SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 2000 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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 January 11, 2001, was 3,385,831.
SIMULATIONS PLUS, INC.
FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 2000
Table of Contents
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet at November 30, 2000 (unaudited) 1
Consolidated Statements of Operations for the three months
ended November 30, 2000 and 1999 (unaudited) 2
Consolidated Statements of Cash Flows for the three months
ended November 30, 2000 and 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 12
Liquidity and Capital Resources 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signature 17
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
November 30, 2000
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents (note 2) $ 50,530
Accounts receivable, net of allowance for
doubtful accounts of $13,337 550,490
Prepaid expenses 30,692
Inventory 176,120
--------------
Total current assets 807,832
--------------
Capitalized computer software development costs,
net of accumulated amortization (note 3) 529,842
Furniture and equipment, net (note 4) 110,381
Other assets 10,856
--------------
Total assets $ 1,458,911
==============
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Advance line of credit $ 99,125
Accounts payable 279,828
Accrued payroll and other expenses 510,431
Accrued warranty and service costs 42,583
Deferred revenue 12,021
Current portion of capitalized lease obligations 13,345
--------------
Total current liabilities 957,333
--------------
Capitalized lease obligations, net of current portion 31,286
--------------
Total liabilities 988,619
--------------
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 3,385,831 (note 5) 3,386
Additional paid-in capital 4,632,278
Accumulated deficit (4,165,372)
--------------
Total shareholders' equity 470,292
--------------
Total liabilities and stockholders' equity $ 1,458,911
==============
The accompanying footnotes are an integral part of these statements.
1
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended November 30, 2000 and 1999
(Unaudited)
Three months ended
---------------------------------
11/30/00 11/30/99
---------------- --------------
Net sales $ 1,058,323 $ 813,916
Cost of sales (Note 6) 478,250 259,365
---------------- --------------
Gross profit 580,073 554,551
---------------- --------------
Operating expenses:
Selling, general & administrative 500,576 503,516
Research and development (Note 6) 89,154 89,812
---------------- --------------
Total operating expenses 589,730 593,328
---------------- --------------
Loss from operations (9,657) (38,777)
Other income (expenses):
Interest revenue 12 234
Interest expense (6,133) (4,415)
---------------- --------------
Loss before provision for income taxes (15,778) (42,958)
Provision for income taxes 0 0
---------------- --------------
Net loss $ (15,778) $ (42,958)
================ ==============
Basic net loss per common share $ (0.00) $ (0.01)
================ ==============
Diluted net loss per common share $ (0.00) $ (0.01)
================ ==============
Weighted average # of common shares
outstanding 3,384,968 3,379,539
================ ==============
The accompanying footnotes are an integral part of these statements.
2
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended November 30, 2000 and 1999
(Unaudited)
Three months ended
--------------------------------
11/30/00 11/30/99
--------------------------------
Cash flows from operating activities:
Net loss $ (15,778) $ (42,958)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization of furniture and equipment 15,486 16,546
Amortization of capitalized software development costs 52,268 31,075
(Increase) decrease in:
Accounts receivable (7,921) 17,187
Inventory (17,803) 3,469
Other assets 10,230 17,484
Increase (decrease) in:
Accounts payable 40,770 (4,905)
Accrued payroll and other expenses 1,385 5,803
Accrued warranty and service costs (1,437)
Deferred revenue (26,847)
--------------- --------------
Net cash provided by operating activities 50,353 43,701
--------------- --------------
Cash flows from investing activities:
Capitalized computer software development cost (32,338) (24,343)
--------------- --------------
Net cash used in investing activities (32,338) (24,343)
--------------- --------------
Cash flows from financing activities:
Proceeds from line of credit 44 164
Payments on capitalized lease obligations (5,064) (7,524)
--------------- --------------
Net cash used in financing activities (5,020) (7,360)
--------------- --------------
Net increase in cash 12,995 11,998
Cash and cash equivalents, beginning of period 37,535 52,323
--------------- --------------
Cash and cash equivalents, end of period $ 50,530 $ 64,321
=============== ==============
The accompanying footnotes are an integral part of these statements.
3
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. 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 a total of
$532,925 in fiscal years 1999 and 1998 when it was determined that the
capitalized amount relating to educational software was greater than net
4
realizable value. Therefore, the amortization of capitalized software
development costs starting from fiscal year 2000 reflects solely pharmaceutical
software development costs.
