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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 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
(Address of principal executive offices including zip code)
(661) 723-7723
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes x No
--- ---
The number of shares outstanding of the Issuer's common stock, par value $0.001
per share, as of July 12, 2000, was 3,385,831.
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SIMULATIONS PLUS, INC.
FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED MAY 31, 2000
Table of Contents
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Page
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PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
Consolidated Balance Sheet at May 31, 2000 (unaudited) 3
Consolidated Statements of Operations for the three and nine months
ended May 31, 2000 and 1999 (unaudited) 4
Consolidated Statements of Cash Flows for the nine months
ended May 31, 2000 and 1999 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis or Plan of Operations
General 9
Results of Operations 13
Liquidity and Capital Resources 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21
Item 3. Defaults upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
Signature 22
Exhibit Index 23
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SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
May 31, 2000
(Unaudited)
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ASSETS
Current assets:
Cash and cash equivalents (note 2) $ 113,462
Accounts receivable, net of allowance for
doubtful accounts of $14,078 442,763
Prepaid expenses 32,149
Inventory 160,497
--------------
Total current assets 748,871
--------------
Capitalized computer software development costs,
net of accumulated amortization (note 3) 556,193
Furniture and equipment, net (note 4) 116,766
Other assets 15,862
--------------
Total assets $ 1,437,692
==============
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Advance line of credit 89,969
Accounts payable 255,381
Accrued payroll and other expenses 437,254
Accrued warranty and service costs 48,077
Current portion of capitalized lease obligations 17,203
--------------
Total current liabilities 847,884
--------------
Capitalized lease obligations, net of current portion 10,210
--------------
Total liabilities 858,094
--------------
Shareholders' equity
Preferred stock: $.001 par value, authorized
10,000,000 shares, issued and outstanding 0 0
Common stock: $.001 par value, authorized
20,000,000 shares, issued and outstanding 3,385,831 (note 5) 3,386
Additional paid-in capital 4,632,281
Accumulated deficit (4,056,069)
--------------
Total shareholders' equity 579,598
--------------
Total liabilities and stockholders' equity $ 1,437,692
==============
The accompanying footnotes are an integral part of these statements.
3
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SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and nine months ended May 31, 2000 and 1999
(Unaudited)
<CAPTION>
Three months ended Nine months ended
------------------------------ ------------------------------
05/31/00 05/31/99 05/31/00 05/31/99
-------------- -------------- -------------- --------------
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Net sales $ 742,520 $ 929,002 $ 2,648,385 $ 2,587,926
Cost of sales 349,226 382,955 955,178 1,171,850
-------------- -------------- -------------- --------------
Gross profit 393,294 546,047 1,693,207 1,416,076
-------------- -------------- -------------- --------------
Operating expenses:
Selling, general & administrative 490,809 552,283 1,612,508 1,693,871
Research and development 69,706 55,552 234,204 127,222
-------------- -------------- -------------- --------------
Total operating expenses 560,515 607,835 1,846,712 1,821,093
-------------- -------------- -------------- --------------
Loss from operations (167,221) (61,788) (153,505) (405,017)
Other income (expenses):
Income from grant 0 75,000 0 150,000
Interest revenue 57 223 371 5,170
Interest expense (4,009) (5,300) (12,772) (15,431)
Gain on disposal of assets 2,436 0 1,831 0
-------------- -------------- -------------- --------------
Income (loss) before provision for income taxes (168,737) 8,135 (164,075) (265,278)
Provision (benefit) for income taxes 0 0 0 0
-------------- -------------- -------------- --------------
Net income (loss) $ (168,737) $ 8,135 $ (164,075) $ (265,278)
============== ============== ============== ==============
Basic net income (loss) per common share $ (0.05) $ 0.00 $ (0.05) $ (0.08)
============== ============== ============== ==============
Diluted net income (loss) per common share $ (0.05) $ 0.00 $ (0.05) $ (0.08)
============== ============== ============== ==============
Weighted average # of common shares
Outstanding 3,385,629 3,389,689 3,380,609 3,375,518
============== ============== ============== ==============
The accompanying footnotes are an integral part of these statements.
