-----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, GEx+tUV0f8yl/qYSuG9ox/4LJxRPUQ3/7qAvEwMDFNUlJhOE5PAie9aMWYlL7Jg0 dNxrZFnCOiUa2nCAtNAWSA== 0001019687-07-001030.txt : 20070410 0001019687-07-001030.hdr.sgml : 20070410 20070409180017 ACCESSION NUMBER: 0001019687-07-001030 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20070228 FILED AS OF DATE: 20070410 DATE AS OF CHANGE: 20070409 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: 07757360 BUSINESS ADDRESS: STREET 1: 42505 10TH STREET WEST STREET 2: * CITY: LANCASTER STATE: CA ZIP: 93534-7059 BUSINESS PHONE: 661-723-7723 MAIL ADDRESS: STREET 1: 42505 10TH STREET WEST CITY: LANCASTER STATE: CA ZIP: 93534-7059 10QSB 1 simulations_10qsb-022807.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, 2007 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.) 42505 10TH STREET WEST LANCASTER, CA 93534-7059 (Address of principal executive offices including zip code) (661) 723-7723 (Issuer's telephone number, including area code) 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 10, 2007, was 7,716,400. SIMULATIONS PLUS, INC. FORM 10-QSB FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 2007 Table of Contents PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Page ---- Consolidated Balance Sheet at February 28, 2007 (unaudited) 2 Consolidated Statements of Operations for the three months and six months ended February 28, 2007 and 2006 (unaudited) 4 Consolidated Statements of Cash Flows for the six months ended February 28, 2007 and 2006 (unaudited) 5 Notes to Consolidated Financial Statements (unaudited) 7 Item 2. Management's Discussion and Analysis or Plan of Operations General 17 Results of Operations 21 Liquidity and Capital Resources 25 Item 3. Quantitative and Qualitative Disclosures about Market Risk 26 Item 4. Controls and Procedures 26 PART II. OTHER INFORMATION Item 1. Legal Proceedings 27 Item 2. Changes in Securities 27 Item 3. Defaults upon Senior Securities 27 Item 4. Submission of Matters to a Vote of Security Holders 27 Item 5. Other Information 28 Item 6. Exhibits and Reports on Form 8-K 28 Signature 29 Exhibit - Certifications SIMULATIONS PLUS, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET at February 28,2007 (Unaudited) - -------------------------------------------------------------------------------- ASSETS Current assets Cash and cash equivalents $3,219,116 Accounts receivable, net of allowance for doubtful accounts and estimated contractual discounts of $40,728 1,431,848 Contracts receivable, net of discounts of $1,059 145,501 Inventory 274,384 Prepaid expenses and other current assets 66,183 Current portion of deferred tax 190,034 ---------- Total current assets 5,327,066 Capitalized computer software development costs, net of accumulated amortization of $2,650,537 1,417,247 Property and equipment, 105,183 net of accumulated depreciation of $527,237 (Note 4) Customer relationships, net of accumulated amortization of $44,260 83,782 Deferred tax 701,446 Other assets 18,445 ---------- Total assets $7,653,169 ========== 2 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable $ 310,741 Accrued payroll and other expenses 424,638 Accrued bonuses to officers 105,566 Accrued warranty and service costs 35,126 Current portion of deferred revenue 110,923 Other current liabilities -- ---------- Total current liabilities 986,994 Deferred revenue 59,647 Total liabilities 1,046,641 ---------- Commitments and contingencies (Note 5) -- Shareholders' equity (Note 6) 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 7,611,700 shares issued and outstanding 3,964 Additional paid-in capital 5,471,036 Retained Earnings 1,131,528 ---------- Total shareholders' equity 6,606,528 ---------- Total liabilities and shareholders' equity $7,653,169 ========== 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, (Unaudited) - ----------------------------------------------------------------------------------------------------------------------- Three months ended Six months ended 2007 2006 2007 2006 ----------- ----------- ----------- ----------- Net sales $ 2,533,836 $ 1,481,791 $ 3,990,287 $ 2,300,606 Cost of sales 557,102 387,067 998,542 718,664 ----------- ----------- ----------- ----------- Gross profit 1,976,734 1,094,724 2,991,745 1,581,942 ----------- ----------- ----------- ----------- Operating expenses Selling, general, and administrative 936,114 687,737 1,692,891 1,316,493 Research and development 216,432 119,713 400,059 216,935 ----------- ----------- ----------- ----------- Total operating expenses 1,152,546 807,450 2,092,950 1,533,428 ----------- ----------- ----------- ----------- Income (loss) from operations 824,188 287,274 898,795 48,514 ----------- ----------- ----------- ----------- Other income (expense) Interest income 24,881 5,621 40,809 9,102 Miscellaneous income -- -- 358 50 Interest expense -- -- -- -- Gain on sale of assets 3,102 3,126 3,102 3,126 Gain on currency exchange 4,055 3,953 7,027 (1,349) ----------- ----------- ----------- ----------- Total other income (expense) 32,038 12,700 51,296 10,929 ----------- ----------- ----------- ----------- Income before benefit from (provision for) income taxes 856,226 299,974 950,091 59,443 Benefit from (provision for) income taxes Provision for income tax (188,370) (51,511) (209,020) (9,511) Change in valuation allowance -- -- -- -- ----------- ----------- ----------- ----------- Total benefit from (provision for) income taxes (188,370) (51,511) (209,020) (9,511) ----------- ----------- ----------- ----------- Net income $ 667,856 $ 248,463 $ 741,071 $ 49,932 =========== =========== =========== =========== Basic earnings per share $ 0.09 $ 0.03 $ 0.10 $ 0.01 =========== =========== =========== =========== Diluted earnings per share $ 0.07 $ 0.03 $ 0.08 $ 0.01 =========== =========== =========== =========== Weighted-average common shares outstanding Basic 7,519,962 7,341,756 7,482,048 7,319,862 =========== =========== =========== =========== Diluted 9,014,825 8,180,450 8,812,656 8,107,420 =========== =========== =========== =========== * The number of shares at February 28, 2006 have been retroactively restated to reflect a 2-for-1 stock split that occurred on August 14, 2006. The accompanying notes are an integral part of these financial statements. 4 SIMULATIONS PLUS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS for the six months ended February 28, (Unaudited) - --------------------------------------------------------------------------------------------------- 2007 2006 ----------- ----------- Cash flows from operating activities Net income $ 741,071 $ 49,932 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization of property and equipment 24,197 21,466 Amortization of customer relationships 16,582 9,600 Bad debt expense 48,000 -- Amortization of capitalized software development costs 222,811 119,718 Stock-based compensation 9,849 -- Contribution of Equipment at book value 774 -- (Gain) on sale of assets (3,102) (3,126) (Increase) decrease in Accounts receivable 194,597 212,969 Inventory (37,335) 39,548 Deferred tax 209,020 9,511 Other assets 15,113 29,404 Increase (decrease) in Accounts payable 95,322 93,426 Accrued payroll and other expenses 59,726 (88,157) Accrued bonuses to officers 6,813 (38,680) Accrued income taxes (1,600) (1,600) Accrued warranty and service costs 374 8,101 Deferred revenue 41,109 (126,708) ----------- ----------- Net cash provided by operating activities 1,643,321 335,404 ----------- ----------- 5 Cash flows from investing activities Purchases of property and equipment (35,143) (41,075) Purchase of Bioreason's assets -- (826,192) Proceeds from sale of assets 4,475 7,215 Capitalized computer software development costs (265,616) (246,154) ----------- ----------- Net