SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 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
(State or other jurisdiction of
Incorporation or Organization)
95-4595609
(I.R.S. Employer
identification No.)
1220 W. AVENUE J
LANCASTER, CA 93534-2902
(Address of principal executive offices including zip code)
(661) 723-7723
(Issuer's telephone number, including area code)
NOT APPLICABLE
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes x No
-------------- --------------
The number of shares outstanding of the Issuer's common stock, par value $0.001
per share, as of January 13, 2006, was 3,674,448.
SIMULATIONS PLUS, INC.
FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 2005
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
----
Consolidated Balance Sheet at November 30, 2005 (unaudited) 2
Consolidated Statements of Operations for the three months
ended November 30, 2005 (unaudited) 4
Consolidated Statements of Cash Flows for the three months
ended November 30, 2005 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis or Plan of Operations
General 14
Results of Operations 19
Liquidity and Capital Resources 21
Item 3. Quantitative and Qualitative Disclosures about Market Risk 22
Item 4. Controls and Procedures 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities 23
Item 3. Defaults upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
Signature 24
Exhibit - Certifications
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
NOVEMBER 30, 2005
(UNAUDITED)
================================================================================
ASSETS
CURRENT ASSETS
Cash and cash equivalents (note 3) $ 931,796
Accounts receivable, net of allowance for doubtful accounts
of $21,208 (note 4) 814,557
Inventory (note 5) 313,290
Prepaid expenses and other current assets 86,007
Deferred tax 60,000
-----------
Total current assets 2,205,650
CAPITALIZED COMPUTER SOFTWARE DEVELOPMENT COSTS,
net of accumulated amortization of $2,186,079 1,279,098
LONG TERM CONTRACTS RECEIVABLE, net of discounts of $13,341 288,439
PROPERTY AND EQUIPMENT, net (note 6) 88,897
CUSTOMER RELATIONSHIPS (note 13) 128,042
DEFERRED TAX 1,293,800
OTHER ASSETS 29,463
-----------
TOTAL ASSETS $ 5,313,389
===========
The accompanying notes are an integral part of these financial statements.
2
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
NOVEMBER 30, 2005
(UNAUDITED)
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 124,449
Accrued payroll and other expenses 381,530
Accrued bonuses to officers 38,680
Accrued warranty and service costs 32,017
Current portion of deferred revenue 65,416
-----------
Total current liabilities 642,092
Deferred revenue 5,715
-----------
Total liabilities 647,807
-----------
COMMITMENTS AND CONTINGENCIES (note 7)
SHAREHOLDERS' EQUITY (note 8)
Preferred stock, $0.001 par value
10,000,000 shares authorized
no shares issued and outstanding --
Common stock, $0.001 par value
20,000,000 shares authorized
3,650,048 shares issued and outstanding 3,651
Additional paid-in capital 5,145,880
Accumulated deficit (483,949)
-----------
Total shareholders' equity 4,665,582
-----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 5,313,389
===========
The accompanying notes are an integral part of these financial statements.
3
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED NOVEMBER 30,
(UNAUDITED)
========================================================================================
2005 2004
----------- -----------
NET SALES $ 818,815 $ 1,066,474
COST OF SALES 331,597 322,128
----------- -----------
GROSS PROFIT 487,218 744,346
----------- -----------
OPERATING EXPENSES
Selling, general, and administrative 628,756 631,945
Research and development 97,222 113,692
----------- -----------
Total operating expenses 725,978 745,637
----------- -----------
INCOME (LOSS) FROM OPERATIONS (238,760) (1,291)
----------- -----------
OTHER INCOME (EXPENSE)
Interest income 3,481 16,771
Miscellaneous income 50 --
Interest expense -- (284)
Gain on sale of assets -- 5,200
Gain (Loss) on currency exchange (5,302) 2,111
----------- -----------
Total other income (expense) (1,771) 23,798
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (240,531) 22,507
BENEFIT FROM (PROVISION FOR) INCOME TAXES
Benefit from (provision for) income tax 42,000 --
Release of valuation allowance -- --
----------- -----------
Total benefit from (provision for) income taxes 42,000 --
----------- -----------
NET INCOME (LOSS) $ (198,531) $ 22,507
----------- -----------
BASIC EARNINGS (LOSS) PER SHARE $ (0.05) $ 0.01
=========== ===========
DILUTED EARNINGS (LOSS) PER SHARE $ (0.05) $ 0.01
----------- -----------
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING
BASIC 3,649,334 3,571,191
=========== ===========
DILUTED 3,649,334 4,143,687
=========== ===========
The accompanying notes are an integral part of these financial statements.
