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 May 31, 2005 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1937
For the transition period from _________ to _________
Commission file number: 001-32046
SIMULATIONS PLUS, INC.
(Name of small business issuer in its charter)
CALIFORNIA 95-4595609
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) identification No.)
1220 W. AVENUE J
LANCASTER, CA 93534-2902
(Address of principal executive offices including zip code)
(661) 723-7723
(Issuer's telephone number, including area code)
NOT APPLICABLE
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes x No
-------------- --------------
The number of shares outstanding of the Issuer's common stock, par value $0.001
per share, as of July 08, 2005, was 3,634,143.
SIMULATIONS PLUS, INC.
FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED MAY 31, 2005
Table of Contents
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 2
Consolidated Balance Sheet at May 31, 2005 (unaudited) 2
Consolidated Statements of Operations for the three months
and nine months ended May 31, 2005 and 2004 (unaudited) 4
Consolidated Statements of Cash Flows for the nine months
ended May 31, 2005 and 2004 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis or Plan of Operations
General 13
Results of Operations 18
Liquidity and Capital Resources 23
Item 3. Quantitative and Qualitative Disclosures about Market Risk 23
Item 4. Controls and Procedures 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Changes in Securities 25
Item 3. Defaults upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
Signature 26
Exhibit - Certifications 27
1
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
AT MAY 31, 2005
(UNAUDITED)
--------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $1,348,491
Accounts receivable, net of allowance for doubtful accounts
of $18,884 1,392,912
Inventory (Note 7) 300,558
Prepaid expenses and other current assets 66,724
Deferred tax 186,000
----------
Total current assets 3,294,685
CAPITALIZED COMPUTER SOFTWARE DEVELOPMENT COSTS,
net of accumulated amortization of $2,095,062 (Note 4) 713,051
PROPERTY AND EQUIPMENT, net (Note 8) 88,401
DEFERRED TAX (Note 5) 1,160,000
OTHER ASSETS 11,150
----------
TOTAL ASSETS $5,267,287
==========
The accompanying notes are an integral part of these financial statements.
2
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
AT MAY 31, 2005
(UNAUDITED)
--------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 182,283
Accrued payroll and other expenses 276,937
Accrued warranty and service costs 28,508
Current portion of deferred revenue 11,416
Other current liabilities 3,965
-----------
Total current liabilities 503,109
DEFERRED REVENUE 11,423
Total liabilities 514,532
-----------
COMMITMENTS AND CONTINGENCIES --
SHAREHOLDERS' EQUITY (Note 10)
Preferred stock, $0.001 par value
10,000,000 shares authorized
no shares issued and outstanding --
Common stock, $0.001 par value
20,000,000 shares authorized
3,632,943 shares issued and outstanding 3,633
Additional paid-in capital 5,092,265
Accumulated deficit (343,143)
-----------
Total shareholders' equity 4,752,755
-----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 5,267,287
===========
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 NINE MONTHS ENDED MAY 31,
(UNAUDITED)
--------------------------------------------------------------------------------------------------------------------------
Three months ended Nine months ended
---------------------------- ----------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
NET SALES $ 1,424,438 $ 1,233,220 $ 3,522,688 $ 3,740,703
COST OF SALES 428,266 382,731 1,121,190 1,194,267
----------- ----------- ----------- -----------
GROSS PROFIT 996,172 850,489 2,401,498 2,546,436
----------- ----------- ----------- -----------
OPERATING EXPENSES
Selling, general, and administrative 644,502 622,005 1,811,889 1,961,622
Research and development 134,007 117,972 378,926 415,354
----------- ----------- ----------- -----------
Total operating expenses 778,509 739,977 2,190,815 2,376,976
----------- ----------- ----------- -----------
INCOME FROM OPERATIONS 217,663 110,512 210,683 169,460
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE)
Interest income 7,114 22,445 38,410 62,203
Miscellaneous income 1,189 1,189 --
Interest expense (259) (383) (543) (767)
Gain (loss) on sale of assets 2,201 -- 7,401 --
Gain (loss) on currency exchange (4,658) -- (2,547) --
----------- ----------- ----------- -----------
Total other income (expense) 5,587 22,062 43,910 61,436
----------- ----------- ----------- -----------
INCOME BEFORE BENEFIT FROM (PROVISION FOR)
INCOME TAXES 223,250 132,574 254,593 230,896
BENEFIT FROM (PROVISION FOR) INCOME TAXES
Provision for income tax (50,000) -- (50,000) --
----------- ----------- ----------- -----------
Total benefit from (provision for) income taxes (50,000) -- (50,000) --
----------- ----------- ----------- -----------
NET INCOME $ 173,250 $ 132,574 $ 204,593 $ 230,896
=========== =========== =========== ===========
BASIC EARNINGS PER SHARE $ 0.05 $ 0.04 $ 0.06 $ 0.07
=========== =========== =========== ===========
Diluted earnings per share $ 0.04 $ 0.03 $ 0.05 $ 0.06
=========== =========== =========== ===========
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING
BASIC 3,627,811 3,536,406 3,602,605 3,474,760
=========== =========== =========== ===========
DILUTED 3,958,063 4,046,223 3,958,063 4,046,223
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
4
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MAY 31,
(UNAUDITED)
--------------------------------------------------------------------------------------
2005 2004
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 204,593 $ 230,896
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization of property and
equipment 34,538 27,289
Amortization of capitalized software development
costs 119,077 141,112
(Gain) on sale of assets (7,401) --
Deferred tax 50,000 --
(Increase) decrease in
Accounts receivable 312,121 176,988
Inventory 58,032 (173,524)
Other assets 49,320 (81,514)
Increase (decrease) in
Accounts payable 29,397 (43,436)
Accrued payroll and other expenses 58,933 44,835
Accrued bonuses to officers (77,626) (133,538)
Accrued income taxes (1,600) --
Accrued warranty and service costs (3,988) (8,125)
Deferred revenue (8,562) (12,162)
--------- ---------
Net cash provided by operating activities 816,834 168,821
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (60,144) (24,015)
Sale of property and equipment 10,972 4,084
Capitalized computer software development costs (255,648) (143,713)
--------- ---------
Net cash used in investing activities (304,820) (163,644)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on capitalized lease obligations -- (3,191)
Proceeds from the exercise of stock options 102,211 139,339
--------- ---------
Net cash provided by financing activities 102,211 136,148
--------- ---------
The accompanying notes are an integral part of these financial statements.
