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, 2002 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 13, 2003, was 3,408,331.
SIMULATIONS PLUS, INC.
FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 2002
Table of Contents
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet at November 30, 2002 (unaudited) 2
Consolidated Statements of Operations for the three months
ended November 30, 2002 and 2001 (unaudited) 3
Consolidated Statements of Cash Flows for the three months
ended November 30, 2002 and 2001 (unaudited) 4
Notes to Consolidated Financial Statements (unaudited) 5
Item 2. Management's Discussion and Analysis or Plan of Operations
General 7
Results of Operations 13
Liquidity and Capital Resources 15
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
Exhibit - Certifications 18
1
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
November 30, 2002
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents (note 2) $ 51,673
Accounts receivable, net of allowance for
doubtful accounts of $11,236 878,069
Prepaid expenses 31,331
Inventory 256,022
------------
Total current assets 1,217,095
------------
Capitalized computer software development costs,
net of accumulated amortization (note 3) 283,577
Furniture and equipment, net (note 4) 79,536
Other assets 11,257
------------
Total assets $ 1,591,465
============
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 132,094
Accrued payroll and other expenses 298,080
Accrued compensation due to officers 140,583
Accrued warranty and service costs 35,499
Current portion of capitalized lease obligations 9,979
Current portion of deferred Income 29,059
------------
Total current liabilities 645,294
------------
Deferred income 39,963
Capitalized lease obligations, net of current portion 7,611
------------
Total liabilities 692,868
------------
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 (3,759,568)
------------
Total shareholders' equity 898,597
------------
Total liabilities and stockholders' equity $ 1,591,465
============
The accompanying footnotes are an integral part of these statements.
2
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended November 30, 2002 and 2001
(Unaudited)
Three months ended
------------------------------
11/30/02 11/30/01
------------ ------------
Net sales $ 1,077,515 $ 1,007,288
Cost of sales 332,798 372,545
------------ ------------
Gross profit 744,717 634,743
------------ ------------
Operating expenses:
Selling, general & administrative 502,881 525,207
Research and development 109,598 93,989
------------ ------------
Total operating expenses 612,479 619,196
------------ ------------
Income from operations 132,238 15,547
Other income (expenses):
Interest revenue 15 7
Interest expense (1,540) (5,048)
------------ ------------
Income before provision for income taxes 130,713 10,506
Provision for income taxes 0 0
------------ ------------
Net income $ 130,713 $ 10,506
============ ============
Basic net earnings per common share $ 0.04 $ 0.00
------------ ------------
Diluted net earnings per common share $ 0.04 $ 0.00
------------ ------------
Basic weighted average # of common shares outstanding 3,408,331 3,394,299
------------ ------------
Diluted weighted average # of common shares outstanding 3,430,768 3,394,299
------------ ------------
The accompanying footnotes are an integral part of these statements.
3
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 2002 AND 2001
(Unaudited)
Three months ended
--------------------------
11/30/02 11/30/01
---------- ----------
Cash flows from operating activities:
Net profit $ 130,713 $ 10,506
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization of furniture and equipment 9,932 14,900
Amortization of capitalized software development costs 35,550 30,974
(Increase) decrease in:
Accounts receivable 50,168 (176,782)
Inventory (47,417) (353)
Other assets 7,275 (22,603)
Increase (decrease) in:
Accounts payable (13,604) 8,484
Accrued expenses (11,684) 38,132
Accrued payroll for officers (58,333) 12,500
Accrued Bonuses (54,057)
Accrued warranty and service costs 4,503 (1,496)
Deferred revenue 11,546 (5,836)
---------- ----------
Net cash provided by (used in) operating activities 64,592 (91,574)
---------- ----------
Cash flows from investing activities:
Purchase of equipment (27,029) (6,182)
Capitalized computer software development cost (18,352) (14,869)
---------- ----------
Net cash used in investing activities (45,381) (21,051)
---------- ----------
Cash flows from financing activities:
Proceeds from line of credit 0 1,007
Payments on capitalized lease obligations (3,610) (3,129)
---------- ----------
Net cash used in financing activities (3,610) (2,122)
---------- ----------
Net increase (decrease) in cash 15,601 (114,747)
Cash and cash equivalents, beginning of period 36,072 166,652
---------- ----------
Cash and cash equivalents, end of period $ 51,673 $ 51,905
========== ==========
The accompanying footnotes are an integral part of these 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. (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.