cash used in investing activities (296,284) (1,106,206) ----------- ----------- Cash flows from financing activities Proceeds from the exercise of stock options 187,043 84,432 ----------- ----------- Net cash provided by financing activities 187,043 84,432 ----------- ----------- Net increase (decrease) in cash and cash equivalents $ 1,534,080 $ (686,370) Cash and cash equivalents, beginning of year 1,685,036 1,754,042 ----------- ----------- Cash and cash equivalents, end of quarter $ 3,219,116 $ 1,067,672 =========== =========== Supplemental disclosures of cash flow information Interest paid $ -- $ -- =========== =========== Income taxes paid $ 1,600 $ 1,600 =========== =========== 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", "us"), the interim data includes 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: SIGNIFICANT ACCOUNTING POLICIES Estimates - --------- 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. Significant accounting policies for us include revenue recognition, accounting for capitalized software development costs, and accounting for income taxes. Principles of Consolidation - --------------------------- The consolidated financial statements include the accounts of Simulations Plus, Inc. and its wholly owned subsidiary, Words+, Inc. All significant intercompany accounts and transactions are eliminated in consolidation. Revenue Recognition - ------------------- We recognize revenue related to software licenses and software maintenance in accordance with the American Institute of Certified Public Accountants ("AICPA") Statements of Position (SOP) No. 97-2, "Software Revenue Recognition." Product revenue is recorded at the time of unlocking the software on the customer's computer(s), net of estimated allowances and returns. Post-contract customer support ("PCS") obligations are insignificant; therefore, revenue for PCS is recognized at the same time, and the costs of providing such support services are accrued and amortized over the obligation period. As a by-product of ongoing improvements and upgrades for our software, some modifications are provided to customers who have already licensed software at no additional charge. We consider these modifications to be minimal, as they are not changing the basic functionality or utility of the software, but rather adding convenience, such as being able to plot some additional variable on a graph in addition to the numerous variables that had been available before. Such software modifications for any single product have been typically once or twice per year, sometimes more, sometimes less. Thus, they are infrequent. We provide, for a fee, additional training and service calls to our customers and recognize revenue at the time the training or service call is provided. 7 We enter into one-year license agreements with most of our customers for the use of our pharmaceutical software products. However, from time to time, we enter into multi-year license agreements. We now unlock and invoice software one year at a time for multi-year licenses. Therefore, revenue is now recognized one year at a time. This eliminates the extreme variability in reported revenues and earnings that we experienced in the past caused by booking multi-year license revenues up front. Cash and Cash Equivalents - ------------------------- For purposes of the statements of cash flows, we consider all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. Accounts Receivable - ------------------- We maintain an allowance for doubtful accounts for estimated losses that may arise if any of our 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 payment terms when making estimates of the uncollectability of our trade accounts receivable balances. If we determine that the financial conditions of any of our customers deteriorated, whether due to customer-specific or general economic issues, an 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. The balance as of February 28, 2007 represents receivables which we purchased as a part of Bioreason's assets in November 2005. Inventory - --------- Inventory is stated at the lower of cost (first-in, first-out basis) or market and consists primarily of computers and peripheral computer equipment. Capitalized Computer Software Development Costs - ----------------------------------------------- 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 with respect to certain external factors including, but not limited to, technological feasibility, anticipated future gross revenues, estimated economic life, and changes in software and hardware technologies. Capitalized software development costs are comprised primarily of salaries and direct payroll-related costs and the purchase of existing software to be used in our software products. Amortization of capitalized software development costs is provided on a product-by-product basis on the straight-line method over the estimated economic life of the products (not to exceed five years). Amortization of software development costs amounted to $222,813 and $119,718 for the six months ended February 28, 2007 and 2006, respectively. We expect future amortization expense to vary due to increases in capitalized computer software development costs. We test capitalized computer software costs for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable within a reasonable time. As a result, we have written off $1,763 during the six months ended February 28, 2007. 8 Property and Equipment - ---------------------- Property and equipment are recorded at cost, less accumulated depreciation and amortization. Depreciation and amortization are provided using the straight-line method over the estimated useful lives as follows: Equipment 5 years Computer equipment 3 to 7 years Furniture and fixtures 5 to 7 years Leasehold improvements 5 years Maintenance and minor replacements are charged to expense as incurred. Gains and losses on disposals are included in the results of operations. Fair Value of Financial Instruments - ----------------------------------- For certain of our financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, accrued payroll and other expenses, accrued bonuses to officers, and accrued warranty and service costs, the carrying amounts approximate fair value due to their short maturities. Shipping and Handling - --------------------- Shipping and handling costs, recorded as cost of sales, amounted to $50,243 and $40,859 for the six months ended February 28, 2007 and 2006, respectively. Research and Development Costs - ------------------------------ Research and development costs are charged to expense as incurred until technological feasibility has been established. These costs consist primarily of salaries and direct payroll-related costs. It also includes purchased software which was developed by other companies and incorporated into, or used in the development of, our final products. Income Taxes - ------------ The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which requires the recognition of deferred tax assets and liabilities for expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The provision for income taxes represents the tax payable for the period and the change during the period in deferred tax assets and liabilities. At the end of fiscal year 2006, we recorded $1,100,500 in deferred tax assets. For the first six months of fiscal year 2007, we recorded a provision for deferred taxes in the amount of $209,020, resulting in a deferred tax asset of $891,480 at February 28, 2007. 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 material differences in the realization of these assets. 