4
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED NOVEMBER 30,
(UNAUDITED)
==================================================================================================
2005 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (198,531) $ 22,507
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Depreciation and amortization of property and
equipment 11,860 10,696
Amortization of capitalized software development
costs 45,709 31,869
(Gain) on sale of assets -- (5,200)
(Increase) decrease in
Accounts receivable 442,031 314,601
Inventory (31,890) 30,761
Deferred tax (42,000) --
Other assets (23,316) 21,358
Increase (decrease) in
Accounts payable 33,408 (17,533)
Accrued payroll and other expenses (17,127) 18,306
Accrued bonuses to officers -- --
Accrued income taxes (1,600) --
Accrued warranty and service costs 4,278 (1,299)
Deferred revenue (69,854) (2,854)
----------- -----------
Net cash provided by operating activities 152,968 423,212
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (10,656) (23,529)
Purchases of Bioreason's assets (826,192) --
Proceeds from sale of assets 2,218 7,895
Capitalized computer software development costs (142,539) (120,032)
----------- -----------
Net cash used in investing activities (977,169) (135,666)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on capitalized lease obligations -- --
Proceeds from the exercise of stock options 1,955 26,566
----------- -----------
Net cash provided by financing activities 1,955 26,566
----------- -----------
The accompanying notes are an integral part of these financial statements.
5
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED NOVEMBER 30,
(UNAUDITED)
==================================================================================================
Net increase (decrease) in cash and cash
equivalents $ (822,246) $ 314,112
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,754,042 734,266
----------- -----------
CASH AND CASH EQUIVALENTS, END OF FISCAL QUARTER $ 931,796 $ 1,048,378
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
INTEREST PAID $ -- $ 284
=========== ===========
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 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. For further information, refer to the financial
statements for the year ended August 31, 2005 and the notes thereto included in
the Company's Annual Report on Form 10-KSB.
Note 2: SIGNIFICANT 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, accounting for capitalized software development costs, and
accounting for income taxes.
Revenue Recognition
-------------------
We recognize revenues related to software licenses and software maintenance in
accordance with the American Institute of Certified Public Accountants ("AICPA")
Statements of Position (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.
Generally, we enter into one-year license agreements with our customers for the
use of our software products. We recognize revenue on these contracts when all
the criteria under SOP 97-2 are met.
From time to time, we enter into multi-year license agreements. We believe our
history of collection with these customers is sufficient to overcome the
presumption that revenue should be recognized in time with the expected cash
collections, and we have therefore recognized the entire license fees, net of an
applicable discount, at the time of the software's release and acceptance by the
customer. Going forward, however, we have advised investors through our press
releases and conference calls that we will unlock and invoice software one year
at a time for future multi-year licenses. This will eliminate the extreme
variability in our reported revenues and earnings that we've experienced in the
past.
7
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 $45,709 and $31,869 for the three months ended
November 30, 2005 and 2004, respectively.
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 not in excess of the amount to be recovered through
revenues. Any such excess of capitalized software development costs to expected
net realizable value is expensed at that time.
Income Taxes
------------
We utilize SFAS No. 109, "Accounting for Income Taxes," which requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements or
tax returns.
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.
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.
8
Concentrations and Uncertainties
--------------------------------
International sales accounted for 24% and 24% of net sales for the three months
ended November 30, 2005 and 2004, respectively. For Simulations Plus, Inc., one
customer accounted for 59% of net sales for the three months ended November 30,
2005, and for Words+, Inc., one government agency accounted for 16% of net sales
during the first fiscal quarter of 2006.
