-----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, ABRz93DYfFotOjKWfqBRCLADwjGKYGPpg/WbfcxkejHWvGAec1jV4oIL5f5GbebE 9NRFNktD+J8AEERal9YSqw== 0001019687-05-001031.txt : 20050414 0001019687-05-001031.hdr.sgml : 20050414 20050414171917 ACCESSION NUMBER: 0001019687-05-001031 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20050228 FILED AS OF DATE: 20050414 DATE AS OF CHANGE: 20050414 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: 05751521 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 CITY: LANCASTER STATE: CA ZIP: 93534-2902 10QSB 1 simulations_10q-022805.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 28, 2005 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: 001-32046 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 14, 2005, was 3,626,643. SIMULATIONS PLUS, INC. FORM 10-QSB FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 2005 Table of Contents PART I. FINANCIAL INFORMATION Item 1. Financial Statements Page ---- Consolidated Balance Sheet at February 28, 2005 (unaudited) 2 Consolidated Statements of Operations for the three months and six months ended February 28, 2005 and 29, 2004 (unaudited) 4 Consolidated Statements of Cash Flows for the six months ended February 28, 2005 and 29, 2004 (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. Quantitative and Qualitative Disclosures about Market Risk 23 Item 4. Controls and Procedures 23 PART II. OTHER INFORMATION Item 1. Legal Proceedings 25 Item 2. Changes in Securities 25 Item 3. Defaults upon Senior Securities 25 Item 4. Submission of Matters to a Vote of Security Holders 25 Item 5. Other Information 25 Item 6. Exhibits and Reports on Form 8-K 26 Signature 27 Exhibit - Certifications 28 SIMULATIONS PLUS, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET at February 28, 2005 (Unaudited) - -------------------------------------------------------------------------------- ASSETS CURRENT ASSETS Cash and cash equivalents (Note 6) $1,009,331 Accounts receivable, net of allowance for doubtful accounts of $11,833 and present value discount of $4,697 1,507,605 Inventory (Note 7) 250,432 Prepaid expenses and other current assets 103,487 ---------- Total current assets 2,870,855 CAPITALIZED COMPUTER SOFTWARE DEVELOPMENT COSTS, net of accumulated amortization of $2,053,794 (Note 4) 697,494 PROPERTY AND EQUIPMENT, net (Note 8) 68,715 DEFERRED TAX (Note 5) 1,396,000 OTHER ASSETS 11,150 ---------- TOTAL ASSETS $5,044,214 ========== The accompanying notes are an integral part of these financial statements. 2 SIMULATIONS PLUS, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET at February 28, 2005 (Unaudited) - -------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 182,355 Accrued payroll and other expenses 239,832 Accrued warranty and service costs 28,084 Current portion of deferred revenue 11,416 Other current liabilities (Note 9) 4,667 ------------ Total current liabilities 466,354 DEFERRED REVENUE 14,277 Total liabilities 480,631 ------------ 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 3,621,043 shares issued and outstanding 3,622 Additional paid-in capital 5,076,354 Accumulated deficit (516,393) ------------ Total shareholders' equity 4,563,583 ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 5,044,214 ============ The accompanying notes are an integral part of these financial statements. 3 SIMULATIONS PLUS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS for the three and six months ended February 28, and 29, (Unaudited) - --------------------------------------------------------------------------------------------------------------------
Three months ended Six months ended --------------------------- --------------------------- 2005 2004 2005 2004 ------------ ------------ ------------ ------------ NET SALES $ 1,031,776 $ 1,368,750 $ 2,098,250 $ 2,507,483 COST OF SALES 370,796 459,790 692,924 811,536 ------------ ------------ ------------ ------------ GROSS PROFIT 660,980 908,960 1,405,326 1,695,947 ------------ ------------ ------------ ------------ OPERATING EXPENSES Selling, general, and administrative 535,442 733,747 1,167,387 1,339,617 Research and development 131,227 153,989 244,919 297,382 ------------ ------------ ------------ ------------ Total operating expenses 666,669 887,736 1,412,306 1,636,999 ------------ ------------ ------------ ------------ INCOME FROM OPERATIONS (5,689) 21,224 (6,980) 58,948 ------------ ------------ ------------ ------------ OTHER INCOME (EXPENSE) Interest income 14,525 19,271 31,296 39,758 Interest expense -- (65) (284) (384) Gain on sale of assets -- -- 5,200 -- Gain on currency exchange -- -- 2,111 -- ------------ ------------ ------------ ------------ Total other income (expense) 14,525 19,206 38,323 39,374 ------------ ------------ ------------ ------------ INCOME BEFORE BENEFIT FROM (PROVISION FOR) INCOME TAXES 8,836 40,430 31,343 98,322 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 $ 8,836 $ 32,627 $ 31,343 $ 79,346 ============ ============ ============ ============ BASIC EARNINGS PER SHARE $ 0.00 $ 0.01 $ 0.01 $ 0.02 ============ ============ ============ ============ Diluted earnings per share $ 0.00 $ 0.01 $ 0.01 $ 0.02 ============ ============ ============ ============ WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING BASIC 3,608,600 3,469,994 3,589,792 3,443,598 ============ ============ ============ ============ DILUTED 4,114,872 4,209,459 4,114,872 4,209,459 ============ ============ ============ ============ The accompanying notes are an integral part of these financial statements. 4
