<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 February 28, 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 April 5, 1999, was 3,383,531.
<PAGE>
SIMULATIONS PLUS, INC.
FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 1999
<TABLE>
Table of Contents
<CAPTION>
Page
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet at February 28, 1999 (unaudited) 1
Consolidated Statements of Operations for the three months and six
months ended February 28, 1999 and 1998 (unaudited) 2
Consolidated Statements of Cash Flows for the six months ended
February 28, 1999 and 1998 (unaudited) 3
Notes to Consolidated Financial Statements (unaudited) 4
Item 2. Management's Discussion and Analysis or Plan of Operations
General 7
Results of Operations 10
Liquidity and Capital Resources 14
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 18
Signature 19
Exhibit Index 20
</TABLE>
<PAGE>
<TABLE>
SIMULATIONS PLUS, INC. AND
SUBSIDIARY
CONSOLIDATED BALANCE SHEET
February 28, 1999
(Unaudited)
<CAPTION>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents (note 2) $ 30,790
Accounts receivable, net of allowance for
doubtful accounts of $14,078 460,740
Prepaid expenses 32,282
Inventory 230,347
--------------
Total current assets 754,159
--------------
Capitalized computer software development costs,
net of accumulated amortization (note 5) 792,902
Furniture and equipment, net (note 3) 183,488
Other assets 12,801
--------------
Total assets $ 1,743,350
==============
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Advance line of credit $ 91,859
Accounts payable 254,090
Accrued payroll and other expenses 253,563
Accrued warranty and service costs 54,444
Current portion of capitalized lease obligations 28,871
--------------
Total current liabilities 682,827
--------------
Capitalized lease obligations, net of current portion 16,610
--------------
Total liabilities 699,437
--------------
Shareholders' equity
Common stock: $.001 par value, authorized
20,000,000 shares, issued and outstanding 3,383,531 (note 4) 3,384
Additional paid-in capital 4,629,270
Accumulated deficit (3,588,741)
--------------
Total shareholders' equity 1,043,913
--------------
Total liabilities and stockholders' equity $ 1,743,350
==============
</TABLE>
The accompanying footnotes are an integral part of these statements.
1
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<TABLE>
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and six months ended February 28, 1999 and 1998
(Unaudited)
<CAPTION>
Three months ended Six months ended
---------------------------------------------------------
02/28/99 02/28/98 02/28/99 02/28/98
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 777,638 $ 532,609 $ 1,658,924 $ 1,075,672
Cost of sales 378,149 272,264 753,857 601,627
------------ ------------ ------------ ------------
Gross profit 399,489 260,345 905,067 474,045
------------ ------------ ------------ ------------
Operating expenses:
Selling, general & administration 557,001 696,364 1,176,626 1,308,250
Research and development 35,797 125,949 71,,670 263,232
------------ ------------ ------------ ------------
Total operating expenses 592,798 822,313 1,248,296 1,571,482
------------ ------------ ------------ ------------
Loss from operations (193,309) (561,968) (343,229) (1,097,437)
Other income (expenses):
Income from grant 0 0 75,000 75,000
Interest revenue 1,520 8,498 4,946 28,906
Interest expense (7,791) (3,005) (10,130) (6,034)
------------ ------------ ------------ ------------
Loss before provision for income taxes (199,580) (556,475) (273,413) (999,565)
Provision (benefit) for income taxes 0 0 0 0
------------ ------------ ------------ ------------
Net loss $ (199,580) $ (556,475) $ (273,413) $ (999,565)
============ ============ ============ ============
Basic net loss per common share $ (0.06) $ (0.17) $ (0.08) $ (0.30)
============ ============ ============ ============
Diluted net loss per common share $ (0.06) $ (0.17) $ (0.08) $ (0.30)
============ ============ ============ ============
Weighted average # of common shares
outstanding 3,383,531 3,350,000 3,371,423 3,350,000
============ ============ ============ ============
</TABLE>
The accompanying footnotes are an integral part of these statements.
