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, 2006 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)
FORMER ADDRESS
1220 W. AVENUE J
LANCASTER, CA 93534-2902
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
-------------- --------------
The number of shares outstanding of the Issuer's common stock, par value $0.001
per share, as of April 12, 2006, was 3,690,948.
SIMULATIONS PLUS, INC.
FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 2006
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
----
Consolidated Balance Sheet at February 28, 2006 (unaudited) 2
Consolidated Statements of Operations for the three months
and six months ended February 28, 2006 and 2005 (unaudited) 4
Consolidated Statements of Cash Flows for the six months
ended February 28, 2006 and 2005 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis or Plan of Operations
General 15
Results of Operations 20
Liquidity and Capital Resources 24
Item 3. Quantitative and Qualitative Disclosures about Market Risk 25
Item 4. Controls and Procedures 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 2. Changes in Securities 26
Item 3. Defaults upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 26
Signature 27
Exhibit - Certifications
1
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
at February 28, 2006
(Unaudited)
--------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents (Note 3) $1,067,672
Accounts receivable, net of allowance for doubtful
accounts of $19,277 (Note 4) 992,469
Inventory (Note 5) 241,852
Prepaid expenses and other current assets 33,287
Current portion of deferred tax 50,489
----------
Total current assets 2,385,769
CAPITALIZED COMPUTER SOFTWARE DEVELOPMENT COSTS,
net of accumulated amortization of $2,260,088 (Note 4) 1,308,704
LONG TERM CONTRACTS RECEIVABLE, net of discounts of $9,571 339,589
PROPERTY AND EQUIPMENT, net (Note 6) 107,839
CUSTOMER RELATIONSHIPS (Note 13) 118,442
DEFERRED TAX 1,251,800
OTHER ASSETS 29,463
----------
TOTAL ASSETS $5,541,606
==========
The accompanying notes are an integral part of these financial statements.
2
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
at February 28, 2006
(Unaudited)
--------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 184,467
Accrued payroll and other expenses 308,641
Accrued warranty and service costs 35,840
Current portion of deferred revenue 14,277
Other current liabilities 1,859
-----------
Total current liabilities 545,084
DEFERRED REVENUE --
Total liabilities 545,084
-----------
COMMITMENTS AND CONTINGENCIES (Notes 7 and 12) --
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
3,690,948 shares issued and outstanding 3,734
Additional paid-in capital 5,228,274
Accumulated deficit (235,486)
-----------
Total shareholders' equity 4,996,522
-----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 5,541,606
===========
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
---------------------------- ----------------------------
2006 2005 2006 2005
----------- ----------- ----------- -----------
NET SALES $ 1,481,791 $ 1,031,776 $ 2,300,606 $ 2,098,250
COST OF SALES 387,067 370,796 718,664 692,924
----------- ----------- ----------- -----------
GROSS PROFIT 1,094,724 660,980 1,581,942 1,405,326
----------- ----------- ----------- -----------
OPERATING EXPENSES
Selling, general, and administrative 687,737 535,442 1,316,493 1,167,387
Research and development 119,713 131,227 216,935 244,919
----------- ----------- ----------- -----------
Total operating expenses 807,450 666,669 1,533,428 1,412,306
----------- ----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS 287,274 (5,689) 48,514 (6,980)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE)
Interest income 5,621 14,525 9,102 31,296
Miscellaneous income -- -- 50 --
Interest expense -- -- -- (284)
Gain on sale of assets 3,126 -- 3,126 5,200
Gain on currency exchange 3,953 -- (1,349) 2,111
----------- ----------- ----------- -----------
Total other income (expense) 12,700 14,525 10,929 38,323
----------- ----------- ----------- -----------
INCOME BEFORE BENEFIT FROM (PROVISION FOR)
INCOME TAXES 299,974 8,836 59,443 31,343
BENEFIT FROM (PROVISION FOR) INCOME TAXES
Provision for income tax (51,511) -- (9,511) --
Change in valuation allowance -- -- -- --
----------- ----------- ----------- -----------
Total benefit from (provision for) income taxes (51,511) -- (9,511) --
----------- ----------- ----------- -----------
NET INCOME $ 248,463 $ 8,836 $ 49,932 $ 31,343
=========== =========== =========== ===========
BASIC EARNINGS PER SHARE $ 0.07 $ 0.00 $ 0.01 $ 0.01
=========== =========== =========== ===========
Diluted earnings per share $ 0.06 $ 0.00 $ 0.01 $ 0.01
=========== =========== =========== ===========
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING
BASIC 3,670,878 3,608,600 3,659,931 3,589,792
=========== =========== =========== ===========
DILUTED 4,090,225 4,114,872 4,053,710 4,114,872
=========== =========== =========== ===========
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)
------------------------------------------------------------------------------------------
2006 2005