SIMUATIONS PLUS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS for the six months ended February 28, and 29, (Unaudited) - -----------------------------------------------------------------------------------------------
2005 2004 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 31,343 $ 79,346 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization of property and equipment 21,518 19,512 Amortization of capitalized software development costs 77,810 109,178 (Gain) on sale of assets (5,200) -- (Increase) decrease in Accounts receivable 197,429 (176,825) Inventory 108,158 (37,750) Other assets 12,557 10,340 Increase (decrease) in Accounts payable 29,469 (1,028) Accrued payroll and other expenses 22,530 (19,778) Accrued bonuses to officers (77,626) (133,538) Accrued income taxes (1,600) -- Accrued warranty and service costs (4,412) (5,672) Deferred revenue (5,708) (9,308) ------------ ------------ Net cash provided by (used in) operating activities 406,268 (165,523) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment (27,401) (17,906) Sale of property and equipment 8,735 379 Capitalized computer software development costs (198,824) (92,676) ------------ ------------ Net cash used in investing activities (217,490) (110,203) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Payments on capitalized lease obligations -- (2,489) Proceeds from the exercise of stock options 86,287 74,878 ------------ ------------ Net cash provided by (used in) financing activities 86,287 72,389 ------------ ------------ The accompanying notes are an integral part of these financial statements. 5 SIMUATIONS PLUS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS for the six months ended February 28, and 29, (Unaudited) - ----------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents $ 275,065 $ (203,337) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 734,266 260,733 ------------ ------------ CASH AND CASH EQUIVALENTS, END OF QUARTER $ 1,009,331 $ 57,396 ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION INTEREST PAID $ 284 $ 384 ============ ============ INCOME TAXES PAID $ 1,600 $ 47,000 ============ ============ The accompanying notes are an integral part of these financial statements. 6
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. 7 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, which varies product to product, not exceeding five 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. We have reassessed economic life of our pharmaceutical software based on our actual experience, and we have determined that the estimated economic life of the products should be five years starting at September 1, 2004. Accordingly, we began amortizing the net book value of capitalized software development costs over a sixty-month period using the straight-line method. As a result, we amortized our pharmaceutical software development costs for $18,667 in the second quarter of fiscal year 2005. If we had not changed our expected economic life, we would have amortized $31,311. 8 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. Note 6: ACCOUNTS RECEIVABLE We maintain an allowance for doubtful accounts for estimated losses that may arise if any of its customers are unable to make required payments. We specifically analyze the age of customer balances, historical bad debt experience, customer credit-worthiness, and changes in customer payments terms when making estimates of the uncollectability of our trade accounts receivable balances. If we determine that the financial conditions of any of its customers deteriorated, whether due to customer specific or general economic issues, increase in the allowance may be made. Accounts receivable are written off when all collection attempts have failed. Our long-term receivables are discounted at the present value. The discount is amortized over the life of the receivable and recognized as interest income. As of February 28, 2005, the unamortized discount amount on such receivable was $4,697. The discounted balance of receivables of $539,303 is due to be collected before the end of fiscal year 2005. 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: PROPERTY AND EQUIPMENT Furniture and equipment as of February 28, 2005 consisted of the following: Equipment $ 98,885 Computer equipment 364,578 Furniture and fixtures 52,704 Leasehold improvements 38,215 ------------ 554,382 Less accumulated depreciation and amortization (485,667) ------------ $ 68,715 ============ 9 Note 9: 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. On February 18, 2005 at an annual shareholders meeting, the shareholders approved an additional 250,000 shares to be reserved for issuance under the 1996 Stock Option Plan. As of February 28, 2005, options to purchase 981,316 shares have been issued and were 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 8,206 options to purchase 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. During the first six months of fiscal year 2005, 56,600 options were exercised by employees. Note 10: 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 11: 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 intrinsic 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. 