4
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SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended May 31, 2000 and 1999
<CAPTION>
(Unaudited) Nine months ended
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Cash flows from operating activities: 05/31/00 05/31/99
-------------- ------------
Net loss $ (164,075) $ (265,278)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization of furniture and equipment 50,171 59,801
Amortization of capitalized software development costs 133,783 178,118
Gain on disposals of furniture & equipment 1,059 0
(Increase) decrease in:
Accounts receivable 127,583 (223,005)
Inventory 32,677 131,446
Other assets 1,990 8,716
Income tax receivable 0 28,941
Increase (decrease) in:
Accounts payable 11,334 (140,739)
Accrued payroll and other expenses 7,216 173,696
Accrued warranty and service costs (22,684) 20,705
-------------- ------------
Net cash provided by (used in) operating activities 179,054 (27,599)
-------------- ------------
Cash flows from investing activities:
Purchase of furniture and equipment (2,490) (6,182)
Capitalized computer software development cost (93,986) (139,103)
-------------- ------------
Net cash used in investing activities (96,476) (145,285)
-------------- ------------
Cash flows from financing activities:
Increase in book overdraft 0 176
Proceeds from line of credit 141 0
Payments on line of credit 0 (7,300)
Payments on capitalized lease obligations (24,595) (24,328)
Proceeds from the exercise of stock options 3,015 0
Proceeds from lease payable 0 6,182
-------------- ------------
Net cash used in financing activities (21,439) (25,270)
-------------- ------------
Net increase (decrease) in cash 61,139 (198,154)
Cash and cash equivalents, beginning of period 52,323 98,154
-------------- ------------
Cash and cash equivalents, end of period $ 113,462 $ 0
============== ============
Supplemental Information for the period ended 05/31/200 & 1999
Subscription agreement for issuance of Common Stock
for tenant improvements $ 33,531
Equipment purchases by lease $ 16,086
The accompanying footnotes are an integral part of these statements.
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SIMULATIONS PLUS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1: GENERAL
-------
As contemplated by the Securities and Exchange Commission under Item 310(b) of
Regulation S-B, the accompanying financial statements and footnotes have been
condensed and therefore do not contain all disclosures required by generally
accepted accounting principles. The interim financial data are unaudited;
however, in the opinion of Simulations Plus, Inc. (the "Company"), the interim
data include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results for the interim periods. Results
for interim periods are not necessarily indicative of those to be expected for
the full year.
Note 2: CASH AND CASH EQUIVALENTS
-------
The Company maintains cash deposits at banks located in California. Deposits at
each bank are insured by the Federal Deposit Insurance Corporation up to
$100,000. As of May 31, 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 equivalent.
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,
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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 consist of the following:
Equipment $ 66,271
Computer equipment 264,357
Furniture and fixtures 45,036
Leasehold improvements 39,433
Demo Equipment 25,173
Rental Equipment 44,797
--------------
485,067
Less accumulated depreciation 368,301
--------------
$ 116,766
==============
Note 5: STOCKHOLDERS' EQUITY
-------
STOCK OPTION PLAN
On February 25, 2000, the Company held its Annual Meeting at which the
shareholders approved an amendment to the Company's 1996 Stock Option Plan (the
"Option Plan") to increase the number of shares underlying options that may be
granted under the plan from 500,000 to 1,000,000 shares. As of November 30,
1999, there were no shares available for grant under the Option Plan. The Board
believed that adding shares to the Option Plan is in the best interests of the
Company because it will permit the Company to attract and retain employees by
providing them with appropriate equity incentives.
On April 17, 2000, the Company issued 252,000 shares to various employees at an
exercise price of the fair market value at the date of grant with five-year
vesting periods. As of May 31, 2000, total 750,086 shares were issued to various
employees, of which 2,300 shares were exercised.
ISSUANCE OF WARRANTS
In August and September 1996, the Company issued 100,000 and 150,000 Warrants
associated with two notes in the amount of $200,000 and $300,000, respectively,
to purchase Common Stock. The warrants are exercisable at $4.00 per share and
expire five years from the date of grant. To date, these Warrants have not been
exercised.