2
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<TABLE>
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended February 28, 1999 and 1998
(Unaudited)
<CAPTION>
Six months ended
---------------------------
02/28/99 02/28/98
---------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (273,413) $ (999,565)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization of furniture and equipment 40,248 23,205
Amortization of capitalized software development costs 124,448 106,251
(Increase) decrease in:
Accounts receivable (84,970) 63,502
Inventory 118,328 31,816
Other assets 906 (9,436)
Income tax receivable 28,941 5,830
Increase (decrease) in:
Accounts payable (80,669) (26,622)
Accrued payroll and other expenses 68,180 11,350
Accrued warranty and service costs 5,948 (7,567)
------------ ------------
Net cash used in operating activities (52,053) (801,236)
------------ ------------
Cash flows from investing activities:
Sales of investments 124,736
Purchase of investments (917,598)
Purchase of furniture and equipment (142,363)
Capitalized computer software development cost (94,223) (310,088)
------------ ------------
Net cash used in investing activities (94,223) (1,245,313)
------------ ------------
Cash flows from financing activities:
Payments on line of credit (5,269)
Payments on capitalized lease obligations (15,819) (12,858)
------------ ------------
Net cash used in financing activities (21,088) (12,858)
------------ ------------
Net decrease in cash (167,364) (2,059,407)
Cash and cash equivalents, beginning of period 198,154 2,156,761
------------ ------------
Cash and cash equivalents, end of period $ 30,790 $ 97,354
============ ============
</TABLE>
The accompanying footnotes are an integral part of these statements.
3
<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: 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, 1999, the Company had no uninsured cash. In
addition, the Company had cash equivalents of $38,152 on deposit with a
high-quality financial institution that is 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: FURNITURE AND EQUIPMENT
- -------
Furniture and equipment consist of the following:
Equipment $ 44,003
Computer equipment 293,748
Furniture and fixtures 45,036
Leasehold improvements 39,431
Demo Equipment 25,173
Rental Equipment 44,797
-----------
492,188
Less accumulated depreciation 308,700
-----------
$ 183,488
===========
Note 4: STOCKHOLDERS' EQUITY
- -------
AUTHORIZATION OF PREFERRED STOCK
On March 26, 1999, the Company held its Annual Meeting and approved an amendment
to the Company's Articles of Incorporation to authorize up to 10,000,000 shares,
4
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par value $0.001, of Preferred Stock. The purpose of this amendment was 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.
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 February 28, 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.
The Company entered into an agreement with Banchik and Associates for investor
relation services. On January 4, 1999, 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
grant. The options vest at a rate of 5,000 per calendar quarter at the beginning
of the period.
5
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On March 26, 1999, the Company determined to issue stock options to the
Company's two independent Directors to purchase an aggregate of 2,206 shares
(1,103 shares each) of the Company's Common Stock at the fair market value of
the date of grant.
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 services 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.
Note 5: 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 6: Income Taxes
- -------
The Company used the liability method of accounting for income taxes pursuant to
SFAS No. 109 "Accounting for Income Taxes."
Note 7: Earnings Per Share
- -------
Effective February 28, 1998, the Company adopted SFAS No. 128 "Earnings Per
Share." All prior periods presented have been restated to confirm with SFAS No.
128.
6
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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, 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 producing and developing simulation software for pharmaceutical
research and it is producing simulation software for science courses for the
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 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) software, to be
released during the third fiscal quarter, estimates the values of a number of
physicochemical properties of molecules with only the structure of the molecules
as input. These properties are required inputs for GastroPlus(TM). The Company's
science experiment educational 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 released an improved version of
GastroPlus(TM) in August 1998 and, a further improved version in February 1999.
Sales of GastroPlus(TM) as of the end of the second quarter include ten of the
7
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largest pharmaceutical firms in the world, including Pfizer, Roche, Pharmaceia
and Upjohn, Zeneca, Astra, and five 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. A second optional module, IVIV Correlation, is in
advanced development and is expected to be released during the third fiscal
quarter. Two other modules are also in development, and both are expected to be
released in 1999. These additional modules will more than double the average
sale price for an annual license. The Company is actively working nearly 500
leads for additional sales. No assurances can be given, however, that any
additional sales will occur as a result of such leads or that any such sales
would be profitable to the Company.
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, as
well as finalizing the development of QMPRPlus(TM) as both a separate companion
program and 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 and the U.S., and will be presented in Japan in
April. 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 have been reduced to
completing the requirements for the Company's National Science Foundation SBIR
grant. Current sales and the National Science Foundation grant provide support
for this level of effort.
