<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 29, 2000 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
----- -----
The number of shares outstanding of the Issuer's common stock, par value $0.001
per share, as of March 31, 2000, was 3,385,531.
<PAGE>
<TABLE>
SIMULATIONS PLUS, INC.
FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 29, 2000
Table of Contents
<CAPTION>
Page
----
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheet at February 29, 2000 (unaudited) 1
Consolidated Statements of Operations for the three and six months
ended February 29, 2000 and February 28, 1999 (unaudited) 2
Consolidated Statements of Cash Flows for the six months
ended February 29, 2000 and February 28, 1999 (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 16
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 20
Signature 21
Exhibit Index 22
</TABLE>
<PAGE>
<TABLE>
Item 1. Financial Statements
--------------------
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
February 29, 2000
(Unaudited)
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents (note 2) $ 132,741
Accounts receivable, net of allowance for
doubtful accounts of $14,078 485,433
Prepaid expenses 23,298
Inventory 152,848
--------------
Total current assets 794,320
--------------
Capitalized computer software development costs,
net of accumulated amortization (note 3) 588,731
Furniture and equipment, net (note 4) 118,908
Other assets 15,862
--------------
Total assets $ 1,517,821
==============
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Advance line of credit $ 99,992
Accounts payable 149,569
Accrued payroll and other expenses 426,726
Accrued warranty and service costs 70,761
Current portion of capitalized lease obligations 19,961
--------------
Total current liabilities 767,009
--------------
Capitalized lease obligations, net of current portion 2,873
--------------
Total liabilities 769,882
--------------
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 3,385,531 (note 5) 3,386
Additional paid-in capital 4,631,886
Accumulated deficit (3,887,333)
--------------
Total shareholders' equity 747,939
--------------
Total liabilities and stockholders' equity $ 1,517,821
==============
The accompanying footnotes are an integral part of these statements.
</TABLE>
1
<PAGE>
<TABLE>
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and six months ended February 29, 2000 and February 28, 1999
(Unaudited)
<CAPTION>
Three months ended Six months ended
----------------------------------------------------------------------
02/29/00 02/28/99 02/29/00 02/28/99
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net sales $ 1,091,949 $ 777,638 $ 1,905,865 $ 1,658,924
Cost of sales 368,363 392,286 605,952 788,896
--------------- --------------- --------------- ---------------
Gross profit 723,586 385,352 1,299,913 870,028
--------------- --------------- --------------- ---------------
Operating expenses:
Selling, general & administration 596,408 542,864 1,121,700 1,141,588
Research and development 74,686 35,797 164,498 71,670
--------------- --------------- --------------- ---------------
Total operating expenses 671,094 578,661 1,286,198 1,213,258
--------------- --------------- --------------- ---------------
Profit (Loss) from operations 52,492 (193,309) 13,715 (343,230)
Other income (expenses):
Grant revenue 0 0 0 75,000
Interest revenue 80 1,520 314 4,947
Interest expense (4,348) (7,791) (8,763) (10,130)
Gain (Loss) on sale of asset (605) 0 (605) 0
--------------- --------------- --------------- ---------------
Profit (Loss) before provision
47,619 (199,580) 4,661 (273,413)
for income taxes
Provision (benefit) for income taxes 0 0 0 0
--------------- --------------- --------------- ---------------
Net profit (loss) $ 47,619 $ (199,580) $ 4,661 $ (273,413)
=============== =============== =============== ===============
Basic net profit (loss) per common share $ 0.01 $ (0.06) $ 0.00 $ (0.08)
=============== =============== =============== ===============
Diluted net profit (loss) per common share $ 0.01 $ (0.06) $ 0.00 $ (0.08)
=============== =============== =============== ===============
Weighted average # of common shares
outstanding 3,384,203 3,383,531 3,380,403 3,371,423
=============== =============== =============== ===============
The accompanying footnotes are an integral part of these statements.