ISSUANCE OF BRIDGE LENDERS WARRANT
In December 1996 and January 1997, the Company issued to the Bridge Lenders
280,000 Warrants (the "Bridge Warrants") to purchase Common Stock. The Bridge
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Warrants are exercisable at $2.50 per share and expire five years from the date
of grant. To date, these Warrants have not been exercised.
SUBSCRIPTION AGREEMENT
In November 1999, 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 1999. 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 May 31, 1998, the Company adopted SFAS No. 128 "Earnings Per Share."
All prior periods presented have been restated to confirm with SFAS No. 128.
8
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Item 2. Management's Discussion and Analysis or Plan of Operations
----------------------------------------------------------
The following discussion should be read in conjunction with the financial
statements and the notes thereto appearing elsewhere in this quarterly report on
Form 10-QSB for the quarter ended May 31, 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, chemical degradation, and
absorption of orally-dosed drug compounds in the gastrointestinal tract of
human, dog, and rat, 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.).
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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 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 ADMET
(Absorption, Distribution, Metabolism, Excretion, and Toxicity). 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, 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.
GastroPlus is now used in over 30 locations worldwide in activities ranging from
early drug discovery to analysis of clinical trial data.
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), water 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 ADMET has become a bottleneck, high throughput screening on
the computer ("IN SILICO") is becoming not just a convenience, but a necessity.
As of May 31, 2000, the Company's pharmaceutical software had been licensed to
32 research centers in 19 pharmaceutical and biotech companies in the U.S.,
Europe, and Japan, and a number of additional companies 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.
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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
are developing 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 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 fourth quarter of fiscal 2000.
2. 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
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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.
Significant progress has been made during this quarter on this module, and
a prototype version is now running. The module has been rewritten during
this quarter to provide greater flexibility for researchers to simulate
metabolism both in the liver and in the intestines. Additional program
modifications and verification are needed before the module will be
released. The Company now expects to release the Metabolism and Efflux
Module during the fourth quarter of fiscal year 2000.
3. 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.
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.
Recently, a new computer was selected to replace the previously discontinued
PegasusLITE product, for which the base computer, manufactured by Epson, became
no longer available in mid-1999. The new computer is highly rugged, and
incorporates more modern technology than the previous unit. The company expects
sales to ramp up after release of this model in the fourth quarter.
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RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED MAY 31, 2000 AND 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.)
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Three Months Ended
--------------------------------------------------------------
05/31/00 05/31/99
------------------------------ ------------------------------
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Net sales $ 742 100.0% $ 929 100.0%
Cost of sales 349 47.0 383 41.2
-------------- -------------- -------------- --------------
Gross profit 393 53.0 546 58.8
-------------- -------------- -------------- --------------
Selling, general and administrative 491 66.2 552 59.4
Research and development 69 9.3 56 6.0
-------------- -------------- -------------- --------------
Total operating expenses 560 75.5 608 65.4
-------------- -------------- -------------- --------------
Loss from operations (167) (22.5) (62) (6.7)
Income from grant 0 0.0 75 8.1
Interest revenue 0 0.0 0 0.0
Interest expense (4) (0.5) (5) (0.5)
Gain on disposal of assets 2 0.3 0 0.0
-------------- -------------- -------------- --------------
Net income (loss) $ (169) (22.8)% $ 8 0.9%
============== ============== ============== ==============
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NET SALES
The consolidated net sales decreased $187,000, or 20.1%, to $742,000 in the
third fiscal quarter of 2000 from $929,000 in the third fiscal quarter of 1999.
Simulations Plus, Inc.'s sales from pharmaceutical and educational software
increased approximately $25,000, or 21.8%, and Words+, Inc.'s sales decreased
approximately $212,000, or 26.1% for the quarter. Management attributes the
decrease in consolidated net sales to decreased sales from its subsidiary,
Words+, outweighed the growth in Pharmaceutical software sales. The decrease in
Words+ sales is due primarily to the temporary lack of key components for the
PegasusLITE(TM), for which the Company will introduce a replacement called
"TuffTalk" in July 2000.
