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, 2004 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: 000-21665
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 7, 2004, was 3,552,043.
Simulations Plus, Inc.
FORM 10-QSB
For the Quarterly Period Ended May 31, 2004
Table of Contents
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet at May 31, 2004 (unaudited) 2
Consolidated Statements of Operations for the three and nine
months ended May 31, 2004 and May 31, 2003 (unaudited) 4
Consolidated Statements of Cash Flows for the three and nine
months ended May 31, 2004 and May 31, 2003 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis or Plan of Operations
General 11
Results of Operations 15
Liquidity and Capital Resources 19
Item 3. Controls and Procedures 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 3. Defaults upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signature 21
Exhibit - Certifications 22
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
at May 31, 2004
(Unaudited)
--------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents (Note 6) $ 402,058
Accounts receivable, net of allowance for doubtful accounts
of $15,187 and present value discount of $42,512 1,516,355
Inventory (Note 7) 365,363
Prepaid expenses and other current assets 147,267
----------
Total current assets 2,431,043
CAPITALIZED COMPUTER SOFTWARE DEVELOPMENT COSTS,
net of accumulated amortization of $1,935,726 (Note 4) 539,275
PROPERTY AND EQUIPMENT, net (Note 8) 72,353
DEFERRED TAX (Note 5) 1,291,110
OTHER ASSETS 11,150
----------
TOTAL ASSETS $4,344,931
==========
The accompanying notes are an integral part of these financial statements.
2
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
at May 31, 2004
(Unaudited)
--------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 131,573
Accrued payroll and other expenses 323,643
Accrued warranty and service costs 36,605
Current portion of deferred revenue 11,416
Other current liabilities (Note 9) 2,808
------------
Total current liabilities 506,045
DEFERRED REVENUE 22,839
OTHER LONG TERM LIABILITIES (Note 9) 3,965
------------
Total liabilities 532,849
------------
COMMITMENTS AND CONTINGENCIES (Note 9) --
SHAREHOLDERS' EQUITY (Note 10)
Preferred stock, $0.001 par value
10,000,000 shares authorized
no shares issued and outstanding --
Common stock, $0.001 par value
20,000,000 shares authorized
3,545,243 shares issued and outstanding 3,546
Additional paid-in capital 4,961,861
Accumulated deficit (1,153,325)
------------
Total shareholders' equity 3,812,082
------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 4,344,931
============
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
--------------------------- ---------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
NET SALES $ 1,233,220 $ 1,260,592 $ 3,740,703 $ 3,458,137
COST OF SALES 382,731 414,299 1,194,267 1,118,892
------------ ------------ ------------ ------------
GROSS PROFIT 850,489 846,293 2,546,436 2,339,245
------------ ------------ ------------ ------------
OPERATING EXPENSES
Selling, general, and administrative 622,005 540,183 1,961,622 1,639,110
Research and development 117,972 73,801 415,354 264,984
------------ ------------ ------------ ------------
Total operating expenses 739,977 613,984 2,376,976 1,904,094
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 110,512 232,309 169,460 435,151
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest income 22,445 37 62,203 72
Interest expense (383) (3,046) (767) (5,674)
Gain (loss) on sale of assets -- (2,312) -- (2,312)
------------ ------------ ------------ ------------
Total other income (expense) 22,062 (5,321) 61,436 (7,914)
------------ ------------ ------------ ------------
INCOME BEFORE BENEFIT FROM (PROVISION FOR)
INCOME TAXES 132,574 226,988 230,896 427,237
BENEFIT FROM (PROVISION FOR) INCOME TAXES
Provision for income tax -- -- -- --
Change in valuation allowance -- -- -- --
------------ ------------ ------------ ------------
Total benefit from (provision for) income taxes -- -- -- --
------------ ------------ ------------ ------------
NET INCOME $ 132,574 $ 226,988 $ 230,896 $ 427,237
============ ============ ============ ============
BASIC EARNINGS PER SHARE $ 0.04 $ 0.07 $ 0.07 $ 0.13
============ ============ ============ ============
Diluted earnings per share $ 0.03 $ 0.06 $ 0.06 $ 0.11
============ ============ ============ ============
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING
BASIC 3,536,406 3,411,390 3,474,760 3,409,527
============ ============ ============ ============
DILUTED 4,046,223 3,716,906 4,046,223 3,716,906
============ ============ ============ ============
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)
-------------------------------------------------------------------------------------------
2004 2003
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 230,896 $ 427,237
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization of property and