5
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MAY 31,
(UNAUDITED)
--------------------------------------------------------------------------------
Net increase in cash and cash
equivalents $ 614,225 $ 141,325
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 734,266 260,733
---------- ----------
CASH AND CASH EQUIVALENTS, END OF QUARTER $1,348,491 $ 402,058
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
INTEREST PAID $ 543 $ 767
========== ==========
INCOME TAXES PAID $ 1,600 $ 1,600
========== ==========
SUPPLEMENTAL SCHEDULE OF NON-CASH TRANSACTIONS
1 In FY04, Minolta copier with a zero book value was traded-in for a new
Ricoh copier/printer. The remaining obligation of $8,177 was assumed by
the lessor of Ricoh copier/printer in the exchange for a higher per
print cost.
2 In FY04, The Company purchased all of the rights, title, and interest in
the Say-it! SAM augmentative communication device developed by SAM
Communications, LLC, for 35,000 shares of Simulations Plus restricted
common stock at $4.65 per share equal to the closing price on the date
when the agreement was signed.
The accompanying notes are an integral part of these financial statements.
6
SIMULATIONS PLUS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
--------------------------------------------------------------------------------
Note 1: GENERAL
As contemplated by the Securities and Exchange Commission under Item 310(b) of
Regulation S-B, the accompanying financial statements and footnotes have been
condensed and therefore do not contain all disclosures required by generally
accepted accounting principles. The interim financial data are unaudited;
however, in the opinion of Simulations Plus, Inc. ("we", "our"), the interim
data include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results for the interim periods. Results
for interim periods are not necessarily indicative of those to be expected for
the full year.
Note 2: CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements and accompanying notes are prepared in
accordance with accounting principles generally accepted in the United States of
America. Preparing financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenue, and expenses. These estimates and assumptions are affected by
management's application of accounting policies. Actual results could differ
from those estimates. Critical accounting policies for us include revenue
recognition (see Note 3), accounting for capitalized software development costs
(see Note 4), and accounting for income taxes (see Note 5).
Note 3: REVENUE RECOGNITION
We account for the licensing of software in accordance with American Institute
of Certified Public Accountants (AICPA) Statement of Position (SOP) 97-2,
"SOFTWARE REVENUE RECOGNITION". The application of SOP 97-2 requires judgment,
including whether a software arrangement includes multiple elements, and if so,
whether vendor-specific objective evidence (VSOE) of fair value exists for those
elements.
The end users receive certain elements of our products over a period of time.
These elements include free post-delivery telephone support and the right to
receive unspecified upgrades/enhancements. In accordance with SOP 97-2, we have
evaluated these agreements and we have recognized the entire license fee on the
date the software is delivered to and accepted by the customer. In order to
recognize the fee in this manner, we have met all the criteria required,
including:
o The Post Contract Customer Support ("PCS") fee is included in the
initial licensing fee,
o The PCS included with the license is for one year or less,
o The estimated cost of providing the PCS during the arrangement is
insignificant, and
o Unspecified upgrades/enhancements during the PCS arrangements have been
and are expected to continue to be minimal and infrequent.
7
Changes to the elements in a software arrangement, the ability to identify VSOE
for those elements, the fair value of the respective elements, the costs
associated with providing PCS and changes to a product's estimated life cycle
could materially impact the amount of earned and unearned revenue. Judgment is
also required to assess whether future releases of certain software represent
new products or upgrades and enhancements to existing products.
From time to time, we offer certain customers multi-year contracts with extended
payment terms. SOP 97-2 requires us to evaluate these contracts to determine if
they qualify for recognition of revenue in a manner similar to our one-year
contracts. On these contracts, we evaluate the collection and concession history
with these customers and products to overcome the presumption that revenue
should be recognized in line with cash collections. To date, we have recognized
these contracts on delivery to and acceptance by the customer of the product.
Substantial judgment is required in evaluating the relevant history and contract
economics of these extended contracts, and could materially impact recorded
revenue and unearned revenue in our financial statements.
Note 4: CAPITALIZED COMPUTER SOFTWARE DEVELOPMENT COSTS
Capitalized computer software development costs are capitalized in accordance
with SFAS No. 86, "Accounting for the Cost of Computer Software to be Sold,
Leased, or Otherwise Marketed". Capitalization of software development costs
begins upon the establishment of technological feasibility and is discontinued
when the product is available for sale. The establishment of technological
feasibility and the ongoing assessment for recoverability of capitalized
software development costs require considerable judgment by management
including, but not limited to, technological feasibility, anticipated future
gross revenues, estimated economic life, and changes in software and hardware
technologies. Any changes to these estimates could materially impact the amount
of amortization expense, research and development expense recognized in the
consolidated statement of operations and the amount recognized as capitalized
software development costs in the consolidated balance sheet.
Amortization of capitalized software development costs is provided on a
product-by-product basis on the straight-line method over the estimated economic
life of the products, which varies product to product, not exceeding five years.
Management periodically compares estimated net realizable value by product with
the amount of software development costs capitalized for that product to ensure
the amount capitalized is recoverable through revenues. Any excess of
development costs to expected net realizable value is expensed at that time.
We have reassessed economic life of our pharmaceutical software based on our
actual experience, and we have determined that the estimated economic life of
the products should be five years starting at September 1, 2004. Accordingly, we
began amortizing the net book value of capitalized software development costs
over a sixty-month period using the straight-line method. As a result, we
amortized our pharmaceutical software development costs for $18,615 in the third
quarter of fiscal year 2005. If we had not changed our expected economic life,
we would have amortized $38,366.
