<PAGE>
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, 1999 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 WEST 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 12, 1999, was 3,383,531.
<PAGE>
SIMULATIONS PLUS, INC.
FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED MAY 31, 1999
Table of Contents
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet at May 31, 1999 (unaudited) 3
Consolidated Statements of Operations for the three and nine
months ended May 31, 1999 and 1998 (unaudited) 4
Consolidated Statements of Cash Flows for the nine months
ended May 31, 1999 and 1998 (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 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signature 20
Exhibit Index 21
2
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<TABLE>
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
May 31, 1999
(Unaudited)
<CAPTION>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 0
Accounts receivable, net of allowance for
doubtful accounts of $14,078 598,775
Prepaid expenses 23,564
Inventory 217,229
--------------
Total current assets 839,568
--------------
Capitalized computer software development costs,
net of accumulated amortization (note 4) 784,112
Furniture and equipment, net (note 2) 170,118
Other assets 13,708
--------------
Total assets $ 1,807,506
==============
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Book overdraft $ 176
Advance line of credit 89,828
Accounts payable 194,020
Accrued payroll and other expenses 359,079
Accrued warranty and service costs 69,201
Current portion of capitalized lease obligations 30,735
--------------
Total current liabilities 743,039
--------------
Capitalized lease obligations, net of current portion 12,419
--------------
Total liabilities 755,458
--------------
Shareholders' equity
Preferred stock: $.001 par value, authorized
10,000,000 shares, issued and outstanding 0 (note 3) 0
Common stock: $.001 par value, authorized
20,000,000 shares, issued and outstanding 3,383,531 (note 3) 3,384
Additional paid-in capital 4,629,270
Accumulated deficit (3,580,606)
--------------
Total shareholders' equity 1,052,048
--------------
Total liabilities and stockholders' equity $ 1,807,506
==============
</TABLE>
The accompanying footnotes are an integral part of these statements.
3
<PAGE>
<TABLE>
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and nine months ended May 31, 1999 and 1998
(Unaudited)
<CAPTION>
Three months ended Nine months ended
---------------------------------------------------------------------
05/31/99 05/31/98 05/31/99 05/31/98
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net sales $ 929,002 $ 730,139 $ 2,587,926 $ 1,805,811
Cost of sales 370,536 399,807 1,124,393 1,001,434
--------------- --------------- --------------- ---------------
Gross profit 558,466 330,332 1,463,533 804,377
--------------- --------------- --------------- ---------------
Operating expenses:
Selling, general & administrative 564,702 703,001 1,741,328 2,011,251
Research and development 55,552 42,370 127,222 305,602
--------------- --------------- --------------- ---------------
Total operating expenses 620,254 745,371 1,868,550 2,316,853
--------------- --------------- --------------- ---------------
Loss from operations (61,788) (415,039) (405,017) (1,512,476)
Other income (expenses):
Income from grant 75,000 75,000 150,000 150,000
Interest revenue 223 13,526 5,170 42,432
Interest expense (5,300) (3,425) (15,431) (9,459)
--------------- --------------- --------------- ---------------
Income (loss) before provision for income taxes 8,135 (329,938) (265,278) (1,329,503)
Provision (benefit) for income taxes 0 0 0 0
--------------- --------------- --------------- ---------------
Net income (loss) $ 8,135 $ (329,938) $ (265,278) $ (1,329,503)
=============== =============== =============== ===============
Basic net income (loss) per common share $ 0.00 $ (0.10) $ (0.08) $ (0.40)
=============== =============== =============== ===============
Diluted net income (loss) per common share $ 0.00 $ (0.10) $ (0.08) $ (0.40)
=============== =============== =============== ===============
Weighted average # of common shares
Outstanding 3,389,689 3,350,000 3,375,518 3,350,000
=============== =============== =============== ===============
</TABLE>
The accompanying footnotes are an integral part of these statements.