8
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In October 1997, the Company was awarded a $300,000 Phase II follow-on grant
which is 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 is expecting to
receive the last payment in April 1999 after submitting its final report. This
grant is funded to further develop software to allow physically disabled science
students to perform simulated laboratory experiments on a computer with minimal
physical input. The Company is using its expertise and technology from its
Words+ subsidiary in designing and building computer access products for the
physically-disabled, as well as its expertise in developing scientific
educational simulation software, in developing these programs. These programs
are also designed to be used by able-bodied students so that the same programs
will be attractive to and used by both physically disabled and able-bodied
persons.
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 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.
9
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RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED FEBRUARY 28, 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
-------------------------------------------------------------
02/28/99 02/28/98
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $778 100.0% $533 100.0%
Cost of sales 378 48.6 272 51.0
Selling, general and administrative 557 71.6 696 130.6
Research and development 36 4.6 126 23.6
-------------------------------------------------------------
Total operating expenses 593 76.2 822 154.2
-------------------------------------------------------------
Loss from operations (193) (24.8) (561) (105.2)
Income from grant 0 0 0 0
Interest revenue 2 0.3 8 1.5
Interest expense (8) (1.0) (3) (0.6)
-------------------------------------------------------------
Net loss $(199) (25.5)% $(556) (104.3)%
=============================================================
</TABLE>
NET SALES
The consolidated net sales increased $245,000, or 46.0%, to $778,000 in the
second fiscal quarter of 1999 from $533,000 in the second fiscal quarter of
1998. Simulations Plus, Inc.'s sales, from pharmaceutical and educational
software, increased approximately $82,000, or 735.4%, and Words+, Inc.'s sales
increased approximately $163,000, or 31.3% for the quarter. Management
attributes the increase in consolidated net sales to the first sales from
Pharmaceutical software launched in the first and second quarters of FY 1999,
and to increased sales from its Words+ subsidiary. Pharmaceutical software sales
contributed over 35% 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 continuous increase in Words+ orders
commencing in February 1998 continuing through today, however, no assurance can
be given as to whether this trend will continue.
COST OF SALES
The consolidated cost of sales increased $106,000, or 39.0%, to $378,000 in the
second fiscal quarter of 1999 from $272,000 in the second fiscal quarter of
1998, however, the percentage of cost of sales decreased by 2.4%. For
Simulations Plus, the cost of sales increased $20,000, or 58.8%, of which the
significant portion of the cost of sales is the systematic amortization of
capitalized software cost, which resulted in a 59.7 % increase in amortization
10
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cost. For Words+, the cost of sales increased $86,000, or 36.0%. The change in
percentage of cost of sales between the second fiscal quarter of 1999 and 1998
is increased by 1.7%. Management attributes the percentage increase in cost of
sales primarily to increase in warranty cost for the quarter although there are
improvements in labor and material cost.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The consolidated selling, general and administrative expenses decreased
$139,000, or 20.0%, to $557,000 in the second fiscal quarter of 1999 from
$696,000 in the second fiscal quarter of 1998. For Simulations Plus, the
selling, general and administrative expenses decreased $39,000, or 8.9%
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 also decreased $100,000, or 22.8% due to allowed attrition within the
field sales force and their payroll related expenses, reducing marketing costs
by consolidating two companies' marketing departments into one, reducing
newsletter printing costs, and reducing advertising costs for the Abbreviate!
product. These reductions outweighed the increases in other expense categories
such as depreciation expense, facility lease, trade shows and travel expenses.
RESEARCH AND DEVELOPMENT
The Company incurred approximately $80,000 of research and development costs for
both companies during the second quarter of 1999. Of this amount, $44,000 was
capitalized and $36,000 was expensed in this period. In the second quarter of
1998, the Company incurred $251,000 of research and development costs, of which
$125,000 was capitalized and $126,000 was expensed. The 68.1% decrease in
research and development expenditure from the second quarter of 1998 to the
second quarter of 1999 was due to significant reduction in development of
educational simulation software and reduction in Words+'s R&D expense.