We operate in the computer software industry, which is highly competitive and
changes rapidly. Our operating results could be significantly affected by our
ability to develop new products and find new distribution channels for new and
existing products.
For a consolidated accounts receivable, one customer comprised 19% of total
receivables. For Simulations Plus, four customers comprised 27%, 23%, 20% and
20% of accounts receivable at November 30, 2005. Three customers comprised 30%,
27% and 26% of accounts receivable at November 30, 2004. For Words+, one
customer comprised 26% of accounts receivable at November 30, 2005. One customer
comprised 32% of accounts receivable at November 30, 2004.
Our subsidiary, Words+, Inc., purchases components for the main computer
products from a single Manufacture. 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 Words+ to obtain computers used in its
products or to renew its licensing agreement to use pictographic symbols could
negatively impact our financial position, results of operations, and cash flows.
Recently Issued Accounting Pronouncements
-----------------------------------------
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, "Accounting for Stock
Issued to Employees." SFAS 123R requires all companies to measure compensation
expense for all share-based payments (including employee stock options and
options issued pursuant to employee stock purchase plans) based upon the fair
value of the stock-based awards at the date of grant, and is effective for the
Company for fiscal year beginning after December 15, 2005. The impact of
adoption of Statement 123R cannot be predicted at this time because it will
depend on levels of share-based payments granted in the future.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections." This statement applies to all voluntary changes in accounting
principles and requires retrospective application to prior periods' financial
statements of changes in accounting principles, unless this would be
impracticable. This statement also makes a distinction between "retrospective
application" of an accounting principle and the "restatement" of financial
statements to reflect the correction of an error. This statement is effective
for accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. The Company is evaluating the effect the adoption of
this interpretation will have on its financial position, cash flows and results
of operations.
Note 3: 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.
Note 4: 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
9
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 November 30, 2005 represents receivables which we have purchased
as a part of Bioreason's assets.
Note 5: 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.
Note 6: PROPERTY AND EQUIPMENT
Furniture and equipment as of November 30, 2005 consisted of the following:
Equipment $ 158,036
Computer equipment 301,871
Furniture and fixtures 57,705
Automobile 21,769
Leasehold improvements 42,660
---------
Sub total 582,041
Less: Accumulated depreciation and amortization (493,144)
---------
Net Book Value 88,897
=========
Note 7: COMMITMENTS AND CONTINGENCIES
Leases
------
The current office lease expired in August 2005, and we are now renting on a
month-to-month basis at a base rate of $15,446 per month plus common area
maintenance ("CAM") charges which are approximately $4,000 per month. We have
signed a new lease for another building which is under construction and is
expected to be completed by the end of January 2006. The new lease has a
five-year term with two (2), three (3) year options to extend.
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.
As of November 30, 2005, the accrued bonuses due to officers were $38,680, which
represented 5% of the Company's net income before bonuses and taxes for the
fiscal year 2005 given to the Company's President, Walter Woltosz, as an annual
bonus and 5% of the Company's net income before bonuses and taxes for the fiscal
year 2005 given to the Corporate Secretary, Virginia Woltosz, as an annual
bonus.
10
The agreement also provides that the Company may terminate the agreement upon
30days' 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 8: STOCKHOLDERS' EQUITY
Stock Option Plan
-----------------
In September 1996, the Board of Directors adopted and the shareholders approved
the 1996 Stock Option Plan (the "Option Plan") pursuant to which a total of
250,000 shares of common stock were reserved for issuance. The shareholders
approved an additional 250,000 shares that may be granted under the Option Plan
in March 1999, 500,000 shares in February 2000, and 250,000 shares in December
2000. Thus, a total of 1,250,000 shares can be granted under the Option Plan.
The Option Plan terminates in 2006, subject to earlier termination by the Board
of Directors. Furthermore, 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 November 30, 2005, options to purchase 1,058,681 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 9,206 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 three months of fiscal year 2006, 1,200 options
were exercised by employees.
Note 9: EARNINGS PER SHARE
We report earnings per share in accordance with SFAS No. 128, "Earnings per
Share." Basic earnings (loss) per share is computed by dividing income (loss)
available to common shareholders by the weighted-average number of common shares
available. 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. Our common share equivalents consist of stock options.