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 49,932 $ 31,343
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization of property and
equipment 21,466 21,518
Amortization of customer relationships 9,600 --
Amortization of capitalized software development
costs 119,718 77,810
(Gain) on sale of assets (3,126) (5,200)
(Increase) decrease in
Accounts receivable 212,969 197,429
Inventory 39,548 108,158
Deferred tax 9,511 --
Other assets 29,404 12,557
Increase (decrease) in
Accounts payable 93,426 29,469
Accrued payroll and other expenses (88,157) 22,530
Accrued bonuses to officers (38,680) (77,626)
Accrued income taxes (1,600) (1,600)
Accrued warranty and service costs 8,101 (4,412)
Deferred revenue (126,708) (5,708)
----------- -----------
Net cash provided by operating activities 335,404 406,268
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (41,075) (27,401)
Purchasse of Bioreason's assets (826,192) --
Sale of property and equipment 7,215 8,735
Capitalized computer software development costs (246,154) (198,824)
----------- -----------
Net cash used in investing activities (1,106,206) (217,490)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the exercise of stock options 84,432 86,287
----------- -----------
Net cash provided by financing activities 84,432 86,287
----------- -----------
The accompanying notes are an integral part of these financial statements.
5
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the six months ended February 28
(Unaudited)
-----------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents $ (686,370) $ 275,065
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,754,042 734,266
----------- -----------
CASH AND CASH EQUIVALENTS, END OF QUARTER $ 1,067,672 $ 1,009,331
=========== ===========
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.
Note 2: CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements and accompanying notes are prepared in
accordance with accounting principles generally accepted in the United States of
America. Preparing financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenue, and expenses. These estimates and assumptions are affected by
management's application of accounting policies. Actual results could differ
from those estimates. Critical accounting policies for us include revenue
recognition, 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 $119,718 and $77,810 for the six months ended
February 28, 2006 and 2005, 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.
Comprehensive Income
--------------------
We utilize Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income." This statement establishes standards for
reporting comprehensive income and its components in a financial statement.
Comprehensive income as defined includes all changes in equity (net assets)
during a period from non-owner sources. Examples of items to be included in
comprehensive income, which are excluded from net income, include foreign
currency translation adjustments and unrealized gains and losses on
available-for-sale securities. Comprehensive income is not presented in our
financial statements since we did not have any of the items of comprehensive
income in any period presented.
8
Concentrations and Uncertainties
--------------------------------
International sales accounted for 34% and 32% of net sales for the second
quarter of fiscal year 2006 (FY06) and 2005 (FY05), respectively. For
Simulations Plus, Inc., one customer accounted for 34% of net sales for the
second quarter of FY06, and for Words+, Inc., one government agency accounted
for 18% of net sales during the second quarter of FY06.
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 consolidated accounts receivable, one government agency accounted for 14%,
and one customer comprised 12% of total receivables. For Simulations Plus, three
customers comprised 29%, 15%, and 15% of accounts receivable at February 28,
2006. Three customers comprised 29%, 23% and 16% of accounts receivable at
February 28, 2005. For Words+, one customer comprised 23% of accounts receivable
at February 28, 2006. Two customers comprised 18% and 15% of accounts receivable
at February 28, 2005.
Our subsidiary, Words+, Inc., purchases components for the main computer-based
products from a single manufacturer. 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.
9
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
when making estimates of the uncollectability of our trade accounts receivable
balances. If we determine that the financial condition 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, 2006 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 February 28, 2006 consisted of the following:
Equipment $ 163,607
Computer equipment 302,961
Furniture and fixtures 57,705
Automobile 21,769
Leasehold improvements 55,639
---------
Sub total 601,681
Less: Accumulated depreciation and amortization (493,842)
---------
Net Book Value 107,839
=========
Note 7: COMMITMENTS AND CONTINGENCIES
Leases
------
We have signed a new lease and moved to a new building on February 3, 2006. The
new lease has a five-year term with two (2), three (3) year options to extend.