8
Note 5: INCOME TAX
SFAS No. 109, "ACCOUNTING FOR INCOME TAXES", establishes financial accounting
and reporting standards for the effect of income taxes. The objectives of
accounting for income taxes are to recognize the amount of taxes payable or
refundable for the current year and deferred tax liabilities and assets for the
future tax consequences of events that have been recognized in an entity's
financial statements or tax returns. Judgment is required in assessing the
future tax consequences of events that have been recognized in our financial
statements or tax returns. Fluctuations in the actual outcome of these future
tax consequences could materially impact our financial position or our results
of operations.
Note 6: ACCOUNTS RECEIVABLE
We maintain an allowance for doubtful accounts for estimated losses that may
arise if any of its customers are unable to make required payments. We
specifically analyze the age of customer balances, historical bad debt
experience, customer credit-worthiness, and changes in customer payments terms
when making estimates of the uncollectability of our trade accounts receivable
balances. If we determine that the financial conditions of any of its customers
deteriorated, whether due to customer specific or general economic issues,
increase in the allowance may be made. Accounts receivable are written off when
all collection attempts have failed.
Our long-term receivables are discounted at the present value. The discount is
amortized over the life of the receivable and recognized as interest income. As
of May 31, 2005, the discount amount on such receivable was fully amortized and
the receivables of $544,000 were collected in June 2005.
Note 7: INVENTORY
Inventory is stated at the lower of cost (first-in, first-out basis) or market,
and consists of computers and peripheral computer equipment.
Note 8: PROPERTY AND EQUIPMENT
Furniture and equipment as of May 31, 2005 consisted of the following:
Equipment $ 156,637
Computer equipment 298,510
Furniture and fixtures 52,704
Automobile 21,769
Leasehold improvements 38,215
---------
Sub total 567,835
Less: Accumulated depreciation and amortization (479,434)
---------
Net Book Value 88,401
=========
9
Note 9: STOCKHOLDERS' EQUITY
Stock Option Plan
In September 1996, the Board of Directors adopted and the shareholders approved
the 1996 Stock Option Plan (the "Option Plan") pursuant to which a total of
250,000 shares of common stock were reserved for issuance. The shareholders
approved 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 May 31, 2005, options to purchase 972,687 shares have been issued and were
outstanding to various employees at an exercise price equal to the fair market
value of our stock price at the date of each grant, with five-year vesting
periods. Also, in accordance with the by-laws of the corporation, a total of
8,206 options to purchase shares have been issued to the Board of Directors at
exercise prices ranging from $1.20 to $5.25, with a three-year vesting period.
During the first nine months of fiscal year 2005, 68,500 options were exercised
by employees.
Note 10: EARNINGS PER SHARE
The Company utilizes SFAS No. 128, "Earnings per Share." Basic earnings (loss)
per share is computed by dividing income (loss) available to common stockholders
by the weighted-average number of common shares outstanding. Diluted earnings
(loss) per share is computed similar to basic earnings (loss) per share except
that the denominator is increased to include the number of additional common
shares that would have been outstanding if the potential common shares had been
issued and if the additional common shares were dilutive. Common equivalent
shares are excluded from the computation if their effect is anti-dilutive. The
Company's common share equivalents consist of stock options.
Note 11: STOCK-BASED COMPENSATION
SFAS No. 123, "Accounting for Stock-Based Compensation," establishes and
encourages the use of the fair-value-based method of accounting for stock-based
compensation arrangements under which compensation cost is determined using the
fair value of stock-based compensation determined as of the date of grant and is
recognized over the periods in which the related services are rendered. The
statement also permits companies to elect to continue using the current
intrinsic value accounting method specified in Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," to account
for stock-based compensation. The Company has elected to use the intrinsic
value-based method and has disclosed the pro forma effect of using the
fair-value-based method to account for its stock-based compensation.
10
The table below represents a reconciliation of the company's pro forma net
income giving effect to the estimated compensation expense related to stock
options that would have been reported if the Company utilized the fair value
method:
Nine Months Nine Months
2005 2004
---------------- ----------------
Net income
As reported $ 204,593 $ 230,896
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 (189,707) (155,657)
---------------- ----------------
PRO FORMA NET INCOME (LOSS) $ 14,886 $ 75,239
================ ================
Earnings (loss) per common share
Basic - as reported $ 0.05 $ 0.07
Basic - Pro forma $ 0.04 $ 0.02
Diluted - as reported $ 0.00 $ 0.06
Diluted - Pro forma $ 0.00 $ 0.02
Note 12: SEGMENT AND GEOGRAPHIC REPORTING
The Company accounts for segments and geographic revenues in accordance with
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information." The Company's reportable segments are strategic business units
that offer different products and services. Results for each segment and
consolidated results are as follows for the nine months ended May 31, 2005 and
May 31, 2004:
---------------------------------- --------------------------------------------------------------------------
May 31, 2005
---------------------------------- --------------------------------------------------------------------------
Simulations
Plus, Inc. Words +, Inc. Eliminations Total
---------------------------------- ------------------- ------------------- ------------------ ---------------
Net Sales 1,596,018 1,926,670 3,522,688
---------------------------------- ------------------- ------------------- ------------------ ---------------
Income (loss) from operations 110,661 100,022 210,683
---------------------------------- ------------------- ------------------- ------------------ ---------------
Identifiable assets 5,712,036 1,398,712 (1,793,461) 5,317,287
---------------------------------- ------------------- ------------------- ------------------ ---------------
Capital expenditures 6,733 53,411 60,144
---------------------------------- ------------------- ------------------- ------------------ ---------------