5
Note 4: FURNITURE AND EQUIPMENT
-------
Furniture and equipment as of November 30, 2002 consisted of the following:
Equipment $ 123,525
Computer equipment 325,482
Furniture and fixtures 45,036
Leasehold improvements 38,215
-----------
532,258
Less accumulated depreciation (452,722)
-----------
$ 79,536
===========
Note 5: 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, 2002, 1,124,478 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 6,206
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. As of today, 2,300 options
have been exercised.
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."
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, 2002 (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 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) 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.
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.
7
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. In 2001, the Company completed the development of, and is now
selling 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 promote or inhibit drug absorption. In 2002, the Company released a
module called PDPlus(TM), which extends the utility of GastroPlus into
pharmacodynamic modeling, which is the modeling of how a drug affects the body
in terms of both therapeutic effect and adverse side effects. This extends the
market for GastroPlus into the Clinical Pharmacology departments in addition to
the use it already enjoys in early discovery and middle development.
A second type of software consists of statistically significant models that
allow prediction of various properties of a chemical compound from just its
molecular structure. These models are not simulations, but instead are formed
from a variety of mathematical functions and relationships, including linear,
nonlinear, and artificial neural network models.
The Company's QMPRPlus(TM) program is the second type of program, and it
provides estimates for the values of several important physicochemical
characteristics of new drug-like molecules with only the structures of the
molecules as input. An optional module for this program predicts permeability in
a special line of cells called MDCK cells. This predictive model was developed
under a funded collaboration with the Affymax Research Institute, at that time a
division of Glaxo Wellcome. During 2002, the Company announced the release of a
powerful "4D Data Mining" module for QMPRPlus, which further extends the utility
of the software through enhanced data visualization and statistical analysis.
Both the MDCK module and the 4D Data Mining module are additional-cost options
to the program.
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 licensee
continues to grow each quarter, and revenues reflect the cumulative effect of
annual license renewals added to new sales.
The Company is now completing the development of one new core product called
QMPRchitect, and a new additional-cost module for GastroPlus called
PBPKPlus(TM). PBPKPlus is a module for GastroPlus that will enable the program
to simulate the distribution of drug to various tissues in the body, such as
brain, heart, lungs, pancreas, liver, spleen, and reproductive organs. The
ability to integrate such detail into GastroPlus will enable researchers to more
accurately predict the pharmacokinetic effects (what happens to the drug when it
gets into the body) and the pharmacodynamic effects (what happens to the body
8
when the drug gets into the body) of new drugs and new dosing regimens.
QMPRchitect will allow users to build their own ensemble artificial neural
network models using a highly sophisticated, state-of-the-art model-building
engine that automates the process of finding the most effective artificial
neural network models for a particular database, using the fast descriptor
engine that is part of QMPRPlus to generate the inputs needed to build the
model. In-house testing of QMPRchitect has demonstrated a reduction in the time
required to build very high quality ensemble artificial neural network (i.e.,
multiple artificial neural networks whose outputs are averaged) from 60-90 days
to a single day. This significant reduction in both labor and calendar time is
expected to revolutionize artificial neural network model building for
structure-to-property predictions.
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, 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.
PRODUCTS
--------
The Company's pharmaceutical software products provide cost-effective solutions
to a number of critical problems in pharmaceutical research, and also serve in
the education of pharmacy and medical students. The Company's pharmaceutical
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,
the majority of the world's largest pharmaceutical companies and a steadily
growing number of smaller companies have licensed the software. Some of these
companies have merged to become single companies (e.g., AstraZeneca and
GlaxoSmithKline, Pfizer and Parke-Davis, and soon, Pfizer and Pharmacia), which
give the appearance of fewer customers, but the Company's software is licensed
on an annual basis by geographic location, so no actual loss in sales has
resulted from these mergers. In fact, several of these mergers have resulted in
increased licenses and new geographic locations as divisions who had the
software demonstrate its use to those who did not.
The 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
PDPlus(TM) Module was released during the 4th quarter of last fiscal year.