4
<PAGE>
<TABLE>
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended May 31, 1999 and 1998
(Unaudited) Nine months ended
<CAPTION>
--------------------------------
05/31/99 05/31/98
--------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (265,278) $ (1,329,503)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization of furniture and equipment 59,801 37,259
Amortization of capitalized software development costs 178,118 160,275
(Increase) decrease in:
Accounts receivable (223,005) (5,713)
Inventory 131,446 54,465
Other assets 8,716 (47,710)
Income tax receivable 28,941 28,485
Increase (decrease) in:
Accounts payable (140,739) 5,030
Accrued payroll and other expenses 173,696 32,504
Accrued warranty and service costs 20,705 (5,522)
--------------- ----------------
Net cash used in operating activities (27,599) (1,070,430)
--------------- ----------------
Cash flows from investing activities:
Investments in HealthWeb - (1,000)
Sale of investments - 428,045
Purchase of investments - (917,598)
Purchase of furniture and equipment (6,182) (142,677)
Capitalized computer software development cost (139,103) (501,303)
--------------- ----------------
Net cash used in investing activities (145,285) (1,134,533)
--------------- ----------------
Cash flows from financing activities:
Increase in book overdraft 176 -
Proceeds from line of credit - 88,000
Payments on line of credit (7,300) -
Payments on capitalized lease obligations (24,328) (13,601)
Proceeds from lease payable 6,182 -
--------------- ----------------
Net cash provided by (used in) financing activities (25,270) 74,399
--------------- ----------------
Net decrease in cash (198,154) (2,130,564)
Cash and cash equivalents, beginning of period 198,154 2,156,761
--------------- ----------------
Cash and cash equivalents, end of period $ 0 $ 26,197
=============== ================
Supplemental Information: (Note 3)
Subscription agreement for issuance of Common Stock
for tenant improvements $ 33,531
Tenant improvements by subscription agreement for Common Stock $ 33,531
</TABLE>
The accompanying footnotes are an integral part of these statements.
5
<PAGE>
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: FURNITURE AND EQUIPMENT
Furniture and equipment consist of the following:
Equipment $ 50,184
Computer equipment 293,748
Furniture and fixtures 45,036
Leasehold improvements 39,433
Demo Equipment 25,173
Rental Equipment 44,797
----------
498,371
Less accumulated depreciation 328,253
----------
$ 170,188
==========
NOTE 3: STOCKHOLDERS' EQUITY
AUTHORIZATION OF PREFERRED STOCK
On March 26, 1999, the Company held its Annual Meeting at which the shareholders
approved an amendment to the Company's Articles of Incorporation to authorize
10,000,000 shares, par value $0.001, of Preferred Stock. The purpose of this
amendment is to authorize shares of Preferred Stock, which may be designated and
issued from time to time by the Board of Directors for a variety of corporate
purposes including future private or public offerings to raise additional
capital, to pay Company debts or to facilitate corporate acquisitions, stock
splits effected in the form of stock dividends, and other general corporate
purposes.
6
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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. A Warrant registration statement was filed with the Securities and
Exchange Commission and was declared effective on March 4, 1999. This
registration will remain effective for 120 days, ending July 1, 1999.
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. A warrant
registration statement was filed with the Securities and Exchange Commission and
was declared effective on March 4, 1999. This registration will remain effective
for 120 days, ending July 1, 1999.
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 May 31, 1999, 12,458 shares were forfeited and
reissued along with a remaining 200,000 shares to various employees at an
exercise price of $1.31 per share, which was the fair market value at the date
of grant, October 30, 1998, with five year vesting periods.
The Annual Meeting of shareholders on March 26, 1999 approved an amendment to
the Company's 1996 Stock Option Plan to increase the shares available for
issuance from 250,000 to 500,000 shares.
In November, the Company entered into an agreement, whereby the Company issues
stock options as a part of compensation, with Banchik and Associates in exchange
for investor relation services. Accordingly, the Company issued stock options to
Banchik and Associates to purchase 30,000 shares of the Company's Common Stock
at an exercise price of $1.00 which was the fair market value at the date of the
service agreement. The options vest at a rate of 5,000 per calendar quarter at
the beginning of the period.
SUBSCRIPTION AGREEMENT
In November 1998, the Company entered into a Subscription Agreement whereby the
Company issued Common Stock in the amount of $33,531 with a 12-month lock-up
period in exchange for service received by the Company in making tenant
improvements to its new facility after relocating in July 1998. The value of
common stock issued was equal to the service received by the Company.
7
<PAGE>
NOTE 4: 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 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 5: Income Taxes
The Company used the liability method of accounting for income taxes pursuant to
SFAS No. 109 "Accounting for Income Taxes."