10 The table below represents a reconciliation of the company's pro forma net income giving effect to the estimated compensation expense related to stock options that would have been reported if the Company utilized the fair value method: Six Six Months Months 2005 2004 ----------- ----------- Net income As reported $ 31,343 $ 79,346 Stock based employee compensation cost, net of related tax effects, that would have been included in the determination of net income if the fair value method had been applied (126,471) (129,138) ----------- ----------- PRO FORMA NET INCOME (LOSS) $ (95,128) $ (49,792) =========== =========== Earnings(loss) per common share Basic - as reported $ 0.01 $ 0.02 Basic - Pro forma $ (0.03) $ (0.01) Diluted - as reported $ 0.01 $ 0.02 Diluted - Pro forma $ (0.02) $ (0.01) Note 12: 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 28, 2005 and February 29, 2004: February 28, 2005 - ------------------------------------------------------------------------------------------------------------- Simulations Plus, Words +, Inc. Eliminations Total Inc - ---------------------------------- ------------------- ------------------- ------------------ --------------- Net Sales 933,602 1,164,648 2,098,250 - ---------------------------------- ------------------- ------------------- ------------------ --------------- Income (loss) from operations (37,533) 30,553 (6,980) - ---------------------------------- ------------------- ------------------- ------------------ --------------- Identifiable assets 5,521,678 1,246,860 (1,724,324) 5,044,214 - ---------------------------------- ------------------- ------------------- ------------------ --------------- Capital expenditures 5,053 22,348 27,401 - ---------------------------------- ------------------- ------------------- ------------------ --------------- Depreciation and Amortization 7,102 14,416 21,518 - ---------------------------------- ------------------- ------------------- ------------------ --------------- 11 February 29, 2004 - ------------------------------------------------------------------------------------------------------------- Simulations Plus, Words +, Inc. Eliminations Total Inc - ---------------------------------- ------------------- ------------------- ------------------ --------------- 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 - ---------------------------------- ------------------- ------------------- ------------------ --------------- In addition, the Company allocates revenues to geographic areas based on the locations of its customers. Geographical revenues for the six months ended February 28, 2005 and February 29, 2004 were as follows (in thousands): February 28, 2005 - ------------------------------ --------------- ------------ ------------ ------------ ------------ ---------- North South America Europe Asia Oceania America Total - ------------------------------ --------------- ------------ ------------ ------------ ------------ ---------- Simulations Plus, Inc. 514 209 210 -0- -0- 933 - ------------------------------ --------------- ------------ ------------ ------------ ------------ ---------- Words+, Inc. 1,009 111 33 12 -0- 1,165 - ------------------------------ --------------- ------------ ------------ ------------ ------------ ---------- Total 1,523 320 243 12 -0- 2,098 - ------------------------------ =============== ============ ============ ============ ============ ========== February 29, 2004 - ------------------------------ --------------- ------------ ------------ ------------ ------------ ---------- 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 13: SUBSEQUENT EVENT Since March 1, 2005, an additional 5,600 stock options to purchase shares have been exercised by employees. 12 Item 2. Management's Discussion and Analysis or Plan of Operations - ------------------------------------------------------------------ FORWARD-LOOKING STATEMENTS CERTAIN STATEMENTS IN THIS QUARTERLY REPORT ON FORM 10-QSB, 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 OUR STOCKHOLDERS AND OTHER PUBLICLY AVAILABLE STATEMENTS ISSUED OR RELEASED BY US INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH COULD CAUSE OUR 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 OUR PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS AND OTHER FACTORS. GENERAL BUSINESS - -------- Simulations Plus, Inc. (the "Company" or "Simulations Plus", or "we" or "our") and its wholly owned subsidiary, Words+, Inc. ("Words+") produce different 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. SIMULATIONS PLUS - ---------------- PRODUCTS - -------- We currently offer four software products for pharmaceutical research: GastroPlus(TM), DDDPlus(TM), ADMET Predictor(TM), and ADMET Modeler(TM). GastroPlus is a computer program that simulates how drugs are absorbed in the human gastrointestinal tract and in a number of standard laboratory animals. The simulation involves pharmacokinetics (what happens to the drug when it gets into the body) and pharmacodynamics (what happens to the body when the drug gets into the body). The basic absorption 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. With additional inputs, it also simulates the amount of drug in the blood plasma versus time, and how the drug affects the body, such as reducing pain, reducing blood pressure, reducing depression, and adverse side effects. 