</TABLE>
2
<PAGE>
<TABLE>
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended February 29, 2000 and February 28, 1999
(Unaudited)
<CAPTION>
Six months ended
--------------------------------
02/29/00 02/28/99
--------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net profit (loss) $ 4,661 $ (273,413)
Adjustments to reconcile net profit (loss) to net cash
used for operating activities:
Depreciation and amortization of furniture and equipment 33,002 40,248
Amortization of capitalized software development costs 62,149 124,448
(Increase) decrease in:
Accounts receivable 84,913 (84,970)
Inventory 40,326 118,328
Other assets 10,841 906
Income tax receivable 28,941
Increase (decrease) in:
Accounts payable (94,478) (80,669)
Accrued payroll and other expenses (3,312) 68,180
Accrued warranty and service costs 5,948
--------------- ---------------
Net cash provided by (used for) operating activities 138,102 (52,053)
--------------- ---------------
Cash flows from investing activities:
Issuance of common stock 2,620
Purchase of furniture and equipment (2,490)
Capitalized computer software development cost (54,890) (94,223)
--------------- ---------------
Net cash used for investing activities (54,760) (94,223)
--------------- ---------------
Cash flows from financing activities:
Borrowed from on line of credit 10,164 (5,269)
Payments on capitalized lease obligations (13,089) (15,819)
--------------- ---------------
Net cash used for financing activities (2,925) (21,088)
--------------- ---------------
Net increase (decrease) in cash 80,418 (167,364)
Cash and cash equivalents, beginning of period 52,323 198,154
--------------- ---------------
Cash and cash equivalents, end of period $ 132,741 $ 30,790
=============== ==============
The accompanying footnotes are an integral part of these statements.
</TABLE>
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 29, 2000, the Company had no uninsured cash. 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
$532,925, $182,925 in the fiscal year 1999 and $350,000 in the fiscal year 1998,
when it was determined that the capitalized amount relating to educational
software was greater than net realizable value.
4
<PAGE>
Note 4: FURNITURE AND EQUIPMENT
- -------
Furniture and equipment as of February 29, 2000 consisted of the following:
Equipment $ 50,185
Computer equipment 340,798
Furniture and fixtures 45,036
Leasehold improvements 39,434
----------
475,453
Less accumulated depreciation 356,545
----------
$ 118,908
==========
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. The notes were repaid upon the
completion of the Company's stock offering. To date, these warrants have not
been exercised.
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 adopted and the shareholders approved
the 1996 Stock Option Plan (the "Option Plan") under which a total of 250,000
shares of common stock was 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. In March 2000, the shareholders approved a
second increase in the number of shares that may be granted under the Option
Plan to 1,000,000. The Option Plan terminates in 2006, subject to earlier
termination by the Board of Directors.
As of February 29, 2000, 501,086 shares had been issued to various employees and
at an exercise price of the fair market value at the date of grant with
five-year vesting periods, of which 2,000 shares were exercised.
5
<PAGE>
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
<PAGE>
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 February 29, 2000 (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 differences 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 of
orally-dosed drug compounds in the human gastrointestinal tract, and with
additional inputs, the blood plasma concentration-time history of the drug after
it reaches the central blood 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
<PAGE>
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 user-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(TM) (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 yet 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.
As of February 29, 2000, the Company's pharmaceutical software had been licensed
to 29 research centers in 17 pharmaceutical and biotech companies in the U.S.,
Europe, and Japan, and a number of additional companies had indicated they were
in the process of getting approvals to license one or more software products. In
addition, the Company is in discussions with several pharmaceutical companies
regarding contract study services, customized software, or both.
8
<PAGE>
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
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, management believes there has not
been any significant direct competition for GastroPlus at this time.