INTEREST REVENUE
Interest revenue for the second fiscal quarter of 1999 decreased to $2,000 from
$8,000 in the second 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 second fiscal quarter of 1999 increased by $5,000, to
$8,000 from $3,000 in the second fiscal quarter of 1998. This increase is caused
by the adjustment of $6,000 that has been made in the second quarter to correct
the error in the first quarter regarding interest on a revolving line of credit.
Without this adjustment, the interest expense shows a $1,000 decline in the
second fiscal quarter of 1999 compared to the second fiscal quarter of 1998.
11
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NET LOSS
The consolidated net loss for the three months ended February 28, 1999 decreased
by $357,000, or 64.2%, to $199,000 in the second fiscal quarter of 1999 compared
to $556,000 in the second fiscal quarter of 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 three
months ended February 28, 1998.
COMPARISON OF SIX MONTHS ENDED FEBRUARY 28, 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>
Six Months Ended
------------------------------------------------------------
02/28/99 02/28/98
------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $1,659 100.0% $1,076 100.0%
Cost of sales 754 45.4 602 55.9
Selling, general and administrative 1,176 70.9 1,308 121.6
Research and development 72 4.3 263 24.4
------------------------------------------------------------
Total operating expenses 1,248 75.2 1,571 146.0
------------------------------------------------------------
Loss from operations (343) (20.6) (1,097) (101.9)
Income from grant 75 4.5 75 7.0
Interest revenue 5 0.3 29 2.7
Interest expense (10) (0.6) (6) (0.6)
------------------------------------------------------------
Net loss $(273) (16.4)% $(999) (92.8)%
============================================================
</TABLE>
NET SALES
The consolidated net sales increased $583,000, or 54.2%, to $1,659,000 for the
six months ended February 28, 1999 compared to $1,076,000 for the six months
ended February 28, 1998. Words+, Inc.'s sales increased approximately $425,000
and Simulations Plus, Inc.'s sales increased approximately $158,000, of which
$148,000 are from Pharmaceutical software sales. Management attributes the
increase primarily to the first sales of its pharmaceutical software launched in
FY 1999, as well as to increased sales from its Words+ subsidiary.
Pharmaceutical software sales contributed over 25% of the total increase in
consolidated sales for the first six 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 a continuous increase in Words+ orders commencing in February 1998
continuing through today, however, no assurance can be given as to whether this
trend will continue.
12
<PAGE>
COST OF SALES
The consolidated cost of sales increased $152,000, or 25.2%, to $754,000 for the
six months ended February 28, 1999 from $602,000 for the six months ended
February 28, 1998, however, the percentage of cost of sales decreased by 10.5%.
For Simulations Plus, the cost of sales increased $36,000, or 53.3%, of which
the significant portion of the cost of sales is the systematic amortization of
capitalized software cost, which resulted in 50.4 % increase in amortization
cost. For Words+, the cost of sales increased $116,000, or 21.7%. Management
attributes the percentage decrease in cost of sales primarily to efficiency in
labor and material costs outweighing increases in warranty costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The consolidated selling, general and administrative expenses decreased
$132,000, or 10.1%, to $1,176,000 for the six months ended February 28, 1999
from $1,308,000 for the six months ended February 28, 1998. For Simulations
Plus, the selling, general and administrative expenses are decreased $73,000, or
14.9% 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 are also decreased $59,000, or 7.2% due to the reduction of the
sales force and their payroll related expenses, reducing marketing costs by
consolidating two companies' marketing departments into one, reducing Newsletter
printing costs, and reducing advertising costs for the Abbreviate! product.
These reductions outweighed the increases in other expense categories such as
depreciation expense, facility lease, trade shows and travel expenses.
RESEARCH AND DEVELOPMENT
The Company incurred approximately $166,000 of research and development costs
for both companies for the six months ended February 28,1999. Of this amount,
$94,000 was capitalized and $72,000 was expensed in this period. In the same
period of 1998, the Company incurred $576,000 of research and development costs,
of which $313,000 was capitalized and $263,000 was expensed. The 71.2% decrease
in research and development expenditure for the six months ended February 28,
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.
INCOME FROM GRANT
During the first fiscal quarter of 1999, the Company received the third $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 first payment of
$75,000 was received in the first fiscal quarter of 1998. The purpose of the
grant is to develop software to allow physically-disabled students to perform
simulated laboratory experiments on a computer.