equipment 27,289 33,379
Amortization of capitalized software development
costs 141,112 114,142
(Increase) decrease in
Accounts receivable 176,988 83,073
Inventory (173,524) 11,253
Other assets (81,514) (6,600)
Increase (decrease) in
Accounts payable (43,436) (65,016)
Accrued expenses 44,835 (63,309)
Accrued payroll for officers -- (198,916)
Accrued bonuses to officers (133,538) (54,057)
Accrued warranty and service costs (8,125) 11,702
Deferred revenue (12,162) (4,605)
---------- ----------
Net cash provided by operating activities 168,821 288,283
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (24,015) (56,059)
Proceeds from sale of property and equipment 4,084 1,559
Capitalized computer software development costs (143,713) (161,955)
---------- ----------
Net cash used in investing activities (163,644) (216,455)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on capitalized lease obligations (3,191) (8,976)
Proceeds from the exercise of stock options 139,339 4,676
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Net cash provided by (used in) financing activities 136,148 (4,300)
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Net increase in cash and cash
equivalents $ 141,325 $ 67,528
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 260,733 36,072
---------- ----------
CASH AND CASH EQUIVALENTS, END OF QUARTER $ 402,058 $ 103,600
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
INTEREST PAID $ 767 $ 1,540
========== ==========
INCOME TAXES PAID $ 1,600 $ 1,600
========== ==========
SUPPLEMENTAL SCHEDULE OF NON-CASH TRANSACTIONS
1. 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. 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.
5
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.
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.
6
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, not exceeding three 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.
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.
During the year ended August 31, 2003, we recognized significant income tax
benefit from the release of a previously recorded reserve for deferred tax
assets. The evaluation of the deferred tax assets is based on our history of
generating taxable profits and our projections of future profits as well as
expected future tax rates to determine if the realization of the deferred tax
asset is more-likely-than-not. Significant judgment is required in these
evaluations, and differences in future results from our estimates, could result
in a material differences in the realizability of these assets.
Note 6: CASH AND CASH EQUIVALENTS
We maintain cash deposits at banks located in California. Deposits at each bank
are insured by the Federal Deposit Insurance Corporation (FDIC) up to $100,000.
We have not experienced any losses in bank accounts and we believe we are not
exposed to any significant credit risk on cash and cash equivalents.
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: FURNITURE AND EQUIPMENT
Furniture and equipment as of May 31, 2004 consisted of the following:
Equipment $ 148,485
Computer equipment 290,479
Furniture and fixtures 52,704
Leasehold improvements 38,215
----------
529,883
Less accumulated depreciation (457,530)
----------
$ 72,353
==========
7
Note 9: OTHER LIABILITIES
We lease certain facilities for our corporate and operations offices under a
non-cancelable operating lease agreement that expires in September 2005. During
the second fiscal quarter of 2004 (FY04), we agreed to a 3-year non-cancelable
operating lease for a printer/copier. In this agreement, we traded in the
previous copier with an additional per charge per print for the new
printer/copier. Accordingly, the remaining balance on the lease of the previous
copier will be amortized over the term of the lease. The equipment that was
traded in had a book value of zero (the original cost of $37,967 with
accumulated depreciation of $37,967) at the time of transaction.
Note 10: STOCKHOLDERS' EQUITY
Stock Option Plan
In September 1996, the Board of Directors adopted and the shareholders approved
the 1996 Stock Option Plan (the "Option Plan") pursuant to which a total of
250,000 shares of common stock were reserved for issuance. In March 1999, the
shareholders approved an increase in the number of shares that may be granted
under the Option Plan to 500,000. In February 2000, the shareholders approved
the number of shares to be granted under the Option Plan to be 1,000,000 shares.
Furthermore, in December 2000, the shareholders approved an increase in number
of shares that may be granted under the Option Plan to 1,250,000. The Option
Plan terminates in 2006, subject to earlier termination by the Board of
Directors.
As of May 31, 2004, 1,097,166 shares have been issued and 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 7,206 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. At the end of the third fiscal quarter of 2004,
104,212 options have been exercised by employees.
