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, 2003 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.
(Name of small business issuer 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
(Issuer's telephone number, including area code)
NOT APPLICABLE
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 14, 2004, was 3,439,374.
SIMULATIONS PLUS, INC.
FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 2003
Table of Contents
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet at November 30, 2003 (unaudited) 2
Consolidated Statements of Operations for the three months
ended November 30, 2003 and 2002 (unaudited) 3
Consolidated Statements of Cash Flows for the three months
ended November 30, 2003 and 2002 (unaudited) 4
Notes to Consolidated Financial Statements (unaudited) 5
Item 2. Management's Discussion and Analysis or Plan of Operations
General 9
Results of Operations 14
Liquidity and Capital Resources 16
Item 3. Controls and Procedures 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signature 19
Exhibit - Certifications 20
1
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
AT NOVEMBER 30, 2003
(Unaudited)
--------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents (Note 2) $ 351,067
Accounts receivable, net of allowance for doubtful accounts
of $26,180 and present value discount of $30,513 1,281,720
Inventory (Note 3) 236,410
Prepaid expenses and other current assets 21,631
------------
Total current assets 1,890,828
LONG TERM RECEIVABLES, net of present value discount
of $29,165 270,835
CAPITALIZED COMPUTER SOFTWARE DEVELOPMENT COSTS,
net of accumulated amortization of $1,847,166 (Note 4) 369,581
PROPERTY AND EQUIPMENT, net (Note 5) 74,621
DEFERRED TAX (Note 6) 1,291,110
OTHER ASSETS 10,890
-----------
TOTAL ASSETS $ 3,907,865
============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 174,046
Accrued payroll and other expenses 283,906
Accrued warranty and service costs 39,159
Current portion of deferred revenue 11,416
Other current liabilities (Note 7) 2,726
------------
Total current liabilities 511,253
DEFERRED REVENUE 28,547
OTHER LONG TERM LIABILITIES (Note 7) 5,451
------------
Total liabilities 545,251
------------
COMMITMENTS AND CONTINGENCIES (Note 7) --
SHAREHOLDERS' EQUITY (Note 8)
Preferred stock, $0.001 par value
10,000,000 shares authorized
no shares issued and outstanding --
Common stock, $0.001 par value
20,000,000 shares authorized
3,439,374 shares issued and outstanding 3,440
Additional paid-in capital 4,696,676
Accumulated deficit (1,337,502)
------------
Total shareholders' equity 3,362,614
------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,907,865
============
The accompanying notes are an integral part of these financial statements.
2
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED NOVEMBER 30,
(Unaudited)
-----------------------------------------------------------------------------------------
2003 2002
------------ ------------
NET SALES $ 1,138,733 $ 1,077,515
COST OF SALES 351,746 332,798
------------ ------------
GROSS PROFIT 786,987 744,717
------------ ------------
OPERATING EXPENSES
Selling, general, and administrative 605,823 502,881
Research and development 143,393 109,598
------------ ------------
Total operating expenses 749,216 612,479
------------ ------------
INCOME FROM OPERATIONS 37,771 132,238
------------ ------------
OTHER INCOME (EXPENSE)
Interest income 20,487 15
Interest expense (366) (1,540)
------------ ------------
Total other income (expense) 20,121 (1,525)
------------ ------------
INCOME BEFORE BENEFIT FROM (PROVISION FOR)
INCOME TAXES 57,892 130,713
BENEFIT FROM (PROVISION FOR) INCOME TAXES
Provision for income tax (11,173) --
Change in valuation allowance -- --
------------ ------------
Total benefit from (provision for) income taxes (11,173) --
------------ ------------
NET INCOME $ 46,719 $ 130,713
============ ============
BASIC EARNINGS PER SHARE $ 0.01 $ 0.04
============ ============
Diluted earnings per share $ 0.01 $ 0.04
============ ============
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING
BASIC 3,417,202 3,408,331
============ ============
DILUTED 4,128,092 3,430,768
============ ============
The accompanying notes are an integral part of these financial statements.