9 Principles of Consolidation - --------------------------- The consolidated financial statements include the accounts of Simulations Plus, Inc. and its wholly owned subsidiary, Words+, Inc. All significant intercompany accounts and transactions are eliminated in consolidation. Customer relationships - ---------------------- The Company purchased customer relationships as a part of the acquisition of certain assets of Bioreason, Inc. in November 2005. Customer relationships were recorded at a cost of $128,042, and are being amortized over 78 months under the sum-of-the-years'-digits method. Amortization expense for the six months ended and accumulated amortization as of February 28, 2007 amounted to $16,582 and $44,260, respectively. Earnings per Share - ------------------ The Company reports earnings per share in accordance with SFAS No. 128, "Earnings per Share." Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of common shares available. Diluted earnings per share is computed similar to basic earnings 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. The components of basic and diluted earnings per share for the six months ended February 28, 2007 and 2006 were as follows (the number of shares at 2/28/2006 reflects the effect of a 2-for-1 stock split for comparison purposes): 02/28/2007 02/28/2006 ---------- ---------- Numerator Net income (loss) attributable to common shareholders $ 741,071 $ 49,932 Denominator Weighted-average number of common shares outstanding during the year 7,482,048 7,319,862 Dilutive effect of stock options 1,330,608 787,558 Common stock and common stock equivalents used for diluted earning per share 8,812,656 8,107,420 Stock-Based Compensation - ------------------------ Prior to September 1, 2006, we accounted for employee stock options grants in accordance with APB No. 25, and adopted the disclosure-only provision of SFAS No. 123, "Accounting for Stock-Based Compensation." In December 2004, the FASB issued Statement of Accounting Standard No. 123R, "Share-Based Payment", a revision of SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS 123R supersedes APB Opinion No. 25, and requires all companies to measure compensation expense for all share-based payments, including employee stock options, based upon the fair value of the stock-based awards at the date of grant. SFAS 123R is effective for the Company for Fiscal Year 2007, beginning September 1, 2006. Subsequent to the effective date, the pro forma disclosures previously permitted under SFAS No. 123 are no longer an alternative to financial statement recognition. 10 Effective September 1, 2006, we adopted SFAS No. 123R using the modified prospective method. Under this method, compensation cost recognized during the six months ended February 28, 2007 includes: (1) compensation cost for all share-based payments granted prior to, but not yet vested as of September 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123 amortized over the options' vesting period, and (2) compensation cost for all share-based payments granted subsequent to September 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R amortized on a straight-line basis over the options' vesting period. As a result of adopting SFAS No. 123R on September 1, 2006, our stock-based compensation was $9,849 for the six months ended February 28, 2007, and included in the condensed consolidated statements of operations as Research and Development expense. The table below represents our pro forma net income giving effect to the estimated compensation expense related to stock options that would have been reported if we had applied the fair value recognition provisions of SFAS No. 123 for the six months ended February 28, 2006. Six Months Ended February 28, 2006 ----------------- Net income (loss) As reported $ 49,932 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 (67,311) ------------- Pro forma net income (loss) $ (17,379) ============= Earnings (loss) per common share Basic - as reported $ 0.01 Basic - Pro forma $ 0.00 Diluted - as reported $ 0.01 Diluted - Pro forma $ 0.00 For the six months ended February 28, 2007, the stock-based employee compensation expense using the fair value recognition method under SFAS No. 123R is included in the condensed consolidated statements of operations. Therefore, it is not presented in the pro forma table above. Concentrations and Uncertainties - -------------------------------- International sales accounted for 36% and 34% of net sales for the six months ended February 28, 2007 and 2006, respectively. For Simulations Plus, Inc., two customers accounted for 22% and 15% of net sales during the six months ended February 28, 2007, and for Words+, Inc., one government agency accounted for 28%, and one customer accounted 13% of net sales during the six months ended February 28, 2007. The Company operates in the computer software industry, which is highly competitive and changes rapidly. The Company's operating results could be significantly affected by its ability to develop new products and find new distribution channels for new and existing products. 11 For Simulations Plus, five customers comprised 25%, 20%, 13%, 12% and 10% of its accounts receivable at February 28, 2007, and three customers comprised 29%, 15% and 15% of accounts receivable at February 28, 2006. For Words+, one government agency comprised 37% and 23% of its accounts receivable at February 28, 2007 and 2006, respectively. The Company's subsidiary, Words+, Inc., purchases components for its main computer products from three manufacturers. Words+, Inc. also uses a number of pictographic symbols that are used in its software products which are licensed from a third party. The inability of the Company to obtain computers used in its products or to renew its licensing agreement to use pictographic symbols could negatively impact the Company's financial position, results of operations, and cash flows. Recently Issued Accounting Pronouncements - ----------------------------------------- In June 2006, the Financial Accounting Standards Board ("FSAB) issued FASB interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109" ("FIN 48"), which clarifies the accounting for uncertainty in income tax positions. The provisions of FIN 48 are effective for the Company on September 1, 2007, with the cumulative effect of the change in accounting principle, if any, recorded as an adjustment to opening retained earnings. We are currently evaluating the impact of adopting FIN 48; however we believe that adoption of FIN 48 will not have a material impact on our consolidated financial statement. In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106, and 132(R), ("SFAS 158"), which requires the recognition of the overfunded or underfunded status of a defined benefit postretirement plan in a company's balance sheet. This portion of the new guidance is effective on December 31, 2006. Additionally, the pronouncement eliminates the option for companies to use a measurement date prior to their fiscal year-end effective December 31, 2008. Since we do not have any defined benefit pension or postretirement plans that are subject to SFAS 158, we do not expect the pronouncement to have a material impact on our consolidated financial statements. In September 2006, The Securities and Exchange Commission ("SEC") released Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements" ("SAB 108"). SAB 108 provides interpretive guidance on the SEC's views on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The provisions of SAB 108 will be effective for the Company for the fiscal year ended August 2007. Since we believe there are no material misstatements in our prior year financial statements, we anticipate that the application of SAB 108 will not have a material effect on our consolidated financial statements. Note 3: CASH AND CASH EQUIVALENTS The Company maintains cash deposits at banks located in California. Deposits at each bank are insured by the Federal Deposit Insurance Corporation up to $100,000 per company. At February 28, 2007, the uninsured portions aggregated to $2,741,000. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents. 12 Note 4: PROPERTY AND EQUIPMENT Furniture and equipment as of February 28, 2007 consisted of the following: Equipment $ 160,428 Computer equipment 334,824 Furniture and fixtures 61,498 Automobile 21,769 Leasehold improvements 53,898 ------------ Sub total 632,417 Less: Accumulated depreciation and amortization (527,234) ------------ Net Book Value 105,183 ============ Note 5: COMMITMENTS AND CONTINGENCIES Employee Agreement - ------------------ On August 9, 2005, the Company entered into an employment agreement with its President/CEO that expires in August 2007. The employment agreement provides for an annual salary of $172,000 and an annual bonus equal to 5% of the Company's net income before taxes, not to exceed $150,000. The agreement also provides that the Company may terminate the agreement upon 30 days' written notice if termination is without cause. The Company's only obligation would be to pay its President the greater of a) 12 months salary or b) the remainder of the term of the employment agreement from the date of notice of termination. Note 6: 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") under which a total of 250,000 shares of common stock had been 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 an increase in the number of shares that may be granted under the Option Plan to 1,000,000. In December 2000, the shareholders approved an increase in the number of shares that may be granted under the Option Plan to 1,250,000. Furthermore, in February 2005, the shareholders approved additional 250,000 shares, resulting to the total number of shares that may be granted under the Option Plan to 1,500,000. All of the preceding numbers of options are based on numbers of options prior to the two-for-one stock split on August 14, 2006. The 1996 Stock Option Plan expired in September 2006. On February 23, 2007, the Board of Directors adopted and the shareholders approved the 2007 Stock Option Plan under which a total of 500,000 shares of common stock has been reserved for issuance. All of the following numbers of options are based on numbers of options after the two-for-one stock split on August 14, 2006. On August 18, 2006, the Company accelerated the vesting of stock options previously awarded for which the underlying shares are registered, excluding 500,000 options for shares of unregistered stock. As a result, Options to purchase approximately 505,000 shares of common stock were accelerated, representing approximately 25% of all outstanding options. The Company's decision for this acceleration was to eliminate future compensation expense that the Company would otherwise recognize with respect to these options following the Company's adoption of SFAS 123(R), Share-Based Payment. The Company adopted FAS No. 123(R) on September 1, 2006, which is the beginning of the Company's 2007 fiscal year. 13 The following summarized the stock option transactions. Weighted-Average Number of Exercise Price Options Per Share ------------ --------------- Outstanding, August 31, 2006 2,040,072 $ 1.33 Granted 100,000 $ 2.15 Exercised (170,204) $ 1.16 Expired/Canceled (96,000) $ 2.15 Outstanding, February 28, 2007 1,873,868 $ 1.35 ---------- -------- Exercisable, February 28, 2007 1,788,868 $ 1.34 ========== ======== Options Outstanding & Unvested at February 28, 2007 --------------------------------------------------- Remaining Weighted Contractual Life Average Number Outstanding (in years) Fair Market Price ------------------ ---------- ----------------- Non Vested before 9/1/2006 100,000 $ 0.62 Granted 100,000 $ 0.82 Cancelled 95,000 $ 0.82 Vested 20,000 $ 0.62 Non Vested at 02/28/2007 85,000 8.61 $ 0.63
The fair value of the options granted during the six months ended February 28, 2007 is estimated at $81,860, of which 95% has been cancelled, reducing this figure to $4,093. The fair value of these options was estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for the six months ended February 28, 2007: dividend yield of 0%, expected volatility of 11%, risk-free interest rate of 4.72%, and expected life of ten years. The weighted-average fair value of options granted during the first fiscal quarter of FY07 was $0.82, and the weighted-average exercise price was $2.15. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which do not have vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. 14 The weighted-average remaining contractual life of options outstanding issued under the Plan was 5.1 years at February 28, 2007. The exercise prices for the options outstanding at February 28, 2007 ranged from $0.53 to $2.48, and the information relating to these options is as follows: Weighted-Average Weighted-Average Weighted-Average Remaining Exercise Exercise Contractual Life Price of Price of Stock Options Stock Options of Options Options Options Exercise Price Outstanding Exercisable Outstanding Outstanding Exercisable - ------------------ ---------------- ---------------- -------------------- --------------- --------------- $0.53 - 1.00 716,768 716,768 3.3 years $ 0.73 $ 0.73 $1.00 - 1.50 603,600 603,600 3.0 years $ 1.35 $ 1.35 $1.50 - 2.50 553,500 468,500 8.5 years $ 2.16 $ 2.24 ---------------- ---------------- 1,873,868 1,788,868 ================ ================
Other Stock Options - ------------------- As of February 28, 2007, the independent members of the Board of Directors hold options to purchase 22,412 shares of common stock at exercise prices ranging from $0.60 to $2.63, which options were granted on or before August 31, 2006. Weighted average Number of Options exercise price ----------------- -------------- Options Outstanding 22,412 $ 1.28 Options exercisable 18,412 $ 1.07 Note 7: SEGMENT AND GEOGRAPHIC REPORTING We account for segments and geographic revenues in accordance with SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." Our 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, 2007 and 2006: February 28, 2007 - ------------------------------------------------------------------------------------------------------------- Simulations Plus, Inc Words +, Inc. Eliminations Total - --------------------------------------------- ---------------- ---------------- --------------- ------------- Net Sales 2,632,197 1,358,090 3,990,287 Income (loss) from operations 923,517 (24,722) 898,795 Identifiable assets 7,471,982 1,891,003 (1,709,816) 7,653,169 Capital expenditures 15,709 19,434 35,143 Depreciation and Amortization 9,613 14,584 24,197 February 28, 2006 - ------------------------------------------------------------------------------------------------------------- Simulations Plus, Inc Words +, Inc. Eliminations Total - --------------------------------------------- ---------------- ---------------- --------------- ------------- Net Sales 1,082,788 1,217,818 2,300,606 Income (loss) from operations (20,410) 68,924 48,514 Identifiable assets 5,748,165 1,579,578 (1,786,137) 5,541,606 Capital expenditures 23,514 22,562 46,076 Depreciation and Amortization 6,792 14,674 21,466