13 We believe GastroPlus is the "gold standard" for simulation of oral drug absorption in the pharmaceutical industry. In addition to virtually every major pharmaceutical company, recent sales have included a growing number of generic drug companies and 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 also save considerable time and money using our software tools. We believe this part of the industry, which includes hundreds of companies, represents major growth potential for GastroPlus. We are aware that other companies have developed competitive software; however, based on customer feedback, we believe that the competitive threat to GastroPlus is limited. We believe that the Metabolism and Transporter Module, the PDPlus module, and the ongoing upgrades we have made to the core simulation have been significant advances in the state-of-the-art of oral drug absorption, pharmacokinetics, and pharmacodynamics analysis. The PBPKPlus(TM) module has been in extended beta testing for a number of months and we believe is now within a few weeks of release. This powerful module will further extend the utility of GastroPlus within the industry by simulating the amount of drug reaching specific tissues in human and laboratory animals. With the release of this new module, we are also incorporating a number of other major changes to the user interface and program capabilities. As a result, this release has been delayed longer than we had originally planned; however, we believe that this next version (GastroPlus 5.0) will be well worth the wait. We announced the release of our fourth core product, DDDPlus (Dose Disintegration and Dissolution Plus), in February 2005. DDDPlus simulates how different tablets and capsules disintegrate and dissolve during in vitro (laboratory) dissolution experiments. The program also simulates the effects of changing formulation excipients (additives that are not the active drug), and changing the experimental apparatus and fluids used in the experiment. We believe this tool will be a valuable asset for formulation scientists as they search for optimum formulations that provide desirable properties at minimum cost, as well as optimum experimental conditions under which to measure disintegration and dissolution to best predict what will happen in human. The market for this tool includes hundreds of drug delivery companies as well as all pharmaceutical and biotech companies. Our recognized expertise in oral absorption and pharmacokinetics is evidenced by the fact that our staff members have been invited speakers or presenters at over 40 prestigious scientific meetings worldwide in the past three years. 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 numerical models that predict various properties of chemical compounds from just their molecular structures. ADMET Predictor(TM) (formerly known as QMPRPlus(TM)) provides estimates for approximately 50 properties of new drug-like molecules with only their structures as input. The ability to predict many properties from just a structure drawing enables researchers to eliminate large numbers of compounds before expensive testing, saving considerable time and money. Recent product improvements included an advanced prediction of ionization constants ("pKa's") for molecules, which tells chemists whether the molecules will ionize (add or give up hydrogen atoms) at different pH levels in the body. Ionization is especially important because it has a major effect on some other properties, like solubility. ADMET Predictor is now one of the few programs available in the world that provides accurate prediction of pKas, and we believe the predictive accuracy of the pKa model in ADMET Predictor is unsurpassed. 14 With the recent release of ADMET Predictor 1.0, we also added an important new capability for toxicity prediction. Toxicity prediction was identified by the U.S. Food and Drug Administration as a critical need in a white paper released in March 2004. We released our first toxicity prediction in the fourth quarter, which predicts whether new molecules are expected to bind to the estrogen receptor. The new capability provides six different toxicity models based on data sets released to the public domain by the U.S. Environmental Protection Agency and the U.S. Food and Drug Administration in 2004. New toxicity models are in development and will be released as we complete them as upgrades to ADMET Predictor. With these new capabilities, we believe ADMET Predictor combines the most comprehensive and accurate set of predictions for Absorption, Distribution, Metabolism, Excretion and Toxicity (ADMET) available today. GastroPlus and/or ADMET Predictor have been licensed by virtually every major pharmaceutical company and a growing number of smaller companies in the U.S., Europe, and Japan. Our number of customers has grown continuously since our first product releases in 1998 and continues to grow each quarter. ADMET Modeler(TM) (formerly QMPRchitect(TM)), was originally released in July of 2003. This powerful program is used to generate the predictive models used in ADMET Predictor in a small fraction of the time once required to build these models. For example, the six new toxicity models in ADMET Predictor were developed in a matter of a few weeks. Most of that time was spent in cleaning up the databases (which seem to always contain a number of errors). Prior to the availability of ADMET Modeler, we would have needed as much as three months for each one of the six models to obtain similar results, or a total of about 18 months. New toxicity models are in development at this time, and will be released as upgrades to ADMET Predictor as they are completed. Pharmaceutical companies spend enormous amounts of money conducting a wide variety of experiments each year. Using such data to build predictive models provides a second return on investment; however, in the past, model-building has traditionally been a tedious activity that required a specialist. With ADMET Modeler, scientists with no model-building experience can use their own experimental data to quickly create very high quality predictive models. We continue to enhance GastroPlus, DDDPlus, ADMET Predictor, and ADMET Modeler, and we are developing new core products to add to our catalog of software for pharmaceutical research. Another core product scheduled to be released in 2005 is MembranePlus(TM), which is described further below. 