3
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED NOVEMBER 30,
(Unaudited)
--------------------------------------------------------------------------------------
2003 2002
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 46,719 $ 130,713
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization of property and
equipment 8,060 9,932
Amortization of capitalized software development
costs 52,552 35,550
(Increase) decrease in
Accounts receivable 140,788 50,168
Inventory (44,571) (47,417)
Other assets 44,382 7,275
Increase (decrease) in
Accounts payable (962) (13,604)
Accrued expenses 5,097 (11,684)
Accrued payroll for officers -- (58,333)
Accrued bonuses to officers (133,538) (54,057)
Accrued warranty and service costs (5,571) 4,503
Deferred revenue (6,454) 11,546
---------- ----------
Net cash provided by operating activities 106,502 64,592
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (2,970) (27,029)
Capitalized computer software development costs (48,209) (18,352)
---------- ----------
Net cash used in investing activities (51,179) (45,381)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on capitalized lease obligations (1,787) (3,610)
Proceeds from the exercise of stock options 36,798 --
---------- ----------
Net cash provided by (used in)
financing activities 35,011 (3,610)
---------- ----------
Net increase (decrease) in cash and cash
equivalents $ 90,334 $ 15,601
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 260,733 36,072
---------- ----------
CASH AND CASH EQUIVALENTS, END OF QUARTER $ 351,067 $ 51,673
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
INTEREST PAID $ 366 $ 1,540
========== ==========
INCOME TAXES PAID $ 47,000 $ 1,600
========== ==========
SUPPLEMENTAL SCHEDULE OF NON-CASH TRANSACTIONS
Minolta copier with a zero book value was traded-in for a new Ricoh
copier/printer. The remaining obligation of $8,177 was assumed by the
lessor of Ricoh copier/printer in the exchange for a higher per print
cost.
The accompanying notes are an integral part of these financial statements.
4
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. ("we", "our"), 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.
ESTIMATES
The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Note 2: CASH AND CASH EQUIVALENTS
-------
We maintain cash deposits at banks located in California. Deposits at each bank
are insured by the Federal Deposit Insurance Corporation up to $100,000. As of
November 30, 2003, the uninsured portions aggregated to $246,000. We have not
experienced any losses in such accounts and we believe we are not exposed to any
significant credit risk on cash and cash equivalents.
Note 3: INVENTORY
-------
Inventory is stated at the lower of cost (first-in, first-out basis) or market,
and consists of computers and peripheral computer equipment.
Note 4: 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
judgment 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 our software products.
5
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.
Note 5: FURNITURE AND EQUIPMENT
-------
Furniture and equipment as of November 30, 2003 consisted of the following:
Equipment $ 137,690
Computer equipment 287,032
Furniture and fixtures 52,704
Leasehold improvements 38,215
----------
515,641
Less accumulated depreciation (441,020)
----------
$ 74,621
==========
Note 6: INCOME TAX
-------
The Company utilizes SFAS No. 109 "Accounting for Income Taxes," which requires
the recognition of deferred tax assets and liabilities for the expected future
tax consequences of events that have been included in the financial statements
or tax returns.
Under this method, deferred income taxes are recognized for the tax consequences
in future years of differences between the tax bases of assets and liabilities
and their financial reporting amounts at each year-end based on enacted tax laws
and statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be realized.
The provision for income taxes represents the tax payable for the period and the
change during the period in deferred tax assets and liabilities.
Note 7: OTHER LIABILITIES
-------
We lease certain facilities for our corporate and operations offices under a
non-cancelable operating lease agreement that expires in September 2005. During
the first fiscal quarter of 2004 (FY04), we agreed to a 3-year non-cancelable
operating lease for a printer/copier. In this agreement, we traded in the
previous copier with an additional per charge per print for the new
printer/copier. Accordingly, the remaining balance on the lease of the previous
copier will be amortized over the term of the lease. The equipment that was
traded in had a book value of zero (the original cost of $37,967 with
accumulated depreciation of $37,967) at the time of transaction.
6
Note 8: STOCKHOLDERS' EQUITY
-------
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, 2003, 1,093,035 shares have been issued and outstanding to
various employees at an exercise price equal to the fair market value of our
stock price at the date of each grant, with five-year vesting periods. Also, in
accordance with the by-laws of the corporation, a total of 7,206 shares have
been issued to the Board of Directors at exercise prices ranging from $1.20 to
$5.25, with a three-year vesting period. At the end of the first fiscal quarter
of 2004, 33,343 options have been exercised by employees.
Note 9: EARNINGS PER SHARE
-------
Effective February 28, 1998, we adopted SFAS No. 128 "Earnings Per Share."
Note 10: REVENUE RECOGNITION
--------
We recognize revenues related to software licenses and software maintenance in
accordance with the American Institute of Certified Public Accountants ("AICPA")
Statements of Position No. 97-2, "Software Revenue Recognition." Product revenue
is recorded at the time of shipment, net of estimated allowances and returns.