COST OF SALES
The Company reclassified royalty expenses 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 third
quarters of 2000 and 1999.
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The consolidated cost of sales decreased $34,000, or 8.9%, to $349,000 in the
third fiscal quarter of 2000 from $383,000 in the third fiscal quarter of 1999.
The percentage of cost of sales increased by 5.8%. For Simulations Plus, the
cost of sales increased $22,000, or 35.2%, of which the significant portion of
the cost of sales is the systematic amortization of capitalized software cost,
which resulted in 33.5% increase in amortization cost. This high increase in
amortization cost is due to the fact that there was an omission in calculating
amortization expense during the first and second quarter of fiscal year 2000 for
two newly released products. For Words+, the cost of sales decreased $56,000, or
17.5%. Management attributes the change in percentage of cost of sales between
the third fiscal quarter of 2000 and 1999 primarily to reduction in Warranty
cost. Since the Company introduced the rugged Panasonic Computer in October
1999, the failure rate is less than 1% and has resulted in less warranty related
costs.
GROSS PROFIT
The consolidated gross profit decreased $153,000, or 28.0 %, to $393,000 in the
third fiscal quarter of 2000 from $546,000 in the third fiscal quarter of 1999.
Management attributes the 5.8% decrease in gross profit between the third fiscal
quarter of 2000 and 1999 to the lower sales from Words+ and high increase in
amount of amortized software expenses caused by an adjusting entry, which
outweighed a significant Warranty cost reduction in Words+ operations.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The consolidated selling, general and administrative expenses decreased $61,000,
or 11.1%, to $491,000 in the third fiscal quarter of 2000 from $552,000 in the
third fiscal quarter of 1999. For Simulations Plus, the selling, general and
administrative expenses decreased $51,000, or 24.4% primarily due to the
reduction in printing, advertising expenses by utilizing in-house equipment and
manpower, reduction in insurance expenses by changing insurance underwriters,
and reduction in professional fees. These reductions outweighed the increases in
salaries and payroll related expense such as 401k and payroll tax expenses. For
Words+, expenses decreased $10,000, or 3.2%, due to reductions in the employee
field sales force and their payroll related expenses by obtaining more
independent sales representatives in various states, reducing telephone expense
significantly by changing long distant carrier as well as reducing insurance
expenses by changing insurance underwriters. These reductions outweighed
increases in trade show expense and increases in other administrative expenses
such as utility expense and facility lease expense.
RESEARCH AND DEVELOPMENT
The Company incurred approximately $108,000 of research and development costs
for both companies during the third quarter of 2000. Of this amount, $39,000 was
capitalized and $69,000 was expensed in this period. In the third quarter of
1999, the Company incurred $108,000 of research and development costs, of which
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$52,000 was capitalized and $56,000 was expensed. There was no change in
research and development expenditure from the third quarter of 2000 to the third
quarter of 1999.
LOSS FROM OPERATIONS
During the third fiscal quarter of 2000, the Company incurred a loss of
approximately $167,000, as compared to a loss of $62,000 for the same period in
the fiscal year 1999. Management attributes the increase in net loss from
operations to decreased sales and increased Research & Development expense
outweighed decreased Cost of sales and Selling, General and Administrative
expenses.
INCOME FROM GRANT
During the third fiscal quarter of 1999, the Company earned the final $75,000 of
a $300,000 Phase II SBIR grant from the National Science Foundation. The final
report was filed in May 1999 and the Company received the final payment in early
June 1999. In the third fiscal quarter of 2000, there was no grant income.
INTEREST EXPENSE
Interest expense for the third fiscal quarter of 2000 decreased by $1,000, to
$4,000 from $5,000 in the third fiscal quarter of 1999. This decrease is
attributable primarily to the reduction in interest amortization expense in
lease obligations.
GAIN ON DISPOSAL OF ASSET
During the third fiscal quarter of 2000, the Company recorded a net gain of
$2,000 when the insurance claim was settled for stolen equipment. The gain was
calculated as net proceeds minus book value. There was no such gain in the
fiscal 1999.
