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, 2001 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, 2002, was 3,408,331.
SIMULATIONS PLUS, INC.
FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 2001
Table of Contents
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet at November 30, 2001 (unaudited) 1
Consolidated Statements of Operations for the three months
ended November 30, 2001 and 2000 (unaudited) 2
Consolidated Statements of Cash Flows for the three months
ended November 30, 2001 and 2000 (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, 2001
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents (note 2) $ 51,905
Accounts receivable, net of allowance for
doubtful accounts of $14,363 621,182
Prepaid expenses 47,626
Inventory 182,711
------------
Total current assets 903,424
------------
Capitalized computer software development costs,
net of accumulated amortization (note 3) 318,196
Furniture and equipment, net (note 4) 82,550
Other assets 13,257
------------
Total assets $ 1,317,427
============
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Advance line of credit $ 99,966
Accounts payable 272,789
Accrued payroll and other expenses 350,036
Accrued compensation due to officers 225,916
Accrued warranty and service costs 43,960
Current portion of capitalized lease obligations 13,697
------------
Total current liabilities 1,006,364
------------
Capitalized lease obligations, net of current portion 17,588
------------
Total liabilities 1,023,952
------------
Shareholders' equity
Preferred stock: $0.001 par value, authorized
10,000,000 shares, no shares issued and outstanding 0
Common stock: $0.001 par value, authorized
20,000,000 shares, issued and outstanding 3,408,331 (note 5) 3,409
Additional paid-in capital 4,654,756
Accumulated deficit (4,364,690)
------------
Total shareholders' equity 293,475
------------
Total liabilities and stockholders' equity $ 1,317,427
============
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, 2001 and 2000
(Unaudited)
Three months ended
---------------------------
11/30/01 11/30/00
------------ ------------
Net sales $ 1,007,288 $ 1,058,323
Cost of sales 372,545 478,250
------------ ------------
Gross profit 634,743 580,073
------------ ------------
Operating expenses:
Selling, general & administrative 525,207 500,576
Research and development 93,989 89,154
------------ ------------
Total operating expenses 619,196 589,730
------------ ------------
Profit (loss) from operations 15,547 (9,657)
Other income (expenses):
Interest revenue 7 12
Interest expense (5,048) (6,133)
------------ ------------
Profit (loss) before provision for income taxes 10,506 (15,778)
Provision for income taxes 0 0
------------ ------------
Net profit (loss) $ 10,506 $ (15,778)
============ ============
Basic net profit (loss) per common share $ 0.00 $ (0.00)
============ ============
Diluted net profit (loss) per common share $ 0.00 $ (0.00)
============ ============
Basic weighted average # of common shares outstanding 3,394,299 3,384,968
============ ============
Diluted weighted average # of common shares outstanding 3,394,299 3,384,968
============ ============
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, 2001 and 2000
(Unaudited)
Three months ended
-----------------------
11/30/00 11/30/00
---------- ----------
Cash flows from operating activities:
Net profit (loss) $ 10,506 $ (15,778)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization of furniture and equipment 14,900 15,486
Amortization of capitalized software development costs 30,974 52,268
(Increase) decrease in:
Accounts receivable (176,782) (7,921)
Inventory (353) (17,803)
Other assets (22,603) 10,230
Increase (decrease) in:
Accounts payable 8,484 40,770
Accrued expenses 38,132 1,385
Accrued payroll for officers 12,500
Accrued warranty and service costs (1,496) (1,437)
Deferred revenue (5,836) (26,847)
---------- ----------
Net cash provided by (used in) operating activities (91,574) 50,353
---------- ----------
Cash flows from investing activities:
Purchase of equipment (6,182)
Capitalized computer software development cost (14,869) (32,338)
---------- ----------
Net cash used in investing activities (21,051) (32,338)
---------- ----------
Cash flows from financing activities:
Proceeds from line of credit 1,007 44
Payments on capitalized lease obligations (3,129) (5,064)
---------- ----------
Net cash used in financing activities (2,122) (5,020)
---------- ----------
Net increase (decrease) in cash (114,747) 12,995
Cash and cash equivalents, beginning of period 166,652 37,535
---------- ----------
Cash and cash equivalents, end of period $ 51,905 $ 50,530
========== ==========
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
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 $126,296 in
fiscal year 2000 when it was required to write off as an impairment loss related
to capitalized software costs for HelixGen, and included in selling, general,
and administrative expenses.