Post-contract customer support ("PCS") obligations are insignificant; therefore,
revenue for PCS is recognized at the time of shipment, and the costs of
providing such support services are accrued and amortized over the obligation
period. Ongoing improvements and upgrades of any significance are infrequent and
minimal in nature and timing. We provide additional training and service calls
to our customers for a fee. We recognize revenues from these activities at the
time the training or service call is provided. The Company believes its history
of collections with its existing customers is sufficient to overcome the
presumption that revenue should be recognized in time with the expected cash
collections, and has therefore recognized the entire license fee, net of an
applicable discount, at the time of the software's release and acceptance by the
customer.
Note 11: LINE OF BUSINESS
--------
For internal reporting purposes, management segregates the Company into two
divisions. Results for each division and consolidated results are as follows for
the three months ended November 30, 2003 and 2002:
7
November 30, 2003
-----------------------------------------------------------------------------
Simulations
Plus, Inc. Words +, Inc. Eliminations Total
-----------------------------------------------------------------------------
Net Sales 642,293 496,440 1,138,733
Income (loss)
from operations 135,148 (97,377) 37,771
Identifiable assets 4,189,068 651,521 (963,279) 3,877,310
Capital expenditures 0 2,970 2,970
Depreciation and
amortization 3,957 4,103 8,060
-----------------------------------------------------------------------------
November 30, 2002
-----------------------------------------------------------------------------
Simulations
Plus, Inc. Words +, Inc. Eliminations Total
-----------------------------------------------------------------------------
Net Sales 506,619 570,896 1,077,515
Income (loss)
from operations 162,385 (30,147) 132,238
Identifiable assets 1,642,942 735,227 (786,704) 1,591,465
Capital expenditures 0 27,029 27,029
Depreciation and
amortization 4,539 5,393 9,932
-----------------------------------------------------------------------------
Note 12: SUBSEQUENT EVENT
--------
On December 23, 2003, Words+, Inc., the Company's subsidiary, has purchased all
of the rights, title, and interest in the Say-it! SAM augmentative communication
device developed by SAM Communications, LLC, for 35,000 shares of Simulations
Plus restricted common stock. The value of this technology acquisition was
recorded at $4.65 per share; equal to the closing price of the Company's stock
on the date the agreement was singed. Its costs are capitalized in accordance
with SFAS No. 86 (see Note 4) and amortized over the estimated economic life of
the product, not exceeding three years.
8
Item 2. Management's Discussion and Analysis or Plan of Operations
FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS IN THIS QUARTERLY REPORT ON FORM 10-KSB, OR THE "REPORT," ARE
"FORWARD-LOOKING STATEMENTS." THESE FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE
NOT LIMITED TO, STATEMENTS ABOUT THE PLANS, OBJECTIVES, EXPECTATIONS AND
INTENTIONS OF SIMULATIONS PLUS, INC., A CALIFORNIA CORPORATION (REFERRED TO IN
THIS REPORT AS THE "COMPANY") AND OTHER STATEMENTS CONTAINED IN THIS REPORT THAT
ARE NOT HISTORICAL FACTS. FORWARD-LOOKING STATEMENTS IN THIS REPORT OR HEREAFTER
INCLUDED IN OTHER PUBLICLY AVAILABLE DOCUMENTS FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION, OR THE "COMMISSION," REPORTS TO THE COMPANY'S STOCKHOLDERS
AND OTHER PUBLICLY AVAILABLE STATEMENTS ISSUED OR RELEASED BY THE COMPANY
INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH COULD
CAUSE THE COMPANY'S ACTUAL RESULTS, PERFORMANCE (FINANCIAL OR OPERATING) OR
ACHIEVEMENTS TO DIFFER FROM THE FUTURE RESULTS, PERFORMANCE (FINANCIAL OR
OPERATING) OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING
STATEMENTS. SUCH FUTURE RESULTS ARE BASED UPON MANAGEMENT'S BEST ESTIMATES BASED
UPON CURRENT CONDITIONS AND THE MOST RECENT RESULTS OF OPERATIONS. WHEN USED IN
THIS REPORT, THE WORDS "EXPECT," "ANTICIPATE," "INTEND," "PLAN," "BELIEVE,"
"SEEK," "ESTIMATE" AND SIMILAR EXPRESSIONS ARE GENERALLY INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS, BECAUSE THESE FORWARD-LOOKING STATEMENTS INVOLVE
RISKS AND UNCERTAINTIES. THERE ARE IMPORTANT FACTORS THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY THESE
FORWARD-LOOKING STATEMENTS, INCLUDING THE COMPANY'S PLANS, OBJECTIVES,
EXPECTATIONS AND INTENTIONS AND OTHER FACTORS.