CONTRACT RESEARCH SERVICES
- --------------------------
The Company offers contract research services to the pharmaceutical industry in
the area of gastrointestinal absorption, pharmacokinetics, and related
technologies. The Company has performed three study contracts for major
pharmaceutical companies, and is currently in discussions with several for
additional studies. These studies 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 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 addition of animal physiologies to its GastroPlus(TM) software, which
will allow researchers to model absorption and pharmacokinetics for several
animal species in addition to the current human model. This addition is
expected to be released during the third quarter of fiscal 2000.
2. 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). Release of this
module has been delayed because of the extensive travel schedule of those
scientific team members involved in its development. Release is now
expected during the third quarter of fiscal 2000.
9
<PAGE>
3. The Company has recently completed the development of 3-dimensional models
for certain predicted physicochemical properties (logP, solubility, and
permeability) for its QMPRPlus(TM) software. These models are not yet
included in the version that is shipping (version 1.1.4), but will be
included in an upgrade version that is expected to be released in the third
quarter of fiscal 2000. The 3D models show improved prediction for logP and
solubility.
4. 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
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. The Company has been working to build a
correlation model with this data for a number of months; however, the
models obtained to date are not considered of sufficient quality to
release. The continuation of this effort is under evaluation at this time.
If it is concluded that models with sufficient accuracy to be of economic
value to the Company's customers cannot be realized, the effort will be
terminated.
5. 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.
Progress has been made during this quarter on this module, and a prototype
version is now running. Additional program modifications and verification
are needed before the module will be released. The Company expects to
release the Metabolism and Efflux Module during the third quarter of fiscal
year 2000.
6. 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, but is being delayed in order to focus resources on GastroPlus(TM),
QMPRPlus(TM), and DDDPlus(TM).
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.
10
<PAGE>
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, business 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.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED FEBRUARY 29, 2000 AND FEBRUARY 28, 1999.
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>
Three Months Ended
------------------------------------------------------------
02/29/00 02/28/99
------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 1,092 100.0% $ 778 100.0%
Cost of sales 368 33.7 393 50.5
----------- ----------- ----------- -----------
Gross profit 724 66.3 385 49.5
----------- ----------- ----------- -----------
Selling, general and administrative 596 54.6 542 69.7
Research and development 75 6.9 36 4.6
----------- ----------- ----------- -----------
Total operating expenses 671 61.4 578 74.3
----------- ----------- ----------- -----------
Profit (loss) from operations 53 4.9 (193) (24.8)
Interest revenue 0 0 2 0.3
Interest expense (4) (0.4) (8) (1.0)
Gain (loss) on disposal of asset (1) (0.1) 0 0
----------- ----------- ----------- -----------
Net profit (loss) $ 48 4.4% $ (199) (25.6)%
=========== =========== =========== ===========
</TABLE>
NET SALES
The consolidated net sales increased $314,000, or 40.4%, to $1,092,000 in the
second fiscal quarter of 2000 from $778,000 in the second fiscal quarter of
1999. Simulations Plus, Inc.'s sales, from pharmaceutical and educational
software, increased approximately $374,000, or 402.2%, and Words+, Inc.'s sales
decreased approximately $60,000, or 8.7% for the quarter. Management attributes
the increase in consolidated net sales to the sales growth in Pharmaceutical
software, which is offset by a reduction of sales from its Words+ subsidiary.
Pharmaceutical software sales contributed approximately 120% of the total
increase in consolidated sales for the quarter. 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.
11
<PAGE>
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 provide a fair comparison between the second
fiscal quarters of 2000 and 1999.