Depreciation and Amortization 10,065 24,473 34,538
---------------------------------- ------------------- ------------------- ------------------ ---------------
11
---------------------------------- --------------------------------------------------------------------------
May 31, 2004
---------------------------------- --------------------------------------------------------------------------
Simulations
Plus, Inc. Words +, Inc. Eliminations Total
---------------------------------- ------------------- ------------------- ------------------ ---------------
Net Sales 1,987,646 1,753,057 3,740,703
---------------------------------- ------------------- ------------------- ------------------ ---------------
Income (loss) from operations 478,182 (317,722) 169,460
---------------------------------- ------------------- ------------------- ------------------ ---------------
Identifiable assets 4,836,230 1,103,627 (1,594,926) 4,344,931
---------------------------------- ------------------- ------------------- ------------------ ---------------
Capital expenditures 3,447 20,568 24,015
---------------------------------- ------------------- ------------------- ------------------ ---------------
Depreciation and Amortization 11,181 16,108 27,289
---------------------------------- ------------------- ------------------- ------------------ ---------------
In addition, the Company allocates revenues to geographic areas based on the
locations of its customers. Geographical revenues for the nine months ended May
31, 2005 and May 31, 2004 were as follows (in thousands):
May 31, 2005
------------------------------ --------------- ------------ ------------ ------------ ------------ ----------
North South
America Europe Asia Oceania America Total
------------------------------ --------------- ------------ ------------ ------------ ------------ ----------
Simulations Plus, Inc. 875 357 364 -0- -0- 1,596
------------------------------ --------------- ------------ ------------ ------------ ------------ ----------
Words+, Inc. 1,698 159 53 17 -0- 1,927
------------------------------ --------------- ------------ ------------ ------------ ------------ ----------
Total 2,573 516 417 17 -0- 3,523
------------------------------ =============== ============ ============ ============ ============ ==========
May 31, 2004
------------------------------ --------------- ------------ ------------ ------------ ------------ ----------
North South
America Europe Asia Oceania America Total
------------------------------ --------------- ------------ ------------ ------------ ------------ ----------
Simulations Plus, Inc. 900 560 528 -0- -0- 1,988
------------------------------ --------------- ------------ ------------ ------------ ------------ ----------
Words+, Inc. 1,543 143 45 16 6 1,753
------------------------------ --------------- ------------ ------------ ------------ ------------ ----------
Total 2,443 703 573 16 6 3,741
------------------------------ =============== ============ ============ ============ ============ ==========
Note 13: SUBSEQUENT EVENT
Since June 1, 2005, an additional 1,200 stock options to purchase shares have
been exercised by employees.
On June 22, 2005, the Company issued 72,000 stock options to employees at an
exercise price equal to the fair market value of our stock price at the date of
grant.
12
Item 2. Management's Discussion and Analysis or Plan of Operations
----------------------------------------------------------
FORWARD-LOOKING STATEMENTS
--------------------------
CERTAIN STATEMENTS IN THIS QUARTERLY REPORT ON FORM 10-QSB, OR THE "REPORT," ARE
"FORWARD-LOOKING STATEMENTS." THESE FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE
NOT LIMITED TO, STATEMENTS ABOUT THE PLANS, OBJECTIVES, EXPECTATIONS AND
INTENTIONS OF SIMULATIONS PLUS, INC., A CALIFORNIA CORPORATION (REFERRED TO IN
THIS REPORT AS THE "COMPANY") AND OTHER STATEMENTS CONTAINED IN THIS REPORT THAT
ARE NOT HISTORICAL FACTS. FORWARD-LOOKING STATEMENTS IN THIS REPORT OR HEREAFTER
INCLUDED IN OTHER PUBLICLY AVAILABLE DOCUMENTS FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION, OR THE "COMMISSION," REPORTS TO OUR STOCKHOLDERS AND OTHER
PUBLICLY AVAILABLE STATEMENTS ISSUED OR RELEASED BY US INVOLVE KNOWN AND UNKNOWN
RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH COULD CAUSE OUR ACTUAL RESULTS,
PERFORMANCE (FINANCIAL OR OPERATING) OR ACHIEVEMENTS TO DIFFER FROM THE FUTURE
RESULTS, PERFORMANCE (FINANCIAL OR OPERATING) OR ACHIEVEMENTS EXPRESSED OR
IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. SUCH FUTURE RESULTS ARE BASED UPON
MANAGEMENT'S BEST ESTIMATES BASED UPON CURRENT CONDITIONS AND THE MOST RECENT
RESULTS OF OPERATIONS. WHEN USED IN THIS REPORT, THE WORDS "EXPECT,"
"ANTICIPATE," "INTEND," "PLAN," "BELIEVE," "SEEK," "ESTIMATE" AND SIMILAR
EXPRESSIONS ARE GENERALLY INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS,
BECAUSE THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES. THERE
ARE IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE EXPRESSED OR IMPLIED BY THESE FORWARD-LOOKING STATEMENTS, INCLUDING OUR
PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS AND OTHER FACTORS.
GENERAL
BUSINESS
--------
Simulations Plus, Inc. (the "Company" or "Simulations Plus", or "we" or "our")
and its wholly owned subsidiary, Words+, Inc. ("Words+") produce different types
of products: (1) Simulations Plus, incorporated in 1996, develops and produces
modeling and simulation software for use in pharmaceutical research and for
education, and also provides contract research services to the pharmaceutical
industry, and (2) Words+, founded in 1981, produces computer software and
specialized hardware for use by persons with disabilities, as well as a personal
productivity software program called Abbreviate! for the retail market.
SIMULATIONS PLUS
----------------
PRODUCTS
--------
We currently offer four software products for pharmaceutical research:
GastroPlus(TM), DDDPlus(TM), ADMET Predictor(TM), and ADMET Modeler(TM).
GastroPlus is a computer program that simulates how drugs are absorbed in the
human gastrointestinal tract and in a number of standard laboratory animals. The
simulation involves pharmacokinetics (what happens to the drug when it gets into
the body) and pharmacodynamics (what happens to the body when the drug gets into
the body). The basic absorption simulation has equations for the movement of the
drug through the gastrointestinal tract, how fast it dissolves in the stomach
and intestines, whether it is converted to a different molecular form by
chemical reactions or by metabolism by enzymes in the gastrointestinal tract,
and how fast it is absorbed through the intestinal wall into the blood stream.