4
Note 4: FURNITURE AND EQUIPMENT
-------
Furniture and equipment as of November 30, 2001 consisted of the following:
Equipment $ 104,236
Computer equipment 304,982
Furniture and fixtures 45,036
Leasehold improvements 38,215
----------
492,469
Less accumulated depreciation (409,919)
----------
$ 82,550
==========
Note 5: STOCKHOLDERS' EQUITY
-------
ISSUANCE OF WARRANTS
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
January 1, 2002, these warrants expired. A previous Subscription with warrants
expired in September 2001. Accordingly, there are no longer any exercisable
warrants for the Company's stock.
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
under the Option Plan to 500,000. In February 2000, the shareholders approved
the number of shares to be granted under the Option Plan to be 1,000,000 shares.
Furthermore, in December 2000, the shareholders approved an increase in number
of shares that may be granted under the Option Plan to 1,250,000. The Option
Plan terminates in 2006, subject to earlier termination by the Board of
Directors.
As of November 30, 2001, 1,148,923 shares have been issued to various employees
at an exercise price equal to the fair market value of the Company's stock price
at the date of grant with five-year vesting periods. Also, a total of 5,206
shares have been issued to the Board of Directors at exercise prices ranging
from $1.50 to $5.25 with a three-year vesting period. As of today, 2,300 options
have been exercised.
5
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. During the fiscal year 2001, 22,500
shares were exercised in exchange for cash of $22,500 and the remaining 7,500
shares expired.
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
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, 2001 (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/metabolic
degradation and absorption of orally-dosed drug compounds in the
gastrointestinal tract of humans and several laboratory animal species, and with
additional inputs, it also simulates the blood plasma concentration-time history
of the drug after it reaches the central circulation. The Company recently
completed the development of, and has now begun to sell licenses for, an
important new extension module for GastroPlus, called the Metabolism and
Transporter Module. This module extends the basic simulation to include
enzyme-specific metabolism in both the liver and in intestinal walls, as well as
the effects of transporter proteins that line the intestinal tract and serve to
7
promote or inhibit drug absorption. The Company's QMPRPlus(TM) program estimates
the values of several important physicochemical characteristics of new drug-like
molecules with only the structures of the molecules as input. Recent additions
to this program include the prediction of permeability in a special line of
cells called MDCK cells. This predictive model was developed during the past
fiscal year under a funded collaboration with the Affymax Research Institute.
Two new important predicted properties were also added to QMPRPlus: plasma
protein binding and volume of distribution. GastroPlus and QMPRPlus are used by
almost every major and a number of smaller pharmaceutical companies in the U.S.,
Europe, and Japan.
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.), and allow students to design
and conduct their own experiments in a virtual laboratory environment. Although
development of FutureLab software was discontinued in 1998, low-level sales
continue through distributors in the U.S., U.K. Australia, and New Zealand.
The development of simulation software involves (1) identifying and
understanding the underlying chemistry, physics, biology, and physiology of the
processes to be simulated, (2) breaking those processes down into the lowest
practical level of individual sub-processes at which the behaviors can be
well-represented mathematically, (3) developing appropriate mathematical
relationships/equations, and (4) converting them into computer subroutines. The
software subroutines representing these individual processes are then integrated
into an overall simulation program, with appropriate coordination between
modules and design of user-friendly interface for inputs and outputs. The
predictions of these programs are then compared to known results in order to
calibrate the simulations and to demonstrate the validity of the models as
useful tools for predicting new results.
PRODUCTS
--------
The Company's pharmaceutical software provides cost-effective solutions
to a number of critical problems in pharmaceutical research, and also serves in
the education of pharmacy and medical students. The Company's software products
and services to date are focused on the area of pharmaceutical research known as
ADMET (Absorption, Distribution, Metabolism, Elimination, and Toxicity). The
Company released its first pharmaceutical software product, GastroPlus, in
August 1998 and immediately received enthusiastic interest from researchers in
large pharmaceutical companies such as Astra, Glaxo Wellcome, Pfizer, Pharmacia,
The Roche Group, SmithKline Beecham and Zeneca. Since then, 19 of the world's
largest pharmaceutical companies and a number of smaller companies have licensed
the software. Some of these companies have merged to become single companies
(e.g., AstraZeneca and GlaxoSmithKline), which give the appearance of fewer
customers, but the Company's software is licensed on an annual basis by
geographic location, so there was no actual loss in sales. An Optimization
Module for GastroPlus was released in November 1998. Two additional modules,
IVIV Correlation and PKPlus(TM) were released in November 2000. The Metabolism
and Transporter Module was released in June 2001. The majority of new sales now
8
include these additional extra-cost modules, contributing significantly to
revenue growth. GastroPlus has now become the "gold standard" for simulation of
oral drug absorption and pharmacokinetics, and is in use throughout the industry
in the U.S., Japan, and Europe. Recent sales have included a number of drug
delivery companies (companies that design the actual tablet or capsule for a
drug that was usually developed by another company). Although these companies
are considerably smaller than the pharmaceutical giants, they can realize
significant savings in cost and time through accurate simulation of their drug
delivery technologies. The Company believes this part of the industry, which
includes hundreds of companies, represents major growth potential for
GastroPlus.