Future minimum lease payments under non-cancelable lease were as follows:
Fiscal Year Lease Commitment
----------- ----------------
2006 $ 131,982
2007 269,864
2008 278,955
2009 288,410
2010 298,241
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.
10
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.
Litigation
----------
On April 6, we received a notice from a liquidator for the former French
subsidiary of Bioreason, Bioreason SARL, saying that the liquidator has
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 to aggressively
pursue our rights and now to respond to their claims. Should the plaintiff
prevail, it would generate a reallocation of the purchase price of Bioreason's
secured assets. A portion of long term contracts receivable would be reallocated
to software and intangible. Their claims may also have some effect on the future
renewals from European customers.
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 February 28, 2006, options to purchase 982,836 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. The outstanding options reflect the cancellation of 60,345
shares, of which 28,945 shares were due to its term for forfeiture if they are
not exercised within 8 years. 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 second quarter of FY06, 40,900 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.
11
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 APB 25'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:
Six Six
Months Months
FY 2006 FY 2005
---------- -----------
Net income (loss)
As reported $ 49,932 $ 31,343
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) (126,471)
---------- -----------
PRO FORMA NET INCOME (LOSS) $ (17,379) $ (95,128)
========== ===========
Earnings (loss) per common share
Basic - as reported $ 0.01 $ 0.01
Basic - Pro forma $ 0.00 $ (0.03)
Diluted - as reported $ 0.01 $ 0.01
Diluted - Pro forma $ 0.00 $ (0.02)
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 six months ended February 28, 2006 and February 28, 2005:
12
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 41,075
--------------------------------------------- ---------------- ---------------- --------------- -------------
Depreciation and Amortization 6,792 14,674 21,466
--------------------------------------------- ---------------- ---------------- --------------- -------------
February 28, 2005
-------------------------------------------------------------------------------------------------------------
Simulations
Plus, Inc Words +, Inc. Eliminations Total
--------------------------------------------- ---------------- ---------------- --------------- -------------
Net Sales 933,602 1,164,648 2,098,250
--------------------------------------------- ---------------- ---------------- --------------- -------------
Income (loss) from operations (37,533) 30,553 (6,980)
--------------------------------------------- ---------------- ---------------- --------------- -------------
Identifiable assets 5,521,678 1,246,860 (1,724,324) 5,044,214
--------------------------------------------- ---------------- ---------------- --------------- -------------
Capital expenditures 5,053 22,348 27,401
--------------------------------------------- ---------------- ---------------- --------------- -------------
Depreciation and Amortization 7,102 14,416 21,518
--------------------------------------------- ---------------- ---------------- --------------- -------------
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, 2006 and February 28, 2005 were as follows (in thousands):
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
------------------------------ =============== ============ ============ ============ ============ ==========
February 28, 2005
-------------------------------------------------------------------------------------------------------------
North South
America Europe Asia Oceania America Total
------------------------------ --------------- ------------ ------------ ------------ ------------ ----------
Simulations Plus, Inc. 514 209 210 -0- -0- 933
------------------------------ --------------- ------------ ------------ ------------ ------------ ----------
Words+, Inc. 1,009 111 33 12 -0- 1,165
------------------------------ --------------- ------------ ------------ ------------ ------------ ----------
Total 1,523 320 243 12 -0- 2,095
------------------------------ =============== ============ ============ ============ ============ ==========
Note 12: SUBSEQUENT EVENT
Press Release
We announced the full release of ClassPharmer 4.0 in March 2006.
Litigation
----------
On April 6, we received a notice from a liquidator for the former French
subsidiary of Bioreason, Bioreason SARL, saying that the liquidator has
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 to aggressively
pursue our rights and now to respond to their claims. Should the plaintiff
prevail, it would generate a reallocation of the purchase price of Bioreason's
secured assets. A portion of long term contracts receivable would be reallocated
to software and intangible. Their claims may also have some effect on the future
renewals from European customers.
13
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 it follows.