Note 10: 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, "Accounting for Stock
Issued to Employees," 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 will be
effective for us for the year beginning September 1, 2006. For fiscal year 2006,
we currently account for share-based payments to employees using APB25's
intrinsic value method as permitted; therefore we do not recognize any
compensation cost for employee stock options. Entities electing to remain with
the accounting method of APB 25 must make pro forma disclosures of net income
and earnings per share, as if the fair value method of accounting defined in
SFAS No. 123 had been applied. We have elected to account for our stock-based
compensation to employees under APB 25.
The table below represents a reconciliation of our pro forma net income giving
effect to the estimated compensation expense related to stock options that would
have been reported if we had utilized the fair value method:
11
Three Three
Months Months
FY 2006 FY 2005
----------- ----------
Net income (loss)
As reported $ (198,531) $ 22,507
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 (36,888) (62,988)
----------- ----------
PRO FORMA NET INCOME (LOSS) $ (235,419) $ (40,481)
=========== ==========
Earnings (loss) per common share
Basic - as reported $ (0.05) $ 0.01
Basic - Pro forma $ (0.06) $ (0.01)
Diluted - as reported $ (0.05) $ 0.01
Diluted - Pro forma $ (0.06) $ (0.01)
Note 11: 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 nine months ended November 30, 2005 and November 30, 2004:
==========================================================================================
November 30, 2005
------------------------------------------------------------------------------------------
Simulations Words +,
Plus, Inc Inc. Eliminations Total
------------------------------------------------------------------------------------------
Net Sales 198,889 619,926 818,815
------------------------------------------------------------------------------------------
Income (loss) from operations (253,284) 14,524 (238,760)
------------------------------------------------------------------------------------------
Identifiable assets 5,601,917 1,468,626 (1,757,154) 5,313,389
------------------------------------------------------------------------------------------
Capital expenditures 9,446 6,211 15,657
------------------------------------------------------------------------------------------
Depreciation and Amortization 3,357 8,503 11,860
------------------------------------------------------------------------------------------
November 30, 2004
------------------------------------------------------------------------------------------
Simulations Words +,
Plus, Inc Inc. Eliminations Total
------------------------------------------------------------------------------------------
Net Sales 523,452 543,022 1,066,474
------------------------------------------------------------------------------------------
Income (loss) from operations 41,405 (18,898) 22,507
------------------------------------------------------------------------------------------
Identifiable assets 5,584,743 1,237,573 (1,812,694) 5,009,622
------------------------------------------------------------------------------------------
Capital expenditures 3,354 20,175 23,529
------------------------------------------------------------------------------------------
Depreciation and Amortization 3,508 7,188 10,696
------------------------------------------------------------------------------------------
In addition, the Company allocates revenues to geographic areas based on the
locations of its customers. Geographical revenues for the three months ended
November 30, 2005 and November 30, 2004 were as follows (in thousands):
12
November 30, 2005
------------------------------------------------------------------------------------------
North South
America Europe Asia Oceania America Total
------------------------------------------------------------------------------------------
Simulations Plus, Inc. 74 8 117 -0- -0- 199
------------------------------------------------------------------------------------------
Words+, Inc. 551 47 10 10 2 620
------------------------------------------------------------------------------------------
Total 625 55 127 10 2 819
--------------------------================================================================
November 30, 2004
------------------------------------------------------------------------------------------
North South
America Europe Asia Oceania America Total
------------------------------------------------------------------------------------------
Simulations Plus, Inc. 327 77 119 -0- -0- 523
------------------------------------------------------------------------------------------
Words+, Inc. 494 30 15 8 -0- 543
------------------------------------------------------------------------------------------
Total 821 107 134 8 -0- 1,066
---------------------------===============================================================
Note 12: SUBSEQUENT EVENT
Since December 1, 2005, an additional 24,400 stock options to purchase shares
have been exercised by employees, including 19,900 options exercised by a
retired employee prior to their expiration date.