The majority of new sales now include these additional extra-cost modules,
contributing significantly to revenue and earnings 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 compound that was
9
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 Property 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 intestinal permeability,
octanol-water partition coefficient (logP), solubility, diffusivity, blood-brain
barrier penetration, plasma protein binding, and volume of distribution. The
ability to predict these properties prior to running wet lab experiments allows
screening of undesirable compounds much faster and at much lower cost than using
traditional experimental methods.
Most of the estimated parameters generated by QMPRPlus 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. 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, ultra
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 data 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 entitled to ongoing consulting assistance in the development and
further enhancement of the GastroPlus absorption simulation model from TSRL
staff, including Dr. Gordon Amidon. The Company believes that the strategic
advantage of exclusive access to TSRL's database, technology and expertise,
combined with the Company's now well-developed 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. The Company is aware that other companies
have developed competitive software; however, based on customer feedback,
management believes there is no significant competition for GastroPlus at this
time. The Company believes 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. 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 30 prestigious scientific meetings worldwide in the
past two years, and they continue to be invited to present at a variety of
meetings worldwide. The Company conducts contracted studies for a number of
customers who prefer to have the studies run by the Company's scientists rather
than to acquire the software and train someone to use it.
10
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 a variety of
pharmaceutical and biotechnology 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 recently completed two study contracts to
analyze drugs that are now in clinical trials, and an extension to one of the
contracts is now being negotiated. Another services contract with a major
pharmaceutical company is currently in negotiation. This company has numerous
software licenses, but desires additional consultation assistance from Company
scientists with certain complex simulation problems.
PHARMACEUTICAL SIMULATIONS SOFTWARE PRODUCT DEVELOPMENT
-------------------------------------------------------
In the area of simulation software for pharmaceutical research, the Company is
pursuing the development of additional modules for GastroPlus and the new
QMPRchitect core program. 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 development now. This module will
enable researchers to predict the amount of drug that reaches different body
tissues and organs, enabling more accurate estimation of therapeutic and adverse
effects for different dosing regimens. 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 partitions 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. The Company
expects 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 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
11
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.
(3) 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 a new,
additional-cost "4D Data Mining" module.
The number of molecular descriptors has been increased in beta versions of
QMPRPlus by about 25%. These new descriptors include over 60 electrotopological
indices that the Company believes will be valuable in building new models for
pharmacokinetic and metabolism properties, as well as certain other descriptors
that will be described at a later date.
(4) QMPRchitect(TM)
-------------------
QMPRchitect is well along in development. This new core product will allow
researchers to build their own ensemble artificial neural network models from
their own data using a highly sophisticated, state-of-the-art process for
identifying critical descriptors and training ensemble artificial neural network
models in the most efficient way. Users can have such new models included in the
output of QMPRPlus along with the existing predicted ADME properties. Through
the automation provided in the proprietary software for this module, alpha
versions of the software have demonstrated a reduction in the time to build
powerful ensemble artificial neural network models from many weeks to one or two
days, with higher quality models than were previously possible. The company has
received strong indications of interest from customers for this new, additional
cost capability. The Company expects to release this new module early in
calendar 2003.
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 announced the release of its new version of E Z
Keys for the new Microsoft XP operating system at the "Technologies for Persons
with Disabilities Conference" in Los Angeles in late March 2002. The Windows XP
version of the Company's Talking Screen software has just been completed at the
time of this writing. 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.
12
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED NOVEMBER 30, 2002 AND 2001.
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
-----------------------------------------------------------
11/30/02 11/30/01
-----------------------------------------------------------
Net sales $ 1,078 100% $ 1,007 100%
Cost of sales 333 30.9 372 36.9
-----------------------------------------------------------
Gross Profit 745 69.1 635 63.1
-----------------------------------------------------------
Selling, general and administrative 503 46.7 525 52.1
Research and development 110 10.2 94 9.3
-----------------------------------------------------------
Total operating expenses 613 56.9 619 61.5
-----------------------------------------------------------
Income from operations 132 12.2 16 1.6
-----------------------------------------------------------
Interest expense (1) (0.0) (5) (0.5)
-----------------------------------------------------------
Net income $ 131 12.2% $ 11 1.1%
===========================================================
NET SALES
The consolidated net sales increased $71,000, or 7.1%, to $1,078,000 in the
first fiscal quarter of 2003 (FY03) from $1,007,000 in the first fiscal quarter
of 2002 (FY02). Simulations Plus, Inc.'s sales, from pharmaceutical and
educational software, increased approximately $117,000, or 29.9%. However,
Words+, Inc.'s sales decreased approximately $46,000, or 7.5%, for the quarter.