The consolidated cost of sales decreased $25,000, or 6.4%, to $368,000 in the
second fiscal quarter of 2000 from $393,000 in the second fiscal quarter of
1999. The percentage of cost of sales decreased by 16.8%. For Simulations Plus,
the cost of sales increased $25,000, or 37.8%. A significant portion of the cost
of sales is the systematic amortization of capitalized software cost, which
decreased by 42.1 % in the second fiscal quarter of 2000 compared to the second
fiscal quarter of 1999. This reduction is due to the fact that all remaining
capitalized software development costs for educational software were expensed
during fiscal 1999. However, the increase in royalty expense, which depends on
sales, outweighed the reduction in amortization cost, resulting in the net
increase. For Words+, the cost of sales decreased $50,000, or 15.2%. Management
attributes the percentage decrease in cost of sales for Words+ primarily to the
fact that a significant portion of sales was generated by product items with
higher profit margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Consolidated selling, general and administrative expenses increased $54,000, or
10.0%, to $596,000 in the second fiscal quarter of 2000 from $542,000 in the
second fiscal quarter of 1999. For Simulations Plus, the selling, general and
administrative expenses increased $41,000, or 20.0%, primarily due to increased
commission expense associated with sales, starting a 401(k) benefit plan for
employees, and increases in payroll, payroll taxes, and rent. Although there are
reductions in expenses, such as legal/accounting expense and telephone expense,
overall increases outweighed reductions. For Words+, SG&A expenses increased
$13,000, or 3.9%, for similar reasons as Simulations Plus, due to 401(k)
employee benefit expenses, payroll, payroll taxes, rent, insurance, and
outsourcing some work in research & development, which outweighed other
reductions in selling, general and administrative expenses.
RESEARCH AND DEVELOPMENT
The Company incurred approximately $106,000 of research and development costs
for both companies during the second quarter of 2000. Of this amount, $31,000
was capitalized and $75,000 was expensed in this period. In the second quarter
of 1999, the Company incurred $80,000 of research and development costs, of
which $44,000 was capitalized and $36,000 was expensed. The increase of $26,000,
or 32.5% in research and development expenditure from the second quarter of 1999
to the second quarter of 2000 was due to the fact that research and development
expenditures for the second quarter of 1999 reported only actual wages and did
not include accrued salaries, while the second quarter of 2000 included accrued
salaries in research and development. This recording error was discovered in the
third quarter of 1999 and corrected accordingly.
12
<PAGE>
INTEREST REVENUE
Interest revenue for the second fiscal quarter of 2000 decreased to $80 from
$2,000 in the second 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 second fiscal quarter of 2000 decreased by $4,000, to
$4,000 from $8,000 in the second fiscal quarter of 1999. This decrease is
attributable primarily to the adjustment of $6,000 that has been made in the
second quarter of 1999 to correct the error in the previous quarter regarding
interest on a revolving line of credit. Without this adjustment, the interest
expense shows a $2,000 increase in the second fiscal quarter of 2000 compared to
the second fiscal quarter of 1999.
LOSS ON SALE OF ASSET
During the second fiscal quarter of 2000, the Company recorded net loss of $605
when an insurance claim was settled for equipment that had been stolen away
during travel for marketing. The loss was calculated as net proceeds minus book
value.
NET PROFIT
The consolidated net profit for the three months ended February 29, 2000
increased by $247,000, or 124.1%, to $48,000 in the second fiscal quarter of
2000 compared to the net loss of $199,000 in the second fiscal quarter of 1999.
Management attributes this increase primarily to the significant increase in
pharmaceutical software sales and decline in cost of sales, outweighing the
increase in selling, general and administrative expenses, and research and
development expense, compared to the three months ended February 28, 1999.
13
<PAGE>
COMPARISON OF SIX MONTHS ENDED FEBRUARY 29, 2000 AND FEBRUARY 28, 1999.