Note 4: FURNITURE AND EQUIPMENT
-------
Furniture and equipment as of November 30, 2000 consisted of the following:
Equipment $ 104,236
Computer equipment 338,071
Furniture and fixtures 45,036
Leasehold improvements 39,433
-------------
526,776
Less accumulated depreciation 416,395
-------------
$ 110,381
=============
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. As of the date of this report, 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. As of
the date of this report, 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") pursuant to which a total of
250,000 shares of common stock were reserved for issuance. In March 1999, the
shareholders approved an increase in the number of shares that may be granted
5
under the Option Plan to 500,000. Furthermore, in February 2000, the
shareholders approved the number of shares to be granted under the Option Plan
to be 1,000,000 shares. The Option Plan terminates in 2006, subject to earlier
termination by the Board of Directors.
As of November 30, 2000, 842,173 shares have been issued to various employees at
an exercise price of the fair market value at the date of grant with five-year
vesting periods, also a total of 3,206 shares have been issued to the Board of
Directors at exercise prices ranging from $1.50 to $5.25 with three-year vesting
period. As of today, 2,300 options have been exercised.
The Company entered into an investor relations agreement during fiscal year 1999
for $4,000 per month and 30,000 stock options at an exercise price of $1, the
fair market value on the date of grant. As of November 30, 2000, all 30,000
stock options were exercisable.
SUBSCRIPTION AGREEMENT
In November 1998, the Company entered into a Subscription Agreement whereby the
Company issued Common Stock in the amount of $33,531 with a 12-month lock-up
period in exchange for services received by the Company in making tenant
improvements to its new facility after relocating in July 1998. The value of
common stock issued was equal to the services received by the Company.
Note 6: COST OF SALES
-------
The Company reclassified freight-out expense as a part of cost of sales starting
at the end of fiscal year 2000. Freight-out expenses of $21,000, incurred in the
quarter ended November 30, 1999, were restated in order to provide a fair
comparison between fiscal quarters.
Note 7: INCOME TAXES
-------
The Company used the liability method of accounting for income taxes pursuant to
SFAS No. 109 "Accounting for Income Taxes."
Note 8: 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
Item 2. Management's Discussion and Analysis or Plan of Operations
----------------------------------------------------------
FORWARD-LOOKING STATEMENTS
The following discussion should be read in conjunction with the financial
statements and the notes thereto appearing elsewhere in this quarterly report on
Form 10-QSB for the quarter ended November 30, 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 a difference include, but are not limited to, those discussed
in the section entitled "Management's Discussion and Analysis or Plan of
Operations." Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as of the
date hereof. Simulations Plus, Inc. undertakes no obligation to publicly revise
these forward-looking statements, or to reflect events or circumstances that
arise after the date hereof. Readers should carefully review the risk factors
described in other documents that the Company has filed and will continue to
file from time to time with the Securities and Exchange Commission.
GENERAL
BUSINESS
--------
Simulations Plus, Inc. (the "Company" or "Simulations Plus") and its wholly
owned subsidiary, Words+, Inc. ("Words+") produce two types of products: (1)
Simulations Plus, incorporated in 1996, develops and produces simulation
software for use in pharmaceutical research and for education, and also provides
contract research services to the pharmaceutical industry, and (2) Words+,
founded in 1981, produces computer software and specialized hardware for use by
persons with disabilities, as well as a personal productivity software program
called Abbreviate! for the retail market.
DESCRIPTION OF SIMULATION SOFTWARE
----------------------------------
The types of simulation software produced by the Company are based on the
equations of chemistry and physics that describe or "model" the behavior of
things in the real world. The Company's GastroPlus(TM) pharmaceutical software
simulates the movement, dissolution/precipitation, chemical degradation, and
absorption of orally-dosed drug compounds in the human gastrointestinal tract of
humans, dogs, and rats, and with additional inputs, the plasma
concentration-time history of the drug after it reaches the central circulation
system. The Company's QMPRPlus(TM) program estimates the value of several
important physicochemical properties 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
7
incorporate the equations of chemistry and physics for each experiment (optics,
electrical circuits, gravity, ideal gases, acid/base titration, etc.).
The development of simulation software involves identifying and understanding
the underlying chemistry and physics of the processes to be simulated, breaking
those processes down into the lowest practical level of individual sub-processes
at which the behaviors can be well-represented mathematically, developing
appropriate mathematical relationships/equations, and converting them into
computer subroutines. The software subroutines representing these individual
processes are then assembled into an overall simulation program, with
appropriate coordination between modules and design of use-friendly inputs and
outputs. The predictions of this program are then compared to known results in
order to determine the validity of the model and to calibrate the simulation to
produce a useful tool for predicting new results.
