-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KMGnIq4RvGKaClx/W9rdbUadlQSKWWixb1PWwsmpN0BhcMrr2jgb7g2OUZ1sixSm Z/jZCUVOI3vLwGfMR3ayKA== 0001019687-04-000777.txt : 20040412 0001019687-04-000777.hdr.sgml : 20040412 20040412160638 ACCESSION NUMBER: 0001019687-04-000777 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20040229 FILED AS OF DATE: 20040412 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIMULATIONS PLUS INC CENTRAL INDEX KEY: 0001023459 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 954595609 FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-32046 FILM NUMBER: 04728683 BUSINESS ADDRESS: STREET 1: 1220 W. AVENUE J STREET 2: * CITY: LANCASTER STATE: CA ZIP: 93534-2902 BUSINESS PHONE: 661-723-7723 MAIL ADDRESS: STREET 1: 1220 W. AVENUE J STREET 2: * CITY: LANCASTER STATE: CA ZIP: 93534-2902 10QSB 1 simulations_10q-022904.txt 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 February 29, 2004 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 April 7, 2004, was 3,537,625. SIMULATIONS PLUS, INC. FORM 10-QSB FOR THE QUARTERLY PERIOD ENDED FEBRUARY 29, 2004 Table of Contents Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheet at February 29, 2004 (unaudited) 2 Consolidated Statements of Operations for the three and six months ended February 29, 2004 and February 28, 2003 (unaudited) 4 Consolidated Statements of Cash Flows for the three and six months ended February 29, 2004 and February 28, 2003 (unaudited) 5 Notes to Consolidated Financial Statements (unaudited) 7 Item 2. Management's Discussion and Analysis or Plan of Operations General 13 Results of Operations 18 Liquidity and Capital Resources 23 Item 3. Controls and Procedures 23 PART II. OTHER INFORMATION Item 1. Legal Proceedings 24 Item 2. Changes in Securities 24 Item 3. Defaults upon Senior Securities 24 Item 4. Submission of Matters to a Vote of Security Holders 24 Item 5. Other Information 24 Item 6. Exhibits and Reports on Form 8-K 24 Signature 25 Exhibit - Certifications 26 SIMULATIONS PLUS, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET at February 29, 2004 (Unaudited) - -------------------------------------------------------------------------------- ASSETS CURRENT ASSETS Cash and cash equivalents (Note 6) $ 57,396 Accounts receivable, net of allowance for doubtful accounts of $17,121 and present value discount of $11,629 1,379,011 Inventory (Note 7) 229,589 Prepaid expenses and other current assets 55,413 ----------- Total current assets 1,721,409 LONG TERM RECEIVABLES, net of present value discount of $52,843 491,157 CAPITALIZED COMPUTER SOFTWARE DEVELOPMENT COSTS, net of accumulated amortization of $1,903,792 (Note 4) 520,172 PROPERTY AND EQUIPMENT, net (Note 8) 77,726 DEFERRED TAX (Note 5) 1,291,110 OTHER ASSETS 11,150 ----------- TOTAL ASSETS $4,112,724 =========== The accompanying notes are an integral part of these financial statements. SIMULATIONS PLUS, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET at February 29, 2004 (Unaudited) - -------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 173,980 Accrued payroll and other expenses 259,031 Accrued warranty and service costs 39,058 Current portion of deferred revenue 11,416 Other current liabilities (Note 9) 2,808 ----------- Total current liabilities 486,293 DEFERRED REVENUE 25,693 OTHER LONG TERM LIABILITIES (Note 9) 4,667 ----------- Total liabilities 516,653 COMMITMENTS AND CONTINGENCIES (Note 9) -- SHAREHOLDERS' EQUITY (Note 10) 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 3,499,509 shares issued and outstanding 3,500 Additional paid-in capital 4,897,446 Accumulated deficit (1,304,875) ----------- Total shareholders' equity 3,596,071 ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $4,112,724 =========== The accompanying notes are an integral part of these financial statements. SIMULATIONS PLUS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS for the six months ended February 29, and 28, (Unaudited) - -------------------------------------------------------------------------------------------