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,
diffusivity, blood-brain barrier penetration, plasma protein binding, and volume
of distribution. Most of these are 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. The Company recently completed the
development of a new permeability model for a special line of cell culture
experiments using Manin-Darby Canine Kidney (MDCK) cells under contract to the
Affymax Research Institute, at the time a division of GlaxoSmithKline. This
unique model, based on high quality data for over 300 compounds from Affymax's
laboratories, was presented at the American Chemical Society meeting in San
Diego during the first week of April 2001. The Company also completed the
development of the blood-brain barrier permeation model during this fiscal year,
as well as the plasma protein binding and volume of distribution model, and it
updated all earlier models with enhanced artificial neural network predictions.
By providing estimates of physicochemical properties from structure alone,
QMPRPlus, by itself or 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 many
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.
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.
As a part of this License Agreement, the Company is also receiving consulting
assistance in the development and further enhancement of the GastroPlus
absorption 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 continually growing expertise in absorption and
pharmacokinetics simulation, have resulted in GastroPlus becoming recognized as
the standard for oral drug absorption simulation and analysis within the
9
pharmaceutical industry. The Company is aware that other companies began to
develop similar software; however, management believes there is no significant
direct competition for GastroPlus at this time. The Company believes that the
addition of the Metabolism and Transporter Module and the accompanying upgrade
of the core simulation in Version 3.0, which was released in June 2001, are
major advances in the state-of-the-art of oral drug absorption and
pharmacokinetics analysis. The Company's recognized expertise in oral absorption
and pharmacokinetics is evidenced by the fact that Company staff members have
been invited speakers at over 20 prestigious scientific meetings worldwide in
the past year alone.
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 continues to perform study contracts for both major
and smaller pharmaceutical companies. 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. These studies are also beneficial to the
Company to validate and enhance its products by studying actual data in the
pharmaceutical industry. The company is currently completing two new study
contracts to analyze drugs that are now in clinical trials.
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 known as
G-protein coupled receptors (GPCR's). Although all of our development work
cannot be disclosed for competitive reasons, some of our development efforts
include:
(1) PDPlus(TM) Module
---------------------
The PDPlus Module for GastroPlus is well under way. Prior versions of
GastroPlus have dealt with absorption and pharmacokinetics (what happens to the
drug when it gets into the body). PDPlus calculates the pharmacodynamics for the
drug (what happens to the body when the drug gets into the body) - i.e., what
kind of therapeutic effect does it produce to treat a disease. This is an
important new capability because it opens up the market to researchers who deal
in late stage clinical trials, and who routinely perform PK/PD
(pharmacokinetic/pharmacodynamic) analyses. Until now, these analyses were
performed using models that treated absorption and its related process with very
simplified models - often so simplified that calculations were in error. With
PDPlus in GastroPlus, researchers will be able to perform highly sophisticated
simulations and analyses to determine the complex interactive effects of factors
that change the amount of drug that is absorbed and how fast it is metabolized
after it is absorbed. These can result in significant variations in
pharmacodynamic effect. Without the ability to predict these effects, excess
costs in clinical trials can result when trials must be repeated to determine
proper dosing levels. PDPl(TM) will enable researchers to better understand the
10
complex interplay among absorption, pharmacokinetics, and pharmacodynamics, and
to better estimate the dosing levels to use in clinical trials prior to the
start of the trials. This additional-cost module is expected to be released
early in calendar year 2002.