Note 13: PURCHASE OF BIOREASON'S ASSETS
On November 4, 2005, we purchased certain secured assets of Bioreason, Inc., a
technology company, for $826,192. Since the appraised value was greater than the
actual purchase price, the remaining amount, after allocation to the contracts
receivable, was allocated proportionally to the other assets purchased.
The purchase price was allocated as follows.
Assets Allocated amounts
------ -----------------
Long-Term contract receivables $ 447,496
Property and equipment 5,001
Software 245,653
Customer relationship 128,042
-----------------
Total $ 826,192
=================
13
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" or
"us") 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. 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 five software products for pharmaceutical research:
GastroPlus(TM), ADMET Predictor(TM), ADMET Modeler(TM), DDDPlus(TM) and
ClassPharmer(TM).
GASTROPLUS
----------
GastroPlus is a computer program for the simulation of the absorption and
pharmacokinetics of drugs in the human gastrointestinal tract as well as in a
number of standard laboratory animals. This sophisticated simulation has
equations for the movement of the drug through the gastrointestinal tract, how
fast it dissolves or precipitates along the way, whether it is converted to a
different molecular form in the gastrointestinal tract prior to absorption, and
14
how fast it is absorbed through various regions of the intestinal wall into the
blood stream. With additional inputs, it also simulates the concentration of
drug in the blood plasma versus time. With an optional module called PDPlus(TM),
the program can also simulate how a drug affects the body, such as reducing
pain, reducing blood pressure, reducing depression, and adverse side effects.
GastroPlus is used from early drug discovery through development and into early
clinical trials. The information provided through these simulations guides
project decisions in various ways. Among the kinds knowledge gained through such
simulation are: (1) 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, (2) whether the absorption process is affected by
certain transporter proteins in the intestinal tract that may cause absorption
to be very different from one region to another, (3) when certain properties of
a new compound can be adequately estimated through computer ("in silico")
predictions or simple experiments rather than through more expensive and
time-consuming experiments, (4) what the likely variations in blood
concentration levels would be in a large population, in different age groups or
in different ethnic groups, and (5) whether a new generic 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 is the industry "gold
standard" for this type of simulation, enjoying a dominant position in the
number of users worldwide. In addition to virtually every major pharmaceutical
company, licenses include a 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. Version 5.0 with the new PBPKPlus(TM) module, released just after
the end of this reporting period, further extends the utility of GastroPlus. 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.
ADMET PREDICTOR
---------------
In addition to simulation software, we produce software that consists of
statistically significant numerical models that predict a variety of properties
of chemical compounds from just their molecular structures. This kind of
predictive capability means a chemist can merely draw a molecule diagram and get
reasonable estimates of these properties, even though the molecule has never
existed. When drug companies try to find new drugs, they search through millions
of such molecular structures. The vast majority of these are not suitable as
medicines. 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 in blood (like albumin) 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 the compounds and then run experiments to identify these weaknesses.
Today, many molecules are eliminated on the basis of computer predictions, such
as those provided by ADMET Predictor.
15
ADMET Predictor provides estimates for approximately 50 properties of new
drug-like molecules from their structures. Recent product improvements included
a state-of-the-art 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 many other properties, like solubility,
permeability, and binding to various proteins. 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.
We added a series of six toxicity predictions to ADMET Predictor during the
previous fiscal year. Toxicity prediction was identified as one of the critical
needs for pharmaceutical research and development in a white paper called the
"Critical Path Initiative" issued by the U.S. Food and Drug Administration in
March 2004. During this reporting period, we added another important toxicity
prediction for a particular form of cardiac toxicity associated with blocking a
potassium channel protein known as hERG (human ether a-go-go). This has been the
cause of severe cardiac toxicity and death, and is a high priority toxicity
measurement required by the FDA for all new drugs. Identifying such likely
failure modes for potential new drug molecules well before expensive experiments
are run can help to reduce the high cost and long development time for new
drugs.
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.
ADMET MODELER
-------------
Our third core product, ADMET Modeler, was 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 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 create very high quality predictive
models.
DDDPLUS
-------
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.