NOTE 6: Earnings Per Share
Effective May 31, 1998, the Company adopted SFAS No. 128 "Earnings Per Share."
All prior periods presented have been restated to confirm with SFAS No. 128.
8
<PAGE>
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, 1999 (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. (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. The Company is
currently developing and producing simulation software for pharmaceutical
research, and is producing simulation software for science courses for the
middle school, high school, community college, and university markets. The
Company 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.
The types of simulation software under development by the Company are based on
the equations of chemistry and physics that describe or "model" the behavior of
things in the real world. The Company's GastroPlus(TM) pharmaceutical software
simulates the movement, dissolution, absorption, and clearance of drug compounds
in the human gastrointestinal tract. The Company's QMPRPlus(TM) program
estimates the values of several important chemical characteristics with only the
structure of the molecule as input. The Company's FutureLab(TM) science
experiment simulations incorporate the equations of chemistry and physics for
each experiment (optics, electrical circuits, gravity, ideal gases, acid/base
titration, etc.)
The Company's pharmaceutical software provides cost-effective solutions to a
number of problems in pharmaceutical research as well as in the education of
pharmacy and medical students. The Company began selling GastroPlus(TM) in
September 1998, and has continued to refine it and extend its capabilities.
Sales of GastroPlus(TM) as of the end of third quarter include ten of the
largest pharmaceutical firms in the world, including Pfizer, Roche, Pharmaceia
9
<PAGE>
and Upjohn, Glaxo Wellcome, Zeneca, and Astra, and four others, including one of
the largest pharmaceutical firms in Japan. An additional (extra-cost)
Optimization Module was released in November 1998 and is receiving enthusiastic
interest from pharmaceutical researchers. Almost all new GastroPlus(TM) licenses
now include the Optimization Module, increasing the average sale price by 50%. A
second optional module, IVIV Correlation, is in advanced development. It was
expected to be released during the third fiscal quarter, however, the release
schedule was delayed to the end of this fiscal year. Two other modules are also
in development, and both are expected to be released in early 2000. The Company
believes these additional modules will more than double the average price for an
annual license. The Company is actively working over 600 leads for additional
sales. No assurances can be given, however, that any additional sales will occur
as a result of such leads.
In 1997, the Company executed a License Agreement with Therapeutic Systems
Research Laboratories, Inc. ("TSRL") to obtain 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 the
Company's access to pharmaceutical markets was enhanced.
In the area of simulation software for pharmaceutical research, the Company is
currently pursuing the development of additional modules for GastroPlus(TM),
such as the IVIV Correlation Module, and the Metabolism and Efflux Module. In
addition, QMPRPlus(TM) has been released as a separate companion program, and
will soon be available also as an optional module within GastroPlus(TM). The
Company is also developing HelixGen(TM), which predicts the receptor structure
of certain transmembrane proteins. The Company is exploring a number of
potential relationships with other companies, and is also considering the
acquisition of complementary companies to more rapidly grow its ability to serve
the pharmaceutical research market.
In February 1999, the Company announced that it had signed a letter of intent
with Absorption Systems LP of Exton, Pennsylvania, to form a Joint Venture. The
purpose of the Joint Venture is to serve a consortium called the Consortium for
ADME Prediction. The acronym ADME stands for Absorption, Distribution,
Metabolism, and Elimination, and is commonly used in pharmaceutical research to
refer to processes that affect how a drug molecule is affected by various
processes in the human body. The consortium concept has been presented to a
number of companies in Europe, Japan, and the U.S. The concept has received
considerable interest from companies to which it has been presented; however,
there can be no assurance that the consortium will be successful.
In the area of educational simulations, the Company's R&D efforts were reduced
to completing the requirements for the Company's National Science Foundation
(NSF) SBIR grant, which has now been completed and the final report has been
submitted.
In October 1997, the Company was awarded a $300,000 Phase II follow-on grant by
the NSF which was funded in four equal payments of $75,000 every six months for
an eighteen month period. The payments were received in October 1997, April
1998, and October 1998 at $75,000 each accordingly. The Company submitted its
final report by the end of May and received the last payment in June 1999.