2004 2003 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 79,346 $ 197,348 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization of property and equipment 19,512 23,350 Amortization of capitalized software development costs 109,178 71,102 (Increase) decrease in Accounts receivable (176,825) 172,882 Inventory (37,750) (18,610) Other assets 10,340 (21,485) Increase (decrease) in Accounts payable (1,028) (24,528) Accrued expenses (19,778) (100,842) Accrued payroll for officers -- (100,000) Accrued bonuses to officers (133,538) (54,057) Accrued warranty and service costs (5,672) 6,191 Deferred revenue (9,308) 1,849 ---------- ---------- Net cash provided by (used in) operating activities (165,523) 153,200 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment (17,906) (37,009) Sale of property and equipment 379 -- Capitalized computer software development costs (92,676) (86,683) ---------- ---------- Net cash used in investing activities (110,203) (123,692) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Payments on capitalized lease obligations (2,489) (6,796) Proceeds from the exercise of stock options 74,878 1,310 ---------- ---------- Net cash provided by (used in) financing activities 72,389 (5,486) ---------- ---------- Net increase (decrease) in cash and cash equivalents $(203,337) $ 24,022 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 260,733 36,072 ---------- ---------- CASH AND CASH EQUIVALENTS, END OF QUARTER $ 57,396 $ 60,094 ========== ========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION INTEREST PAID $ 384 $ 1,540 ========== ========== INCOME TAXES PAID $ 47,000 $ 1,600 ========== ==========
SUPPLEMENTAL SCHEDULE OF NON-CASH TRANSACTIONS 1. 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. 2. The Company 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 at $4.65 per share equal to the closing price on the date when the agreement was signed. The accompanying notes are an integral part of these financial statements. SIMULATIONS PLUS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS for the three and six months ended February 29, and 28, (Unaudited) - ------------------------------------------------------------------------------------------------------------------
Three months ended Six months ended --------------------------- --------------------------- 2004 2003 2004 2003 ------------ ------------ ------------ ------------ NET SALES $ 1,368,750 $ 1,120,029 $ 2,507,483 $ 2,197,544 COST OF SALES 459,790 371,795 811,536 704,593 ------------ ------------ ------------ ------------ GROSS PROFIT 908,960 748,234 1,695,947 1,492,951 ------------ ------------ ------------ ------------ OPERATING EXPENSES Selling, general, and administrative 733,747 598,946 1,339,617 1,101,827 Research and development 153,989 81,585 297,382 191,183 ------------ ------------ ------------ ------------ Total operating expenses 887,736 680,531 1,636,999 1,293,010 ------------ ------------ ------------ ------------ INCOME FROM OPERATIONS 21,224 67,703 58,948 199,941 ------------ ------------ ------------ ------------ OTHER INCOME (EXPENSE) Interest income 19,271 19 39,758 34 Interest expense (65) (1,087) (384) (2,627) ------------ ------------ ------------ ------------ Total other income (expense) 19,206 (1,068) 39,374 (2,593) ------------ ------------ ------------ ------------ INCOME BEFORE BENEFIT FROM (PROVISION FOR) INCOME TAXES 40,430 66,635 98,322 197,348 BENEFIT FROM (PROVISION FOR) INCOME TAXES Provision for income tax (7,803) -- (18,976) -- Change in valuation allowance -- -- -- -- ------------ ------------ ------------ ------------ Total benefit from (provision for) income taxes (7,803) -- (18,976) -- ------------ ------------ ------------ ------------ NET INCOME $ 32,627 $ 66,635 $ 79,346 $ 197,348 ============ ============ ============ ============ BASIC EARNINGS PER SHARE $ 0.01 $ 0.02 $ 0.02 $ 0.06 ============ ============ ============ ============ Diluted earnings per share $ 0.01 $ 0.02 $ 0.02 $ 0.05 ============ ============ ============ ============ WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING BASIC 3,469,994 3,408,331 3,443,598 3,408,575 ============ ============ ============ ============ DILUTED 4,209,459 3,781,590 4,209,459 3,781,590 ============ ============ ============ ============ The accompanying notes are an integral part of these financial statements.