16
Over 60 companies evaluated Version 1.0 of DDDPlus. This is an indication of the
strong interest and business potential in this area. However to date, few
licenses have been sold. Through the evaluation process, we received valuable
feedback about what would be required for various customers to license the
software, and we are now incorporating those improvements. We remain confident
that sales of DDDPlus licenses will take place. The initial release served us
well to stimulate interest in this first-of-its-kind software and to get
formulation scientists thinking about how to use such a capability in their
work.
CLASSPHARMER(TM)
----------------
In November 2005, we acquired certain secured assets of Bioreason, Inc. from its
former creditors, including a software package called ClassPharmer. ClassPharmer
is a molecule classification software program, similar in nature to ChemTK(TM),
which we purchased from Sage Informatics in August 2005, but with more
sophisticated and patented classification algorithms and various additional
convenience features. ClassPharmer was programmed in a combination of
programming languages that make it run much more slowly than ChemTK, and certain
elements of the ChemTK user interface are more user-friendly and visually
pleasing than ClassPharmer.
Our strategy for acquiring ChemTK from Sage was to eventually integrate it into
ClassPharmer and make a single package, which will become ClassPharmer 4.0 (our
current version is ClassPharmer 3.5). This effort has progressed well during
this reporting period, and we expect to have a beta release in January 2006.
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. 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
-------------------------------------------------------
Although all of our development work cannot be disclosed for competitive
reasons, some of our development efforts during this reporting period included:
(1) 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 GastroPlus as part of a Formulation
Module in calendar 2006.
(2) DDDPLUS
-----------
The DDDPlus (Dose Disintegration and Dissolution Plus) software is being
improved by incorporating additional functionality in accordance with comments
and suggestions received from approximately 60 companies who evaluated the
17
initial release. A number of enhancements have been incorporated at this time
and several more are in progress. We expect to release a much-enhanced version
of DDDPlus in early calendar year 2006.
(3) ADMET PREDICTOR UPGRADES
----------------------------
The initial toxicity predictions in ADMET Predictor were released during fiscal
year 2005, and we have continued to add new toxicity models steadily. At this
time, we are working on additional such models, but we are not revealing their
nature for competitive reasons.
(4) MEMBRANEPLUS(TM)
--------------------
MembranePlus is a computer program that simulates IN VITRO experiments that
measure the permeability of new drug-like molecules through a layer of living
cells or through an artificial membrane. These experiments are conducted in
order to estimate the permeability of new drug compounds through the human
intestinal wall and into the blood. However, such experiments do not produce
results that are easily translated into human permeabilities. We believe that a
detailed mechanistic simulation of these IN VITRO experiments will provide the
insight and understanding needed to provide reasonably accurate estimates of
permeability in different regions of the human intestinal tract from IN VITRO
data.
This development effort accelerated during fiscal year 2005 with the hiring of a
new Ph.D. scientist who focused on this program. We have now progressed to the
point where the simulation is predicting the movement of drug molecules through
the bulk fluid, into the membranes at the surface of a cell layer, through the
surface membrane, through the interior of the cell, into the opposite surface
membrane, and through it to the bulk fluid on the opposite side of the cell
layer. Although a few technical issues remain to be resolved, we are optimistic
that the simulation will become a unique tool for the analysis of data from
these experiments, and will enable researchers to more accurately human
intestinal permeability from these IN VITRO experiments. We are not aware of any
other effort to produce a product of this nature.
This project was put on hold in September 2005 because our product manager for
GastroPlus took a position with another company, and the scientist responsible
for MembranePlus was assigned to take over GastroPlus. She has done an excellent
job with GastroPlus, completing the PBPKPlus Module and all of the many
associated changes that accompanied it. She will continue to work on GastroPlus
as needed, but will also work on MembranePlus again as GastroPlus activities
allow. We are currently interviewing candidates for an additional position in
this area to provide her with assistance on these two projects.