15 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, 2007 and 2006 were as follows (in thousands): February 28, 2007 - ------------------------------------------------------------------------------------------------------------- North South America Europe Asia Oceania America Total - ------------------------------ --------------- ------------ ------------ ------------ ------------ ---------- Simulations Plus, Inc. 1,414 908 310 -0- -0- 2,632 Words+, Inc. 1,129 191 25 11 2 1,358 --------------- ------------ ------------ ------------ ------------ ---------- Total 2,543 1,099 335 11 2 3,990 =============== ============ ============ ============ ============ ========== February 28, 2006 - ------------------------------------------------------------------------------------------------------------- North South America Europe Asia Oceania America Total - ------------------------------ --------------- ------------ ------------ ------------ ------------ ---------- Simulations Plus, Inc. 526 316 241 -0- -0- 1,083 Words+, Inc. 1,072 107 26 11 2 1,218 --------------- ------------ ------------ ------------ ------------ ---------- Total 1,598 423 267 11 2 2,301 =============== ============ ============ ============ ============ ==========
Note 8: EMPLOYEE BENEFIT PLAN We maintain a 401(K) Plan for all eligible employees. We make matching contributions equal to 100% of the employee's elective deferral, not to exceed 4% of total employee compensation. We can also elect to make a profit-sharing contribution. Contributions by the Company to this Plan amounted to $30,518 and $23,122 for the six months ended February 28, 2007 and 2006, respectively. Note 9: SUBSEQUENT EVENT Since March 1, 2007, an additional 104,700 stock options to purchase shares have been exercised by employees that generated $164,137 in proceeds. 16 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 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. For the purposes of this document, we sometimes refer to the two businesses as "Simulations Plus" when referring to the business that is primarily pharmaceutical software and services, and "Words+" when referring to the business that is primarily assistive technologies for persons with disabilities. SIMULATIONS PLUS - ---------------- PRODUCTS - -------- We currently offer four software products for pharmaceutical research: ADMET Predictor(TM), ClassPharmer(TM), DDDPlus(TM), and GastroPlus(TM). 17 ADMET PREDICTOR - --------------- ADMET (Absorption, Distribution, Metabolism and Excretion and Toxicity) Predictor consists of a library of statistically significant numerical models that predict various properties of chemical compounds from just their molecular structures. This capability means a chemist can merely draw a molecule diagram and get estimates of these properties, even though the molecule has never existed. Drug companies search through millions of such "virtual" molecular structures as they attempt to find new drugs. The vast majority of these molecules are not suitable as medicines for various reasons. Some have such low solubility that they will not dissolve well, some have such low permeability through the intestinal wall that they will not be absorbed well, some degrade so quickly that they are not stable enough to have a useful shelf life, some bind to proteins (like albumin) in blood to such a high extent that little unbound drug is available to reach the target, and some will be toxic in various ways. Identification of such properties as early as possible enables researchers to eliminate poor compounds without spending time and money to make them and then run experiments to identify these weaknesses. Today, many molecules can be eliminated on the basis of computer predictions, such as those provided by ADMET Predictor. Several studies have now been published that compare the predictive accuracy of software programs like ADMET Predictor. In each case, out of more than a dozen programs, ADMET Predictor has been ranked first in accuracy over all other programs (it was ranked second in one study, but that study was later redone with a more difficult set of test compounds and a newer version of ADMET Predictor, and it was then ranked first). This is a remarkable accomplishment, considering the greater size and resources of many of the competitors. ADMET Predictor now includes the former separate ADMET Modeler program for greater user convenience and to enhance the ADMET Predictor product. ADMET Modeler was first released in July of 2003 as a separate product, and was integrated into ADMET Predictor last year. 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 new toxicity models were developed in a matter of a few hours once we completed the tedious effort of "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 after cleaning the databases for each new model to obtain similar results. Pharmaceutical companies spend enormous amounts of money conducting a wide variety of experiments on new molecules each year. Using such data to build predictive models provides a second return on this investment; however, in the past, model-building has traditionally been a tedious activity that required a specialist. With ADMET Modeler, scientists without model-building experience can now use their own experimental data to quickly create high quality predictive models. During this reporting period, continuous improvement of ADMET Predictor/Modeler has been underway, including development of additional predictive models, including two models for predicting ways that new molecules could be used to interfere with the HIV-1 integrase enzyme, a necessary component for the introduction of the virus into which were released during this reporting period. Additional models are in development based on the proprietary database of salmonella mutagenicity measurements we acquired as part of the assets of Bioreason, Inc. in November 2005. Unlike previous models for salmonella mutagenicity that include all strains of the bacteria, this unique database provides mutagenicity data for ten individual strains. Modeling each strain by itself provides more focused and accurate models, and we believe this capability will be unique. We expect to release the new models in the third fiscal quarter. 18 Another enhancement of ADMET Predictor has been to provide compatibility with the popular Pipeline Pilot(TM) software offered by SciTegic, a subsidiary of Accelrys. This software serves as a tool to allow chemists to run several different software programs in series to accomplish a set workflow for large numbers of molecules. In early discovery, chemists often work with hundreds of thousands or millions of "virtual" molecules - molecules that exist only in a computer. The chemist tries to decide which few molecules from these large "libraries" should be made and tested. Using Pipeline Pilot with ADMET Predictor (and ClassPharmer - see below), perhaps in conjunction with other software products, the chemist can create and screen very large libraries faster and more efficiently than running each program by itself. In addition, modifications that provide enhanced user convenience and data analysis capabilities have been added to both the ADMET Predictor and ADMET Modeler portions of the code, and these are in final test. The new capabilities will be demonstrated at the American Chemical Society meeting in Chicago in late March. CLASSPHARMER(TM) - ---------------- ClassPharmer improvements during the second quarter have focused on adding Pipeline Pilot compatibility, incorporating new features requested by users around the world, and adding new capabilities that we are not ready to announce at this time. We expect to announce a new release during the third quarter. DDDPLUS - ------- DDDPlus sales have increased during the first two quarters, and continuous improvements are being added to further enhance the value of this product to our customers. A faster numerical package developed by the Lawrence Livermore Laboratories has been incorporated, resulting in typical speed improvements of about three-fold. Several user convenience features have also been added, and testing is in progress for the release