SIMULATIONS PLUS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the Years Ended February 29, and 28, (Unaudited) - -------------------------------------------------------------------------------------------------------
Common Stock Additional -------------------------- Paid-In Accumulated Shares Amount Capital Deficit Total ------------ ------------ ------------ ------------ ------------ BALANCE, AUGUST 31, 2002 3,408,331 $ 3,409 $ 4,654,756 $(3,890,281) $ 767,884 SHARES ISSUED UPON EXERCISE OF STOCK OPTIONS 3,916 4 5,149 5,153 NET INCOME 2,506,060 2,506,060 ------------ ------------ ------------ ------------ ------------ BALANCE, AUGUST 31, 2003 3,412,247 $ 3,413 $ 4,659,905 $(1,384,221) $ 3,279,097 ============ ============ ============ ============ ============ SHARES ISSUED UPON PURCHASING SAY-IT! SAM PROD 35,000 35 162,715 162,750 SHARES ISSUED UPON EXERCISE OF STOCK OPTIONS 52,262 52 74,826 74,878 NET INCOME 79,346 79,346 ------------ ------------ ------------ ------------ ------------ BALANCE, FEBRUARY 29, 2004 3,499,509 $ 3,500 $ 4,897,446 $(1,304,875) $ 3,596,071 ============ ============ ============ ============ ============ The accompanying notes are an integral part of these financial statements.
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. Note 2: 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. Actual results could differ from those estimates. Critical accounting policies for us include revenue recognition (see Note 3), accounting for capitalized software development costs (see Note 4), and accounting for income taxes (see Note 5). Note 3: 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 multi-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. Note 4: CAPITALIZED COMPUTER 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. 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: INCOME TAX 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. Note 6: 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 (FDIC) up to $100,000. As of February 29, 2004, all cash deposits are insured by FDIC. 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 7: 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 8: FURNITURE AND EQUIPMENT Furniture and equipment as of February 29, 2004 consisted of the following: Equipment $ 98,884 Computer equipment 337,236 Furniture and fixtures 52,704 Leasehold improvements 38,215 ---------- 527,039 Less accumulated depreciation (449,313) ---------- $ 77,726 ========== Note 9: 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 second 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. Note 10: 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 February 29, 2004, 1,075,106 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 second fiscal quarter of 2004, 58,478 options have been exercised by employees. 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 signed. 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. Note 11: EARNINGS PER SHARE The Company utilizes SFAS No. 128, "Earnings per Share." Basic earnings (loss) per share is computed by dividing income (loss) available to common stockholders by the weighted-average number of common shares outstanding. Diluted earnings (loss) per share is computed similar to basic earnings (loss) per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. Common equivalent shares are excluded from the computation if their effect is anti-dilutive. The Company's common share equivalents consist of stock options. Note 12: STOCK-BASED COMPENSATION SFAS No. 123, "Accounting for Stock-Based Compensation," establishes and encourages the use of the fair value based method of accounting for stock-based compensation arrangements under which compensation cost is determined using the fair value of stock-based compensation determined as of the date of grant and is recognized over the periods in which the related services are rendered. The statement also permits companies to elect to continue using the current implicit value accounting method specified in Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," to account for stock-based compensation. The Company has elected to use the intrinsic value based method and has disclosed the pro forma effect of using the fair value based method to account for its stock-based compensation. Note 13: Segment and Geographic Reporting The Company accounts for segments and geographic revenues in accordance with SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." The Company's reportable segments are strategic business units that offer different products and services. Results for each segment and consolidated results are as follows for the six months ended February 29, 2004 and February 28, 2003: February 29, 2004 ---------------------------------------------------- Simulations