<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 November 30, 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 W. AVENUE J
LANCASTER, CA 93534-2902
(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
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The number of shares outstanding of the Issuer's common stock, par value $0.001
per share, as of January 14, 2000, was 3,383,531.
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SIMULATIONS PLUS, INC.
FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 1999
Table of Contents
Page
PART I. FINANCIAL INFORMATION ----
Item 1. Financial Statements
Consolidated Balance Sheet at November 30, 1999 (unaudited) 1
Consolidated Statements of Operations for the three months
ended November 30, 1999 and 1998 (unaudited) 2
Consolidated Statements of Cash Flows for the three months
ended November 30, 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 11
Liquidity and Capital Resources 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signature 17
Exhibit Index 18
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SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
November 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents (note 2) $ 64,321
Accounts receivable, net of allowance for
doubtful accounts of $14,078 553,159
Prepaid expenses 18,988
Inventory 189,705
----------------
Total current assets 826,173
----------------
Capitalized computer software development costs,
net of accumulated amortization (note 3) 589,258
Furniture and equipment, net (note 4) 132,875
Other assets 13,529
----------------
Total assets $ 1,561,835
================
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Advance line of credit $ 89,992
Accounts payable 239,142
Accrued payroll and other expenses 435,841
Accrued warranty and service costs 70,761
Current portion of capitalized lease obligations 26,616
----------------
Total current liabilities 862,352
----------------
Capitalized lease obligations, net of current portion 1,782
----------------
Total liabilities 864,134
----------------
Shareholders' equity
Preferred stock: $0.001 par value, authorized
10,000,000 shares, no shares issued and outstanding
Common stock: $0.001 par value, authorized
20,000,000 shares, issued and outstanding 3,383,531 (note 5) 3,384
Additional paid-in capital 4,629,268
Accumulated deficit (3,934,951)
----------------
Total shareholders' equity 697,701
----------------
Total liabilities and stockholders' equity $ 1,561,835
================
</TABLE>
The accompanying footnotes are an integral part of these statements.
1
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SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended November 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
-----------------------------------
11/30/99 11/30/98
---------------- ----------------
<S> <C> <C>
Net sales $ 813,916 $ 881,286
Cost of sales 237,589 396,610
---------------- ----------------
Gross profit 576,327 484,676
---------------- ----------------
Operating expenses:
Selling, general & administrative 525,292 598,723
Research and development 89,812 35,873
---------------- ----------------
Total operating expenses 615,104 634,596
---------------- ----------------
Loss from operations (38,777) (149,920)
Other income (expenses):
Income from grant 0 75,000
Interest revenue 234 3,426
Interest expense (4,415) (2,339)
---------------- ----------------
Loss before provision for income taxes (42,958) (73,833)
Provision (benefit) for income taxes 0 0
---------------- ----------------
Net loss $ (42,958) $ (73,833)
================ ================
Basic net loss per common share $ (0.01) $ (0.02)
================ ================
Diluted net loss per common share $ (0.01) $ (0.02)
================ ================
Weighted average # of common shares
outstanding 3,379,539 3,359,315
================ ================
</TABLE>
The accompanying footnotes are an integral part of these statements.
2
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SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended November 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
-----------------------------------
11/30/99 11/30/98
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (42,958) $ (73,833)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization of furniture and equipment 16,546 16,504
Amortization of capitalized software development costs 31,075 67,873
(Increase) decrease in:
Accounts receivable 17,187 (60,301)
Inventory 3,469 43,129
Other assets 17,484 7,818
Income tax receivable 28,941
Increase (decrease) in:
Accounts payable (4,905) (100,493)
Accrued payroll and other expenses 5,803 69,888
Accrued warranty and service costs 5,668
---------------- ----------------
Net cash provided by (used in) operating activities 43,701 5,194
---------------- ----------------
Cash flows from investing activities:
Capitalized computer software development cost (24,343) (50,154)
---------------- ----------------
Net cash used in investing activities (24,343) (50,154)
---------------- ----------------
Cash flows from financing activities:
Proceeds from line of credit 164 (5,824)
Payments on capitalized lease obligations (7,524) (8,160)
---------------- ----------------
Net cash used in financing activities (7,360) (13,984)
---------------- ----------------
Net decrease in cash 11,998 (58,944)
Cash and cash equivalents, beginning of period 52,323 198,154
---------------- ----------------
Cash and cash equivalents, end of period $ 64,321 $ 139,210
================ ================
</TABLE>
The accompanying footnotes are an integral part of these statements.