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, and ideal gases), 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. 15 CONTRACT RESEARCH SERVICES - -------------------------- We offer contract research services to the pharmaceutical industry in the area of gastrointestinal absorption, pharmacokinetics, structure-property model building, 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. Such studies are also beneficial to us to validate and enhance our products by studying actual data in the pharmaceutical industry. In the fourth quarter of fiscal year 2004, we received our largest study contract to date. We believe the results of that study saved our customer from conducting a human trial that would have inevitably failed. The business of contracted studies is growing, and we believe it could contribute significantly to our revenues and earnings; however, we plan to control growth in this area such that it does not adversely impact our product development stream. PHARMACEUTICAL SIMULATIONS SOFTWARE PRODUCT DEVELOPMENT - ------------------------------------------------------- In the area of simulation software for pharmaceutical research, we are developing additional capabilities for GastroPlus, DDDPlus, ADMET Predictor, and ADMET Modeler. 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 was demonstrated at the American Association of Pharmaceutical Scientists conference in early November 2004. We expect the module to be released for sale in the third quarter. This module enables researchers to predict the amount of drug that reaches different body tissues and organs. This is an important new capability because it is one of the most promising technologies for predicting human pharmacokinetics from animal data (pharmacokinetics refers to what happens to the drug after it enters the body). With actual human data, this capability will enable scientists to predict the concentration of drug in various body tissues, which should contribute to a better understanding of both therapeutic and adverse effects. Without the ability to predict these effects, clinical trial costs can soar when trials must be repeated to determine proper dosing levels. We believe the integration of the GastroPlus absorption model with a complete PBPK capability provides the most comprehensive simulation capability currently available. This capability was developed in response to customer requests from several of the largest pharmaceutical companies in the world, and two large companies have been involved in beta testing the new version. (2) Multiple Particle Size Dissolution Model The current dissolution model in GastroPlus uses a single "effective" particle size. While this has adequately represented the dissolution of most tablets, capsules, and suspensions 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 from smaller than average to larger than average. 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. The multiple particle size model has already been demonstrated in our DDDPlus software. We plan to incorporate it into a Formulation Module for GastroPlus in calendar 2005. (3) ADMET Predictor(TM) upgrades We will continue to add new molecular descriptors and new predicted ADMET properties to ADMET Predictor. We recently announced the release of ADMET Predictor 1.0 with structure drawing depiction and six toxicity predictions, as well as improved pKa prediction and other user convenience improvements. We expect to add a number of user conveniences as well as additional toxicity models and prediction of other ADMET properties in the coming months. 16 RESULTS OF OPERATIONS COMPARISON OF THREE MONTHS ENDED FEBRUARY 28, 2005 AND FEBRUARY 29, 2004. 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 ------------------------------------------------------------ 02/28/05 02/29/04 ------------------------------- ---------------------------- Net sales $ 1,032 100% $ 1,369 100% Cost of sales 371 35.9 460 33.6 ---------------- -------------- ------------- -------------- Gross profit 661 64.1 909 66.4 ---------------- -------------- ------------- -------------- Selling, general and administrative 535 51.8 734 53.6 Research and development 131 12.7 154 11.2 ---------------- -------------- ------------- -------------- Total operating expenses 666 64.5 888 64.8 ---------------- -------------- ------------- -------------- Income (loss) from operations (5) (0.5) 21 1.5 ---------------- -------------- ------------- -------------- Other income (expenses) 14 1.4 19 1.4 ---------------- -------------- ------------- -------------- Net income before taxes 9 0.9 40 2.9 ---------------- -------------- ------------- -------------- Provision for income taxes - - 7 0.5 ---------------- -------------- ------------- -------------- Net income $ 9 0.9% $ 33 2.4% ================ ============== ============= ==============