PRODUCTS
--------
The Company's pharmaceutical software provides cost-effective solutions to a
number of problems in pharmaceutical research as well as in the education of
pharmacy and medical students. The Company's software products and services to
date are focussed on the area of pharmaceutical research known as 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. Two
additional modules, IVIV Correlation and PKPlus(TM) were released on November 7,
2000. The majority of new sales now include these modules, generating additional
revenue.
QMPRPlus (Quantitative Molecular Permeability Relationships), which can be used
as a companion program to GastroPlus or by itself, takes as inputs the
structures of molecules, and provides estimates for human effective
permeability, octanol-water partition coefficient (logP), solubility, and
diffusivity - all inputs to GastroPlus. QMPRPlus thereby extends the utility of
GastroPlus into early drug discovery, during which pharmaceutical companies may
not have even made many of the molecules that have been identified as potential
drug candidates. By providing estimates of physicochemical properties from
structure alone, QMPRPlus, coupled with GastroPlus, allows researchers to rank
order large numbers of candidate compounds in terms of their potential for human
intestinal absorption. Because pharmaceutical companies are dealing with
millions of compounds per year, and because the area of ADMET has become a
bottleneck, high throughput screening on the computer ("IN SILICO") is becoming
not just a convenience, but a necessity.
As of November 30, 2000, the Company had a total of nearly 60 individual
software licenses at 21 pharmaceutical companies in 7 countries on three
continents. In addition, the Company is in discussions with several
pharmaceutical companies regarding contract study services, customized software,
or both.
8
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 the small intestines of rats. The
Company is also receiving consulting assistance in the development of the
GastroPlus(TM) 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 four study contracts for major
pharmaceutical companies, and is in the process of answering a request for
proposal for additional studies with one of them. These provide an additional
source of revenue for the Company, as well as a means to introduce the Company's
software products to new customers. Management expects the number and size of
study contracts, which can include custom software development, to continue to
increase in the future.
PHARMACEUTICAL SIMULATIONS SOFTWARE 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) Metabolism, Efflux and Transporter Module
The Metabolism, Efflux and Transporter Module will extend the simulation within
GastroPlus to include greater detail for the effects of certain metabolic
processes on drug molecules, the effects of certain proteins in intestinal cells
that return ("efflux") a drug molecule back to the intestinal contents, and the
effects of certain other proteins that serve to move ("transport") some drug
molecules rapidly into or through intestinal cells. Metabolism refers to the
actions of certain enzymes, present primarily within intestinal cells, blood,
and liver, that change a drug molecule either by cleaving part of it away or by
adding other atoms to it. This effect usually renders a drug molecule
ineffective, but sometimes can turn a molecule into a useful drug product after
9
the original molecule (in this case called a "prodrug") has been absorbed.
Efflux refers to a process wherein a drug molecule enters an intestinal cell,
but is later returned to the interior of the intestine by an efflux protein.
Transporter proteins are proteins which serve to carry a drug molecule rapidly
into and/or through an intestinal cell, resulting in a significant increase in
permeability. Metabolism, efflux and transport are all important processes for
certain types of drug molecules, so there is considerable interest within the
pharmaceutical industry in modeling (simulating) the mechanisms by which these
processes occur during and subsequent to intestinal absorption of the drug
molecules. The Company expects to release the Metabolism, Efflux and Transporter
Module during the second quarter of fiscal year 2001.
(2) HelixGen(TM)
HelixGen is a program that predicts the 3-dimensional geometry (i.e., the
position of each atom) 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. Drugs that bind to these sites can
prevent the flow of molecules into and out of the cell, and in so doing may
relieve pain, reduce tremors, improve memory, or other such nerve-related
functions. The ability to predict the geometry of these proteins will enable
researchers to identify likely new drug molecules that could bind to these sites
in the computer, prior to actually synthesizing molecules for experimental
testing. During this fiscal year, development of HelixGen was postponed in order
to focus on the improvements to GastroPlus and QMPRPlus described above.
Development of the program is expected to resume in mid FY 2001.
(3) DDDPlus(TM)
The Company initiated the Consortium for Dissolution Prediction in April 2000.
The purpose of this consortium is to develop a predictive software simulation
called DDDPlus, which will simulate the disintegration and dissolution of
tablets and capsules in an IN VITRO (laboratory) experiment. The Company has
received indications of interest in joining this consortium from several
companies, and is continuing to pursue its formation. Initial computer program
development was begun in early calendar 2000, but has been on hold because of
higher priorities with GastroPlus and QMPRPlus. Work on both the Consortium for
Dissolution Prediction and the DDDPlus program are expected to resume in mid
2001. Walter Woltosz, the Chief Executive Officer of the Company was invited to
make a presentation directly related to this area of technology at the
Dissolution Testing conference in the Washington, D.C., area on November
30-December 1, 2000.