10
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The Company's wholly owned subsidiary, Words+, Inc. has been in business since
1981. Words+ is a technology leader in designing and developing augmentative and
alternative communication computer software and hardware devices for persons who
cannot speak due to physical disabilities. Words+ products enable a disabled
person to operate a computer and to communicate through a voice synthesizer,
through movements as slight as the blink of an eye. The Company's most famous
user is Cambridge University theoretical astrophysicist Professor Stephen
Hawking, author of the best-selling A BRIEF HISTORY OF TIME.
The Company believes it has been an industry technology leader 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 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.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED MAY 31, 1999 AND 1998.
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
-----------------------------------------------------------
05/31/99 05/31/98
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 929 100.0% $ 730 100.0%
Cost of sales 371 39.9 400 54.8
-----------------------------------------------------------
Gross profit 558 60.1 330 45.2
-----------------------------------------------------------
Selling, general and administrative 565 60.8 703 96.3
Research and development 55 5.9 42 5.8
-----------------------------------------------------------
Total operating expenses 620 66.7 745 102.1
-----------------------------------------------------------
Loss from operations (62) (6.7) (415) (56.9)
Income from grant 75 8.1 75 10.3
Interest revenue 0 0.0 14 1.9
Interest expense (5) (0.5) (3) (0.4)
-----------------------------------------------------------
Net income (loss) $ 8 0.9% $ (329) (45.1)%
===========================================================
</TABLE>
11
<PAGE>
NET SALES
The consolidated net sales increased $199,000, or 27.3%, to $929,000 in the
third fiscal quarter of 1999 from $730,000 in the third fiscal quarter of 1998.
Simulations Plus, Inc.'s sales from pharmaceutical and educational software
increased approximately $105,000, or 839.4%, and Words+, Inc.'s sales increased
approximately $94,000, or 13.1% for the quarter. Management attributes the
increase in consolidated net sales to the first sales from Pharmaceutical
software launched in FY 1999, and to increased sales from its Words+ subsidiary.
Pharmaceutical software sales contributed over 45% of the total increase in
consolidated sales for the quarter. The increase in Words+ sales is due
primarily to its MultiLevel MessageMate and Freedom 2000 communication products
being well received by the marketplace. The Company has noticed a steady
increase in Words+ orders that began in February 1998 and continues through
today; however, no assurance can be given as to whether this trend will
continue.
COST OF SALES
The consolidated cost of sales decreased $29,000, or 7.3%, to $371,000 in the
third fiscal quarter of 1999 from $400,000 in the third fiscal quarter of 1998.
The percentage of cost of sales decreased by 14.9%. For Simulations Plus, the
cost of sales increased $20,000, or 59.1%, of which the significant portion of
the cost of sales is the systematic amortization of capitalized software cost,
which resulted in 59.7 % increase in amortization cost. For Words+, the cost of
sales decreased $50,000, or 13.6%. Management attributes the change in
percentage of cost of sales between the third fiscal quarter of 1999 and 1998 is
primarily due to significant cost reduction in Material cost.
GROSS PROFIT
The consolidated gross profit increased $228,000, or 69.1%, to $558,000 in the
third fiscal quarter of 1999 from $330,000 in the third fiscal quarter of 1998.
Management attributes the 14.9% increase in gross profit between the third
fiscal quarter of 1999 and 1998 to the higher sales on a fixed amount of
amortized software expenses and a significant Material cost reduction in Words+
operations.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The consolidated selling, general and administrative expenses decreased
$138,000, or 19.6%, to $565,000 in the third fiscal quarter of 1999 from
$703,000 in the third fiscal quarter of 1998. For Simulations Plus, the selling,
general and administrative expenses decreased $16,000, or 7.0% primarily due to
the downsizing of educational software development activities as the Company
reduced staff, significant reduction in educational software marketing expenses,
and other associated overhead costs. These reductions outweighed the increases
in other administrative expense such as legal and accounting expenses and
consultant fees. For Words+, expenses decreased $122,000, or 25.9%, due to
reductions in the employee field sales force and their payroll related expenses,
reducing trade shows and travel expenses, reducing marketing cost by
consolidating two companies' marketing departments into one, and reducing
newsletter printing costs. These reductions outweighed increases in selling
expenses such as commissions to independent sales representatives and
freight-out expense, as well as increases in other administrative expenses such
as depreciation expense and facility lease expense.