NET SALES Consolidated net sales decreased $337,000, or 24.6%, to $1,032,000 in the second fiscal quarter of 2005 (FY05) from $1,369,000 in the second fiscal quarter of 2004 (FY04). Our sales from pharmaceutical and educational software decreased approximately $332,000, or 44.7%; and our Words+, Inc. subsidiary's sales decreased approximately $5,000, or 0.8%, for the quarter. Management attributes the decrease in pharmaceutical software sales primarily to the fact that we received a two-year order for almost $500,000 during the second quarter of last fiscal year, while no such order was received this year. Several orders that we had expected in the first quarter were received during the second quarter, and new customers were added during the second quarter; however, the total revenues generated were less than during the second quarter of fiscal year 2004. Management attributes the decrease in Words+ sales primarily a decline in sales of our Freedom and MessageMate products, which were largely offset by increases in sales of our "Say-it! SAM" and "TuffTalker" products, COST OF SALES Consolidated cost of sales decreased $89,000, or 19.4%, to $371,000 in the second fiscal quarter of FY05 from $460,000 in the second fiscal quarter of FY04. The percentage of cost of sales in the second fiscal quarter of FY05 increased 2.3% from the second fiscal quarter of FY04. For Simulations Plus, cost of sales decreased $53,000, or 48.6%. A significant portion of cost of sales is the systematic amortization of capitalized software development costs, which decreased $30,000, or 61.2%, and a decrease in royalty expense of $23,000, or 37.7% which represents royalty payments to TSRL. As a percentage, cost of sales decreased from 14.7% in FY04 to 13.7% in FY05. Management attributes this decrease in percentage of cost of sales primarily to a change in estimate of pharmaceutical software product life, which, based on our demonstrated product lives, we reassessed to be 5 years beginning with the first fiscal quarter of FY05. Thus, quarterly amortization of capitalized software development costs decreased. For Words+, cost of sales decreased $36,000, or 10.3%. As a percentage, cost of sales decreased 5.3% between the second fiscal quarter of FY05 and FY04. Management attributes the percentage decrease in cost of sales for Words+ primarily to the price increases instituted as part of our restructuring of Words+ in fiscal year 2004. 17 GROSS PROFIT Consolidated gross profit decreased $248,000, or 27.3%, to $661,000 in the second fiscal quarter of FY05 from $909,000 in the second fiscal quarter of FY04. Management attributes this decrease to lower pharmaceutical software sales which outweighed an increase in gross profit generated by Words+ products. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Consolidated selling, general and administrative expenses decreased $199,000, or 27.1%, to $535,000 in the second fiscal quarter of FY05 from $734,000 in the second fiscal quarter of FY04. For Simulations Plus, selling, general and administrative expenses decreased $48,000, or 13.9%. The major decreases in expenses were insurance, legal, and accounting, which outweighed increases in investor relation's fees, and salary increases along with payroll-related expenses such as payroll taxes, and 401(k) matching contributions. For Words+, expenses decreased $151,000, or 38.9%, due to reductions in salary and payroll-related expenses such as health insurance, payroll taxes and 401(k) matching contributions, and selling expenses. These decreases outweighed increases in dues and subscriptions, and repairs. RESEARCH AND DEVELOPMENT We incurred approximately $210,000 of research and development costs for both companies during the second fiscal quarter of FY05. Of this amount, $79,000 was capitalized and $131,000 was expensed. In the second fiscal quarter of FY04, we incurred $360,000 of research and development costs, of which $206,000 was capitalized and $154,000 was expensed. The decrease of $150,000, or 41.7%, in research and development expenditure from the second fiscal quarter of FY04 to the second fiscal quarter of FY05 was due primarily to the purchase of Say-it! SAM technology incurred in FY04, while no similar expense was experienced in FY05. OTHER INCOME (EXPENSE) Net other income (expense) in the second fiscal quarter of FY05 decreased by $5,000. This is due primarily to the decrease in the amortization of present value discount on long-term receivables. PROVISION FOR INCOME TAXES Although the Company had a Net Operating Loss (NOL) carried forward which was applied to the Company's Federal income tax liability, the State of California suspended the NOL carry forward for two years beginning with fiscal years that began after January 2003, resulting in a $7,000 tax due to the state of California for the second quarter of FY04. We do not expect any tax due to the state of California for the second quarter of FY05. NET INCOME Consolidated net income for the three months' operations decreased by $24,000, or 72.7%, to $9,000 in the second quarter of FY05 compared to $33,000 in the second quarter of FY04. Management attributes this decrease in profit primarily to the decrease in pharmaceutical software and services sales and other income which outweighed decreases in cost of sales, selling, general and administrative expenses, research and development expenses, and provision for income taxes. 18 COMPARISON OF SIX MONTHS ENDED FEBRUARY 28, 2005 AND FEBRUARY 29, 2004. 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 ------------------------------------------------------------ 02/28/05 02/29/04 ------------------------------- ---------------------------- Net sales $ 2,098 100% $ 2,507 100% Cost of sales 693 33.0 811 32.4 ---------------- -------------- ------------- -------------- Gross profit 1,405 67.0 1,696 67.6 ---------------- -------------- ------------- -------------- Selling, general and administrative 1,167 55.6 1,340 53.4 Research and development 245 11.7 297 11.9 ---------------- -------------- ------------- -------------- Total operating expenses 1,412 67.3 1,637 65.3 ---------------- -------------- ------------- -------------- Income (loss) from operations (7) (0.3) 59 2.3 ---------------- -------------- ------------- -------------- Other income (expenses) 38 1.8 39 1.6 ---------------- -------------- ------------- -------------- Net income before taxes 31 1.5 98 3.9 ---------------- -------------- ------------- -------------- Provision for income taxes - - 19 0.8 ---------------- -------------- ------------- -------------- Net income $ 31 1.5% $ 79 3.1% ================ ============== ============= ==============