(2) Multiple Particle Size Dissolution Model
--------------------------------------------
The current dissolution model in GastroPlus uses a single "effective"
particle size. While this model has well represented most tablets, capsules, and
suspensions we have dealt with to date, formulation researchers know that real
dosage forms do not consist of particles that are all one size. Instead, there
is a distribution of particle sizes over some range from smaller than the
average size to larger than the average size. Smaller particles dissolve faster
than larger particles. For some drugs, this results in dissolution behavior that
is not well modeled with a single effective particle size. This new model will
allow formulation researchers to asses the effects of different particle size
distributions on dissolution and absorption.
(3) QMPRPlus(TM) upgrades
-------------------------
We continue to add new molecular descriptors and new predicted ADMET
properties to QMPRPlus(TM). We are now developing the ability for researchers to
add their own data to refine the predictions for ADMET properties. We are also
negotiating with several companies to develop additional models based on their
experimental data. These models may be proprietary to each company, or they may
result in additional predictions that can be licensed to other users, as we did
with the MDCK model developed under contract to Affymax. A Data Mining Module is
in development, which will allow researchers to see the distribution of their
chemicals in up to four dimensions (3D plus color). This is a highly valuable
capability that will complement the predictive capabilities of QMPRPlus nicely.
This extra-cost module is expected to be released in early 2002.
(4) HelixGen(TM)
----------------
HelixGen is a program that is designed to predict the 3-dimensional
geometry (i.e., the position of each atom) of a special class of transmembrane
proteins known as G-protein coupled receptors (GPCR's). 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 GPCR's can prevent the flow of certain molecules into and out
of the cell, and in so doing may relieve pain, reduce tremors, improve memory,
or affect other such nerve-related functions. The ability to predict the
geometry of GPCR's in the computer will enable researchers to identify likely
new drug molecules that could bind to them prior to actually synthesizing the
molecules for experimental testing. 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 at some time in the future when
resources and priorities allow. Because of accounting standards, and the
continued postponement of development activities on this program, the Company
was required to expense $126,296 in the 2nd quarter of FY2001 to write off all
of the previously capitalized software development costs for HelixGen.
11
DISABILITY PRODUCT DEVELOPMENT
------------------------------
The Company's wholly owned subsidiary, Words+, Inc. has been an industry
technology leader for over 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
software products, E Z Keys and Talking Screen, as well as its growing line of
hardware products. The Company is well along in developing new versions of its
software products for the new Microsoft XP operating system. 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.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED NOVEMBER 30, 2001 AND 2000.
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
------------------------------------------------------
11/30/01 11/30/00
------------------------------------------------------
Net sales $ 1,007 100% $1,058 100%
Cost of sales 372 36.9 478 45.2
------------------------------------------------------
Gross Profit 635 63.1 580 54.8
------------------------------------------------------
Selling, general and administrative 525 52.1 501 47.4
Research and development 94 9.3 89 8.4
------------------------------------------------------
Total operating expenses 619 61.5 590 55.8
------------------------------------------------------
Profit (loss) from operations 16 1.6 (10) (0.9)
------------------------------------------------------
Interest expense (5) (0.5) (6) (0.6)
------------------------------------------------------
Net profit (loss) $ 11 1.1% $ (16) (1.5)%
======================================================
NET SALES
The consolidated net sales decreased $51,000, or 4.8%, to $1,007,000 in the
first fiscal quarter of 2002 (FY02) from $1,058,000 in the first fiscal quarter
of 2001 (FY01). Simulations Plus, Inc.'s sales, from pharmaceutical and
educational software, increased approximately $169,000, or 76.5%. However,
Words+, Inc.'s sales decreased approximately $220,000, or 26.3% for the quarter.
The increase in the Company's leading pharmaceutical software sales is
attributable to a combination of additional license sales to existing customers,
new customers, new modules, and four major upgrades to existing products.
Management attributes the decrease in Words+ sales primarily to the tragic
incidents on September 11, personnel changes in two key sales representatives,
and overall slowing in the economy during this time period.
12
COST OF SALES
Consolidated cost of sales decreased $106,000, or 22.2%, to $372,000 in the
first fiscal quarter of FY02 from $478,000 in the first fiscal quarter of FY01.