13
With additional inputs, it also simulates the amount of drug in the blood plasma
versus time, and how the drug affects the body, such as reducing pain, reducing
blood pressure, reducing depression, and adverse side effects.
We believe GastroPlus is the "gold standard" for simulation of oral drug
absorption in the pharmaceutical industry. In addition to virtually every major
pharmaceutical company, recent sales have included a growing number of generic
drug companies and drug delivery companies (companies that design the tablet or
capsule for a drug compound that was developed by another company). Although
these companies are considerably smaller than the pharmaceutical giants, they
can also save considerable time and money using our software tools. We believe
this part of the industry, which includes hundreds of companies, represents
major growth potential for GastroPlus.
We are aware that other companies have developed competitive software; however,
based on customer feedback, we believe that the competitive threat to GastroPlus
is limited. We believe that the Metabolism and Transporter Module, the PDPlus
module, and the ongoing upgrades we have made to the core simulation have been
significant advances in the state-of-the-art of oral drug absorption,
pharmacokinetics, and pharmacodynamics analysis.
The PBPKPlus(TM) module has been in extended beta testing for a number of months
and we believe is now nearly ready to release. This powerful module will further
extend the utility of GastroPlus within the industry by simulating the amount of
drug reaching specific tissues in human and in laboratory animals. With the
release of this new module, we have also incorporated a number of other major
changes to the user interface and program capabilities. As a result, this
release has been delayed longer than we had originally planned; however, we
believe that this next version (GastroPlus 5.0) will be well worth the wait.
We announced the release of our fourth core product, DDDPlus (Dose
Disintegration and Dissolution Plus), in February 2005. DDDPlus simulates how
different tablets and capsules disintegrate and dissolve during in vitro
(laboratory) dissolution experiments. The program also simulates the effects of
changing formulation excipients (additives that are not the active drug), and
changing the experimental apparatus and fluids used in the experiment. We
believe this tool will be a valuable asset for formulation scientists as they
search for optimum formulations that provide desirable properties at minimum
cost, as well as optimum experimental conditions under which to measure
disintegration and dissolution to best predict what will happen in human. The
market for this tool includes hundreds of drug delivery companies as well as all
pharmaceutical and biotech companies. Although a significant number of companies
have been evaluating DDDPlus, no sales have been realized through the end of the
third quarter. We remain confident that sales of DDDPlus licenses will begin to
ramp up in the near future.
Our recognized expertise in oral absorption and pharmacokinetics is evidenced by
the fact that our staff members have been invited speakers or presenters at over
40 prestigious scientific meetings worldwide in the past three years. We also
conduct contracted studies for customers who prefer to have studies run by our
scientists rather than to license our software and train someone to use it.
In addition to simulation software, we produce software that consists of
statistically significant numerical models that predict various properties of
chemical compounds from just their molecular structures. ADMET Predictor(TM)
(formerly known as QMPRPlus(TM)) provides estimates for approximately 50
properties of new drug-like molecules with only their structures as input. The
ability to predict many properties from just a structure drawing enables
researchers to eliminate large numbers of compounds before expensive testing,
saving considerable time and money.
14
Recent product improvements included an advanced prediction of ionization
constants ("pKa's") for molecules, which tells chemists whether the molecules
will ionize (add or give up hydrogen atoms) at different pH levels in the body.
Ionization is especially important because it has a major effect on some other
properties, like solubility. ADMET Predictor is now one of the few programs
available in the world that provides accurate prediction of pKas, and we believe
the predictive accuracy of the pKa model and the additional information
regarding probabilities of various microspecies (different ionized forms of the
molecule that exist in different proportions) provided by our approach in ADMET
Predictor are unsurpassed.
With the release of ADMET Predictor 1.0 in December 2004, we also added an
important new capability for toxicity prediction. Toxicity prediction was
identified by the U.S. Food and Drug Administration as a critical need in a
white paper released in March 2004. We released our first toxicity prediction in
the fourth quarter, which predicts whether new molecules are expected to bind to
the estrogen receptor. The new capability provides six different toxicity models
based on data sets released to the public domain by the U.S. Environmental
Protection Agency and the U.S. Food and Drug Administration in 2004. New
toxicity models are in development and will be released as we complete them as
upgrades to ADMET Predictor.
With these new capabilities, we believe ADMET Predictor combines the most
comprehensive and accurate set of predictions for Absorption, Distribution,
Metabolism, Excretion and Toxicity (ADMET) available today.
GastroPlus and/or ADMET Predictor have been licensed by virtually every major
pharmaceutical company and a growing number of smaller companies in the U.S.,
Europe, and Japan. Our number of customers has grown continuously since our
first product releases in 1998 and continues to grow each quarter.
ADMET Modeler(TM) (formerly QMPRchitect(TM)), was originally released in July of
2003. This powerful program is used to generate the predictive models used in
ADMET Predictor in a small fraction of the time once required to build these
models. For example, the six new toxicity models in ADMET Predictor were
developed in a matter of a few weeks. Most of that time was spent in cleaning up
the databases (which seem to always contain a number of errors). Prior to the
availability of ADMET Modeler, we would have needed as much as three months for
each one of the six models to obtain similar results, or a total of about 18
months. New toxicity models are in development at this time, and will be
released as upgrades to ADMET Predictor as they are completed.
Pharmaceutical companies spend enormous amounts of money conducting a wide
variety of experiments each year. Using such data to build predictive models
provides a second return on investment; however, in the past, model-building has
traditionally been a tedious activity that required a specialist. With ADMET
Modeler, scientists with no model-building experience can use their own
experimental data to quickly create very high quality predictive models. ADMET
Modeler 1.0 was released just after the end of the third quarter. Prior to that
release, we were still shipping the earlier QMPRchitect product.