3
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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 November 30, 1999, the Company had no uninsured cash. In
addition, the Company had cash equivalents of $18,667 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: CAPITALIZED COMPUTER SOFTWARE DEVELOPMENT COSTS
- -------
Software development costs are capitalized in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Cost of
Computer Software to be Sold, Leased, or Otherwise Marketed." Capitalization of
software development costs begins upon the establishment of technological
feasibility and is discontinued when the product is available for sale. The
establishment of technological feasibility and the ongoing assessment for
recoverability of capitalized software development costs require considerable
judgement by management with respect to certain external factors including, but
not limited to, technological feasibility, anticipated future gross revenue,
estimated economic life, and changes in software and hardware technologies.
Capitalized software development costs are comprised primarily of salaries and
direct payroll related costs and the purchase of existing software to be used in
the Company's software products.
Amortization of capitalized software development costs is provided on a
product-by-product basis on the straight-line method over the estimated economic
life of the products, not exceeding three years. Management periodically
compares estimated net realizable value by product with the amount of software
development costs capitalized for that product to ensure the amount capitalized
is recoverable through revenues. Any excess of development costs to expected net
realizable value is expensed at that time. The Company expensed total of
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$532,925 in the fiscal years 1999 and 1998 when it was determined that the
capitalized amount relating to educational software was greater than net
realizable value.
Note 4: FURNITURE AND EQUIPMENT
- -------
Furniture and equipment as of November 30, 1999 consisted of the following:
Equipment $ 50,185
Computer equipment 338,308
Furniture and fixtures 45,036
Leasehold improvements 39,434
-------------
472,963
Less accumulated depreciation 340,088
-------------
$ 132,875
=============
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.
In January 1997, the Company entered into Subscription Agreements whereby the
Company issued notes in the amount of $1,100,000 and issued 280,000 warrants to
purchase common stock. The warrants are exercisable at $2.50 per share, are
subject to a 12-month-lock-up period, and expire five years from the grant date.
The notes were repaid upon the completion of the Company's stock offering. To
date, these warrants have not been exercised.
STOCK OPTION PLAN
In September 1996, the Board of Directors adapted and the shareholders approved
the 1996 Stock Option Plan (the "Option Plan") under which a total of 250,000
shares of common stock has been reserved for issuance. In March 1999, the
shareholders approved an increase in the number of shares that may be granted
under the Option Plan to 500,000. The Option Plan terminates in 2006, subject to
earlier termination by the Board of Directors.
As of November 30, 1999, 499,981 shares have been issued to various employees at
an exercise price of the fair market value at the date of grant with five-year
vesting periods.
5
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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.
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
----------------------------------------------------------
FORWARD-LOOKING STATEMENTS
The following discussion should be read in conjunction with the financial
statements and the notes thereto appearing elsewhere in this quarterly report on
Form 10-QSB for the quarter ended November 30, 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
BUSINESS
- --------
Simulations Plus, Inc. (the "Company" or "Simulations Plus") and its wholly
owned subsidiary, Words+, Inc. ("Words+") produce two types of products: (1)
Simulations Plus, incorporated in 1996, develops and produces simulation
software for use in pharmaceutical research and for education, and also provides
contract research services to the pharmaceutical industry, and (2) Words+,
founded in 1981, produces computer software and specialized hardware for use by
persons with disabilities, as well as a personal productivity software program
called Abbreviate! for the retail market.