NET SALES Consolidated net sales decreased $409,000, or 16.3%, to $2,098,000 in the first six months of FY05 from $2,507,000 in the first six months of FY04. Our sales from pharmaceutical and educational software decreased approximately $451,000, or 32.6%; however, our Words+, Inc. subsidiary's sales increased approximately $42,000, or 3.7%, for the six months. Management attributes the decrease in pharmaceutical software sales to three factors: (1) revenues from analytical study contract revenues were zero in FY05, while we had $32,000 in study contract revenues in FY04, (2) the amount of the new one-year global license in FY05 was somewhat less than the amount we received from a multi-year "ADME Partners" license in FY04, and (3) we received a two-year order worth just under $500,000 in the second quarter of FY04, while no such order was received in the second quarter of FY05. Despite these decreases, pharmaceutical revenues from new customers increased in FY05, which we expect will expand future annual license renewal revenues. Management attributes the increase in Words+ sales primarily to the sales growth in products of "Say-it! SAM" and "TuffTalker", which accounted for 39% of total sales in FY05, compared with 7% of total sales in FY04. This increase outweighed a decrease in Freedom product and MessageMates sales. COST OF SALES Consolidated cost of sales decreased $118,000, or 14.5%, to $693,000 in the first six months of FY05 from $811,000 in the first six months of FY04. The percentage of cost of sales in the first six months of FY05 is almost the same as the first six months of FY04. For Simulations Plus, cost of sales decreased $84,000, or 44.9%. A significant portion of cost of sales is the systematic amortization of capitalized software development costs, which decreased $68,000, or 72.3%. In addition, royalty expense decreased $16,000, or 16.1%. As a percentage, cost of sales decreased from 13.5% in FY04 to 11.1% in FY05. Management attributes this decrease in percentage of cost of sales primarily to a change in estimate of pharmaceutical software product life, which we reassessed to be 5 years beginning with this fiscal year. Thus, six months amortization of capitalized software development costs decreased. For Words+, cost of sales decreased $34,000, or 5.4%. As a percentage, cost of sales decreased 4.9% between the first six months of FY05 and FY04. Management attributes the percentage decrease in cost of sales for Words+ primarily to the price increases instituted as part of our restructuring of Words+ in fiscal year 2004. GROSS PROFIT Consolidated gross profit decreased $291,000, or 17.2%, to $1,405,000 in the first six months of FY05 from $1,696,000 in the first six months of FY04. Management attributes this decrease to lower pharmaceutical software sales which outweighed an increase in gross profit generated by Words+ products. 19 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Consolidated selling, general and administrative expenses decreased $173,000, or 12.9%, to $1,167,000 in the first six months of FY05 from $1,340,000 in the first six months of FY04. For Simulations Plus, selling, general and administrative expenses increased $3,000, or 0.5%, which is almost the same. The major increases in expenses were in the categories of investor relations fees, and salary increases along with payroll-related expenses such as health insurance, payroll taxes, and 401(k) matching contributions. These increases outweighed decreases in commission expense, travel, and legal fees. For Words+, expenses decreased $176,000, or 25.3%, due to a reduction in salary and payroll-related expenses such as health insurance, payroll taxes and 401(k) matching contributions, commission, and catalog expenses. These decreases outweighed small increases in repairs, trade shows and travel expenses. RESEARCH AND DEVELOPMENT We incurred approximately $444,000 of research and development costs for both companies during the first six months of FY05. Of this amount, $199,000 was capitalized and $245,000 was expensed. In the first six months of FY04, we incurred $550,000 of research and development costs, of which $253,000 was capitalized and $297,000 was expensed. The decrease of $111,000, or 20.2%, in research and development expenditure from the first six months of FY04 to the first six months of FY05 was due primarily to the purchase of Say-it! SAM technology incurred in FY04, while no such expense was incurred in FY05. OTHER INCOME (EXPENSE) The net of other income (expense) in the first six months of FY05 decreased by $1,000. The amortization of present value discount on long-term receivables decreased by $8,000, however we gained $5,000 on sale of equipment and $2,000 on currency exchange. 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 2003, resulting in a $19,000 tax due to the state of California for the first six months of FY04. We do not expect any tax due to the state of California for the first six months of FY05. NET INCOME Consolidated net income for the six months' operations decreased by $48,000, or 60.8%, to $31,000 in the first six months of FY05 compared to $79,000 in the first six months of FY04. Management attributes this decrease in profit primarily to the decrease in sales and other income which outweighed decreases in cost of sales, selling, general and administrative expenses, research and development expenses, and provision for income taxes. 