Assets Allocated amounts
------ -----------------
Long-Term contracts receivable $ 447,496
Property and equipment 5,001
Software 245,653
Customer relationships 128,042
----------------
Total $ 826,192
================
14
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: ADMET
Modeler(TM), ADMET Predictor(TM), ClassPharmer(TM), DDDPlus(TM), and
GastroPlus(TM).
ADMET MODELER
-------------
ADMET (Absorption, Distribution, Metabolism and Excretion and Toxicity) Modeler
was first 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
15
"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.
At the end of the 2nd quarter, a beta version of a new release of ADMET Modeler
was undergoing in-house testing. This version improves the support vector
machine ensemble modeling to include classification models (e.g.,
high/medium/low classes for a predicted property) as well as regression models
(i.e., models that predict a continuous numerical value for a property). Several
other improvements have also been added. We expect release of this new version
during the 3rd fiscal quarter.
ADMET PREDICTOR
---------------
ADMET Predictor consists of a library 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. Drug companies search
through millions of such molecular structures as they attempt to find new drugs.
The vast majority of these molecules 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 (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
the compounds 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.
During the 2nd quarter, improvements were made to the program to include a
convenient model editor and to add an algorithm whereby scientists can now add
their own data and extend any of the predictive models into their own "chemical
space" when it is significantly different from that of the data used to train
the model. A sensitivity depiction was also added to allow scientists to see to
which particular descriptors (molecular features) a property is most sensitive.
This information is helpful to chemists to enable them to see how different
molecular structural features affect various ADMET properties. This version is
in final beta test and is expected to be released in the 3rd quarter.
CLASSPHARMER(TM)
----------------
In November 2005, we acquired certain secured assets of Bioreason, Inc. from its
former creditors, including two patents governing classification algorithms and
a software package called ClassPharmer. ClassPharmer is a molecule
classification software program, similar in nature to ChemTK(TM), which we
acquired from Sage Informatics in August 2005, but with more sophisticated
proprietary 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.
16
Our strategy for acquiring ChemTK from Sage was to eventually integrate it with
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 delivered beta versions of ClassPharmer 4.0 to a
number of ClassPharmer 3.5 customers in Europe and Japan in February 2006. Note:
in a subsequent event to this reporting period, we released ClassPharmer 4.0 in
March 2006.
DDDPLUS
-------
DDDPlus (Dose Disintegration and Dissolution Plus) was first released 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.
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 have now incorporated those improvements. We have also added
significant new functionality by enabling formulation scientists to optimize
experimental conditions to achieve a desired dissolution-time profile, and to
handle polymer matrix formulations that are often used in controlled release
formulations. These features are in final beta test and a full release of
version 2.0 is expected in the 3rd quarter. Demonstrations of the beta version
over the last two months have resulted in keen interest at customer sites.
We remain confident that significant 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.
GASTROPLUS
----------
GastroPlus simulates 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 (i.e., degraded) in the
gastrointestinal tract prior to absorption, and 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 the optional PBPKPlus(TM) Module, released during this reporting
period, concentrations in a variety of tissues and organs can now also be
predicted. With the optional PDPlus(TM) module, the program can also simulate
how a drug affects the body, such as reducing pain, reducing blood pressure,
reducing depression, and causing 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 of knowledge gained through
such simulations 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
17
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 and tissue
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 growing number of generic drug companies and drug
delivery companies (companies that design the tablet or capsule for a drug
compound that was developed by another company). Although these companies are
considerably smaller than the pharmaceutical giants, they can also save
considerable time and money 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 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 during 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.
CONTRACT RESEARCH SERVICES
--------------------------
In addition to our software products, we also 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 incorporated into a beta
version of GastroPlus that is undergoing testing both in-house and at selected
customer sites. We expect full release of this version in the 3rd quarter.
18
(2) 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.
(3) 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 the previous 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 during this reporting period. She
will continue to work on GastroPlus as needed, but will also work on
MembranePlus again as GastroPlus activities allow. We are currently interviewing
several candidates to expand our life sciences team, with at least 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 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.