DESCRIPTION OF SIMULATION SOFTWARE
- ----------------------------------
The types of simulation software produced by the Company are based on the
equations of chemistry and physics that describe or "model" the behavior of
things in the real world. The Company's GastroPlus(TM) pharmaceutical software
simulates the movement, dissolution/precipitation, and absorption orally-dosed
drug compounds in the human gastrointestinal tract, and with additional inputs,
the plasma concentration-time of the drug after it reaches the central
circulation. The Company's QMPRPlus(TM) program estimates the value of several
important physicochemical characteristics of new drug-like molecules with only
the structure of the molecule as input. The Company's award-winning
FutureLab(TM) science experiment simulations for middle school and high school
students incorporate the equations of chemistry and physics for each experiment
(optics, electrical circuits, gravity, ideal gases, acid/base titration, etc.).
7
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The development of simulation software involves identifying and understanding
the underlying chemistry and physics of the processes to be simulated, breaking
those processes down into the lowest practical level of individual sub-processes
at which the behaviors can be well-represented mathematically, developing
appropriate mathematical relationships/equations, and converting them into
computer subroutines. The software subroutines representing these individual
processes are then assembled into an overall simulation program, with
appropriate coordination between modules and design of use-friendly inputs and
outputs. The predictions of this program are then compared to known results in
order to determine the validity of the model and to calibrate the simulation to
produce a useful tool for predicting new results.
PRODUCTS
- --------
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's software products and services to
date are focussed on the area of pharmaceutical research known as ADME
(Absorption, Distribution, Metabolism, and Excretion). The Company released its
first pharmaceutical software product, GastroPlus(TM), in August 1998 and
received enthusiastic interest from researchers in large pharmaceutical
companies such as Astra-Zeneca, Pfizer, Pharmacia and Upjohn, The Roche Group,
and SmithKline Beecham. An Optimization Module was released in November 1998 and
the majority of new sales now include this module, generating additional
revenue.
QMPRPlus (Quantitative Molecular Permeability Relationships), a companion
program to GastroPlus, takes as inputs the structures of molecules, and provides
estimates for human effective permeability, octanol-water partition coefficient
(logP), solubility, and diffusivity - all inputs to GastroPlus. QMPRPlus thereby
extends the utility of GastroPlus into early drug discovery, during which
pharmaceutical companies may not have even made many of the molecules that have
been identified as potential drug candidates. By providing estimates of
physicochemical properties from structure alone, QMPRPlus, coupled with
GastroPlus, allows researchers to rank order large numbers of candidate
compounds in terms of their potential for human intestinal absorption. Because
pharmaceutical companies are dealing with millions of compounds per year, and
because the area of ADME has become a bottleneck, high throughput screening on
the computer ("IN SILICO") is becoming not just a convenience, but a necessity.
In 1998, the Company executed a License Agreement with Therapeutic Systems
Research Laboratories, Inc. ("TSRL"), Ann Arbor, Michigan, to obtain exclusive
rights to TSRL's technology and database, including measurements of drug
permeability from nearly 60 laboratory experiments to measure the intestinal
permeability of drug compounds in human and/or rat small intestines. The Company
is also receiving consulting assistance in the development of the simulation
model from TSRL staff, including Dr. Gordon Amidon and Dr. John Crison. The
Company believes that the strategic advantage of exclusive access to TSRL's
technology and expertise, combined with the Company's now well-developed and
growing expertise in absorption and pharmacokinetics simulation, have resulted
8
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in GastroPlus becoming recognized as a unique simulation and analysis capability
within the pharmaceutical industry. The Company is aware that other companies
began to develop similar software; however, there has not been any significant
direct competition for GastroPlus at this time. As of this writing,
GastroPlus(TM) has been licensed to 17 companies, at 29 geographical locations,
with multiple seats at many locations. Customers are in the U.S., Europe, and
Japan.