Plus, Inc. Words +, Inc. Eliminations Total ----------- ----------- ----------- ----------- Net Sales 1,384,557 1,122,926 2,507,483 Income (loss) from operations 311,768 (241,820) 79,346 Identifiable assets 4,571,061 984,293 (1,442,630) 4,112,724 Capital expenditures 1,981 15,925 17,906 Depreciation and amortization 7,548 11,964 19,512 ----------- ----------- ----------- ----------- February 28, 2003 ---------------------------------------------------- Simulations Plus, Inc. Words +, Inc. Eliminations Total ----------- ----------- ----------- ----------- Net Sales 1,088,782 1,108,762 2,197,544 Income (loss) from operations 282,991 (85,643) 197,348 Identifiable assets 1,686,368 735,662 (915,564) 1,506,466 Capital expenditures 73,008 50,684 123,692 Depreciation and amortization 71,953 22,499 94,452 ----------- ----------- ----------- ----------- In addition, the Company allocates revenues to geographic areas based on the location of its customers. Geographical revenues for the six months ended February 29, 2004 were as follows (in thousand): North South America Europe Asia Oceania America Total - -------------- ---------- ---------- ---------- ---------- ---------- ---------- Simulations Plus, Inc. 530 434 420 -0- -0- 1,384 - -------------- ---------- ---------- ---------- ---------- ---------- ---------- Words+, Inc. 964 103 37 14 5 1,123 - -------------- ---------- ---------- ---------- ---------- ---------- ---------- Total 1,494 537 457 14 5 2,507 - -------------- ---------- ---------- ---------- ---------- ---------- ---------- Note 14: SUBSEQUENT EVENT The Company was approved for listing on the American Stock Exchange on March 9, 2004 and commenced trading under the ticker symbol "SLP" beginning Wednesday, March 17, 2004. Since March 1, 2004, additional 38,116 options have been exercised by employees. 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) 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 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. 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. (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 technology purchase has enabled us to move into this market segment faster and at lower cost than developing the product ourselves. RESULTS OF OPERATIONS COMPARISON OF THREE MONTHS ENDED FEBRUARY 29, 2004 AND FEBRUARY 28, 2003. 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 ------------------------------------- 02/29/04 02/28/03 ----------------- ------------------ Net sales $ 1,369 100% $ 1,120 100% Cost of sales 460 33.6 372 33.2 ------- ------- ------- -------- Gross profit 909 66.4 748 66.8 ------- ------- ------- -------- Selling, general and administrative 734 53.6 599 53.5 Research and development 154 11.2 81 7.2 ------- ------- ------- -------- Total operating expenses 888 64.8 680 60.7 ------- ------- ------- -------- Income from operations 21 1.5 68 6.1 ------- ------- ------- -------- Other income (expenses) 19 1.4 (1) (0.0) ------- ------- ------- -------- Net income before taxes 40 2.9 67 6.1 ------- ------- ------- -------- Provision for income taxes 7 0.5 0 0 ------- ------- ------- -------- Net income $ 33 2.4% $ 67 6.1% ======= ======= ======= ======== NET SALES Consolidated net sales increased $249,000, or 22.2%, to $1,369,000 in the second fiscal quarter of 2004 (FY04) from $1,120,000 in the second fiscal quarter of 2003 (FY03). Simulations Plus, Inc.'s sales from pharmaceutical and educational software increased approximately $160,000, or 27.5%, and our Words+, Inc. subsidiary's sales increased approximately $89,000, or 16.6%, for the quarter. The increase in our pharmaceutical software sales is attributable in part to another multi-year global license we received from one of the largest pharmaceutical company during the second quarter of FY04. Management attributes the increase in Words+ sales primarily to the increase in sales of our Freedom 2000 product line, a special Medicare-approved dedicated device, which outweighed the decrease in sales of our TuffTalker Plus. COST OF SALES Consolidated cost of sales increased $88,000, or 23.7%, to $460,000 for the second fiscal quarter of 2004 (FY04) from $372,000 in the second fiscal quarter of 2003 (FY03). The percentage of cost of sales in the second fiscal quarter of FY04 is slightly increased by 0.4% from the second fiscal quarter of FY03. For Simulations Plus, cost of sales increased $22,000, or 25.4%. A significant portion of cost of sales is the systematic amortization of capitalized software development costs, which increased $18,000, or 58.75%, and an increase in royalty expense of $4,000, or 7.4% which represents royalty payments to TSRL. As a percentage of total revenues, cost of sales for our pharmaceutical software business