Much of the increase in the Company's leading pharmaceutical software sales is
attributable to the Roche order for a new product package called the "ADME
Partners" program, which provides virtually unlimited licenses for the use of
Simulations Plus' GastroPlus(TM) and QMPRPlus(TM) and all modules, coupled with
product training and consultation. Management attributes the decrease in Words+
sales primarily to the delay in development of Talking Screen for Windows XP,
which has just been completed in January 2003.
COST OF SALES
Consolidated cost of sales decreased $39,000, or 10.5%, to $333,000 in the first
fiscal quarter of FY03 from $372,000 in the first fiscal quarter of FY02. The
percentage of cost of sales decreased by 6.0%. For Simulations Plus, cost of
sales decreased $9,000, or 14.0%. A significant portion of cost of sales is the
systematic amortization of capitalized software development costs, which
decreased $1,000, or 2.4%, and a decrease in royalty expense of $8,000, or
25.0%, which was due to the smaller proportion of total sales accounted for by
the basic GastroPlus program (i.e., without additional modules). Only the basic
GastroPlus program is subject to royalty payments to TSRL. For Words+, cost of
sales decreased $30,000, or 10.0%. The change in percentage of cost of sales
between the first fiscal quarter of FY03 and FY02 is a decrease of 1.3%.
Management attributes the percentage decrease in cost of sales for Words+
primarily to the fact that the percentage of sales generated by products with
higher profit margins was greater than products with lower profit margins.
13
GROSS PROFIT
Consolidated gross profit increased $110,000, or 17.3%, to $745,000 in the first
quarter of FY03 from $635,000 in the first quarter of FY02. Management
attributes this increase to a significant increase in pharmaceutical software
sales, accompanied by a decrease in cost of sales, resulting in over 35%
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 decreased $22,000, or
4.2%, to $503,000 in the first fiscal quarter of FY03 from $525,000 in the first
fiscal quarter of FY02. For Simulations Plus, selling, general and
administrative expenses increased $5,000, or 2.5%. The major increases in
expenses were in the categories of salaries and payroll-related expenses, such
as insurance and 401(k) matching contributions, and other taxes due to foreign
countries. These increases outweighed decreases in consultant fees, contract
labor, depreciation and professional fees. For Words+, expenses decreased
$27,000, or 7.7%, due to decreases in catalog printing costs, trade shows,
commissions to independent sales reps, auto lease expenses, salaries, and
telephone expenses. These decreases outweighed increases in travel expense,
insurance, and technical service costs.
RESEARCH AND DEVELOPMENT
The Company incurred approximately $128,000 of research and development costs
for both companies during the first quarter of FY03. Of this amount, $18,000 was
capitalized and $110,000 was expensed in this period. In the first quarter of
FY02, the Company incurred $109,000 of research and development costs, of which
$15,000 was capitalized and $94,000 was expensed. The increase of $19,000, or
17.4% in research and development expenditure from the first quarter of 2002 to
the first quarter of 2003 was primarily due to staff expansion and salary
increases in the first quarter of FY03.
INTEREST EXPENSE
Interest expense for the first quarter of FY03 decreased by $4,000, to $1,000 in
the first quarter of FY03 from $5,000 in the first quarter of FY02. This
decrease is attributable primarily to no interest expense on the Company's
revolving line of credit, which was paid off earlier in the year. Interest was
incurred only on existing leases.
NET PROFIT
Consolidated net profit for the three months' operations increased by $120,000,
or 1,090.9%, to $131,000 in the first quarter of FY03 compared to $11,000 in the
first quarter of FY02. Management attributes this increase in profit primarily
to the increases in sales, along with continued decreases in cost of sales,
selling, general and administrative expenses, and interest expense, which
outweighed increases in research and development expenses.