12
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RESEARCH AND DEVELOPMENT
The Company incurred approximately $107,000 of research and development costs
for both companies during the third quarter of 1999. Of this amount, $52,000 was
capitalized and $55,000 was expensed in this period. In the third quarter of
1998, the Company incurred $233,000 of research and development costs, of which
$191,000 was capitalized and $42,000 was expensed. The 54.1% decrease in
research and development expenditure from the third quarter of 1998 to the third
quarter of 1999 was due to significant reduction in development of educational
simulation software, as well as a reduction in Words+'s R&D expense.
LOSS FROM OPERATIONS
During the third fiscal quarter of 1999, the Company incurred a loss of
approximately $62,000 as compared to a loss of $415,000 for the same period in
the fiscal year 1998. Management attributes the reduction in net loss from
operations to increased sales and decreased expenses, including Selling, General
and Administrative expenses.
INCOME FROM GRANT
During the third fiscal quarter of 1999, the Company earned the final $75,000 of
a $300,000 Phase II SBIR grant from the National Science Foundation. The final
report was filed in May 1999 and the Company received the final payment in early
June 1999. In the third fiscal quarter of 1998, the Company received the second
$75,000 payment under this grant.
INTEREST REVENUE
Interest revenue for the third fiscal quarter of 1999 decreased to $0 from
$14,000 in the third fiscal quarter of 1998. This decrease is primarily due to
the interest earned on investment activities in commercial notes through a
highly-qualified financial institution being reduced because portions of the
capital resources were used in the Company's operations.
INTEREST EXPENSE
Interest expense for the third fiscal quarter of 1999 increased by $2,000, to
$5,000 from $3,000 in the third fiscal quarter of 1998. This increase is caused
by the interest on a revolving line of credit and increase in interest on the
capitalized lease obligations.
NET INCOME OR (LOSS)
The consolidated net profit for the three months ended May 31, 1999 increased by
$337,000, to a profit of $8,000 in the third fiscal quarter of 1999 compared to
a loss of ($329,000) in the third fiscal quarter of 1998. Management attributes
this increase primarily to the significant increase in sales, decrease in cost
of sales, and decrease in selling, general and administrative expenses, which
outweighed an increase in research and development expense compared to the three
months ended May 31, 1998.
13
<PAGE>
COMPARISON OF NINE MONTHS ENDED MAY 31, 1999 AND 1998.
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
-----------------------------------------------------------
05/31/99 05/31/98
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 2,588 100.0% $ 1,806 100.0%
Cost of sales 1,124 43.4 1,001 55.4
-----------------------------------------------------------
Gross profit 1,464 56.6 805 44.6
-----------------------------------------------------------
Selling, general and administrative 1,741 67.3 2,011 111.4
Research and development 127 4.9 306 16.9
-----------------------------------------------------------
Total operating expenses 1,868 72.2 2,317 128.3
-----------------------------------------------------------
Loss from operations ( 404) (15.6) ( 1,512) (83.7)
Income from grant 150 5.8 150 8.3
Interest revenue 5 0.2 42 2.3
Interest expense (15) (0.6) (9) (0.5)
-----------------------------------------------------------
Net loss $ (264) (10.2)% $ (1,329) (73.6)%
===========================================================
</TABLE>
NET SALES
The consolidated net sales increased $782,000, or 43.3%, to $2,588,000 for the
nine months ended May 31, 1999 compared to $1,806,000 for the nine months ended
May 31, 1998. Words+, Inc.'s sales increased approximately $519,000 and
Simulations Plus, Inc.'s sales increased approximately $263,000, of which
$238,000 were from Pharmaceutical software sales. Management attributes the
increase primarily to the first sales from its new Pharmaceutical software
business launched in the FY 1999, and to increased sales from its Words+
subsidiary. Pharmaceutical software sales contributed over 30% of the total
increase in consolidated sales for the first nine months' operation. The
increase in Words+ sales is due primarily to its MultiLevel MessageMate and
Freedom 2000 communication products being well received by the marketplace. The
Company has noticed an increase in Words+ orders that began in February 1998 and
continues through today; however, no assurance can be given as to whether this
trend will continue.