WORDS+
------
PRODUCTS
--------
Our wholly owned subsidiary, Words+, Inc. has been an industry pioneer and
technology leader for over 24 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 Compaq iPAQ personal digital assistant (PDA). PDA-based
communication devices have been very successful in the augmentative
18
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 SAM and to offer it on additional platforms. At the CSUN
conference in March 2005, we introduced the SAM Tablet XP1, our Windows XP-based
tablet. At the Closing the Gap conference in October 2005, we announced the
expected December release of our SAM for PC version, allowing SAM to be
distributed on virtually any Windows XP desktop or laptop computer. All received
enthusiastic responses from both potential customers and Words+ dealers alike.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED NOVEMBER 30, 2005.
The following table sets forth our consolidated statements of operations (in
thousands) and the percentages that such items bear to net sales:
----------------------------------------
Three Months Ended
----------------------------------------
11/30/05 11/30/04
----------------------------------------
Net sales $ 819 100% $ 1,066 100%
Cost of sales 332 40.5 322 30.2
--------- ----------- --------- --------
Gross profit 487 59.5 744 69.8
--------- ----------- --------- --------
Selling, general and administrative 629 76.8 632 59.3
Research and development 97 11.8 114 10.7
--------- ----------- --------- --------
Total operating expenses 726 88.6 746 70.0
--------- ----------- --------- --------
Income (loss) from operations (239) (29.2) (2) (0.2)
--------- ----------- --------- --------
Other income (expense) (1) 0.0 24 2.3
--------- ----------- --------- --------
Net income (loss) before taxes (240) (29.3) 22 2.1
--------- ----------- --------- --------
Benefit from income taxes 42 5.1% - -
--------- ----------- --------- --------
Net income (loss) $ (198) (24.2)% $ 22 2.1%
========= =========== ========= ========
NET SALES
Consolidated net sales decreased $247,000, or 23.2%, to $819,000 in the first
fiscal quarter of 2006 (FY06) from $1,066,000 in the first fiscal quarter of
2005 (FY05). Our sales from pharmaceutical and educational software decreased
approximately $324,000, or 62.0%; and our Words+, Inc. subsidiary's sales
increased approximately $77,000, or 14.2%, for the quarter. We attribute the
decrease in pharmaceutical software sales primarily to the delay in a large
global renewal order, which we received in the first fiscal quarter last year,
but was received in December, 2005 moving its revenue into the second fiscal
quarter of 2006.
We attribute the increase in Words+ sales primarily an increase in sales of
"Say-it! SAM" and "Freedom" products. Some decline in MessageMate products and
increase in insurance discounts were offset by these increases.
19
COST OF SALES
Consolidated cost of sales increased $10,000, or 3.1%, to $332,000 in the first
fiscal quarter of FY06 from $322,000 in the first fiscal quarter of FY05. The
percentage of cost of sales in the first fiscal quarter of FY06 increased 10.3%
from the first fiscal quarter of FY05. For Simulations Plus, absolute cost of
sales decreased $17,000, or 36.4%. As a percentage, cost of sales increased to
15.2% in FY06 from 9.1% in FY05. A significant portion of cost of sales is the
systematic amortization of capitalized software development costs, which is an
independent fixed cost rather than variable cost related to sales. Thus, we
attribute the increase in the percentage of cost of sales primarily to the
decrease in sales.
For Words+, cost of sales increased $27,000, or 9.7%. As a percentage, cost of
sales decreased 2.0% between the first fiscal quarter of FY06 and FY05. We
attribute the percentage decrease in cost of sales for Words+ primarily to the
ability to obtain purchase discounts by volume purchases of computers and PDAs,
which are main parts of the systems we sell.
GROSS PROFIT
Consolidated gross profit decreased $257,000, or 34.5%, to $487,000 in the first
fiscal quarter of FY06 from $744,000 in the first fiscal quarter of FY05. We
attribute this decrease to the decrease in sales of pharmaceutical software
which outweighed the increase in profit margin on Words+ products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Consolidated selling, general and administrative expenses decreased $3,000, or
0.5%, to $629,000 in the first fiscal quarter of FY06 from $632,000 in the first
fiscal quarter of FY05. For Simulations Plus, selling, general and
administrative expenses increased $1,000, or 0.3%. The major increases in
expenses were selling expenses, such as commissions to dealers and trade shows,
salary and payroll-related expenses such as health insurance and
payroll taxes, and rent and recruiting costs, which outweighed decreases in
equipment rental, accounting, and investor relations.