DISABILITY PRODUCT DEVELOPMENT
------------------------------
The Company's wholly owned subsidiary, Words+, Inc. has been an industry
technology leader for nearly 20 years 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
10
software products, E Z Keys and Talking Screen, as well as its growing line of
hardware products. The Company will also consider acquisitions of other
products, businesses and companies that are complementary to its existing
augmentative and alternative communication and computer access business lines.
11
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED NOVEMBER 30, 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.)
Three Months Ended
------------------------------------------------------------
11/30/00 11/30/99
------------------------------------------------------------
Net sales $1,058 100% $814 100.0%
Cost of sales 478 259
45.2 31.8
------------------------------------------------------------
Gross Profit 580 54.8 555 68.2
------------------------------------------------------------
Selling, general and administrative 501 47.4 504 61.9
Research and development 89 8.4 90 11.1
------------------------------------------------------------
Total operating expenses 590 55.8 594 73.0
------------------------------------------------------------
Loss from operations (10) (0.9) (39) (4.8)
------------------------------------------------------------
Interest expense (6) (0.6) (4) (0.5)
------------------------------------------------------------
Net loss $ (16) (1.5)% $(43) (5.3)%
============================================================
NET SALES
The consolidated net sales increased $244,000, or 30.0%, to $1,058,000 in the
first fiscal quarter of 2001 (FY01) from $814,000 in the first fiscal quarter of
2000 (FY00). Simulations Plus, Inc.'s sales, from pharmaceutical and educational
software, increased approximately $70,000, or 46.2%, and Words+, Inc.'s sales
increased approximately $174,000, or 26.3% for the quarter. Management
attributes the increase in consolidated net sales to the sales growth in both
pharmaceutical software and subsidiary Words+ sales. The Company's leading
pharmaceutical software increased 48.8% to $210,000 in the first fiscal quarter
of 2001 from $141,000 in the first fiscal quarter of 2000. The increase in
Words+ sales is due primarily to the sales increase in two popular products, the
newly introduced TuffTalker(TM) and the existing Freedom 2000(TM). Approximately
37% of Words+ sales increase was generated from TuffTalker sales, the
replacement for the PegasusLite(TM), which had been discontinued since late
1999, and 28% of the increase was generated from Freedom 2000 sales with
Panasonic Toughbook computers in which the disability market seeks durability.
COST OF SALES
The consolidated cost of sales increased $219,000, or 84.6%, to $478,000 in the
first fiscal quarter of FY01 from $259,000 in the first fiscal quarter of FY00.
The percentage of cost of sales increased by 13.4%. For Simulations Plus, the
cost of sales increased $25,000, or 50.1% of which a significant portion of the
cost of sales is the systematic amortization of capitalized software cost, which
resulted in a 68.2% increase in amortization cost. Another factor of increase in
cost of sales is royalty expense due to the agreement between the Company and
TSRL to pay royalties on GastroPlus sales. For Words+, the cost of sales
increased $193,000, or 92.8%. The change in percentage of cost of sales between
12
the first fiscal quarter of FY01 and FY00 is increased by 16.5%. Management
attributes the percentage increase in cost of sales for Words+ primarily to a
significant portion of sales was generated by product items with lower profit
margins.
GROSS PROFIT
The consolidated gross profit increased $25,000, or 4.5%, to $580,000 in the
first quarter of FY01 from $555,000 in the first quarter of FY00. Management
attributes the 13.4% decrease in gross profit margin between the first quarter
of FY01 and FY00 to an increase in amortization expense of capitalized software
for Simulations Plus and a significant sales increase in lower profit margin
products for Words+.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The consolidated selling, general and administrative expenses decreased $3,000,
or 0.6%, to $501,000 in the first fiscal quarter of FY01 from $504,000 in the
first fiscal quarter of FY00. For Simulations Plus, the selling, general and
administrative expenses increased $28,000, or 17.8%. Although the majority of
expenses are maintained fairly constant, there were slight increases in some
expenses, such as conference expenses, accounting fees, salaries, and income
taxes to overseas governments. For Words+, expenses decreased $31,000, or 9.1%,
due to reductions in sales discounts, trade shows, promotions, insurance and
contract labor. These reductions outweighed increases in other expenses such as
commissions to independent sales reps, 401(k) expenses and small increases in
salaries and wages.