We continue to enhance GastroPlus, DDDPlus, ADMET Predictor, and ADMET Modeler,
and we are developing new core products to add to our catalog of software for
pharmaceutical research. Another core product scheduled to be released in 2005
is MembranePlus(TM), which is described further below.
15
In addition to our pharmaceutical software, we also produce a set of
award-winning science experiment simulations (computer programs for Windows and
Macintosh computers) for middle school and high school students under the
umbrella name of FutureLab(TM). These simulations incorporate the equations of
chemistry and physics for each experiment (optics, electrical circuits, gravity,
universal gravitation, and ideal gases), and allow students to design and
conduct their own experiments in a virtual laboratory environment. Although
development of FutureLab software was discontinued in 1998, low-level sales have
continued through distributors in the U.S., U.K. Australia, and New Zealand.
CONTRACT RESEARCH SERVICES
--------------------------
We offer contract research services to the pharmaceutical industry in the area
of gastrointestinal absorption, pharmacokinetics, structure-property model
building, and related technologies. These studies provide us an additional
source of revenue, as well as a means to introduce our software products to new
customers. Such studies are also beneficial to us to validate and enhance our
products by studying actual data in the pharmaceutical industry. In the fourth
quarter of fiscal year 2004, we received our largest study contract to date. We
believe the results of that study saved our customer from conducting a human
trial that would have inevitably failed. The business of contracted studies is
growing, and we believe it could contribute significantly to our revenues and
earnings; however, we plan to control growth in this area such that it does not
adversely impact our product development stream.
PHARMACEUTICAL SIMULATIONS SOFTWARE PRODUCT DEVELOPMENT
-------------------------------------------------------
In the area of simulation software for pharmaceutical research, we are
developing additional capabilities for GastroPlus, DDDPlus, ADMET Predictor, and
ADMET Modeler. Although all of our development work cannot be disclosed for
competitive reasons, some of our development efforts include:
(1) PBPKPlus(TM) Module
-----------------------
The PBPKPlus Module for GastroPlus was demonstrated at the American Association
of Pharmaceutical Scientists conference in early November 2004. We had expected
the module to be released for sale in the third quarter; however, release has
been slipped to the fourth quarter. This powerful module enables researchers to
predict the amount of drug that reaches different body tissues and organs. This
is an important new capability because it is one of the most promising
technologies for predicting human pharmacokinetics from animal data
(pharmacokinetics refers to what happens to the drug after it enters the body).
With actual human data, this capability will enable scientists to predict the
concentration of drug in various body tissues, which should contribute to a
better understanding of both therapeutic and adverse effects. Without the
ability to predict these effects, clinical trial costs can soar when trials must
be repeated to determine proper dosing levels. We believe the integration of the
GastroPlus absorption model with a complete PBPK capability provides the most
comprehensive simulation capability currently available. This capability has
been developed in response to customer requests from several of the largest
pharmaceutical companies in the world, and two large companies have been
involved in beta testing the new version.
16
(2) Multiple Particle Size Dissolution Model
--------------------------------------------
The current dissolution model in GastroPlus uses a single "effective" particle
size. While this has adequately represented the dissolution of most tablets,
capsules, and suspensions to date, formulation researchers know that real dosage
forms do not consist of particles that are all one size. Instead, there is a
distribution of particle sizes from smaller than average to larger than average.
Smaller particles dissolve faster than larger particles. For some drugs, this
results in dissolution behavior that is not well-modeled with a single effective
particle size. This new model will allow formulation researchers to assess the
effects of different particle size distributions on dissolution and absorption.
The multiple particle size model has already been demonstrated in our DDDPlus
software. We plan to incorporate it into a Formulation Module for GastroPlus in
calendar 2005.
(3) ADMET Predictor(TM) upgrades
--------------------------------
We will continue to add new molecular descriptors and new predicted ADMET
properties to ADMET Predictor. We announced the release of ADMET Predictor 1.0
in December 2004 with structure drawing depiction and six toxicity predictions,
as well as improved pKa prediction and other user convenience improvements. We
expect to add a number of user conveniences as well as additional toxicity
models and prediction of other ADMET properties in the coming months. Further
improvements were completed during the third quarter and we expect to release
Version 1.2 during the fourth quarter.
17
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED MAY 31, 2005 AND MAY 31, 2004.
The following table sets forth our consolidated statements of operations (in
thousands) and the percentages that such items bear to net sales:
------------------------------------------------------------
Three Months Ended
------------------------------------------------------------
05/31/05 05/31/04
------------------------------- ----------------------------
Net sales $ 1,424 100% $ 1,233 100%
Cost of sales 428 30.1 383 31.1
---------------- -------------- ------------- --------------
Gross profit 996 69.9 850 68.9
---------------- -------------- ------------- --------------
Selling, general and administrative 645 45.3 622 50.4
Research and development 134 9.4 118 9.6
---------------- -------------- ------------- --------------
Total operating expenses 779 54.7 740 60.0
---------------- -------------- ------------- --------------
Income from operations 217 15.2 110 8.9
---------------- -------------- ------------- --------------
Other income 6 0.4 22 1.8
---------------- -------------- ------------- --------------
Net income before taxes 223 15.6 132 10.7
---------------- -------------- ------------- --------------
Provision for income taxes 50 3.5 - -
---------------- -------------- ------------- --------------
Net income $ 173 12.1% $ 132 10.7%
================ ============== ============= ==============
NET SALES
Consolidated net sales increased $191,000, or 15.5%, to $1,424,000 in the third
fiscal quarter of 2005 (FY05) from $1,233,000 in the third fiscal quarter of
2004 (FY04). Our sales from pharmaceutical and educational software increased
approximately $59,000, or 9.8%; and our Words+, Inc. subsidiary's sales
increased approximately $132,000, or 20.9%, for the quarter. Management
attributes the increase in pharmaceutical software sales primarily to the
increase in new customers and additional module sales to the existing customers.
Management attributes 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.