19
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. 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 FEBRUARY 28, 2006 AND 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
------------------------------------------------------------
02/28/06 02/28/05
------------------------------- ----------------------------
Net sales $ 1,482 100% $ 1,032 100%
Cost of sales 387 26.1 371 35.9
---------------- -------------- ------------- --------------
Gross profit 1,095 73.9 661 64.1
---------------- -------------- ------------- --------------
Selling, general and administrative 690 46.5 535 51.8
Research and development 118 8.0 131 12.7
---------------- -------------- ------------- --------------
Total operating expenses 808 54.5 666 64.5
---------------- -------------- ------------- --------------
Income (loss) from operations 287 19.4 (5) (0.5)
---------------- -------------- ------------- --------------
Other income 13 0.9 14 1.4
---------------- -------------- ------------- --------------
Net income before taxes 300 20.2 9 0.9
---------------- -------------- ------------- --------------
Provision for income taxes 52 3.5% - -
---------------- -------------- ------------- --------------
Net income $ 248 16.7% $ 9 0.9%
================ ============== ============= ==============
NET SALES
Consolidated net sales increased $450,000, or 43.6%, to $1,482,000 in the second
fiscal quarter of 2006 (2Q FY06) from $1,032,000 in the second fiscal quarter of
2005 (2Q FY05). Our sales from pharmaceutical and educational software increased
approximately $474,000, or 115.5%; and our Words+, Inc. subsidiary's sales
experienced a slight decrease of approximately $24,000, or 3.8%, for the
quarter. We attribute $300,000 of the increase in pharmaceutical software sales
to a global renewal order from a large customer, which we had received in the
first quarter of FY05, but was received just after the start of the second
quarter in FY06. The additional $174,000 was from new business, including some
revenues from the ClassPharmer software which we acquired in November 2005.
We attribute the decrease in Words+ sales primarily a decrease in sales of
"TuffTalker" and "Freedom" products which outweighed increases in Software
sales, "TuffTalker Plus" products and decreases in insurance discounts.
20
COST OF SALES
Consolidated cost of sales increased $16,000, or 4.3%, to $387,000 in the 2Q
FY06 from $371,000 in the 2Q FY05. The percentage of cost of sales in the 2Q
FY06 decreased 9.8% from the 2Q FY05. For Simulations Plus, absolute cost of
sales increased $79,000, or 140.8%. As a percentage of sales, cost of sales
increased to 15.3% in FY06 from 13.7% 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 relates to sales.
The amortization cost increased approximately $30,000, or 157.9%, in the 2Q FY06
comparing with the same period in FY05.
For Words+, cost of sales decreased $63,000, or 19.9%. As a percentage of sales,
cost of sales decreased 8.5% between the 2Q FY06 and 2Q 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 for the systems we sell.
GROSS PROFIT
Consolidated gross profit increased $434,000, or 64.9%, to $1,095,000 in the 2Q
FY 06 from $661,000 in the 2Q FY05. We attribute this increase to the increase
in sales of pharmaceutical software in addition to an increase in profit margin
on Words+ products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Consolidated selling, general and administrative expenses increased $155,000, or
29.0%, to $690,000 in the 2Q FY06 from $535,000 in the 2Q FY05. For Simulations
Plus, selling, general and administrative expenses increased $131,000, or 44.1%.
One of the major increases in expenses was legal fees which were incurred to
communicate with an attorney in France, who represented an employee at the
former French subsidiary of Bioreason, and who was contesting our ClassPharmer
distribution rights in Europe. Other increases were in an accounting fee which
was incurred for a value assessment of the Bioreason assets provided by an
independent firm, selling expenses, such as commissions to dealers and travel
expenses, salary and payroll-related expenses such as health insurance and
payroll taxes, rent, moving expense, and recruiting costs, which outweighed
decreases in investor relations, dues and subscriptions, and supplies.
For Words+, expenses increased $24,000, or 9.8%, due primarily to increases in
salaries, payroll taxes, selling expenses, such as commission and travel
expenses, technical service costs and supplies. These increases outweighed
decreases in depreciation, repairs, and insurance.
RESEARCH AND DEVELOPMENT
We incurred approximately $223,000 of research and development costs for both
companies during the 2Q FY06. Of this amount, $103,000 was capitalized and
$120,000 was expensed. In the 2Q FY05, we incurred $210,000 of research and
development costs, of which $79,000 was capitalized and $131,000 was expensed.
The increase of $13,000, or 6.2%, in research and development expenditures from
the 2Q FY05 to the 2Q FY06 was due primarily to salary increases to existing
staff.