On December 23, 2003, Words+, Inc., the Company's subsidiary, purchased all
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. The value of this technology acquisition was recorded
at $4.65 per share; equal to the closing price of the Company's stock on the
date the agreement was signed. Its costs are capitalized in accordance with SFAS
No. 86 (see Note 4) and amortized over the estimated economic life of the
product, not exceeding three years.
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 (in thousands, except per share data):
Three Three
Months Months
2004 2003
----------- -----------
Net income
As reported $ 132,574 $ 226,988
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 (90,338) (85,716)
----------- -----------
PRO FORMA NET INCOME $ 42,236 $ 141,272
=========== ===========
Earnings per common share
Basic - as reported $ 0.04 $ 0.07
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 $ 0.01 $ 0.03
Diluted - as reported $ 0.03 $ 0.06
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 $ 0.01 $ 0.02
8
Nine Nine
Months Months
2004 2003
----------- -----------
Net income
As reported $ 230,896 $ 427,237
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 (271,013) (257,149)
----------- -----------
PRO FORMA NET INCOME/(LOSS) $ (40,117) $ 170,088
=========== ===========
Earnings per common share
Basic - as reported $ 0.07 $ 0.13
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 $ (0.01) $ 0.08
Diluted - as reported $ 0.06 $ 0.11
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 $ (0.01) $ 0.07
Note 11: 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 12: 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 implicit
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.
Note 13: 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, 2004 and
May 31, 2003:
---------------------------------------------------------
May 31, 2004
---------------------------------------------------------
Simulations
Plus, Inc Words +, Inc. Eliminations Total
------------ ------------ ------------ ------------
Net Sales 1,987,646 1,753,057 3,470,703
Income (loss) from operations 487,182 (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 129,466 38,935 168,401
9
---------------------------------------------------------
May 31, 2003
---------------------------------------------------------
Simulations
Plus, Inc Words +, Inc. Eliminations Total
------------ ------------ ------------ ------------
Net Sales 1,703,358 1,754,779 3,458,137
Income (loss) from operations 549,225 (114,074) 435,151
Identifiable assets 1,857,184 728,126 (950,583) 1,634,727
Capital expenditures 35,232 20,827 56,059
Depreciation and Amortization 109,018 38,503 147,521
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, 2004 were as follows (in thousand):
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 14: SUBSEQUENT EVENT
Since June 1, 2004, an additional 6,800 options have been exercised by
employees.
On July 2, 2004, the Company announced to restructure its Words+ subsidiary. The
purpose of restructure is to reduce expenses to ensure profitable results for
the current quarter. In addition to the reduction in workforce that was
completed on June 30, the Company also is instituting a number of other changes
to increase our operating efficiency and to maximize dealer effectiveness. The
Company expects the actions taken for the subsidiary to result in a savings
approaching $100,000 for the current quarter.
10
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 THE COMPANY'S STOCKHOLDERS
AND OTHER PUBLICLY AVAILABLE STATEMENTS ISSUED OR RELEASED BY THE COMPANY
INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH COULD
CAUSE THE COMPANY'S 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 THE COMPANY'S PLANS, OBJECTIVES,
EXPECTATIONS AND INTENTIONS AND OTHER FACTORS.
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE IN THIS
REPORT.
GENERAL
Business
--------
Simulations Plus, Inc. (the "Company" or "Simulations Plus", or "we" or "our")
and its wholly owned subsidiary, Words+, Inc. ("Words+") produce two 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.
Description of Simulation and Modeling Software
-----------------------------------------------
The development of simulation software involves (1) understanding the underlying
science of the process to be simulated, (2) breaking the process down into the
lowest practical level of sub-processes which can be represented mathematically,
(3) developing mathematical equations for each of these sub-processes, and (4)
programming the equations into computer subroutines. Software subroutines are
then integrated into the overall simulation program, with appropriate
coordination between modules and design of a user-friendly interface for inputs
and outputs. The predictions of the simulations are compared to known results in
order to calibrate the software. The types of simulation software we produce are
based on the equations of chemistry and physics that describe or "model" the
behavior of things in the real world.