NET INCOME OR (LOSS)
The consolidated net loss for the three months ended May 31, 2000 increased by
$177,000, to a loss of ($169,000) in the third fiscal quarter of 2000 compared
to a profit of $8,000 in the third fiscal quarter of 1999. Management attributes
this decrease primarily to the decrease in sales, decrease in grant income, and
increase in research & development expense, which outweighed reductions in cost
of sales, selling, general and administrative expenses compared to the three
months ended May 31, 1999.
COMPARISON OF NINE MONTHS ENDED MAY 31, 2000 AND 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.)
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<TABLE>
<CAPTION>
Nine Months Ended
--------------------------------------------------------------
05/31/00 05/31/99
------------------------------ ------------------------------
<S> <C> <C> <C> <C>
Net sales $ 2,648 100.0% $ 2,588 100.0%
Cost of sales 955 36.1 1,172 45.3
-------------- -------------- -------------- --------------
Gross profit 1,693 63.9 1,416 54.7
-------------- -------------- -------------- --------------
Selling, general and administrative 1,612 60.9 1,694 65.5
Research and development 234 8.8 127 4.9
-------------- -------------- -------------- --------------
Total operating expenses 1,846 69.7 1,821 70.4
-------------- -------------- -------------- --------------
Loss from operations (153) (5.8) (405) (15.6)
Income from grant 0 0 150 5.8
Interest revenue 0 0 5 0.2
Interest expense (13) (0.5) (15) (0.6)
Gain on disposal of assets 2 0.1 0 0.0
-------------- -------------- -------------- --------------
Net loss $ (164) (6.2)% $ (265) (10.2)%
============== ============== ============== ==============
</TABLE>
NET SALES
The consolidated net sales increased $60,000, or 2.2%, to $2,648,000 for the
nine months ended May 31, 2000 compared to $2,588,000 for the nine months ended
May 31, 2000. Simulations Plus, Inc.'s sales increased approximately $463,000,
or 155.6%, and Words+, Inc.'s sales decreased approximately $403,000, or 17.6%
for the nine months ended May 31, 2000. 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 contributed over 800% of the total increase in consolidated sales for
the first nine months' operation. The decrease in Words+ sales is due primarily
to the temporary lack of key components for the PegasusLITE(TM), for which the
Company will introduce a replacement, called "TuffTalk" in July 2000.
COST OF SALES
The Company reclassified royalty expenses 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 third
quarters of 2000 and 1999.
The consolidated cost of sales decreased $217,000, or 18.5%, to $955,000 in the
third fiscal quarter of 2000 from $1,172,000 in the third fiscal quarter of
1999. The percentage of cost of sales decreased by 9.2%. For Simulations Plus,
the cost of sales increased $34,000, or 17.3%, of which the significant portion
of the cost of sales is royalty, which resulted in 156.3% increase in royalty
cost. There was a high increase in amortization caused by the adjustment made in
the third fiscal quarter of 2000 to record an omission of amortization expense
during the first and second quarter of fiscal year 2000 for two newly released
products. However, this adjustment was offset by the reduction in educational
software amortization since we wrote off all the remaining capitalized software
for educational software by the end of fiscal year 1999. For Words+, the cost of
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<PAGE>
sales decreased $251,000, or 25.7%. Management attributes the change in
percentage of cost of sales between the third fiscal quarter of 2000 and 1999
primarily to reduction in Warranty cost and Amortization of Capitalized
software. Since the Company introduced the rugged Panasonic Computer in October
1999, the failure rate is less than 1% and has resulted in less warranty related
costs. Also, capitalized development cost for Window version was completely
amortized by the end of the fiscal year 1999 and there is no such expense in the
fiscal year 2000.
