.0%, to
$2,011,000 for the nine months ended May 31, 1998 from $1,436,000 for the nine
months ended May 31, 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 and advertising costs.
Research and Development
The Company incurred approximately $807,000 of research and development costs,
of which $501,000 was capitalized and $306,000 was expensed for the nine months
ended May 31, 1998. For the nine months ended May 31, 1997, the Company incurred
$566,000 of research and development costs, of which $481,000 was capitalized
and $85,000 was expensed. The 42.6% increase in research and development
expenditure from the nine months ended May 31, 1997 to the same period of 1998
was due to the expanded
14
<PAGE> 15
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 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. During the nine months of operations
in 1998, the Company received $150,000 of a $300,000 grant (Phase II) from the
NSF to further develop the FutureLab(TM) series.
Interest Revenue
Interest revenue for the nine month ended May 31, 1998 increased to $42,000 from
$2,000 for the nine months ended May 31, 1997. This increase is due to the
interest earned on investment in commercial notes through a high-qualify
financial institution.
Financing Costs
Financing costs for the six months ended February 28, 1998 was $0 compared to
$188,000 for the nine months ended May 31, 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 in the 1997 fiscal year.
Interest Expense
Interest expense for the nine months ended May 31, 1998 decreased by $81,000, or
90.0%, to $9,000 from $90,000 for the nine months ended May 31, 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 $9,000 for the nine months ended May 31, 1998 represents the
interest portion of the Company's capitalized lease obligations.
Net Loss
Net loss for the nine months ended May 31, 1998 increased by $511,000, or 62.5%,
to $1,329,000 for the nine months ended May 31, 1998 compared to $818,000 for
the nine months ended May 31, 1997. Management attributes this decline primarily
to the increase in cost of sales, the increase in selling, general and
administrative expenses, and increase in research and development expense
compared to the nine months ended May 31, 1997.
15
<PAGE> 16
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.
The Company has available a $100,000 revolving line of credit from a bank.
Interest is payable on a monthly basis at the bank's prime rate plus 3.0%. The
outstanding balance under the revolving line of credit as of May 31, 1998 was
$88,000. The revolving line of credit is not secured by any of the assets of the
Company but is personally guaranteed by Mr. Walter S. Woltosz, the Company's
Chief Executive Officer, President and Chairman of the Board of Directors.
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 second payment was received in April 1998. Additional payments
are expected in October 1998 and April 1999.
As of May 31, 1998, the Company had $515,750 of cash and cash equivalents and
for the nine months ended May 31, 1998 the Company incurred a loss of
approximately $1,330,000. Management believes that additional capital will be
need to allow the Company to continue its research, development, and marketing
activities at its current level of expenditures in the pharmaceutical and
educational software areas. Accordingly, the Company is currently negotiating
with several financing institutions with respect to raising additional
investment capital. 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 such financing is not available, the Company
intends to reduce expenses in order to conserve cash. This will be accomplished,
in part, through a combination of reductions in workforce, salary reductions for
management, and reductions in certain travel, conferences, and overhead
expenses.
In July 1998, the Company entered into a non-cancelable operating lease
agreement, for certain facilities for its corporate and operations offices that
expire in August 2001. The lease includes a monthly base rent of $10,000, which
increases after the first year. This lease results in a savings to the Company
of approximately $40,000 per year over its previous office space.
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: July 15, 1998 By: /s/ MOMOKO BERAN
-----------------------------
Momoko Beran
Chief Financial Officer
18
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