COST OF SALES
Consolidated cost of sales increased $45,000, or 11.8%, to $428,000 in the third
fiscal quarter of FY05 from $383,000 in the third fiscal quarter of FY04. The
percentage of cost of sales in the third fiscal quarter of FY05 decreased 1.0%
from the third fiscal quarter of FY04. For Simulations Plus, cost of sales
increased $5,000, or 7.4%. A significant portion of cost of sales is the
systematic amortization of capitalized software development costs, which
decreased $5,000, or 22.0%, while royalty expense increased by $10,000, or
22.4%, which represents royalty payments to TSRL. As a percentage, cost of sales
18
slightly decreased from 11.7% in FY04 to 11.5% in FY05. Management attributes
this decrease in percentage of cost of sales primarily to a change in estimate
of pharmaceutical software product life, which, based on our demonstrated
product lives, we reassessed to be 5 years beginning with the first fiscal
quarter of FY05. Thus, quarterly amortization of capitalized software
development costs decreased even though there is an additional amortization
expense for our newly released DDDPlus product beginning in this quarter.
For Words+, cost of sales increased $40,000, or 12.9%. As a percentage, cost of
sales decreased 3.3% between the third fiscal quarter of FY05 and FY04.
Management attributes the percentage decrease in cost of sales for Words+
primarily to the price increases instituted as part of our restructuring of
Words+ in fiscal year 2004.
GROSS PROFIT
Consolidated gross profit increased $146,000, or 17.2%, to $996,000 in the third
fiscal quarter of FY05 from $850,000 in the third fiscal quarter of FY04.
Management attributes this increase to sales increases in both pharmaceutical
software and Words+ products along with improvement in profit margin on Words+
products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Consolidated selling, general and administrative expenses increased $23,000, or
3.7%, to $645,000 in the third fiscal quarter of FY05 from $642,000 in the third
fiscal quarter of FY04. For Simulations Plus, selling, general and
administrative expenses increased $78,000, or 30.6%. The major increases in
expenses were selling expenses, such as commissions to dealers, trade shows, and
travel, equipment lease, salary for an added employee in Marketing department,
and payroll taxes and insurances, which outweighed decreases in legal,
accounting, and bank charges. Foreign taxes also decreased as the result of an
enactment of a new tax treaty between the USA and Japan.
For Words+, expenses decreased $55,000, or 15.0%, due primarily to reductions in
salaries and payroll-related expenses such as health insurance, payroll taxes
and 401(k) matching contributions, which were all a part of the restructuring of
Words+ in fiscal year 2004. These decreases outweighed increases in commissions,
contract labor, and repairs.
RESEARCH AND DEVELOPMENT
We incurred approximately $191,000 of research and development costs for both
companies during the third fiscal quarter of FY05. Of this amount, $57,000 was
capitalized and $134,000 was expensed. In the third fiscal quarter of FY04, we
incurred $172,000 of research and development costs, of which $51,000 was
capitalized and $121,000 was expensed. The increase of $19,000, or 11.1%, in
research and development expenditure from the third fiscal quarter of FY04 to
the third fiscal quarter of FY05 was due primarily to the hiring of additional
scientist/programmer for new product development and salary increases to
existing staff.
19
OTHER INCOME (EXPENSE)
Net other income (expense) in the third fiscal quarter of FY05 decreased by
$16,000. This is due primarily to the decrease in the amortization of present
value discount on long-term receivables, which are fully amortized by the end of
this fiscal quarter.
PROVISION FOR INCOME TAXES
We have estimated income tax provision of $50,000 approximately for the third
quarter of FY05 while there was no provision for the third quarter of FY04.
NET INCOME
Consolidated net income for the three months' operations increased by $41,000,
or 31.1%, to $173,000 in the third quarter of FY05 compared to $132,000 in the
third quarter of FY04. Management attributes this increase in profit primarily
to the increases in both pharmaceutical software and Words+ product sales with
improved profit margins, which outweighed increases in selling, general and
administrative expenses, research and development expenses, income tax
provision, and a decrease in other income.
COMPARISON OF NINE MONTHS ENDED MAY 31, 2005 AND MAY 31, 2004.
The following table sets forth our consolidated statements of operations (in
thousands) and the percentages that such items bear to net sales:
Nine months Ended
------------------------------------------------------------
05/31/05 05/31/04
------------------------------- ----------------------------
Net sales $ 3,523 100% $ 3,741 100%
Cost of sales 1,121 31.8 1,194 31.9
---------------- -------------- ------------- --------------
Gross profit 2,402 68.2 2,547 68.1
---------------- -------------- ------------- --------------
Selling, general and administrative 1,812 51.4 1,962 52.5
Research and development 379 10.8 415 11.1
---------------- -------------- ------------- --------------
Total operating expenses 2,191 62.2 2,377 63.5
---------------- -------------- ------------- --------------
Income from operations 211 6.0 170 4.5
---------------- -------------- ------------- --------------
Other income 44 1.2 61 1.6
---------------- -------------- ------------- --------------
Net income before taxes 255 7.2 231 6.2
---------------- -------------- ------------- --------------
Provision for income taxes 50 1.4 - -
---------------- -------------- ------------- --------------
Net income $ 205 5.8% $ 231 6.2%
================ ============== ============= ==============
NET SALES
Consolidated net sales decreased $218,000, or 5.8%, to $3,523,000 for the nine
months ended May 31, 2005 compared to $3,741,000 for the nine months ended May
31, 2004. Our sales from pharmaceutical and educational software decreased
approximately $392,000, or 19.7%; however, our Words+, Inc. subsidiary's sales
increased approximately $174,000, or 9.9%, for the nine months. Management
20
attributes the decrease in pharmaceutical software sales primarily to the
revenue we received from a two-year order worth just under $500,000 in FY04,
which has not been duplicated in FY05. The amount of the new one-year global
license order we received in FY05 from a different customer was less than the
amount we received from the multi-year "ADME Partners" license in FY04. Although
the amount of sales decreased, the number of new customers increased in FY05, so
we expect an expansion in future annual license renewal revenues.