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE IN THIS
REPORT.
GENERAL
BUSINESS
--------
Simulations Plus, Inc. (the "Company" or "Simulations Plus", or "we" or "our")
and its wholly owned subsidiary, Words+, Inc. ("Words+") produce two types of
products: (1) Simulations Plus, incorporated in 1996, develops and produces
modeling and 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 AND MODELING SOFTWARE
-----------------------------------------------
The development of simulation software involves (1) understanding the underlying
science of the process to be simulated, (2) breaking the process down into the
lowest practical level of sub-processes which can be represented mathematically,
(3) developing mathematical equations for each of these sub-processes, and (4)
9
programming the equations into computer subroutines. Software subroutines are
then integrated into the overall simulation program, with appropriate
coordination between modules and design of a user-friendly interface for inputs
and outputs. The predictions of the simulations are compared to known results in
order to calibrate the software. The types of simulation software we produce are
based on the equations of chemistry and physics that describe or "model" the
behavior of things in the real world.
PRODUCTS
--------
Our GastroPlus(TM) pharmaceutical software simulates how drugs are absorbed in
the human body and in animals. The simulation has equations for the movement of
the drug through the gastrointestinal tract, how fast it dissolves in the
stomach and intestines, whether it is converted to a different molecular form by
chemical reactions or by metabolism by enzymes in the gastrointestinal tract,
and how fast it is absorbed through the intestinal wall into the blood stream.
If some additional inputs are provided, it also simulates the amount of drug in
the blood plasma versus time. With an optional module called PDPlus(TM), the
program can also simulate how a drug affects the body, such as reducing pain,
reducing blood pressure, or reducing depression. Adverse side effects can also
be simulated.
We believe GastroPlus is the "gold standard" for simulation of oral drug
absorption in the pharmaceutical industry. In addition to pharmaceutical
companies, recent sales have included a number of drug delivery companies
(companies that design the tablet or capsule for a drug compound that was
developed by another company). Although these companies are considerably smaller
than the pharmaceutical giants, they can save cost and time through accurate
simulations of their drug delivery technologies. We believe this part of the
industry, which includes hundreds of companies, represents major growth
potential for GastroPlus.
In 1998, we signed a License Agreement with Therapeutic Systems Research
Laboratories, Inc. ("TSRL"), Ann Arbor, Michigan, to obtain exclusive rights to
TSRL's technology and database, including data from nearly 60 laboratory
experiments to measure the intestinal permeability of drug compounds in human
and/or rat. As a part of this License Agreement, we are also entitled to ongoing
consulting assistance in the development and further enhancement of the
GastroPlus absorption simulation model from TSRL staff, including Dr. Gordon
Amidon. We believe that the strategic advantage of exclusive access to TSRL's
database, technology and expertise, combined with our own expertise in
absorption, pharmacokinetics, and pharmacodynamics simulation, have resulted in
GastroPlus becoming the de facto standard for oral drug absorption simulation
and analysis within the pharmaceutical industry. We are aware that other
companies have developed competitive software; however, based on customer
feedback, we believe there is no significant competitive threat for GastroPlus
at this time. We believe that the addition of the Metabolism and Transporter
Module last year, the recently released PDPlus module, and ongoing upgrades of
the core simulation are advances in the state-of-the-art of oral drug
absorption, pharmacokinetics, and pharmacodynamics analysis. The PBPKPlus module
now in development will further extend the utility of GastroPlus within the
industry. Our recognized expertise in oral absorption and pharmacokinetics is
10
evidenced by the fact that our staff members have been invited speakers at over
30 prestigious scientific meetings worldwide in the past two years, and they
continue to be invited to present at a variety of meetings worldwide. We also
conduct contracted studies for customers who prefer to have studies run by our
scientists rather than to license our software and train someone to use it.
In addition to simulation software, we produce software that consists of
statistically significant models (equations) that predict various properties of
chemical compounds from just their molecular structures. When drug companies try
to find new drugs, they search through thousands or millions of potential
molecular structures (combinations of atoms arranged in different ways to make
molecules) to find a good molecule. In order for a new molecule to become an
approved drug, it must have acceptable values for certain properties, such as
solubility (how much can be dissolved in a glass of water), permeability (how
well it gets absorbed through the intestinal wall), and others.