We also produce software that predicts properties of potential new drug
molecules just from their molecular structure. This type of software employs
sophisticated mathematical algorithms to find empirical correlations between
sets of chemical descriptors and the property to be predicted. Unlike simulation
software, this type of software is not based on theoretical models, but instead
is based on finding mathematical relationships such as artificial neural network
ensembles and other statistical methods, that seem to predict properties, but
for which there is no underlying scientific theory and equations to understand
why the models work.
11
Products
--------
Our GastroPlus(TM) computer program simulates how drugs are absorbed in the
human body and in animals. The 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.
If some additional inputs are provided, it also simulates the amount of drug in
the blood plasma versus time. With an optional module called PDPlus(TM), the
program can also simulate how a drug affects the body, such as reducing pain,
reducing blood pressure, or reducing depression. Adverse side effects can also
be simulated with PDPlus.
We believe GastroPlus is the "gold standard" for simulation of oral drug
absorption in the pharmaceutical industry. In addition to pharmaceutical
companies, recent sales have included a number of 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 save cost and time through accurate
simulations of their drug delivery technologies. We believe this part of the
industry, which includes hundreds of companies, represents major growth
potential for GastroPlus.
In 1998, we signed a License Agreement with Therapeutic Systems Research
Laboratories, Inc. ("TSRL"), Ann Arbor, Michigan, to obtain exclusive rights to
TSRL's technology and database, including data from nearly 60 laboratory
experiments to measure the intestinal permeability of drug compounds in human
and/or rat. As a part of this License Agreement, we are also entitled to ongoing
consulting assistance in the development and further enhancement of the
GastroPlus absorption simulation model from TSRL staff, including Dr. Gordon
Amidon. We believe that the strategic advantage of exclusive access to TSRL's
database, technology and expertise, combined with our own expertise in
absorption, pharmacokinetics, and pharmacodynamics simulation, have resulted in
GastroPlus becoming the de facto standard for oral drug absorption simulation
and analysis within the pharmaceutical industry. We are aware that other
companies have developed competitive software; however, based on customer
feedback, we believe there is no significant competitive threat for GastroPlus
at this time. We believe that the Metabolism and Transporter Module last year,
the PDPlus module, and ongoing upgrades of the core simulation have been
significant advances in the state-of-the-art of oral drug absorption,
pharmacokinetics, and pharmacodynamics analysis. The PBPKPlus module now in
development will further extend the utility of GastroPlus within the industry.
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 models (equations) that predict various properties of
chemical compounds from just their molecular structures. When drug companies try
to find new drugs, they search through thousands or millions of potential
molecular structures (combinations of atoms arranged in different ways to make
molecules). In order for a new molecule to become an approved drug, it must have
acceptable values for all of its properties, such as solubility (how much can be
dissolved in a glass of water), permeability (how well it gets absorbed through
the intestinal wall), toxicity, and others.
Our QMPRPlus(TM) program provides estimates for approximately 40 properties of
new drug-like molecules with only their structures as input. Recent developments
have included adding a prediction of the percent of a new drug that would be
absorbed at dose levels of 1, 10, 100, and 1000 milligrams, and the addition of
the 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. QMPRPlus is now
one of the few programs available in the world that provides accurate prediction
of pKas, and we believe the predictive accuracy of the pKa model in QMPRPlus is
unsurpassed. With this new capability, QMPRPlus combines the most comprehensive
set of predictions for Absorption, Distribution, Metabolism and Excretion (ADME)
available today.
12
GastroPlus and/or QMPRPlus are used by almost every major and a number of
smaller pharmaceutical companies in the U.S., Europe, and Japan. The number of
customers continues to grow each year. Our revenue growth reflects the
cumulative effect of new license sales added to annual license renewals from the
previous year.
QMPRchitect (TM) was released in July of 2003, after two years in development.
This powerful program is used to generate the predictive models used in QMPRPlus
in a small fraction of the time once required to build these models. With
QMPRchitect, scientists can use their own experimental data for their own sets
of molecules to create new predictive models. For example, if a company had
experimental data for solubility for 500 new molecules that were somewhat
similar to each other (called a "chemical series"), it could use QMPRchitect to
make a predictive model for solubility that would be a good predictor for other
molecules in the same series. In the past, we have needed 2-3 months to produce
equivalent models. Now, with QMPRchitect, the time is reduced to a few hours or
days.