13
<PAGE>
INTEREST REVENUE
Interest revenue for the six month ended February 28, 1999 decreased to $5,000
from $29,000 for the six months ended February 28, 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 six months ended February 28, 1999 increased by $4,000,
or 66.7%, to $10,000 from $6,000 for the six months ended February 28, 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 six months ended February 28, 1999 decreased by $726,000, or
72.7%, to $273,000 for the six months ended February 28, 1999 compared to
$999,000 for the six months ended February 28, 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 six
months ended February 28, 1998.
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 February 28, 1999
was $92,000. 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 those salaries are accrued and will be paid at
14
<PAGE>
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 February 28, 1999, the aggregate amount of such
accrued salaries was approximately $121,000.
In October 1997, the Company was awarded a follow-on $300,000 Phase II 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. The grant is being paid in four equal payments of $75,000
semi-annually. The first three payments on such grant were received in October
1997, April 1998 and October 1998. The Company is expecting to receive the last
payment in April 1999.
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.
In order to maintain quotation of its securities on the NASDAQ SmallCap Market
("NASDAQ"), the Company has to maintain certain minimum financial requirements.
As of February 28, 1999, the Company's net assets were $1,043,913, which is
below the continued listing requirements for the NASDAQ SmallCap market,
specifically, the net tangible assets of $2,000,000. If the Company is unable to
increase its net tangible assets to meet the NASDAQ's requirement for continued
listing, the Company's securities may be delisted from NASDAQ. In such event,
trading, if any, in the shares of Common Stock would thereafter be conducted in
the over-the-counter markets in the so-called "pink sheets" or on the NASDAQ's
"electronic Bulletin Board." Consequently, the liquidity of the Company's
securities could be impaired, not only in the number of securities which could
be bought and sold, but also through delays in the timing of the transactions,
reductions in security analysts' and the news media's coverage of the Company,
and lower prices for the Company's securities than otherwise might be attained.
If the Company's securities were to be delisted from NASDAQ, they could become
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.
15
<PAGE>
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.
Management realizes that there are urgent needs for additional funds to meet one
of the listing requirements, net tangible assets, and to continue its research,
development, and marketing activities at its current level of expenditures in
the pharmaceutical and educational software areas. Accordingly, the Company has
signed an agreement with The Kriegsman Group, a southern California based
investment banking firm, to assist the Company in raising additional investment
capital. The Company has been interviewing investors and providing responses to
due diligence questions from a number of them. While management is optimistic
that financing can be obtained on acceptable terms, there can be no assurance
that such financing will be available to the Company or, if available, that it
will be on terms acceptable to the Company.
16
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
None.
Item 2. Changes in Securities
---------------------
The information set forth in Note 5 of the notes to condensed
financial statements is incorporated herein by this reference.
Item 3. Defaults Upon Senior Securities
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
On March 26, 1999, the Registrant held its annual meeting of
shareholders. At such meeting, the following persons were
reelected as directors:
Walter Woltosz
Virginia Woltosz
Dr. David Z. D'Argenio
Dr. Richard Weiss.
At such meeting, 2,208,180 shares were voted in person or by
proxy. Each director nominee received 2,208,180 votes.
Additionally, shareholders approved the following items:
(1) Amending the Registrant's Articles of Incorporation to
authorize 10 million shares of what is commonly known as
"blank check" Preferred Stock.
(2) Amending the Registrant's Stock Option Plan to authorize
500,000 shares to be available under the plan.
(3) Ratifying the selection of Singer, Lewak, Greenbaum &
Goldstein, LLP as their independent accountants.
All of the above proposals received 2,208,180 votes. While
there were no abstentions and no "no votes", 1,175,351 shares
were not represented in person or by proxy.
Item 5. Other Information
-----------------
None.
17
<PAGE>
Item 6. Exhibits and Reports on form 8-K
--------------------------------
(a) Exhibits:
27 Financial Data Schedule.
(b) Reports on Form 8-K
None.
18
<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.
Simulations Plus, Inc.
Date: April 8, 1999 By: /s/ MOMOKO BERAN
---------------------------------
Momoko Beran
Chief Financial Officer
19
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