for the second fiscal quarter of FY04 was 14.7%, compared to 15.0% for the second fiscal quarter of FY03, a decrease of 0.3%. Management attributes this slight decrease in percentage of cost of sales primarily to a proportional decrease in the percentage of sales paid as royalty to TSRL, which is only on licenses of the basic GastroPlus program. All other software products and modules are not subject to royalty payments. For Words+, cost of sales increased $66,000, or 23.1%. The change in cost of sales as a percentage of revenues between the second fiscal quarter of FY04 and FY03 was an increase of 3.0%. Management attributes the percentage increase in cost of sales for Words+ primarily to the fact that the proportion of sales generated by products with higher profit margins, such as software, compared to products with lower profit margins, such as computer-based systems, decreased in FY04. GROSS PROFIT Consolidated gross profit increased $161,000, or 21.5%, to $909,000 in the second quarter of FY04 from $748,000 in the second quarter of FY03. Management attributes this increase to a significant increase in pharmaceutical software sales, resulting in approximately 28% increase in gross profit for these sales in addition to a slight gross profit generated by Words+ products. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Consolidated selling, general and administrative expenses increased $135,000, or 22.5%, to $734,000 in the second fiscal quarter of FY04 from $599,000 in the second fiscal quarter of FY03. For Simulations Plus, selling, general and administrative expenses increased $47,000, or 15.8%. The major increases in expenses were in the categories of commission expense, salaries/bonus, payroll tax, 401(k) matching contributions, insurance, and travel expenses. These increases outweighed decreases in vacation expense, contract labor, public relations, and supplies. For Words+, expenses increased $88,000, or 29.1%, primarily due to increases in selling expenses, such as commission expense, catalog, trade shows, travel, and salaries/bonus, payroll tax, and insurance. These increases outweighed decreases in dues & subscriptions, postage, supplies, and telephone. RESEARCH AND DEVELOPMENT We incurred approximately $360,000 of research and development costs for both companies during the second quarter of FY04. Of this amount, $206,000 was capitalized and $154,000 was expensed. In the second quarter of FY03, we incurred $150,000 of research and development costs, of which $69,000 was capitalized and $81,000 was expensed. The increase of $210,000, or 140.0% in research and development expenditure from the second quarter of FY03 to the second quarter of FY04 was due primarily to the purchase of Say-it! SAM technology, staff expansion, salary increases, and year-end bonus increases. OTHER INCOME (EXPENSE) Interest income in the second quarter of FY04 increased by $19,000 due primarily to the amortization of present value discounts on long-term receivables. The interest expense in the second quarter of FY04 decreased by $1,000 which is attributable primarily to eliminated interest expense on leased equipment. 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 $7,000 tax due to the state of California for the second quarter FY04. NET INCOME Consolidated net income for the three months' operations decreased by $34,000, or 50.8%, to $33,000 in the second quarter of FY04 compared to $67,000 in the second quarter of FY03. Management attributes this decrease in profit primarily to the increases in cost of sales, selling, general and administrative expenses, and research and development expenses and provision for income taxes, which outweighed increases in sales and other income. COMPARISON OF SIX MONTHS ENDED FEBRUARY 29, 2004 AND FEBRUARY 28, 2003. The following table sets forth our consolidated statements of operations (in thousands) and the percentages that such items bear to net sales: Six Months Ended ------------------------------------- 02/29/04 02/28/03 ----------------- ------------------ Net sales $ 2,507 100% $ 2,198 100% Cost of sales 811 32.4 705 32.1 ------- ------- ------- -------- Gross profit 1,696 67.6 1,493 67.9 ------- ------- ------- -------- Selling, general and administrative 1,340 53.4 1,102 50.1 Research and development 297 11.9 191 8.7 ------- ------- ------- -------- Total operating expenses 1,637 65.3 1,293 58.8 ------- ------- ------- -------- Income from operations 59 2.3 200 9.1 ------- ------- ------- -------- Other income (expenses) 39 1.6 (3) (0.1) ------- ------- ------- -------- Net income before taxes 98 3.9 197 8.0 ------- ------- ------- -------- Provision for income taxes 19 0.8 0 0 ------- ------- ------- -------- Net income $ 79 3.1% $ 197 9.0% ======= ======= ======= ======== NET