21
OTHER INCOME
Net other income in the 2Q FY06 decreased by $1,000, from net income of $14,000
to net income of $13,000. This is due primarily to the decrease in the
amortization of present value discounts on long-term receivables 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 $4,000 in
the 2Q FY06, while the amortized interest income we had in the 2Q FY05 was
$12,000. Although there were gains of $7,000 from currency exchange and sale of
assets, they did not overcome the decrease in amortized interest income.
PROVISION FOR INCOME TAX
We estimated income taxes of $10,000 at the end of February 28, 2006. At the end
of the first fiscal quarter of FY06, we estimated an income tax benefit of
$42,000 (because of the loss during that quarter). To consolidate these amounts,
we recorded an estimated income tax for $52,000 in the 2Q FY06, while there was
no income tax benefit (or provision) in the 2Q FY05.
NET INCOME
Consolidated net income for the three months' operations increased by $239,000,
or 2,655.6%, to $248,000 in the 2Q FY06 compared to $9,000 in the 2Q FY05. We
attribute this increase in profit primarily to the increases in pharmaceutical
software and other income along with the improvement in gross margin. Although
there were increases in Selling, general and administrative expense, research
and development expenditure, a provision for income taxes, the increase in
revenues combined with improved profit margins outweighed the increased
expenses.
COMPARISON OF SIX MONTHS ENDED FEBRUARY 28, 2006 AND 2005.
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
------------------------------------------------------------
02/28/06 02/28/05
------------------------------- ----------------------------
Net sales $ 2,301 100% $ 2,098 100%
Cost of sales 719 31.3 693 33.0
---------------- -------------- ------------- --------------
Gross profit 1,582 68.8 1,405 67.0
---------------- -------------- ------------- --------------
Selling, general and administrative 1,316 57.2 1,167 55.6
Research and development 217 9.4 245 11.7
---------------- -------------- ------------- --------------
Total operating expenses 1,533 66.6 1,412 67.3
---------------- -------------- ------------- --------------
Income (loss) from operations 49 2.1 (7) (0.3)
---------------- -------------- ------------- --------------
Other income 11 0.5 38 1.8
---------------- -------------- ------------- --------------
Net income before taxes 60 2.6 31 1.5
---------------- -------------- ------------- --------------
Provision for income taxes 10 1.4 - -
---------------- -------------- ------------- --------------
Net income $ 50 2.2% $ 31 1.5%
================ ============== ============= ==============
NET SALES
Consolidated net sales increased $203,000, or 9.7%, to $2,301,000 in the first
six months of fiscal year 2006 (FY06) from $2,098,000 in the first six months of
fiscal year 2005 (FY05). Our sales from pharmaceutical and educational software
increased approximately $150,000, or 16.0%; and our Words+, Inc. subsidiary's
sales increased approximately $53,000, or 4.6%, for the six months ended at
February 28, 2006. We attribute the increase in pharmaceutical software sales
primarily to the revenue from ClassPharmer sales which we purchased in November
2005 to make a new ClassPharmer combined with ChemTK, another purchased product
in August 2005.
22
We attribute the increase in Words+ sales primarily an increase in sales of our
"Say-it! SAM" product. Some declines in "TuffTalker" and "Freedom" product sales
were offset by the increases in sales of "TuffTalker Plus" and a mix of other
products.
COST OF SALES
Consolidated cost of sales increased $26,000, or 3.8%, to $719,000 in the first
six months of FY06 from $693,000 in the first six months of FY05. The percentage
of cost of sales in the first six months of FY06 decreased 1.7% from the first
six months of FY05. For Simulations Plus, absolute cost of sales increased
$62,000, or 59.6%. As a percentage, cost of sales increased to 15.3% in FY06
from 11.1% 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 a variable cost related to sales. The amortization cost
increased approximately $44,000, or 168.6%, in the first six months of FY06
compared with the same period in FY05.
For Words+, cost of sales decreased $36,000, or 6.1%. As a percentage, cost of
sales decreased 5.2% between the first six months of FY06 and FY05. We attribute
the percentage decrease in cost of sales for Words+ primarily to the ability to
obtain purchase discounts through volume purchases of computers and PDAs, which
are main parts for the systems we sell.