Our QMPRPlus(TM) program provides estimates for several important properties of
new drug-like molecules with only their structures as input. Recent developments
have included adding a prediction of the percent of a new drug that would be
absorbed at dose levels of 1, 10, 100, and 1000 milligrams, and the addition of
the prediction of ionization constants ("pKa's") for molecules, which tells
chemists whether the molecules will ionize (add or give up hydrogen atoms) in
the body. Ionization has a major effect on some other properties, like
solubility.
GastroPlus and QMPRPlus are used by almost every major and a number of smaller
pharmaceutical companies in the U.S., Europe, and Japan. The number of customers
continues to grow each year. Our revenue growth reflects the cumulative effect
of new license sales added to annual license renewals from the previous year.
QMPRchitect (TM) was released in July of 2003. This program is used to generate
the predictive models used in QMPRPlus. With QMPRchitect, scientists can use
their own experimental data for a set of molecules to create a new predictive
model. For example, if a company had some experimental data for solubility for
500 new molecules that were somewhat similar to each other (called a "chemical
series"), they could use QMPRchitect to make a predictive model for solubility
that would be a good predictor for other molecules in the same series. In the
past, we have needed 2-3 months to produce equivalent models. With QMPRchitect,
the time is usually reduced to a few hours or days.
We continue to enhance GastroPlus, QMPRPlus, and QMPRchitect, and we are also
developing new core products to add to our catalog of software for
pharmaceutical research.
In addition to our pharmaceutical software, we also produce a set of
award-winning science experiment simulations (computer programs for Windows and
Macintosh computers) for middle school and high school students under the
umbrella name of FutureLab(TM). These simulations incorporate the equations of
chemistry and physics for each experiment (optics, electrical circuits, gravity,
universal gravitation, ideal gases, 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 have
continued through distributors in the U.S., U.K. Australia, and New Zealand.
11
CONTRACT RESEARCH SERVICES
--------------------------
We offer contract research services to the pharmaceutical industry in the area
of gastrointestinal absorption, pharmacokinetics, and related technologies.
These studies provide us an additional source of revenue, as well as a means to
introduce our software products to new customers. These studies are also
beneficial to us to validate and enhance our products by studying actual data in
the pharmaceutical industry. A services contract with a major pharmaceutical
company was signed last year. This company has numerous software licenses, but
desires additional consultation assistance from our scientists for certain
complex simulation problems.
PHARMACEUTICAL SIMULATIONS SOFTWARE PRODUCT DEVELOPMENT
-------------------------------------------------------
In the area of simulation software for pharmaceutical research, we are
developing additional modules for GastroPlus, QMPRPlus, and QMPRchitect.
Although all of our development work cannot be disclosed for competitive
reasons, some of our development efforts include:
(1) PBPKPlus(TM) Module
-----------------------
The PBPKPlus Module for GastroPlus is in early development. This module will
enable researchers to predict the amount of drug that reaches different body
tissues and organs. This is an important new capability because it opens up the
market to researchers who deal in later stage clinical trials, and who routinely
perform PBPK (physiologically based pharmacokinetic) and PD (pharmacodynamic)
analyses. Until now, these analyses were performed using models that treated
absorption and its related processes with simplified models - often so
simplified that calculations were in error. With PBPKPlus integrated with the
sophisticated absorption model in GastroPlus, researchers will be able to
perform more accurate simulations and analyses to better understand how a drug
moves from the blood into different tissues and organs. Without the ability to
predict these effects, clinical trial costs can soar when trials must be
repeated to determine proper dosing levels. We expect to release this
additional-cost module later this fiscal year.
(2) Multiple Particle Size Dissolution Model
--------------------------------------------
The current dissolution model in GastroPlus uses a single "effective" particle
size. While this model has represented most tablets, capsules, and suspensions
we have dealt with to date reasonably well, 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 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 assess the effects of different particle size
distributions on dissolution and absorption.
12
(3) DDDPlus(TM)
---------------
The DDDPlus (Dose Disintegration and Dissolution Plus) project originally began
in 2000, and proceeded at a slow pace until 2003, in between other higher
priority projects. DDDPlus will simulate how different tablets and capsules
disintegrate and dissolve during in vitro (in the laboratory) experiments. The
program will include the effects of changing formulation excipients (additives
that are not the active drug). This tool will be a valuable asset for
formulation scientists as they search for optimum formulations that provide
desirable properties at minimum cost.
(4) QMPRPlus(TM) upgrades
-------------------------
We continue to add new molecular descriptors and new predicted ADMET properties
to QMPRPlus(TM). Last year we completed the development of two new,
additional-cost modules, one for predicting ionization constants ("pKa Module')
and one for predicting the fraction of a dose that will be absorbed at dose
levels of 1, 10, 100, and 1000 milligrams ("Fraction Absorbed Module"). Other
enhancements have been included to allow the program to account for a wider
variety of molecular features ("descriptors") to be used in its mathematical
models.