SALES Consolidated net sales increased $309,000, or 14.1%, to $2,507,000 for the six months ended February 29, 2004 compared to $2,198,000 for the six month ended February 28, 2003. Simulations Plus, Inc.'s sales from pharmaceutical and educational software increased approximately $296,000, or 27.2%, and Words+, Inc. subsidiary's sales increased approximately $13,000, or 1.3%, for the same six month periods. The increase in our pharmaceutical software sales is attributable in part 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. The increase is also due in part to another multi-year global license the Company received from one of our largest pharmaceutical customers during the second quarter of FY04. Management attributes the increase in Words+ sales primarily to the increase in sales of our Freedom 2000 product line, a special Medicare-approved dedicated device, which outweighed lower sales of our TuffTalker Plus and decreases in software sales to overseas customers. COST OF SALES Consolidated cost of sales increased $106,000, or 15.0%, to $811,000 for the six months ended February 29, 2004 from $705,000 for the six months ended February 28, 2003. The percentage of cost of sales for the six months ended February 29, 2004 increased by 0.3%. For Simulations Plus, cost of sales increased $45,000, or 31.6%. A significant portion of cost of sales is the systematic amortization of capitalized software development costs, which increased $33,000, or 54.5%, and an increase in royalty expense of $12,000, or 14.3% which represents royalty payments to TSRL. The change in percentage of cost of sales between the first six months of FY04 and FY03 is an increase of 0.4%, 13.5% in FY04 and 13.1% 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 increased $61,000, or 11.0%. The change in percentage of cost of sales between the first six months of FY04 and FY03 was an increase of 5.5%. 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 complete computer-based systems. GROSS PROFIT Consolidated gross profit increased $203,000, or 13.6%, to $1,696,000 for the six months ended February 29, 2004 from $1,493,000 for the six months ended February 28, 2003. Management attributes this increase to a significant increase in pharmaceutical software sales, resulting in approximately 27% 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 $238,000, or 21.6%, to $1,340,000 for the six months ended February 29, 2004 from $1,102,000 for the six months ended February 28, 2003. For Simulations Plus, selling, general and administrative expenses increased $166,000, or 34.7%. The major increases in expenses were in the categories of other taxes due to sales to foreign countries, commissions, salary/bonus, payroll tax, 401(k) matching, insurance, printing, investor relations, and travel. These increases outweighed small decreases in contract labor, public relations, dues/subscriptions, employee benefits, and depreciation. For Words+, expenses increased $72,000, or 11.5%. The increases in expenses were in the categories of selling expenses, such as commissions, catalog, and trade shows, insurance, salary/bonus, and payroll tax. These increases outweighed decreases in contract labor, dues/subscriptions, postage, and technical service costs. RESEARCH AND DEVELOPMENT We incurred approximately $550,000 of research and development costs for both companies during the first six months of FY04. Of this amount, $253,000 was capitalized and $297,000 was expensed. For the first six months of FY03, we incurred $278,000 of research and development costs, of which $87,000 was capitalized and $191,000 was expensed. The increase of $272,000, or 49.4% in research and development expenditure from the first six months of FY03 to the same period of FY04 was due to the purchase of the Say-it! SAM technology, staff expansion, and salary increases. OTHER INCOME (EXPENSE) Interest income for the first six months of FY04 increased by $39,000 due primarily to the amortization of present value discounts on long-term receivables. Interest expense declined by $3,000 for the same time period which is attributable to eliminated interest expense on leased equipment since all leased equipment has been paid off or traded-in. 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 $19,000 tax due to the state of California for the first six months of FY04. NET INCOME Consolidated net income for the six months' operations decreased by $118,000, or 59.9%, to $79,000 for the six months ended February 29, 2004 compared to $197,000 for the six months ended February 28, 2003. 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. 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 February 29, 2004, 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 renewal paperwork is due by April 10, 2004, and is currently a work-in-process. 