For Words+, expenses decreased $4,000, or 1.7%, due primarily to decreases in
salaries, selling expenses, equipment repairs, contributions, contract labor,
and depreciation expenses. These decreases outweighed increases in commissions,
rent, and technical service costs.
RESEARCH AND DEVELOPMENT
We incurred approximately $460,000 of research and development costs for both
companies during the first fiscal quarter of FY06. Of this amount, $363,000,
including an allocation of appraised value of $220,000 on ClassPharmer software,
was capitalized and $97,000 was expensed. In the first fiscal quarter of FY05,
we incurred $234,000 of research and development costs, of which $120,000 was
capitalized and $114,000 was expensed. The increase of $226,000, or 96.6%, in
research and development expenditures from the first fiscal quarter of FY05 to
the first fiscal quarter of FY06 was due primarily to the purchase of the
ClassPharmer software and some salary increases to existing staff.
OTHER INCOME (EXPENSE)
Net other income in the first fiscal quarter of FY06 decreased by $25,000, from
net income of $24,000 to net expense of $1,000. This is due primarily to a
decrease in the amortization of present value discount on long-term receivables
20
which we fully amortized by May 2005. We incurred other long-term receivables
from a part of the Bioreason assets purchase, however their amortized interest
was only $150 in the first fiscal quarter of FY06, while it was $15,000 in the
first fiscal quarter of FY05.
BENEFIT FROM INCOME TAXES
We estimated a benefit of income tax for $42,000 in the first fiscal quarter of
FY06, while there was no income tax benefit (or provision) in the first fiscal
quarter of FY05.
NET INCOME
Consolidated net income for the three months' operations decreased by $220,000,
or 1,000.0%, to a loss of $198,000 in the first quarter of FY06 compared to a
profit of $22,000 in the first quarter of FY05. We attribute this decrease in
profit primarily to the decreases in pharmaceutical software and other income
along with the increases in cost of sales. Although there was a decrease in
selling, and general and administrative expenses, research and development
expenses, a benefit from income taxes, and an increase in Words+ product sales
with improved profit margins, they did not overcome the decrease in consolidated
net income.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of capital have been cash flows from its
operations and a bank line of credit. The Company did not renew a revolving line
of credit for $500,000 from a bank in May 2005 because the Company did not use
it during the prior year and did not expect to need it in the near future. The
Company will consider re-applying for the line of credit when there is a need
for it.
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 apply for a loan from a bank and 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.
21
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 loss from currency exchange in the first three months of
FY06. 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, we carried out an evaluation,
under the supervision and with the participation of the Company's
management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of
our 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 required to be
included in our periodic SEC filings.
(b) CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING. There was no
change in our internal controls over financial reporting during
our most recent fiscal quarter that has materially affected,
or is reasonably likely to materially affect, our internal
controls over financial reporting.
22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
While we may from time to time be involved in various claims,
lawsuits or disputes with third parties, we are not currently
a party to any significant litigation. We have been contacted
by a former Bioreason salesperson in France regarding his
status and status of certain contracts after our acquisition
of certain secured assets of Bioreason from its creditors, and
we are working with our attorneys to resolve this matter at
this time.
Item 2. Changes in Securities
---------------------
None.
Item 3. Defaults Upon Senior Securities
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None.
Item 5. Other Information
-----------------
None.
Item 6. Exhibits and Reports on form 8-K
--------------------------------
(a) Exhibits:
31.1 -2 Certification of Chief Executive Officer and Chief
Financial Officer
32 Certification pursuant to Sec. 906 of the Sarbanes-Oxley
Act of 2002
23
SIGNATURE
In accordance with Section 13 or 15 (d) of the Securities Exchange Act of 1934,
the Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Lancaster, State of California, on
January 16, 2005.
Simulations Plus, Inc.
Date: January 16, 2006 By: /s/ MOMOKO BERAN
-----------------------
Momoko Beran
Chief Financial Officer
24