DISABILITY PRODUCT DEVELOPMENT
------------------------------
Our wholly owned subsidiary, Words+, Inc. has been an industry technology leader
for over 22 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.
We will continue to enhance our major software products, E Z Keys and Talking
Screen, as well as our growing line of hardware products. We 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. We recently announced the purchase of the Say-it! SAM
technologies from SAM Communications, LLC of San Diego, which gives us our
smallest, lightest augmentative communication system based on a Compaq iPAQ
personal digital assistant (PDA). PDA-based communication devices have been very
successful in the augmentative communication market, and this acquisition has
enabled us to move into this market segment faster and at lower cost than
developing the product ourselves.
13
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED NOVEMBER 30, 2003 AND 2002.
The following table sets forth our consolidated statements of operations (in
thousands) and the percentages that such items bear to net sales:
Three Months Ended
------------------------------------------------------------
11/30/03 11/30/02
------------------------------- ----------------------------
Net sales $ 1,139 100% $ 1,078 100%
Cost of sales 352 30.9 333 30.9
---------------- -------------- ------------- --------------
Gross profit 787 69.1 745 69.1
---------------- -------------- ------------- --------------
Selling, general and administrative 606 53.2 503 46.7
Research and development 143 12.6 110 10.2
---------------- -------------- ------------- --------------
Total operating expenses 749 65.8 613 56.9
---------------- -------------- ------------- --------------
Income from operations 38 3.3 132 12.2
---------------- -------------- ------------- --------------
Other income (expenses) 20 1.8 (1) (0.0)
---------------- -------------- ------------- --------------
Net income before taxes 58 5.1 131 12.2
---------------- -------------- ------------- --------------
Provision for income taxes 11 1.0 -- --
---------------- -------------- ------------- --------------
Net income $ 47 4.1% $ 131 12.2%
================ ============== ============= ==============
NET SALES
Consolidated net sales increased $61,000, or 5.7%, to $1,139,000 in the first
fiscal quarter of 2004 (FY04) from $1,078,000 in the first fiscal quarter of
2003 (FY03). Simulations Plus, Inc.'s sales from pharmaceutical and educational
software increased approximately $136,000, or 26.8%; however, our Words+, Inc.
subsidiary's sales decreased approximately $75,000, or 13.1%, for the quarter.
Much of the increase in our pharmaceutical software sales is attributable to the
exercise of an option under the large multi-year order we received during the
4th quarter of FY03 for an additional geographic location. This option added a
fifth site for the modified "ADME Partners" program under that license
agreement, which provides virtually unlimited licenses for the use of our
GastroPlus(TM), QMPRPlus(TM), and QMPRchitect(TM) software products with all
optional modules. Management attributes the decrease in Words+ sales primarily
to the low sales of TuffTalker Plus, which declined approximately $27,000, or
67%, compared to the same period of the previous year and some decline in
software sales. Management attributes these declines primarily due to heavy
competition in picture-based communication systems.
COST OF SALES
Consolidated cost of sales increased $19,000, or 5.7%, to $352,000 in the first
fiscal quarter of FY04 from $333,000 in the first fiscal quarter of FY03. The
percentage of cost of sales in the first fiscal quarter of FY04 is the same as
the first fiscal quarter of FY03. For Simulations Plus, cost of sales increased
$22,000, or 41.4%. A significant portion of cost of sales is the systematic
amortization of capitalized software development costs, which increased $15,000,
or 50.3%, and an increase in royalty expense of $7,000, or 30.3% which
represents royalty payments to TSRL. The change in percentage of cost of sales
between the first fiscal quarter of FY04 and FY03 is an increase of 1.4%, 12.1%
14
in FY04 and 10.9% in FY03. Management attributes this slight increase in
percentage of cost of sales primarily to a proportional increase in amortization
of capitalized software development costs compared to sales.
For Words+, cost of sales decreased $5,000, or 2.0%. The change in percentage of
cost of sales between the first fiscal quarter of FY04 and FY03 was an increase
of 6.0%. Management attributes the percentage increase in cost of sales for
Words+ primarily to the fact that the percentage of sales generated by products
with higher profit margins, such as software, was less than products with lower
profit margins, such as computer-based systems.
GROSS PROFIT
Consolidated gross profit increased $42,000, or 5.6%, to $787,000 in the first
quarter of FY04 from $745,000 in the first quarter of FY03. Management
attributes this increase to a significant increase in pharmaceutical software
sales, resulting in approximately 25% increase in gross profit for these sales.