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 in providing timely alert to them for 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. 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 January 14, 2004. (Incorporated by reference to the Company's Form 8-K filed on January 14, 2004.) 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. 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 April 14, 2004. Simulations Plus, Inc. Date: April 12, 2004 By: /s/ MOMOKO BERAN ---------------------------- Momoko Beran Chief Financial Officer EX-31.1 3 sim_10qex31-1.txt EXHIBIT 31.1 RULE 13A-14(A) CERTIFICATION SIMULATIONS PLUS, INC. a California corporation CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, Walter S. Woltosz, Chief Executive Officer of Simulations Plus, Inc., a California corporation (the "Company"), do hereby certify, in accordance with Rules 13a-14 and 15d-14, as created pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002, with respect to the Quarterly Report on Form 10-QSB of the Company for the fiscal quarter ended February 29, 2004, as filed with the Securities and Exchange Commission herewith under Section 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that: (1) I have reviewed this Quarterly Report on Form 10-QSB of the Company for the fiscal quarter ended February 29, 2004 (the "Quarterly Report"); (2) Based on my knowledge, this Quarterly 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 Quarterly Report; (3) Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this Quarterly Report; (4) The Company's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the Company and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared; (b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) evaluated the effectiveness of the Company's disclosure controls and procedures and presented in this Quarterly Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Quarterly Report based on such evaluation; and (d) disclosed in this Quarterly Report any change in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter (the Company's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonable likely to materially affect, the Company's internal control over financial reporting; and (5) The Company's other certifying officers and I have disclosed, based on our most recent evaluation, to the Company's auditors and the audit committee of the Company's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal control over financial reporting. Dated: April 12, 2004 By: /s/ Walter S. Woltosz ---------------------------- Walter S. Woltosz Chief Executive Officer EX-31.2 4 sim_10qex31-2.txt EXHIBIT 31.2 RULE 13A-14(A) CERTIFICATION SIMULATIONS PLUS, INC. a California corporation CERTIFICATION OF CHIEF FINANCIAL OFFICER I, Momoko A. Beran, Chief Financial Officer of Simulations Plus, Inc., a California corporation (the "Company"), do hereby certify, in accordance with Rules 13a-14 and 15d-14, as created pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002, with respect to the Quarterly Report on Form 10-QSB of the Company for the fiscal quarter ended February 29, 2004, as filed with the Securities and Exchange Commission herewith under Section 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that: (1) I have reviewed this Quarterly Report on Form 10-QSB of the Company for the fiscal quarter ended February 29, 2004 (the "Quarterly Report"); (2) Based on my knowledge, this Quarterly 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 Quarterly Report; (3) Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this Quarterly Report; (4) The Company's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the Company and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared; (b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) evaluated the effectiveness of the Company's disclosure controls and procedures and presented in this Quarterly Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Quarter Report based on such evaluation; and (d) disclosed in this Quarterly Report any change in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter (the Company's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonable likely to materially affect, the Company's internal control over financial reporting; and (5) The Company's other certifying officers and I have disclosed, based on our most recent evaluation, to the Company's auditors and the audit committee of the Company's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal control over financial reporting. Dated: April 12, 2004 By: /s/ Momoko A. Beran ---------------------------- Momoko A. Beran Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----