CONTRACT RESEARCH SERVICES
- --------------------------
The Company offers contract research services to the pharmaceutical industry in
the area of gastrointestinal absorption and related technologies. The Company
has performed three study contracts for major pharmaceutical companies, and is
in the process of answering a request for proposal for additional studies with
one of them. These provide an additional source of revenue for the Company, as
well as a means to introduce the Company's software products to new customers.
Management expects the number and size of study contracts, which can include
custom software development, to continue to increase in future.
PRODUCT DEVELOPMENT
- -------------------
In the area of simulation software for pharmaceutical research, the Company is
currently pursuing the development of additional modules for GastroPlus and
QMPRPlus, as well as a third program called HelixGen(TM), which predicts the
3-dimensional receptor structure of certain transmembrane proteins. The Company
is also pursuing the development of another core product called DDDPlus(TM)
(Dose Disintegration and Dissolution Plus), which will simulate the
disintegration and dissolution of tablets and capsules in IN VITRO experiments.
Other development efforts include:
1. The IVIV Correlation Module for GastroPlus(TM) will provide IN VITRO-IN
VIVO correlation capabilities to pharmaceutical researchers. IN VITRO-IN
VIVO correlation in this context refers to the ability to determine the
relationship between the concentration-time curve of a drug product in the
blood after oral dose (IN VIVO) to the rate at which the oral dose is
observed to dissolve in a laboratory experiment (IN VITRO). This module is
expected to be released during the second quarter of FY2000.
2. The Company has recently added the ability to accept 3-dimensional
structural data to QMPRPlus, and increased the number of molecular
descriptors from 30 in the first version to 150 in the new version.
Mathematical models for the output parameters that include these new 3D
descriptors are now in development. These models are expected to offer
improved accuracy over the 2-dimensional models currently in the program.
3. The Absorption Systems Caco-2 Permeability Module will be an optional
module for QMPRPlus to predict permeability from data collected IN VITRO in
Caco-2 cells. The Company signed a license agreement with Absorption
Systems LP of Exton, Pennsylvania, for data on 330 compounds tested by
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Absorption Systems in Caco-2 cell cultures, and is using this database to
build the optional module, which is expected to be released in the second
or third quarter of FY2000.
4. The Metabolism and Efflux Module will extend the simulation within
GastroPlus to include greater detail for the effects of certain metabolic
processes on drug molecules, and the effects of certain proteins in
intestinal cells that return ("efflux") a drug molecule to the intestinal
contents. There is considerable interest within the pharmaceutical industry
in modeling (simulating) the mechanisms by which these processes occur
during and subsequent to intestinal absorption of the drug molecules. The
Company expects to release the Metabolism and Efflux Module during the
second quarter of fiscal year 2000.
5. HelixGen is a program that predicts the 3-dimensional geometry of a special
class of proteins known as G-coupled transmembrane proteins. This type of
protein serves as a channel for passage of certain molecules through the
walls of nerve cells and other cells, and is a target for the majority of
neurogenic drugs. Full development of this program is expected to resume in
FY2000.
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, who has communicated through Words+
products since 1985.
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.
The Company completed the development of and released a new Message Builder
feature for the MessageMate in December 1999, which is an enhancement of the
existing MessageMate product. It enables users to select prerecorded words or
phrases one at a time, and then plays the entire message formed by them.
10
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RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED NOVEMBER 30, 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
-------------------------------------------------------------------------
11/30/99 11/30/98
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 814 100.0% $ 881 100.0%
Cost of sales 238 29.2 397 45.0
-------------------------------------------------------------------------
Gross Profit 576 70.8 484 55.0
-------------------------------------------------------------------------
Selling, general and administrative 525 64.5 598 67.9
Research and development 90 11.1 36 4.1
-------------------------------------------------------------------------
Total operating expenses 615 75.6 634 72.0
-------------------------------------------------------------------------
Loss from operations (39) (4.8) (150) (17.0)
-------------------------------------------------------------------------
Income from grant - - 75 8.5
Interest revenue - - 3 0.3
Interest expense (4) (0.5) (2) (0.2)
-------------------------------------------------------------------------
Net loss $ (43) (5.3)% $ (74) (8.4)%
=========================================================================
</TABLE>
NET SALES
The consolidated net sales decreased $67,000, or 7.6%, to $814,000 in the first
fiscal quarter of 2000 from $881,000 in the first fiscal quarter of 1999.