RESEARCH AND DEVELOPMENT
The Company incurred approximately $118,000 of research and development costs
for both companies during the first quarter of FY01. Of this amount, $32,000 was
capitalized and $86,000 was expensed in this period. In the first quarter of
FY00, the Company incurred $114,000 of research and development costs, of which
$24,000 was capitalized and $90,000 was expensed. The increase of $2,000, or
1.8% in research and development expenditure from the first quarter of 2000 to
the first quarter of 2000 was due to the fact that there was a slight increase
in research and development salaries.
INTEREST EXPENSE
Interest expense for the first quarter of FY01 increased by $2,000, to $6,000
from $4,000 in the first quarter of FY00. This increase is attributable
primarily to the interest paid on a revolving line of credit.
NET LOSS
The consolidated net loss for the three months ended November 30, 2000 decreased
by $27,000, or 62.8%, to $16,000 in the first quarter of FY01 compared to
13
$43,000 in the first quarter of FY00. Management attributes this decrease
primarily to the significant increase in revenue while maintaining selling,
general and administrative expenses constant, which outweighed an increase in
material costs for Words+ products.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of capital have been cash flow from its
operations, a bank line of credit, a government grant, cash loans from the
officers on an as-needed basis, and accruing and not paying full salaries to
certain executive officers and managers.
The Company has available a $100,000 revolving line of credit from a bank.
Interest is payable on a monthly basis at the bank's prime rate plus 3.0%. The
outstanding balance under the revolving line of credit as of November 30, 2000
was $99,000. The revolving line of credit is not secured by any of the assets of
the Company but is personally guaranteed by Mr. Walter S. Woltosz, the Company's
Chief Executive Officer, President and Chairman of the Board of Directors.
Beginning in August 1998, certain executive officers and managers accepted
reduced salaries on a temporary basis in order to protect the cash assets of the
Company. The unpaid portions of salaries are accrued and will be paid at such
future time as management deems the Company's cash flow and cash reserves are
sufficient to make such payment without adverse effects to the Company's
financial position. As of this time, only the Company's CEO and CFO are
receiving reduced salaries, with the unpaid amounts being accrued. As of
November 30, 2000, the amount of accrued and unpaid salaries due to the
Company's executive officers was $314,000.
The Company believes that existing capital and anticipated funds from operations
and temporary salary reductions for senior management will be sufficient to meet
its anticipated cash needs for working capital and capital expenditures for at
least the next 13 months. However, if anticipated funds from operations are
insufficient to satisfy the Company's capital requirements, the Company may have
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 had 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
14
from the Nasdaq effective at the close of business on July 2, 1999 because the
Company did not meet the requirements for continued listing on Nasdaq.
Accordingly, trading in the shares of the Company's Common Stock is now
conducted on the Nasdaq's "Electronic Bulletin Board." Consequently, the
liquidity of the Company's securities may be impaired, not only in the number of
securities which can be bought and sold, but also through delays in the timing
of the transactions, reductions in security analysts' and media coverage of the
Company, and lower prices for the Company's securities than otherwise may be
attained.
As a result of the delisting, the Company's securities are subject to Rule 15g-9
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
which imposes additional sales practice requirements on broker-dealers which
sell such securities to persons other than established customers and "accredited
investors" (generally, individuals with net worths in excess of $1,000,000 or
annual incomes exceeding $200,000, or $300,000 together with their spouses). For
transactions covered by this rule, a broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser's
written consent to the transaction prior to the sale. Consequently, the rule may
adversely affect the ability of broker-dealers to sell the Company's securities
acquired hereby in the secondary market.
Securities and Exchange Commission ("Commission") regulations define a "penny
stock" to be any non-Nasdaq equity security that has a market price (as therein
defined) of less than $5.00 per share or with an exercise price of less than
$5.00 per share, subject to certain exceptions. For any transaction involving a
penny stock, unless exempt, the rules require delivery, prior to any transaction
in a penny stock, of a disclosure schedule prepared by the Commission relating
to the penny stock market. Disclosure is also required to be made about
commissions payable to both the broker-dealer and the registered representative
and current quotations for the securities. Finally, monthly statements are
required to be sent disclosing recent price information for the penny stock held
in the account and information on the limited market in penny stocks.
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.
15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
None.
Item 2. Changes in Securities
---------------------
None.
Item 3. Defaults Upon Senior Securities
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None.
Item 5. Other Information
-----------------
None.
Item 6. Exhibits and Reports on form 8-K
--------------------------------
(a) Exhibits:
None.
(b) Reports on Form 8-K
None.
16
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Simulations Plus, Inc.
Date: January 11, 2001 By: /s/ MOMOKO BERAN
----------------
Momoko Beran
Chief Financial Officer
17