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>
Six Months Ended
------------------------------------------------------------
02/29/00 02/28/99
------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 1,906 100.0% $ 1,659 100.0%
Cost of sales 606 31.8 789 47.6
------------------------------------------------------------
Gross profit 1,300 68.2 870 52.4
------------------------------------------------------------
Selling, general and administrative 1,122 58.9 1,141 68.8
Research and development 164 8.6 72 4.3
------------------------------------------------------------
Total operating expenses 1,286 67.5 1,213 73.1
------------------------------------------------------------
Profit (loss) from operations 14 0.7 (343) (20.7)
Income from grant 0 0 75 4.5
Interest revenue 0 0 5 0.3
Interest expense (8) (0.4) (10) (0.6)
Gain (loss) on disposal of asset (1) (0.1) 0 0
------------------------------------------------------------
Net profit (loss) $ 5 0.3% $ (273) (16.5)%
============================================================
</TABLE>
NET SALES
The consolidated net sales increased $247,000, or 14.9%, to $1,906,000 for the
six months ended February 29, 2000 compared to $1,659,000 for the six months
ended February 28, 1999. Simulations Plus, Inc.'s sales, from pharmaceutical and
educational software, increased approximately $438,000, or 243.3%, and Words+,
Inc.'s sales decreased approximately $191,000, or 12.9% for the six months ended
February 29, 2000. Management attributes the increase in consolidated net sales
to the significant sales growth in Pharmaceutical software, which is offset by a
reduction of sales from its Words+ subsidiary. Pharmaceutical software sales
contributed over 180% of the total increase in consolidated sales for the six
months ended February 29, 1000. 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 provide a fair comparison of results of
operations between the six months ended in February 29, 2000 and February 28,
1999.
The consolidated cost of sales decreased $183,000, or 23.2%, to $606,000 for the
six months ended February 29, 2000 from $789,000 for the six months ended
February 28, 1999. The percentage of cost of sales decreased by 15.8%. For
Simulations Plus, the cost of sales increased $12,000, or 8.8%. A significant
portion of the cost of sales is the systematic amortization of capitalized
software cost, which decreased by 38.5% in the six months ended February 29,
2000 compared to the six months ended February 28, 1999. This reduction is due
to the fact that all remaining capitalized software development costs for
educational software were expensed during fiscal 1999. However, the increase in
royalty expense, which depends on sales, outweighed the reduction in
amortization cost, resulting in the net increase. For Words+, the cost of sales
decreased $195,000, or 29.6%. The percentage change of cost of sales between the
six months ended February 28, 1999 and February 29, 2000 is a decrease of 8.5%.
Management attributes the percentage decrease in cost of sales for Words+
primarily to the fact that a significant portion of sales was generated by
product items with higher profit margins.
14
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Consolidated selling, general and administrative expenses decreased $19,000, or
1.7%, to $1,122,000 for the six months ended February 29, 2000 from $1,141,000
for the six months ended February 28, 1999. For Simulations Plus, selling,
general and administrative expenses increased $20,000, or 5.1%, primarily due to
increased commission expense associated with sales, starting a 401(k) benefit
plan for employees, and increases in payroll, payroll taxes, and rent. Although
there were slight reductions in some expenses, such as legal/accounting expense
and telephone expense, overall increases in selling, general and administrative
expenses outweighed the reductions. For Words+, the expenses decreased $39,000,
or 5.2%, due to reductions in commission based on sales, reductions in the
employee field sales force, their travel expenses, and their payroll-related
expenses, and reducing marketing cost by consolidating the management of two
companies' marketing departments into one person. These reductions outweighed
increases in other expense categories such as facility lease, insurance expense,
401(k) expense, and contract labor costs.
RESEARCH AND DEVELOPMENT
The Company incurred approximately $220,000 of research and development costs
for both companies for the six months ended February 29, 2000. Of this amount,
$56,000 was capitalized and $164,000 was expensed in this period. In the same
period of 1999, the Company incurred $166,000 of research and development costs,
of which $94,000 was capitalized and $72,000 was expensed. The increase of
54,000, or 32.5%, in research and development expenditure for the six months
ended February 29, 2000 compared to the same period of 1999 was due to the fact
that research and development expenditures for the six months ended February 28,
1999 reported only actual wages and did not include accrued salaries, while the
six months ended February 29, 2000 included accrued salaries in research and
development. This recording error was discovered in the third quarter of 1999
and corrected accordingly.