20 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 28, 2005, 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 2005. 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. Quantitative and Qualitative Disclosures about Market Risk - ------------------------------------------------------------------ Our risk from exposure to financial markets is limited to foreign exchange variances and fluctuations in interest rates. We may be subject to some foreign exchange risks. Most of our business transactions are in U.S. dollars, although we generate significant revenues from customers overseas. The exception is that we were compensated in Japanese yen by some Japanese customers. As a result, we experienced a small gain from currency exchange in the first six months of FY05. In the future, if foreign currency transactions increase significantly, then we may mitigate this effect through foreign currency forward contracts whose market-to-market gains or losses are recorded in "Other Income or expense" at the time of the transaction. To date, exchange rate exposure has not resulted in a material impact. Item 4. 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 timely alerting them to material information relating to the Company required to be included in the Company's periodic SEC filings. (b) CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING. There was no change in Company's internal control over financial reporting during the Company's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's Internal control over financial reporting. 21 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 - ----------------------------------------------------------- On March 11, 2004, the Registrant held its annual meeting of shareholders. The following proposals were submitted to a vote of security holders at the meeting. 1. Election of directors Walter Woltosz Virginia Woltosz Dr. David Z. D'Argenio Dr. Richard Weiss 2. Ratification of the selection of Rose, Snyder, and Jacobs as the Company's independent accountants. 3. To adopt amendment to 1996 Stock Option Plan The above proposals were approved and the results of the balloting at the meeting are summarized in the following table. Proposal Yes No Abstain Withheld Total - -------------------- ----------------- ------------------ ----------------- ----------------- ------------------ (1) 3,218,398 -- -- 10,000 3,228,398 - -------------------- ----------------- ------------------ ----------------- ----------------- ------------------ (2) 3,215,098 800 12,500 -- 3,228,398 - -------------------- ----------------- ------------------ ----------------- ----------------- ------------------ (3) 2,279,011 54,761 14,596 -- 2,348,368 - -------------------- ----------------- ------------------ ----------------- ----------------- ------------------
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 32 Certification pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002 99.1 Press release dated September 3, 2004. (Incorporated by reference to the Company's Form 8-K filed on September 3, 2004.) (b) Reports on Form 8-K On September 3, 2004, Simulations Plus, Inc. issued a press release announcing changes in independent auditor. Following the press release, Form 8K was filed on September 3, 2004. On September 22, 2004, Simulations Plus, Inc. filed Form 8K/A revising our documents in response to SEC's comments regarding Form 8K filed on September 3, 2004. 22 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, 2005. Simulations Plus, Inc. Date: April 14, 2005 By: /s/ MOMOKO BERAN -------------------------------- Momoko Beran Chief Financial Officer 23 EX-31.1 2 simulations_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 28, 2005, 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 28, 2005 (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 14, 2005 By: /s/ Walter S. Woltosz ----------------------------- Walter S. Woltosz Chief Executive Officer EX-31.2 3 simulations_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 28, 2005, 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 28, 2005 (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 14, 2005 By: /s/ Momoko A. Beran ----------------------------- Momoko A. Beran Chief Financial Officer EX-32 4 simulations_10qex32.txt EXHIBIT 32 CERTIFICATIONS PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SECTION 1350) In connection with the Quarterly Report of Simulations Plus, Inc., a California corporation (the "Company"), on Form 10-QSB for the quarter ended February 28, 2005, as filed with the Securities and Exchange Commission (the "Report"), Walter S. Woltosz, Chief Executive Officer of the Company and Momoko A. Beran, Chief Financial Officer of the Company, respectively, do each hereby certify, pursuant of ss. 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. ss. 1350), that to his/her knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the report fairly presents, in all material respects, the financial condition and result of operations of the Company. /S/ WALTER S. WOLTOSZ - ------------------------------- Walter S. Woltosz Chief Executive Officer April 14, 2005 /S/ MOMOKO A. BERAN - ------------------------------- Momoko A. Beran Chief Financial Officer April 14, 2005 (A signed original of this written statement required by Section 906 has been provided to Simulations Plus, Inc. and will be retained by Simulations Plus, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.) -----END PRIVACY-ENHANCED MESSAGE-----