The percentage of cost of sales decreased by 8.3%. For Simulations Plus, cost of
sales decreased $13,000, or 16.9%, of which the significant portion of the cost
of sales is the systematic amortization of capitalized software cost, which
resulted in a 40.4% decrease in amortization cost. Another factor of cost of
sales is royalty expense increasing $8,000, or 32.0%, due increased GastroPlus
sales and the agreement between the Company and TSRL which includes royalty
payments on GastroPlus sales. However the decrease in amortization cost
outweighed the increase in royalty expense resulting in lower cost of sales than
the previous year, despite the increase in sales. For Words+, cost of sales
decreased $93,000, or 23.2%. The change in percentage of cost of sales between
the first fiscal quarter of FY02 and FY01 is increased by 2.1%. Management
attributes the percentage increase in cost of sales for Words+ primarily to the
fact that the percentage of sales generated by product items with lower profit
margins was greater than the items with higher profit margins.
GROSS PROFIT
The consolidated gross profit increased $55,000, or 9.5%, to $635,000 in the
first quarter of FY02 from $580,000 in the first quarter of FY01. Management
attributes this increase to a significant increase in pharmaceutical software
sales, while there is a decrease in its cost of sales, resulting in over 125%
increase in gross profit for these sales. This increase outweighed the decrease
in gross profit generated by Words+ products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Consolidated selling, general and administrative expenses increased $24,000, or
4.8%, to $525,000 in the first fiscal quarter of FY02 from $501,000 in the first
fiscal quarter of FY01. For Simulations Plus, the selling, general and
administrative expenses decreased $13,000, or 6.9%. The major decreases in
expenses were in the categories of public relations and other taxes. The public
relations expense decreased due to the elimination of an outside public
relations firm, and other taxes, which are income taxes due to foreign
countries, were not applicable in this quarter. These decreases outweighed
increases in contract labor, travel expense, and health insurance. For Words+,
expenses increased $37,000, or 11.9%, due to increases in catalog printing,
commissions to independent sales reps, trade shows, auto lease expenses, health
insurance, and contact labor. These increases outweighed decreases in travel
expense, telephone, salaries and wages, payroll taxes, and supplies.
RESEARCH AND DEVELOPMENT
The Company incurred approximately $109,000 of research and development costs
for both companies during the first quarter of FY02. Of this amount, $15,000 was
capitalized and $94,000 was expensed in this period. In the first quarter of
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FY01, the Company incurred $118,000 of research and development costs, of which
$32,000 was capitalized and $86,000 was expensed. The decrease of $9,000, or
7.6% in research and development expenditure from the first quarter of 2001 to
the first quarter of 2002 was primarily due to the less supply expense in the
first quarter of FY02.
INTEREST EXPENSE
Interest expense for the first quarter of FY02 decreased by $1,000, to $5,000
from $6,000 in the first quarter of FY01. This decrease is attributable
primarily to a lower interest rate on a revolving line of credit.
NET LOSS
The consolidated net profit for the three months operations increase by $27,000,
or 168.8%, to profit of $11,000 in the first quarter of FY02 compared to loss of
$16,000 in the first quarter of FY01. Management attributes this increase in
profit primarily to the lower cost of sales, thus higher gross profit, which
outweighed increases in expenses.
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, and accruing and not paying portions of 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%. At
November 30, 2001, the outstanding balance under the revolving line of credit
was approximately $100,000, and it was $99,000 at November 30, 2000. 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 being 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, 2001, the amount of accrued and unpaid salaries due to the
Company's executive officers and one manager was $386,000.
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. Thereafter, if cash generated from
operations is insufficient to satisfy the Company's capital requirements, the
Company may have to sell additional equity or debt securities or obtain expanded
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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
available, that it will be in amounts and on terms acceptable to the Company. If
cash flows from operations are insufficient to continue operations at the
current level, and if no additional financing is obtained, then management will
restructure the Company in a way to preserve its pharmaceutical and disability
businesses while maintaining expenses within operating cash flows.
Since July 2, 1999, trading in the shares of the Company's Common Stock
has been 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 the new
media's coverage of the Company, and lower prices for the Company's securities
than otherwise may be attained.
Because the company's securities are listed on the bulletin board, they
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 worth in
excess of $1,000,000 or annual incomes exceeding $200,000, or $300,000 together
with their spouses). For transactions covered by this rule, a broker-dealer must
make a special suitability determination for the purchaser and have received the
purchaser's written consent to the transaction prior to the sale. Consequently,
the rule may adversely affect the ability of broker-dealers to sell the
Company's securities acquired 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.
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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.
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SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Simulations Plus, Inc.
Date: January 14, 2002 By: /s/ MOMOKO BERAN
--------------------------
Momoko Beran
Chief Financial Officer
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