Management attributes the increase in Words+ sales primarily to the sales growth
in our "Say-it! SAM" and "TuffTalker" products, which accounted for 36% of total
sales in FY05, compared with 13% of total sales in FY04. This increase
outweighed a decline in "Freedom" and "MessageMate" products.
COST OF SALES
Consolidated cost of sales decreased $73,000, or 6.1%, to $1,121,000 for the
nine months of FY05 from $1,194,000 for the nine months of FY04. The percentage
of cost of sales for FY05 is almost identical to that for FY04, decreasing 0.1%.
For Simulations Plus, cost of sales decreased $78,000, or 30.4%. A significant
portion of cost of sales is the systematic amortization of capitalized software
development costs, which decreased $73,000, or 62% and royalty expense decreased
by $5,000, or 4% which represents royalty payments to TSRL. As a percentage,
cost of sales decreased from 13.0% in FY04 to 11.3% in FY05. Management
attributes this decrease in percentage of cost of sales primarily to a change in
estimate of pharmaceutical software product life, which, based on our
demonstrated product lives, we reassessed to be 5 years beginning with the first
fiscal quarter of FY05. Thus, nine months' amortization of capitalized software
development costs decreased even though there is an additional amortization
expense for the new DDDPlus product beginning in the third fiscal quarter of
FY05.
For Words+, cost of sales increased $5,000, or 0.6%. As a percentage, cost of
sales decreased 4.5% for the nine months operations between FY05 and FY04.
Management attributes the percentage decrease in cost of sales for Words+
primarily to the price increases instituted as part of our restructuring of
Words+ in fiscal year 2004.
GROSS PROFIT
Consolidated gross profit decreased $291,000, or 17.2%, to $1,405,000 in the
first nine months of FY05 from $1,696,000 in the first nine months of FY04.
Management attributes this decrease to lower pharmaceutical software sales which
outweighed an increase in gross profit generated by Words+ products.
21
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Consolidated selling, general and administrative expenses decreased $150,000, or
7.6%, to $1,812,000 in the first nine months of FY05 from $1,962,000 in the
first nine months of FY04. For Simulations Plus, selling, general and
administrative expenses increased $80,000, or 8.9%. The major increases in
expenses were in the categories of selling expenses such as commissions and
trade shows, equipment lease, investor relations fees, and salary increases
along with payroll-related expenses such as health insurance, payroll taxes, and
401(k) matching contributions. These increases outweighed decreases in legal and
accounting, printing, and workers compensation insurance.
For Words+, expenses decreased $230,000, or 21.6%, due to reductions in salaries
and payroll-related expenses such as health insurance, payroll taxes and 401(k)
matching contributions, commission, travel expenses and catalog expenses. These
decreases outweighed increases in contract labor, equipment repair, and
depreciation expenses.
RESEARCH AND DEVELOPMENT
We incurred approximately $635,000 of research and development costs for both
companies during the first nine months of FY05. Of this amount, $256,000 was
capitalized and $379,000 was expensed. In the first nine months of FY04, we
incurred $722,000 of research and development costs, of which $307,000 was
capitalized and $415,000 was expensed. The decrease of $87,000, or 12.1%, in
research and development expenditure from the first nine months of FY04 to the
first nine months of FY05 was due primarily to our purchase of the Say-it! SAM
technology which was incurred in FY04, while no such expense was incurred in
FY05. This decrease outweighed the salary increases in Research and Development.
OTHER INCOME (EXPENSE)
The net of other income (expense) in the first nine months of FY05 decreased by
$17,000. The amortization of present value discount on long-term receivables
decreased by $23,000. We recognized a loss of $2,000 on currency exchange and a
gain of $7,000 on sale of equipment and $1,000 of miscellaneous revenue in the
first nine months of FY05 while there were no such income and expenses in FY04.
PROVISION FOR INCOME TAXES
We have estimated income tax provision of $50,000 approximately for the first
nine months of FY05 while there was no provision for the same period of FY04.
NET INCOME
Consolidated net income for the nine months' operations decreased by $26,000, or
11.3%, to $205,000 in the first nine months of FY05 compared to $231,000 in the
first nine months of FY04. Management attributes this decrease in profit
primarily to the decrease in sales and other income which outweighed the
decreases in cost of sales, selling, general and administrative expenses, and
research and development expenses.
22
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 because the Company did not use it during the
prior year and did not expect to need it in the near future. The Company is
considering 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.
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 nine months of
FY05. In the future, if foreign currency transactions increase significantly,
then we may mitigate this effect through foreign currency forward contracts
whose market-to-market gains or losses are recorded in "Other Income or expense"
at the time of the transaction. To date, exchange rate exposure has not resulted
in a material impact.
Item 4. Controls and Procedures
-----------------------
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. As of the end of the
period covered by this report, the Company carried out an evaluation,
under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of
the Company's disclosure controls and procedures pursuant to Exchange
Act Rule 13a-14. Based upon that evaluation, the Chief Executive
Officer and 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.
23
(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.
24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
In the normal course of business, the Company is subject to
various lawsuits and claims. The Company believes that the
final outcomes of these matters, either individually or in the
aggregate, will not have a material effect on the financial
statements. The Company is not involved in any such litigation
at this time.
Item 2. Changes in Securities
---------------------
None.
Item 3. Defaults Upon Senior Securities
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None.
Item 5. Other Information
-----------------
None.
Item 6. Exhibits and Reports on form 8-K
--------------------------------
(a) Exhibits:
31.1-2 Certification of Chief Executive Officer and Chief Financial
Officer
32 Certification pursuant to Sec. 906 of the Sarbanes-Oxley Act
of 2002
25
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
July 08, 2005.
Simulations Plus, Inc.
Date: July 08, 2005 By: /s/ MOMOKO BERAN
-----------------------
Momoko Beran
Chief Financial Officer
26