Simulations Plus, Inc.'s sales, from pharmaceutical and educational software,
increased approximately $64,000, or 73.6%, and Words+, Inc.'s sales decreased
approximately $131,000, or 16.5% for the quarter. Management attributes the
decrease in consolidated net sales to a decline in sales from its Words+
subsidiary outweighed somewhat by an increase in sales from Pharmaceutical
software. Pharmaceutical sales increased in each of the last five quarters. The
decline in Words+ sales is due primarily to the temporary lack of key components
for the Pegasus LITE(TM), for which the Company is actively seeking replacement.
COST OF SALES
The Company reclassified Royalty expense as a part of cost of sales starting
with this fiscal year. Accordingly, last year's cost of sales was restated
reflecting this change in order to compare the results of operations fairly
between the first fiscal quarter of 2000 and 1999.
Consolidated cost of sales decreased $159,000, or 40.1%, to $238,000 in the
first fiscal quarter of 2000 from $397,000 in the first fiscal quarter of 1999.
The percentage of cost of sales decreased by 15.8%. For Simulations Plus, the
cost of sales decreased $14,000, or 21.2%. A significant portion of the cost of
sales is the systematic amortization of capitalized software cost, which
11
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decreased by 34.5 % since the Company wrote off all remaining capitalized
software development costs for educational software at the end of fiscal 1999.
For Words+, the cost of sales decreased $145,000, or 43.8%. The change in
percentage of cost of sales between the first fiscal quarter of 2000 and 1999 is
improved by 13.7%. Management attributes the percentage decrease in cost of
sales for Words+ primarily to two reasons: (1) a significant portion of sales
was generated by product items with higher profit margins, (2) capitalized
software development costs for educational software were fully amortized by the
end of fiscal year 1999, so there were no amortization costs for educational
software for the current quarter.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The consolidated selling, general and administrative expenses decreased $73,000,
or 12.2%, to $525,000 in the first fiscal quarter of 2000 from $598,000 in the
first fiscal quarter of 1999. For Simulations Plus, the selling, general and
administrative expenses decreased $21,000, or 11.6%. There were slight increases
in some expenses, such as travel expenses, printing and investor relation
expenses, which reflect the Company's efforts in selling/marketing and steady
communications to investors. However, overall decreases in other expense
categories, such as facility lease expense, outweighed the increase. For Words+,
expenses decreased $52,000, or 12.5%, due to reductions in commission based on
sales, reductions in the employee field sales force and their payroll related
expenses, and reducing marketing costs by consolidating the management of two
companies' marketing departments into one person. These reductions outweighed
increases in other expenses such as utilities and insurance.
RESEARCH AND DEVELOPMENT
The Company incurred approximately $114,000 of research and development costs
for both companies during the first quarter of 2000. Of this amount, $24,000 was
capitalized and $90,000 was expensed in this period. In the first quarter of
1999, the Company incurred $86,000 of research and development costs, of which
$50,000 was capitalized and $36,000 was expensed. The increase of $28,000, or
32.6% in research and development expenditure from the first quarter of 1999 to
the first quarter of 2000 was due to the fact that research and development
expenditures for the first quarter of 1999 reported only actual wages and did
not include accrued salaries, while the first quarter of 2000 included accrued
wages in research and development.
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 final payment of
$75,000 was received in June 1999. There is no grant income for fiscal year
2000.