This increase outweighed a decrease in gross profit generated by Words+
products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Consolidated selling, general and administrative expenses increased $103,000, or
20.5%, to $606,000 in the first fiscal quarter of FY04 from $503,000 in the
first fiscal quarter of FY03. For Simulations Plus, selling, general and
administrative expenses increased $119,000, or 65.6%. The major increases in
expenses were in the categories of other taxes due to sales to foreign
countries, a transfer of administrative personnel wages from Words+ to
Simulations Plus for internal tracking purposes, investor relation's fees which
began in the last fiscal quarter of last year, and payroll-related expenses such
as health insurance and 401(k) matching contributions. These increases
outweighed small decreases in dues/subscriptions, employee benefits, and
depreciation.
For Words+, expenses decreased $16,000, or 4.9%, due to a transfer of
administrative personnel wages from Words+ to Simulations Plus for internal
tracking purposes, contract labor, technical service costs, recruiting expense,
and utilities. These decreases outweighed increases in selling expense, such as
commission to sales reps and travel expense, dues/subscriptions, insurance, and
telephone.
RESEARCH AND DEVELOPMENT
We incurred approximately $191,000 of research and development costs for both
companies during the first quarter of FY04. Of this amount, $48,000 was
capitalized and $143,000 was expensed. In the first quarter of FY03, we incurred
$128,000 of research and development costs, of which $18,000 was capitalized and
$110,000 was expensed. The increase of $63,000, or 49.2% in research and
development expenditure from the first quarter of FY03 to the first quarter of
FY04 was due to staff expansion and salary increases.
15
OTHER INCOME (EXPENSE)
Interest income in the first quarter of FY04 increased by $20,000 due primarily
to the amortization of present value discount on long-term receivables.
PROVISION FOR INCOME TAXES
Although the Company had a Net Operating Loss (NOL) carried forward which was
applied to the Company's Federal income tax liability, the State of California
suspended the NOL carry forward for two years beginning with fiscal years that
began after January 2002, resulting in a $11,000 tax due to the state of
California for the first quarter FY04.
NET INCOME
Consolidated net income before tax for the three months' operations decreased by
$84,000, or 64.1%, to $47,000 in the first quarter of FY04 compared to $131,000
in the first quarter of FY03. Management attributes this decrease in profit
primarily to the increases in cost of sales, selling, general and administrative
expenses, research and development expenses and provision for income taxes,
which outweighed increases in sales and other income.
CRITICAL ACCOUNTING POLICIES
--------------------------------------------------------------------------------
Our consolidated financial statements and accompanying notes are prepared in
accordance with accounting principles generally accepted in the United States of
America. Preparing financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenue, and expenses. These estimates and assumptions are affected by
management's application of accounting policies. Critical accounting policies
for us include revenue recognition, accounting for capitalized software
development costs, and accounting for income taxes.
REVENUE RECOGNITION
-------------------
We account for the licensing of software in accordance with American Institute
of Certified Public Accountants (AICPA) Statement of Position (SOP) 97-2,
"SOFTWARE REVENUE RECOGNITION". The application of SOP 97-2 requires judgment,
including whether a software arrangement includes multiple elements, and if so,
whether vendor-specific objective evidence (VSOE) of fair value exists for those
elements.
The end users receive certain elements of our products over a period of time.
These elements include free post-delivery telephone support and the right to
receive unspecified upgrades/enhancements. In accordance with SOP 97-2, we have
evaluated these agreements and we have recognized the entire license fee on the
date the software is delivered to and accepted by the customer. In order to
recognize the fee in this manner, we have met all the criteria required,
including:
o The Post Contract Customer Support ("PCS") fee is included in
the initial licensing fee,
o The PCS included with the license is for one year or less,
o The estimated cost of providing the PCS during the arrangement
is insignificant, and
o Unspecified upgrades/enhancements during the PCS arrangements
have been and are expected to continue to be minimal and
infrequent.
Changes to the elements in a software arrangement, the ability to identify VSOE
for those elements, the fair value of the respective elements, the costs
associated with providing PCS and changes to a product's estimated life cycle
could materially impact the amount of earned and unearned revenue. Judgment is
also required to assess whether future releases of certain software represent
new products or upgrades and enhancements to existing products.