15
<PAGE>
INCOME FROM GRANT
During the first six months 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. There is no grant
income for fiscal year 2000.
INTEREST REVENUE
Interest revenue for the six months ended February 29, 2000 decreased to $300
from $5,000 for the six months ended February 28, 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 six months ended February 29, 2000 decreased by $2,000,
or 20.0%, to $8,000 from $10,000 for the six months ended February 28, 1999.
This decrease is attributable primarily to the reduction in interest
amortization expense in lease obligations, some of which are at the end of their
lease terms.
LOSS ON SALE OF ASSET
During the second fiscal quarter of 2000, the Company recorded a net loss of
$605 when the insurance claim was settled for stolen equipment. The loss was
calculated as net proceeds minus book value. There was no such expense in the
fiscal 1999.
NET PROFIT
The consolidated net profit for the six months ended February 29, 2000 increased
by $278,000, or 101.8%, to $5,000 for the six months ended February 29, 2000
compared to the net loss of $273,000 for the six months ended February 28, 1999.
Management attributes this increase primarily to the significant increase in
pharmaceutical software sales, decline in cost of sales, and decline in selling,
general and administrative expenses outweighing the increase in research and
development expense compared to the six months ended February 28, 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.
16
<PAGE>
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 29, 2000
was $100,000. 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 have been accrued and were paid to most
employees during the second quarter of 2000. In order to preserve the Company's
cash flow and cash reserves, portions of certain key executives' salaries
continue to be accrued until the Company obtains sufficient funds to make such
payments without adverse effects to the Company's cash position.
The Company believes that existing capital and anticipated funds from operations
and accruing portions of the salaries for some senior managers 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 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. 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.
17
<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 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.
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
---------------------------------------------------
On March 25, 2000, the Registrant held its annual meeting of
shareholders. The following proposals were submitted to a vote
of security holders at the meeting.
(1) Election of directors
Walter Woltosz
Virginia Woltosz
Dr. David Z. D'Argenio
Dr. Richard Weiss.
(2) Approval of Amendment to the Registrant's Stock Option Plan
to authorize 1,000,000 shares to be available under the
plan.
(3) Ratification of the selection of Singer, Lewak, Greenbaum &
Goldstein, LLP as their independent
accountants.
All of the above proposals were approved and the results of
the balloting at the meeting are summarized in the following
table.
Broker
Proposal Yes No Abstain Non-Votes Total
=============================================================
1 3,276,022 - 11,250 - 3,287,272
2 2,384,175 65,991 6,150 830,856 3,287,272
3 3,268,208 9,159 9,905 - 3,287,272
Item 5. Other Information
None.
19
<PAGE>
Item 6. Exhibits and Reports on form 8-K
--------------------------------
(a) Exhibits:
27. Financial Data Schedule.
(b) Reports on Form 8-K
None.
20
<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 11, 2000 By: /s/ MOMOKO BERAN
----------------
Momoko Beran
Chief Financial Officer
21
<PAGE>
Ex-27
Financial Data Schedule
22
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-31-2000
<PERIOD-START> SEP-01-1999
<PERIOD-END> FEB-29-2000
<CASH> 132,741
<SECURITIES> 0
<RECEIVABLES> 485,433
<ALLOWANCES> 0
<INVENTORY> 152,848
<CURRENT-ASSETS> 794,320
<PP&E> 118,908
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,517,821
<CURRENT-LIABILITIES> 767,009
<BONDS> 0
0
0
<COMMON> 3,386
<OTHER-SE> 744,553
<TOTAL-LIABILITY-AND-EQUITY> 1,517,821
<SALES> 1,905,865
<TOTAL-REVENUES> 1,905,865
<CGS> 605,952
<TOTAL-COSTS> 1,892,150
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,763
<INCOME-PRETAX> 4,661
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,661
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,661
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