of a new version. We expect release of a new version in the third quarter. GASTROPLUS - ---------- GastroPlus continues to enjoy its "gold standard" status in the industry for its class of simulation software. It is used from early drug discovery through preclinical development and into early clinical trials. The information provided through GastroPlus simulations guides project decisions in various ways. Among the kinds of knowledge gained through such simulations are: (1) the best "first dose in human" for a new drug prior to Phase I trials, (2) whether a potential new drug compound is likely to be absorbed at high enough levels to achieve the desired blood concentrations needed for effective therapy, (3) whether the absorption process is affected by certain enzymes and transporter proteins in the intestinal tract that may cause the amount of drug reaching the blood to be very different from one region of the intestine to another, (4) when certain properties of a new compound are probably adequately estimated through computer ("in silico") predictions or simple experiments rather than through more expensive and time-consuming IN VITRO or animal experiments, (5) what the likely variations in blood and tissue concentration levels would be in a large population, in different age groups or in different ethnic groups, and (6) whether a new formulation for an existing approved drug is likely to demonstrate "bioequivalence" (equivalent blood concentration versus time) to the currently marketed dosage form in a human trial. Our marketing intelligence indicates that GastroPlus enjoys a dominant position in the number of users worldwide. In addition to virtually every major pharmaceutical company, licenses include a growing number of smaller pharmaceutical and biotech companies, 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 smaller than the pharmaceutical giants, they can also save considerable time and money through simulation. We believe this part of the industry, which includes hundreds of companies, represents major growth potential for GastroPlus. Our experience has been that the number of new companies adopting GastroPlus shows steady growth, adding to the base of annual licenses each year. We announced the renewal of GastroPlus licenses by both Hoffmann LaRoche and another very large pharmaceutical company in December, with increased license fees in both cases. 19 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 continue working on improving GastroPlus under the two-year (one full-time equivalent) contract we announced on August 31, 2006, as well as our own internal product improvement efforts. CONTRACT RESEARCH SERVICES - -------------------------- Our recognized expertise in oral absorption and pharmacokinetics is evidenced by the fact that our staff members have been speakers or presenters at over 40 prestigious scientific meetings worldwide in the past three years. We 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. The demand for our consulting services has been increasing steadily, and we expect this trend to continue. Consulting contracts serve both to showcase our technologies and as a way to build relationships with new customers, as well as strengthening relationships with our existing customers. GOVERNMENT-FUNDED RESEARCH - -------------------------- We submitted a proposal to the National Institutes for Health in December for a $100,000 Phase I Small Business Innovation Research (SBIR) grant to develop an advanced method for calculating certain important parameters that would extend the capabilities of our ADMET Predictor/Modeler product. We have received review comments that are very favorable. Although there can be no assurances, we believe that this effort will be funded during the fourth fiscal quarter. If this Phase I grant is received and if we are successful, we will be eligible to apply for a Phase II follow-on grant on the order of $750,000. We submitted a second SBIR grant application for a $100,000 Phase I project on April 5, 2007, and we plan to submit additional such proposals in the future. SBIR grant funds provide the ability to expand staff and grow the product line without adversely affecting earnings, because the expenses associated with the efforts in the studies are funded largely, if not completely, through the grants. WORDS+ SUBSIDIARY - ----------------- PRODUCTS - -------- Our wholly owned subsidiary, Words+, Inc. has been an industry pioneer and technology leader for over 25 years in introducing and improving augmentative and alternative communication and computer access software and devices for disabled persons. We intend 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 Say-it! SAM, as well as our growing line of hardware products. We will also consider acquisitions of other products, businesses and companies that are complementary to our existing augmentative and alternative communication and computer access business lines. We purchased the Say-it! SAM technologies from SAM Communications, LLC of San Diego in December 2003. This acquisition gave us our smallest, lightest augmentative communication system, which is based on a Hewlett-Packard 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. SAM-based products now account for a significant share of our growing Words+ revenues. Since the acquisition of the Say-it! SAM technologies, we have continued to add new functionality to the SAM software and to offer it on additional hardware platforms. 20 RESULTS OF OPERATIONS COMPARISON OF THREE MONTHS ENDED FEBRUARY 28, 2007 AND 2006. 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 ------------------------------------------------------------ 02/28/07 02/28/06 ------------------------------- ---------------------------- Net sales $ 2,534 100% $ 1,482 100% Cost of sales 557 22.0 387 26.1 ---------------- -------------- ------------- -------------- Gross profit 1,977 78.0 1,095 73.9 ---------------- -------------- ------------- -------------- Selling, general and administrative 936 36.9 688 46.4 Research and development 217 8.6 120 8.1 ---------------- -------------- ------------- -------------- Total operating expenses 1153 45.5 808 54.5 ---------------- -------------- ------------- -------------- Income from operations 824 32.5 287 19.4 ---------------- -------------- ------------- -------------- Other income 32 1.3 13 0.9 ---------------- -------------- ------------- -------------- Net income before taxes 856 33.8 300 20.2 ---------------- -------------- ------------- -------------- Benefit from (provision for) income taxes (188) (7.4)% (52) (3.5)% ---------------- -------------- ------------- -------------- Net income (loss) $ 668 26.4% $ 248 16.7% ================ ============== ============= ==============