We continue to enhance GastroPlus, QMPRPlus, and QMPRchitect, and we are
developing new core products to add to our catalog of software for
pharmaceutical research.
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, ideal gases, etc.), 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, 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. These studies are also
beneficial to us to validate and enhance our products by studying actual data in
the pharmaceutical industry.
Pharmaceutical Simulations Software Product Development
-------------------------------------------------------
In the area of simulation software for pharmaceutical research, we are
developing additional modules for GastroPlus, QMPRPlus, and QMPRchitect.
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 is in late stage development and beta
testing. This module enables researchers to predict the amount of drug that
reaches different body tissues and organs. This is an important new capability
because it opens up the market to researchers who deal in later stage clinical
trials, and who routinely perform PBPK (physiologically based pharmacokinetic)
and PD (pharmacodynamic) analyses. Until now, these analyses treated absorption
and its related processes with simplified models - often so simplified that
calculations were in error. With PBPKPlus integrated with the sophisticated
absorption model in GastroPlus, researchers will be able to perform more
accurate simulations and analyses to better understand how a drug moves from the
blood into different tissues and organs. Without the ability to predict these
effects, clinical trial costs can soar when trials must be repeated to determine
proper dosing levels. We expect to release this additional-cost module later
this year.
13
(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.
(3) DDDPlus(TM)
---------------
The DDDPlus (Dose Disintegration and Dissolution Plus) project originally began
in 2000, and proceeded at a slow pace until 2003, in between other higher
priority projects. Development is now in late stage, and simulations are being
run to test the equations. In addition, the user interface is being refined to
provide a user-friendly program for formulation scientists. DDDPlus simulates
how different tablets and capsules disintegrate and dissolve during in vitro (in
the laboratory) experiments. The program includes 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.
(4) QMPRPlus(TM) upgrades
-------------------------
We continue to add new molecular descriptors and new predicted ADMET properties
to QMPRPlus(TM). We recently announced the release of QMPRPlus 5.0, which now
incorporates an optional pKa prediction module that we believe is the most
accurate pKa predictor available today. This is an important new capability, and
comes after two years of intensive development effort. The pKa predictor in
QMPRPlus is "thermodynamically accurate" in that it is based on equations that
represent the full set of interactions that occur when a molecule has more than
one ionization site. Last year we completed the development of a module for
predicting the fraction of a dose that will be absorbed at dose levels of 1, 10,
100, and 1000 milligrams ("Fraction Absorbed Module"), which requires accurate
pKa values. Now, the pKas are calculated internally. Other enhancements have
been included that allow the program to account for a wider variety of molecular
features ("descriptors") to be used in its mathematical models.
Disability Product Development
------------------------------
Our wholly owned subsidiary, Words+, Inc. has been an industry technology leader
for over 22 years in introducing and improving augmentative and alternative
communication and computer access software and devices for disabled persons and
intends 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 Talking
Screen, as well as our growing line of hardware products. We will also consider
acquisitions of other products, businesses and companies that are complementary
to its existing augmentative and alternative communication and computer access
business lines. We announced the purchase of the Say-it! SAM technologies from
SAM Communications, LLC of San Diego in December 2003, which gave us our
smallest, lightest augmentative communication system, which is based on a Compaq
iPAQ personal digital assistant (PDA). PDA-based communication devices have been
very successful in the augmentative 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.
14
RESULTS OF OPERATIONS
Comparison of Three Months Ended May 31, 2004 and May 31, 2003.
The following table sets forth our consolidated statement of operations (in
thousands) and the percentages that such items bear to net sales:
----------------------------------------------
Three Months Ended
----------------------------------------------
05/31/04 05/31/03
---------------------- ----------------------
Net sales $ 1,233 100% $ 1,260 100%
Cost of sales 383 31.1 414 32.9
---------- ---------- ---------- ----------
Gross profit 850 68.9 846 67.1
---------- ---------- ---------- ----------
Selling, general and administrative 622 50.4 540 42.9
Research and development 118 9.6 74 5.9
---------- ---------- ---------- ----------
Total operating expenses 740 60.0 614 48.7
---------- ---------- ---------- ----------
Income from operations 110 8.9 232 18.4
---------- ---------- ---------- ----------
Other income (expenses) 22 1.8 (5) (0.4)
---------- ---------- ---------- ----------
Net income before taxes 132 10.7 227 18.0
---------- ---------- ---------- ----------
Provision for income taxes 0 0 0 0
---------- ---------- ---------- ----------
Net income $ 132 10.7% $ 227 18.0%
========== ========== ========== ==========
Net Sales
---------
Consolidated net sales decreased $27,000, or 2.1%, to $1,233,000 in the third
fiscal quarter of 2004 (FY04) from $1,260,000 in the third fiscal quarter of
2003 (FY03). Simulations Plus, Inc.'s sales from pharmaceutical and educational
software decreased approximately $11,000, or 1.9%, and our Words+, Inc.