GROSS PROFIT
The consolidated gross profit increased $277,000, or 19.6%, to $1,693,000 in the
third fiscal quarter of 2000 from $1,416,000 in the third fiscal quarter of
1999. Management attributes the 9.2% increase in gross profit margin between the
third fiscal quarter of 2000 and 1999 to a reduction in amortization expense of
capitalized software for both the companies and a significant Warranty cost
reduction, which outweighed the increase in royalty cost.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The consolidated selling, general and administrative expenses decreased $82,000,
or 4.8%, to $1,612,000 for the nine months ended May 31, 2000 from $1,694,000
for the nine months ended May 31, 1999. For Simulations Plus, the selling,
general and administrative expenses decreased $31,000, or 5.2% primarily due to
the reduction in printing, advertising expenses by utilizing in-house equipment
and manpower, reduction in insurance expenses by changing insurance
underwriters, and reduction in professional fees. These reductions outweighed
the increases in salaries and payroll related expense such as 401k and payroll
tax expenses and travel expense associating with more sales activities. For
Words+, expenses decreased $51,000, or 4.6%, due to reductions in the employee
field sales force and their payroll related expenses and travel expenses by
obtaining more independent sales representatives in various states, reducing
telephone expense significantly by changing long distant carrier as well as
reducing insurance expenses by changing insurance underwriters. These reductions
outweighed increases in catalog printing expense and increases in other
administrative expenses such as utility expense, 401k expense and facility lease
expense.
RESEARCH AND DEVELOPMENT
The Company incurred approximately $329,000 of research and development costs
for both companies for the nine months ended May 31,1999. Of this amount,
$95,000 was capitalized and $234,000 was expensed in this period. In the same
period of 1999, the Company incurred $273,000 of research and development costs,
of which $146,000 was capitalized and $127,000 was expensed. The 17.0% increase
in research and development expenditures for the nine months ended May 31, 2000
compared to the same period of 1999 was due to the increase in research &
development salary increase.
17
<PAGE>
LOSS FROM OPERATIONS
The Company incurred a net loss from operations of approximately $153,000, as
compared to a loss of $405,000 for the same period in the fiscal year 1999.
Management attributes the decrease in net loss from operations to increased
sales and to the decreased Cost of sales and Selling, general and administrative
expenses outweighed increased Research & Development expense.
INCOME FROM GRANT
During the third fiscal quarter of 1999, the Company received the third and the
final payment of $150,000, $75,000 each, 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 nine months ended May 31, 2000 decreased to $0 from
$5,000 for the nine months ended May 31, 1999. This decrease is primarily due to
the interest earned on investment activities in commercial notes through a
highly qualified financial institution being reduced because the most of the
capital resources were used in the Company's operations.
INTEREST EXPENSE
Interest expense for the nine months ended May 31, 2000 decreased by $2,000, or
13.3%, to $13,000 from $15,000 for the nine months ended May 31, 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.
GAIN ON DISPOSAL OF ASSET
During the second and third fiscal quarters of 2000, the Company recorded a net
gain of $2,000 when insurance claims were settled for stolen equipment. The gain
was calculated as net proceeds minus book value. There was no such gain in the
fiscal 1999.
NET LOSS
Net loss for the nine months ended May 31, 2000 decreased by $101,000, or 38.1%,
to $164,000 for the nine months ended May 31, 2000 compared to $265,000 for the
nine months ended May 31, 1999. Management attributes this decrease primarily to
the decrease in cost of sales and decrease in selling, general and
administrative expenses outweighing the decrease in sales, decrease in grant
income and increase in research and development expense compared to the nine
months ended May 31, 1999.
18
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has available a $100,000 revolving line of credit. Interest is
payable on a monthly basis at the bank's prime rate plus 3.0%. The outstanding
balance under the revolving line of credit as of May 31, 2000 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 have been accrued and were paid to most
employees during the second quarter of fiscal 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, 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, 1000 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 Security Exchange Act of 1934, as amended (the "Exchange Act"), which
imposes additional sales practice requirements on broker-dealers which sell such
19
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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 purchases 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.
20
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
In the normal course of business, the Company is subject to
various lawsuits and claims. The Company believes that the
final outcomes of these matters, either individually or in the
aggregate, will not have a material effect on the financial
statements.
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.
21
<PAGE>
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: July 14, 2000 Simulations Plus, Inc.
By: /s/ Momoko Beran
-----------------------
Momoko Beran
Chief Financial Officer
22