14
<PAGE>
COST OF SALES
The consolidated cost of sales increased $123,000, or 12.3%, to $1,124,000 for
the nine months ended May 31, 1999 from $1,001,000 for the nine months ended May
31, 1998, however, the percentage of cost of sales decreased by 12.1%. For
Simulations Plus, the cost of sales increased $57,000, or 55.3%, of which the
significant portion of the cost of sales is the systematic amortization of
capitalized software cost, which resulted in a 53.5% increase in amortization
cost. For Words+, the cost of sales increased $66,000, or 7.3%. The change in
percentage of cost of sales between the nine months operations ended May 31,
1999 and 1998 decreased by 8.6%. Management attributes the percentage decrease
in cost of sales primarily to efficiency in labor and material costs outweighing
increases in warranty costs.
GROSS PROFIT
The consolidated gross profit increased $659,000, or 81.9%, to $1,464,000 in the
third fiscal quarter of 1999 from $805,000 in the third fiscal quarter of 1998.
Management attributes the 12.0% increase in gross profit margin between the
third fiscal quarter of 1999 and 1998 to higher sales on a fixed amount of
amortized software expenses, and a significant Material cost reduction and Labor
cost efficiency in Words+ operations.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The consolidated selling, general and administrative expenses decreased
$270,000, or 13.4%, to $1,741,000 for the nine months ended May 31, 1999 from
$2,011,000 for the nine months ended May 31, 1998. For Simulations Plus, the
selling, general and administrative expenses decreased $89,000, or 12.4%,
primarily due to the downsizing of educational software development activities
as the Company reduced staff, significant reduction in educational software
marketing expenses, and other associated overhead costs. For Words+, the
expenses decreased $181,000, or 14.0% due to the reduction of the employee field
sales force and their payroll related expense, reducing marketing cost by
consolidating two companies' marketing department into one, reducing newsletter
printing costs, and reducing advertising costs for the Company's Abbreviate!
product. These reductions outweighed the increases in other expense categories
such as commissions to the independent sales representatives, freight-out
expense, depreciation expense, facility lease, trade shows and travel expense
costs.
RESEARCH AND DEVELOPMENT
The Company incurred approximately $273,000 of research and development costs
for both companies for the nine months ended May 31,1999. Of this amount,
$146,000 was capitalized and $127,000 was expensed in this period. In the same
period of 1998, the Company incurred $807,000 of research and development costs,
of which $501,000 was capitalized and $306,000 was expensed. The 66.2% decrease
in research and development expenditures for the nine months ended May 31, 1999
compared to the same period of 1998 was due to significant reduction in
development of educational simulation software and reduction in Words+'s R&D
expense.
15
<PAGE>
LOSS FROM OPERATIONS
The Company incurred a net loss from operations of approximately $404,000 as
compared to a loss of $1,512,000 for the same period in the fiscal year 1998.
Management attributes the reduction in net loss from operations to increased
sales and decreased expenses, including Selling, General and Administrative
expenses.
INCOME FROM GRANT
During the third fiscal quarter of 1999, the Company submitted its Final Report
and triggered the fourth and final payment of $75,000 of a $300,000 Phase II
SBIR grant from the National Science Foundation (the "NSF") to further develop
the FutureLab(TM) series. The final report was filed in May of 1999 and the
final payment of $75,000 was received in early June of 1999.
INTEREST REVENUE
Interest revenue for the nine months ended May 31, 1999 decreased to $5,000 from
$42,000 for the nine months ended May 31, 1999. This decrease is primarily due
to the interest earned on investment activities in commercial notes through a
highly-qualified financial institution being reduced because portions of the
capital resources were used in the Company's operations.
INTEREST EXPENSE
Interest expense for the nine months ended May 31, 1999 increased by $6,000, or
66.7%, to $15,000 from $9,000 for the nine months ended May 31, 1998. This
increase is attributable primarily to the interest incurred on a revolving line
of credit which the Company utilizes from time to time for working capital
needed.
NET LOSS
Net loss for the nine months ended May 31, 1999 decreased by $1,065,000, or
80.1%, to $264,000 for the nine months ended May 31, 1999 compared to $1,329,000
for the nine months ended May 31, 1998. Management attributes this decrease
primarily to the significant increase in sales outweighing the small increase in
cost of sales, decrease in selling, general and administrative expenses, and
decrease in research and development expense compared to the nine months ended
May 31, 1998.
16
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of capital have been cash flows from its
operations, a bank line of credit, a government grant, cash loans from the
officers on an as-needed basis, accruing and not paying full salaries to certain
executive officers and managers, and remaining proceeds from the Company's
initial public offering.