14
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of capital have been cash flows from its
operations, a bank line of credit, 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, with a minimum
floor of 7.5%, plus 3.5%. At November 30, 2002, the outstanding balance under
the revolving line of credit was zero, while it was $100,000 at November 30,
2001. 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. The amount of such accrued and unpaid salaries due to the
Company's executive officers was $141,000 as of November 30, 2002, reduced from
$386,000 as of November 30, 2001. Effective as of March 1, 2002, all officers'
salaries have been restored to their full levels and accrued amounts will be
paid as described above.
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. 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 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.
15
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:
Certification of Chief Executive Officer and Chief
Financial Officer
(b) Reports on Form 8-K
None.
16
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Simulations Plus, Inc.
Date: January 17, 2003 By: /s/ MOMOKO BERAN
----------------
Momoko Beran
Chief Financial Officer
17
STATEMENT PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
BY
PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER
REGARDING FACTS AND CIRCUMSTANCES RELATING TO EXCHANGE ACT FILINGS
I, Walter Woltosz, certify that:
1. I have reviewed this annual report on Form 10-QSB of January 16, 2003;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: January 16, 2003
/s/ Walter Woltosz
------------------
Walter S. Woltosz
Chief Executive Officer
18
STATEMENT PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
BY
PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER
REGARDING FACTS AND CIRCUMSTANCES RELATING TO EXCHANGE ACT FILINGS
I, Momoko Beran, certify that:
1. I have reviewed this annual report on Form 10-QSB of January 16, 2003;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: January 16, 2003
/s/ Momoko Beran
----------------
Momoko A. Beran
Chief Financial Officer
19
Item 6 (a) - Exhibit
Regulation FD Disclosure
On January 17, 2003, Simulations Plus, Inc. (the "Company" "we," us" or
"our") filed our Quarterly Report on Form 10-QSB for the fiscal quarter ended
November 30, 2002 (the "Report") with the Securities and Exchange Commission
(the "Commission"). In connection with the filing of the Report, we have
furnished the certifications set forth below to the Commission, to accompany the
Report, as required by 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002:
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Walter S. Woltosz, Chief Executive Officer of Simulations Plus, Inc.
(the "Company"), do hereby certify, in accordance with 18 U.S.C. Section 1350,
as created pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) the Quarterly Report on Form 10-QSB of the Company for the fiscal
quarter ended November 30, 2002 (the "Report") fully complies with the
requirements of Section 13(a) or 15(d), as applicable, of the
Securities Exchange Act of 1934, as amended; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
Simulations Plus, Inc.
Dated: January 17, 2003 By: /s/ Walt Woltosz
------------------------
Walter S. Woltosz
Chief Executive Officer
The foregoing certification is being furnished herewith solely to accompany the
Report, pursuant to 18 U.S.C. 1350, and is not being filed for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be
incorporated by reference into any filing of the Company with the Securities and
Exchange Commission, whether filed prior to or after the furnishing of the
foregoing certification, regardless of any general or specific incorporation
language in any such filing.
20
Item 6 (a) - Exhibit
Regulation FD Disclosure
On January 17, 2003, Simulations Plus, Inc. (the "Company" "we," us" or
"our") filed our Quarterly Report on Form 10-QSB for the fiscal quarter ended
November 30, 2002 (the "Report") with the Securities and Exchange Commission
(the "Commission"). In connection with the filing of the Report, we have
furnished the certifications set forth below to the Commission, to accompany the
Report, as required by 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002:
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Momoko A. Beran, Chief Financial Officer of Simulations Plus, Inc.
(the "Company"), do hereby certify, in accordance with 18 U.S.C. Section 1350,
as created pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) the Quarterly Report on Form 10-QSB of the Company for the fiscal
quarter ended November 30, 2002 (the "Report") fully complies with the
requirements of Section 13(a) or 15(d), as applicable, of the
Securities Exchange Act of 1934, as amended; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
Simulations Plus, Inc.
Dated: January 17, 2003 By: /s/ Momoko Beran
-----------------
Momoko A. Beran
Chief Financial Officer
The foregoing certification is being furnished herewith solely to accompany the
Report, pursuant to 18 U.S.C. 1350, and is not being filed for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be
incorporated by reference into any filing of the Company with the Securities and
Exchange Commission, whether filed prior to or after the furnishing of the
foregoing certification, regardless of any general or specific incorporation
language in any such filing.
21