From time to time, we offer certain customers three-year contracts with extended
payment terms. SOP 97-2 requires us to evaluate these contracts to determine if
they qualify for recognition of revenue in a manner similar to our one-year
contracts. On these contracts, we evaluate the collection and concession history
with these customers and products to overcome the presumption that revenue
should be recognized in line with cash collections. To date, we have recognized
these contracts on delivery to and acceptance by the customer of the product.
Substantial judgment is required in evaluating the relevant history and contract
economics of these extended contracts, and could materially impact recorded
revenue and unearned revenue in our financial statements.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
--------------------------------------
Capitalized computer software development costs are capitalized in accordance
with 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 judgment by management
including, but not limited to, technological feasibility, anticipated future
gross revenues, estimated economic life, and changes in software and hardware
technologies. Any changes to these estimates could materially impact the amount
of amortization expense, research and development expense recognized in the
consolidated statement of operations and the amount recognized as capitalized
software development costs in the consolidated balance sheet.
INCOME TAXES
------------
SFAS No. 109, "ACCOUNTING FOR INCOME TAXES", establishes financial accounting
and reporting standards for the effect of income taxes. The objectives of
accounting for income taxes are to recognize the amount of taxes payable or
refundable for the current year and deferred tax liabilities and assets for the
future tax consequences of events that have been recognized in an entity's
financial statements or tax returns. Judgment is required in assessing the
future tax consequences of events that have been recognized in our financial
statements or tax returns. Fluctuations in the actual outcome of these future
tax consequences could materially impact our financial position or our results
of operations.
During the year ended August 31, 2003, we recognized significant income tax
benefit from the release of a previously recorded reserve for deferred tax
assets. The evaluation of the deferred tax assets is based on our history of
generating taxable profits and our projections of future profits as well as
expected future tax rates to determine if the realization of the deferred tax
asset is more-likely-than-not. Significant judgment is required in these
evaluations, and differences in future results from our estimates, could result
in a material differences in the realizability of these assets.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of capital have been cash flows from its
operations and a bank line of credit. The Company has available a $500,000
revolving line of credit from a bank. Interest is payable on a monthly basis at
the bank's prime rate plus 1.5%. At November 30, 2003, the outstanding balance
under the revolving line of credit was zero. The revolving line of credit is
secured by the Company's assets, consisting of tangible personal property
(except goods in transit), is personally guaranteed by the Company's President,
and expires in May 2004.
The Company believes that existing capital and anticipated funds from operations
will be sufficient to meet its anticipated cash needs for working capital and
capital expenditures for the foreseeable future. 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 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 became insufficient to continue
operations at the current level, and if no additional financing was obtained,
then management would restructure the Company in a way to preserve its
pharmaceutical and disability businesses while maintaining expenses within
operating cash flows.
Item 3. Controls and Procedures
-----------------------
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. As of the
end of the period covered by this report, the Company carried
out an evaluation, under the supervision and with the
participation of the Company's management, including the
Company's Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to
Exchange Act Rule 13a-14. Based upon that evaluation, the
Chief Executive Officer and Director of Finance concluded that
the Company's disclosure controls and procedures are effective
16
in timely alerting them to material information relating to
the Company required to be included in the Company's periodic
SEC filings.
(b) CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING. There
was no change in Company's internal control over financial
reporting during the Company's most recent fiscal quarter that
has materially affected, or is reasonably likely to materially
affect, the Company's Internal control over financial
reporting.
17
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. The Company is not
involved in any such litigation at this time.
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:
31.1-2 Certification of Chief Executive Officer and Chief
Financial Officer
99.1 Press release dated December 12, 2003. (Incorporated
by reference to the Company's Form 8-K filed on
December 12, 2003.)
99.1 Press release dated December 29, 2003. (Incorporated
by reference to the Company's Form 8-K filed on
December 29, 2003.)
(b) Reports on Form 8-K
On December 12, 2003, Simulations Plus, Inc. issued a press
release announcing preliminary revenue for the fiscal quarter
ending November 30, 2003. Following the press release, Form
8-K was filed on December 12, 2003.
On December 29, 2003, Simulations Plus, Inc. issued a press
release announcing that its Words+, Inc. subsidiary had
purchased all of the rights, title, and interest in the
Say-it! SAM augmentative communication device developed by SAM
Communications, LLC for 35,000 shares of Simulations Plus
restricted common stock.
18
SIGNATURE
In accordance with Section 13 or 15 (d) of the Securities Exchange Act of 1934,
the Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Lancaster, State of California, on
January 14, 2004.
Simulations Plus, Inc.
Date: January 14, 2004 By: /s/ MOMOKO BERAN
----------------
Momoko Beran
Chief Financial Officer
19