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, 1999 was
$90,000. The revolving line of credit is not secured by any of the assets of the
Company but is personally guaranteed by Mr. Walter S. Woltosz, the Company's
Chief Executive Officer, President and Chairman of the Board of Directors.
Beginning in August 1998, certain executive officers and managers accepted
reduced salaries on a temporary basis in order to protect the cash assets of the
Company. The unpaid portions of salaries are accrued and will be paid at such
future time as management deems the Company's cash flow and cash reserves are
sufficient to make such payment without adverse effects to the Company's
financial position. As of May 31, 1999, such accrued but unpaid salaries equaled
$135,259.
The Company believes that existing capital and anticipated funds from
operations, cost reductions from downsizing certain segments of operations, and
temporary salary reductions for senior management will be sufficient to meet its
anticipated cash needs for working capital and capital expenditures for at least
the next 13 months. However, if anticipated funds from operations are
insufficient to satisfy the Company's capital requirements, the Company may have
to sell additional equity or debt securities or obtain expanded credit
facilities. In the event such financing is needed in the future, there can be no
assurance that such financing will be available to the Company, or, if cash
flows from operations are insufficient to continue operations at the current
level, and if no additional financing is obtained, then management may
restructure the Company in a way to preserve its pharmaceutical and disability
businesses while maintaining expenses within operating cash flows.
On July 2, 1999, the Company was informed that its securities were being
delisted from the Nasdaq SmallCap Market ("Nasdaq") effective at the close of
business on July 2, 1999, because the Company did not meet the net tangible
assets requirement required for continued listing on Nasdaq. Accordingly,
trading in the shares of the Company's Common Stock is now conducted on the
Nasdaq's "Electronic Bulletin Board." Consequently, the liquidity of the
Company's securities may be impaired, not only in the number of securities which
can be bought and sold, but also through delays in the timing of the
transactions, reductions in security analysts' and the news media's coverage of
the Company, and lower prices for the Company's securities than otherwise may be
attained.
17
<PAGE>
Further, as a result of the delisting, the Company's securities are subject to
Rule 15g-9 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), which imposes additional sales practice requirements on broker-dealers
that sell such securities to persons other than established customers and
"accredited investors" (generally, individuals with net worth in excess of
$1,000,000 or annual incomes exceeding $200,000, or $300,000 together with their
spouses). For transactions covered by this rule, a broker-dealer must make a
special suitability determination for the purchaser and have received the
purchaser's written consent to the transaction prior to the sale. Consequently,
the rule may adversely affect the ability of broker-dealers to sell the
Company's securities acquired in the secondary market.
Securities and Exchange Commission ("Commission") regulations define a "penny
stock" to be any non-Nasdaq equity security that has a market price (as therein
defined) of less than $5.00 per share or with an exercise price of less than
$5.00 per share, subject to certain exceptions. For any transaction involving a
penny stock, unless exempt, the rules require delivery, prior to any transaction
in a penny stock, of a disclosure schedule prepared by the Commission relating
to the penny stock market. Disclosure is also required to be made about
commissions payable to both the broker-dealer and the registered representative
and current quotations for the securities. Finally, monthly statements are
required to be sent disclosing recent price information for the penny stock held
in the account and information on the limited market in penny stocks.
The foregoing required penny stock restrictions will not apply to the Company's
securities if such securities are listed on Nasdaq and have certain price and
volume information provided on a current and continuing basis or meet certain
minimum tangible assets or average revenue criteria. There can be no assurance
that the Company's securities will qualify for exception from these
restrictions. In any event, even if the Company's securities were exempt from
such restrictions, it would remain subject to Section 15(b)(6) of the Exchange
Act, which gives the Commission the authority to prohibit any person that is
engaged in unlawful conduct while participating in a distribution of penny stock
from associating with a broker-dealer or participating in the distribution of a
penny stock, if the Commission finds that such a restriction would be in the
public interest. If the Company's securities were subject to the rules on penny
stocks, the market liquidity for the Company's securities would be severely
adversely affected.
18
<PAGE>
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. Financial Data Schedule.
(b) Reports on Form 8-K
None.
19
<PAGE>
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 15, 1999 Simulations Plus, Inc.
By: /s/ Momoko Beran
----------------------------------
Momoko Beran
Chief Financial Officer
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