GROSS PROFIT
Consolidated gross profit increased $177,000, or 12.6%, to $1,582,000 in the
first six months of FY06 from $1,405,000 in the first six months of FY05. We
attribute this increase to the increase in sales of pharmaceutical software in
addition to an increase in profit margin on Words+ products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Consolidated selling, general and administrative expenses increased $149,000, or
12.8%, to $1,316,000 in the first six months of FY06 from $1,167,000 in the
first six months of FY05. For Simulations Plus, selling, general and
administrative expenses increased $130,000, or 20.1%. The major increases in
expenses were selling expenses, such as trade shows and travel, legal fees which
were incurred for the acquisition of assets from Sage Informatics and Bioreason,
and by legal communications with a former employee of the former French
subsidiary of Bioreason regarding ClassPharmer distribution rights in Europe, as
well as salary and payroll-related expenses such as health insurance and payroll
taxes, rent, and recruiting costs, which outweighed decreases in investor
relations, equipment rental, and dues and subscriptions.
For Words+, expenses increased $19,000, or 1.6%, due primarily to increases in
commissions, advertising, salaries, payroll tax, technical service costs, and
supplies. These increases outweighed decreases in trade shows, contract labor,
Contribution, and equipment repair.
RESEARCH AND DEVELOPMENT
We incurred approximately $709,000 of research and development costs for both
companies during the first six months of FY06. Of this amount, $492,000,
including allocation of the appraised value of $245,653 on the ClassPharmer
software, was capitalized and $217,000 was expensed. In the first six months of
FY05, we incurred $444,000 of research and development costs, of which $199,000
was capitalized and $245,000 was expensed. The increase of $265,000, or 59.7%,
in research and development expenditures from the first six months of FY05 to
the first six months of FY06 was due primarily to our acquisition of the
ClassPharmer software and salary increases to existing staff.
23
OTHER INCOME (EXPENSE)
Net other income in the first six months of FY06 decreased by $27,000, from net
income of $38,000 to $11,000. This is due primarily to the decrease in the
amortization of present value discounts on long-term receivables which we had
fully amortized by May 2005. We incurred other long-term receivables from a part
of the Bioreason assets purchase; however, their amortized interest was $4,000
in the first six months of FY06, while the amortized interest revenue we had in
the same period of FY05 was $28,000. There were also decreases in gains from
currency exchange and sales of assets in the first six months of FY06 compared
with the same period of FY05.
PROVISION FOR INCOME TAX
We estimated an income tax of $10,000 for the first six months of FY 06, while
there was no income tax benefit or provision in the first six months of FY05.
NET INCOME
Consolidated net income for the first six months of FY06 increased by $19,000,
or 61.3%, to $50,000 compared to $31,000 in the first six months of FY05. We
attribute this increase in profit primarily to the increases in sales from both
pharmaceutical software licenses and Words+ products, which outweighed increases
in operating expenses and income tax, and the decrease in other income.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of capital have been cash flows from its
operations and a bank line of credit. The Company 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.
24
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 six 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, 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 was no
change in Company's internal control over financial reporting during
the Company's most recent fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the Company's Internal
control over financial reporting.
25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
On April 6, we received a notice from a liquidator for the former French
subsidiary of Bioreason, Bioreason SARL, saying that the liquidator has
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 to aggressively
pursue our rights and now to respond to their claims. Should the plaintiff
prevail, it would generate a reallocation of the purchase price of Bioreason's
secured assets. A portion of long term contracts receivable would be reallocated
to software and intangible. Their claims may also have some effect on the future
renewals from European customers.
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 24, 2006, 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.
The above proposals were approved and the results of the balloting at
the meeting are summarized in the following table.
-------------------- ----------------- ------------------ ----------------- ----------------- ------------------
Proposal Yes No Abstain Withheld Total
-------------------- ----------------- ------------------ ----------------- ----------------- ------------------
(1) 3,143,313 -- -- 5,101 3,148,414
-------------------- ----------------- ------------------ ----------------- ----------------- ------------------
(2) 3,148,147 -- 267 -- 3,148,414
-------------------- ----------------- ------------------ ----------------- ----------------- ------------------
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
26
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 12, 2006.
Simulations Plus, Inc.
Date: April 12, 2006 By: /s/ MOMOKO BERAN
-----------------------------
Momoko Beran
Chief Financial Officer
27