NET SALES Consolidated net sales increased $1,052,000, or 71.0%, to $2,534,000 in the second fiscal quarter of 2007 (2Q07) from $1,482,000 in the second fiscal quarter of 2006 (2Q06). Our sales from pharmaceutical and educational software increased approximately $924,000, or 104.5%; and our Words+, Inc. subsidiary's sales increased approximately $128,000, or 21.4%, for the quarter. We attribute the increase in pharmaceutical software sales primarily to increased licenses, both to new customers and for new modules and additional licenses to renewal customers. In addition to our software sales, revenues from our contract services increased in the 2Q07 compared with 2Q06. We attribute the increase in Words+ sales primarily to an increase in sales of "Say-it! SAM", "TuffTalker" and "Freedom" products. Some declines in software sales and "MessageMate" products were offset by these increases. COST OF SALES Consolidated cost of sales increased $170,000, or 43.9%, to $557,000 in the 2Q07 from $387,000 in the 2Q06. The percentage of cost of sales in 2Q07 decreased 4.1% to 22% from 26.1% in 2Q06. For Simulations Plus, cost of sales increased $85,000, or 63.3%. However, as a percentage of revenue, cost of sales decreased to 12.2% in 2Q07 from 15.3% in 2Q06. A significant portion of cost of sales for pharmaceutical software products is the systematic amortization of capitalized software development costs, which is an independent fixed cost rather than a variable cost related to sales. This amortization cost increased approximately $43,000, or 87.6%, in 2Q07 compared with 2Q06. Royalty expense also increased approximately $129,000, or 49.7%, in 2Q07 compared with 2Q06. However, as a percentage of revenue, royalty cost decreased to 7.2% in 2Q07 from 9.8% in 2Q06, thus resulting in a decrease in the percentage of cost of sales. 21 For Words+, cost of sales increased $85,000, or 33.6%. As a percentage, cost of sales increased 4.2% between the second fiscal quarter of FY07 and FY06. We attribute the percentage increase in cost of sales for Words+ primarily to the sales we have generated from one large order with low margin by providing a volume discount, in addition to increased costs of computers. Last fiscal year, we were able to obtain purchase discounts by volume purchase of computers; however such discounts were not available to us when the new models came on the market and the previous models were discontinued. GROSS PROFIT Consolidated gross profit increased $882,000, or 105.2%, to $1,977,000 in 2Q07 from $1,095,000 in 2Q06. We attribute this increase to the increase in sales of pharmaceutical software, contract studies, and Words+ products, which outweighed increases in cost of goods sold. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Consolidated selling, general and administrative (SG&A) expenses increased $248,000, or 36.1%, to $936,000 in 2Q07 from $688,000 in 2Q06. For Simulations Plus, SG&A increased $158,000, or 37.3%. As a percentage of sales, SG&A decreased to approximately 32.3% in 2Q07 from approximately 48.2% in 2Q072Q06. The major increases in SG&A expenses were investor relations, accrued bonus to officers, salaries and payroll-related expenses such as health insurance, 401K and payroll taxes, which outweighed decreases in professional fees. For Words+, SG&A expenses increased $90,000, or 34.3%, due primarily to increases in commissions, catalogs, marketing consultant fees, salaries and payroll-related expenses such as health insurance and payroll taxes, telephone and supplies. These increases outweighed decreases in travel expense. RESEARCH AND DEVELOPMENT We incurred approximately $349,000 of research and development costs for both companies during 2Q07. Of this amount, $132,000 was capitalized and $217,000 was expensed. In 2Q06, we incurred $223,000 of research and development costs, of which $103,000 was capitalized and $120,000 was expensed. The increase of $126,000, or 56.5%, in total research and development expenditures from the 2Q06 to 2Q07 was due primarily to increases in salaries because of new hires and salary increases to existing staff. OTHER INCOME (EXPENSE) Net other income (expense) in the 2Q07 increased by $19,000, or 152.3%, to $32,000 in 2Q07 from $13,000 in 2Q06. This is due primarily to increased interest revenue from money market accounts, gains on currency exchange, and gain on sale of assets. PROVISION FOR INCOME TAXES The provision for income taxes increased by $136,000, or 265.7%, to $188,000 in the 2Q07 from $52,000 in 2Q06 due to increase in net income. 22 NET INCOME Consolidated net income increased by $420,000, or 168.8%, to $668,000 in the 2Q07 from $248,000 in 2Q06. We attribute this increase in profit primarily to the increases in revenue from both pharmaceutical software and Words+ products and from other income, which outweighed increases in cost of sales, selling, and general and administrative expenses, research and development expenses, and provision for income taxes. COMPARISON OF SIX MONTHS ENDED FEBRUARY 28, 2007 AND 2006. 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 ------------------------------------------------------------ 02/28/07 02/28/06 ------------------------------- ---------------------------- Net sales $ 3,990 100% $ 2,301 100% Cost of sales 998 25.1 719 31.3 ---------------- -------------- ------------- -------------- Gross profit 2,992 75.0 1,582 68.8 ---------------- -------------- ------------- -------------- Selling, general and administrative 1,693 42.4 1,316 57.2 Research and development 400 10.0 217 9.4 ---------------- -------------- ------------- -------------- Total operating expenses 2,093 52.5 1,533 66.6 ---------------- -------------- ------------- -------------- Income from operations 899 22.5 49 2.1 ---------------- -------------- ------------- -------------- Other income 51 1.3 11 0.5 ---------------- -------------- ------------- -------------- Net income before taxes 950 23.8 60 2.6 ---------------- -------------- ------------- -------------- Benefit from (provision for) income taxes (209) (5.2) (10) (1.4) ---------------- -------------- ------------- -------------- Net income $ 741 18.6% $ 50 2.2% ================ ============== ============= ==============
NET SALES Consolidated net sales increased $1,689,000, or 73.4%, to $3,990,000 in the first six months of fiscal year 2007 (FY07) from $2,301,000 in the first six months of fiscal year 2006 (FY06). Our sales from pharmaceutical and educational software increased approximately $1,549,000, or 143.1%; and our Words+, Inc. subsidiary's sales increased approximately $140,000, or 11.5%, for the first six months of fiscal year 2007. We attribute the increase in pharmaceutical software sales primarily to increased licenses, both to new customers and for new modules, additional licenses to renewal customers, and contract studies. We attribute the increase in Words+ sales primarily to increases in sales of "Say-it! SAM", "TuffTalker" and "Freedom" products. Some declines in software sales and "TuffTalker Plus" products were offset by these increases. COST OF SALES Consolidated cost of sales increased $279,000, or 38.9%, to $998,000 in the first six months of FY07 from $719,000 in the first six months of FY06; however, as a percentage of revenue, cost of sales decreased 6.2%. For Simulations Plus, cost of sales increased $172,000, or 104.1%; however, as a percentage of revenue, cost of sales decreased to 12.8% in the first six months of FY07 from 15.3% in the first six months of FY06. A significant portion of cost of sales for pharmaceutical software products is the systematic amortization of capitalized 23 software development costs, which is an independent fixed cost rather than a variable cost related to sales. This amortization cost increased approximately $101,000, or 144.7%, in the first six months of FY07 compared with the same period in FY06. Royalty expense increased approximately $71,000, or 74.3%, in the first six months of FY07 compared with the same period in FY06; however, as a percentage of revenue, royalty expense decreased to 6.3%, thus resulting in a decrease in the percentage of cost of sales. For Words+, cost of sales increased $107,000, or 19.5%. As a percentage of revenue, cost of sales increased 3.3% between the first six months of FY07 and FY06. We attribute the percentage increase in cost of sales for Words+ primarily to volume discounts provided to a distributor for one large order and to increased costs of computers and PDAs which are main parts for the systems we sell. GROSS PROFIT Consolidated gross profit increased $1,410,000, or 89.1%, to $2,992,000 in the first six months of FY07 from $1,582,000 in the first six months of FY06. We attribute this increase to the increase in sales of pharmaceutical software, contract studies, and Words+ products which outweighed increases in cost of goods sold. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Consolidated selling, general and administrative (SG&A) expenses increased $377,000, or 28.7%, to $1,693,000 in the first six months of FY07 from $1,316,000 in the first six months of FY06. For Simulations Plus, SG&A increased $247,000, or 31.8%. As a percentage of sales, SG&A decreased from approximately 71.8% in the first six months of FY06 to approximately 38.9% in the first six months of FY07. The major increases in SG&A expenses were selling expenses, such as commissions to dealers, accrued bonus to officers, bad debts from one receivable from the purchased assets of Bioreason, and increases in salaries and payroll-related expenses such as health insurance, 401K and payroll taxes, which outweighed decreases in professional fees For Words+, SG&A expenses increased $130,000, or 9.8%, due primarily to increases in commissions, catalogs, marketing consultant fees, telephone and supplies. These increases outweighed decreases in utilities, technical service costs, and travel expense. RESEARCH AND DEVELOPMENT We incurred approximately $666,000 of research and development costs for both companies during the first six months of FY07. Of this amount, $266,000 was capitalized and $400,000 was expensed. In the first six months of FY06, we incurred $709,000 of research and development costs, of which $492,000, including an allocation of appraised value of $246,000 on ClassPharmer software, was capitalized and $217,000 was expensed. The decrease of $43,000, or 6.1%, in total research and development expenditures from the first six months of FY06 to the first six months of FY07 was due primarily to the acquisition of the ClassPharmer software in FY06, which outweighed increases in salaries because of new hires and salary increases to existing staff since the first six months of fiscal year FY06. The increase of $183,000 in expensed R&D from $217,000 to $400,000 is primarily to staff additions in our Life Sciences department. 24 OTHER INCOME Net other income in the first six months of FY07 increased by $40,000, or 363.6%, from $11,000 to $51,000. This is due primarily to increased interest revenue from money market accounts, a gain on currency exchange, and a gain on sale of assets. PROVISION FOR INCOME TAXES The provision for income taxes increased by $199,000, or 2,098%, to $209,000 in the first six months of FY07 from $10,000 in the first six months of FY06. NET INCOME (LOSS) Consolidated net income increased by $691,000, or 1,382.0%, to $741,000 in the first six months of FY07 from $50,000 in the first six months of FY06. We attribute this increase in profit primarily to the increases in pharmaceutical software, contract studies, and other income, which outweighed increases in cost of sales, selling, and general and administrative expenses, research and development expenses, provision for income taxes. LIQUIDITY AND CAPITAL RESOURCES Our principal sources of capital have been cash flows from our operations. We have achieved continuous positive operating cash flow in the last six fiscal years. We believe that our existing capital and anticipated funds from operations will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for the foreseeable future. Thereafter, if cash generated from operations is insufficient to satisfy our capital requirements, we may open a revolving line of credit with a bank, or we 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 us, or, if available, that it will be in amounts and on terms acceptable to us. 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. 25 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 FY07. 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 Chief Financial Officer 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 were no changes in the Company's internal controls over financial reporting during the Company's most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting. 26 PART II. OTHER INFORMATION Item 1. Legal Proceedings ----------------- On April 6, 2006 we received notice from a liquidator for the former French subsidiary of Bioreason (Bioreason SARL), saying that the liquidator had initiated legal action against Simulations Plus in the French courts with respect to ClassPharmer distribution rights to European customers, and is claiming commissions and legal fees with respect to European customers. We have been working through our U.S. attorneys and a law firm in Paris. We have filed a counterclaim for our rights and lost sales against Bioreason SARL's assets by sending a debt recovery declaration to the liquidator on June 15, 2006. We believe the documentation from our purchase of certain secured assets of Bioreason clearly shows our rights to the disputed accounts. We received an e-mail from our French lawyer that there will be a court hearing in August 2007, and our French lawyer will be there to represent us. Although we are pursuing our rights aggressively, there can be no assurance that the outcome will be favorable. We expect resolution of this issue in 2007. 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 February 23, 2007, 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 approve the 2007 Stock Option Plan, which replaces the expired 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) 6,930,541 -- -- 4,000 6,934,541 - -------------- -------------- ----------- ----------- ------------- ------------ (2) 6,930,541 -- -- 4,000 6,934,541 - -------------- -------------- ----------- ----------- ------------- ------------ (3) 6,926,141 400 8,000 -- 6,934,541 - -------------- -------------- ----------- ----------- ------------- ------------ 27 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 28 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 10, 2007. Simulations Plus, Inc. Date: April 10, 2007 By: /s/ MOMOKO BERAN ---------------------------- Momoko Beran Chief Financial Officer 29 EX-31.1 2 simulations_ex3101.txt CERTIFICATION 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, 2007, 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, 2007 (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 controls 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 controls over financial reporting, or caused such internal controls 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 controls 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 controls 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 controls 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 controls over financial reporting. Dated: April 10, 2007 By: /s/ Walter S. Woltosz ------------------------- Walter S. Woltosz Chief Executive Officer EX-31.2 3 simulations_ex3102.txt CERTIFICATION 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, 2007, 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, 2007 (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 controls 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 controls 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 controls 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 controls 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 controls over financial reporting. Dated: April 10, 2007 By: /s/ Momoko A. Beran ------------------------- Momoko A. Beran Chief Financial Officer EX-32 4 simulations_ex3200.txt CERTIFICATION 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, 2007, 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 10, 2007 /S/ MOMOKO A. BERAN - ------------------------------- Momoko A. Beran Chief Financial Officer April 10, 2007 (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-----