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INTEREST REVENUE
Interest revenue for the first fiscal quarter of 2000 decreased to $200 from
$3,000 in the first fiscal quarter of 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 first fiscal quarter of 2000 increased by $2,000, to
$4,000 from $2,000 in the first fiscal quarter of 1999. This increase is
attributable primarily to the interest paid on a revolving line of credit.
NET LOSS
The consolidated net loss for the three months ended November 30, 1999 decreased
by $31,000, or 41.9%, to $43,000 in the first fiscal quarter of 2000 compared to
$74,000 in the first fiscal quarter of 1999. Management attributes this decrease
primarily to the significant reductions in cost of sales, resulting higher gross
profit, and overall reductions in selling, general and administrative expenses
which outweighed research and development expense compared to the three months
ended November 30, 1999.
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 November 30, 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.
The Company believes that existing capital and anticipated funds from 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
13
<PAGE>
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 August 31, 1998 the Company ceased to meet one of the requirements for
continued listing, namely the Company's net tangible assets as of August 31,
1998 were $1,284,000 which was below the $2,000,000 required by the Nasdaq.
Further, as of November 30, 1998 the market value of the Company's public float
was below the $4,000,000 required for continued Nasdaq listing. On July 2, 1999,
the Company was informed that its securities were being delisted from the Nasdaq
effective at the close of business on July 2, 1999 because the Company did not
meet the requirements 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 media coverage of the Company, and lower
prices for the Company's securities than otherwise may be attained.
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 which
sell such securities to persons other than established customers and "accredited
investors" (generally, individuals with net worths 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 hereby 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.
14
<PAGE>
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 exemption 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.
YEAR 2000 COMPLIANCE
The Company has completed a comprehensive review of its computer systems to
identify all software applications that could be affected by the inability of
many existing computer systems to process time-sensitive data accurately beyond
the year 1999 (referred to as the "Year 2000" issue). The Company is also
continuing to monitor its computer systems and the adequacy of the processes and
progress of third-party vendors of systems that may be affected by the Year 2000
issue. The Company is dependent on third-party computer systems and
applications, particularly with respect to such critical tasks as accounting,
billing and buying, planning and paying for media, and it also relies on its own
computer systems. The Company completed its Year 2000 compliance program, and
after the turn of the millennium, the Company has not seen Year 2000 issue
problems, however, the Company may experience cost overruns in the future, if
such a problem incurs, which could have a material adverse effect on its
business, results of operations and financial condition. While management
believes the Company's procedures are designed to be successful, because of the
complexity of the Year 2000 issue and the interdependence of organizations using
computer systems, the Company's efforts, or those of third parties with whom it
interacts, may not be satisfactorily completed in a timely fashion. If the
Company has failed to adequately address the Year 2000 issue, then its business,
results of operations and financial condition could be materially adversely
affected.
15
<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.
16
<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: January 14, 2000 By: /s/ MOMOKO BERAN
----------------------
Momoko Beran
Chief Financial Officer
17
<PAGE>
Ex-27
Financial Data Schedule
18
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<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-2000
<PERIOD-START> SEP-01-1999
<PERIOD-END> NOV-30-1999
<CASH> 64,321
<SECURITIES> 0
<RECEIVABLES> 553,159
<ALLOWANCES> 0
<INVENTORY> 189,705
<CURRENT-ASSETS> 826,173
<PP&E> 722,133
<DEPRECIATION> 132,875
<TOTAL-ASSETS> 1,561,835
<CURRENT-LIABILITIES> 862,352
<BONDS> 0
0
0
<COMMON> 3,384
<OTHER-SE> 694,317
<TOTAL-LIABILITY-AND-EQUITY> 1,561,835
<SALES> 813,916
<TOTAL-REVENUES> 813,916
<CGS> 237,589
<TOTAL-COSTS> 852,693
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,415
<INCOME-PRETAX> (42,958)
<INCOME-TAX> 0
<INCOME-CONTINUING> (42,958)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (42,958)
<EPS-BASIC> (.01)
<EPS-DILUTED> (.01)
</TABLE>