subsidiary's sales decreased approximately $16,000, or 2.5%, for the quarter.
The decrease in our pharmaceutical software sales is due primarily to timing
delays in some customers orders, which the Company expected to receive in the
third quarter, but were received in the beginning of the forth quarter.
Management attributes the decrease in Words+ sales primarily to a decrease in
service contract revenue, which outweighed an increase in product sales such as
"Say-it! SAM" and dedicated communication device "Freedom 2001".
Cost of Sales
-------------
Consolidated cost of sales decreased $31,000, or 7.5%, to $383,000 for the third
fiscal quarter of 2004 (FY04) from $414,000 in the third fiscal quarter of 2003
(FY03). The percentage of cost of sales in the third fiscal quarter of FY04
decreased by 1.8% from the third fiscal quarter of FY03. For Simulations Plus,
cost of sales decreased $4,000, or 6.0%. A significant portion of cost of sales
is the systematic amortization of capitalized software development costs, which
decreased $7,000, or 22.0%. The decrease in amortization outweighed an increase
in royalty expense of $2,000, or 4.8% which represents royalty payments to TSRL,
another significant portion of cost of sales. As a percentage of total revenues,
cost of sales for our pharmaceutical software business for the third fiscal
quarter of FY04 was 11.7%, compared to 12.2% for the third fiscal quarter of
FY03, a decrease of 0.5%. Management attributes this slight decrease in
percentage of cost of sales primarily to a proportional decrease in amortization
of software development cost as a percentage of sales.
For Words+, cost of sales decreased $27,000, or 8.0%. The change in cost of
sales as a percentage of revenues between the third fiscal quarters of FY04 and
FY03 was a decrease of 3.0%. Management attributes the percentage decrease in
cost of sales for Words+ primarily to increasing the product prices effective as
of May 1 and successfully obtaining some discounts from suppliers.
15
Gross Profit
------------
Consolidated gross profit increased $4,000, or 0.5%, to $850,000 in the third
quarter of FY04 from $846,000 in the second quarter of FY03. Management
attributes this increase to an improvement in gross profit generated by Words+
products.
Selling, General and Administrative Expenses
--------------------------------------------
Consolidated selling, general and administrative expenses increased $82,000, or
15.2%, to $622,000 in the third fiscal quarter of FY04 from $540,000 in the
third fiscal quarter of FY03. For Simulations Plus, selling, general and
administrative expenses increased $40,000, or 18.4%. The major increases in
expenses were in the categories of insurance, printer leasing, accounting fees,
and investor relations which include costs for listing on Amex. These increases
outweighed decreases in travel expense, foreign taxes, and printing costs.
For Words+, expenses increased $42,000, or 11.5%, primarily due to increases in
selling expenses, such as commission expense, travel and additional sales
employee, depreciation, equipment repairs, and insurance. These increases
outweighed decreases in technical service costs, utilities, dues &
subscriptions, and catalog expense.
Research and Development
------------------------
We incurred approximately $172,000 of research and development costs for both
companies during the third quarter of FY04. Of this amount, $51,000 was
capitalized and $121,000 was expensed. In the third quarter of FY03, we incurred
$149,000 of research and development costs, of which $75,000 was capitalized and
$74,000 was expensed. The increase of $23,000 or 15.4% in research and
development expenditures from the third quarter of FY03 to the third quarter of
FY04 was due primarily to staff expansion and salary increases.
Other income (expense)
----------------------
Interest income in the third quarter of FY04 increased by $22,000 due primarily
to the amortization of present value discounts on long-term receivables.
Interest expense in the third fiscal quarter of FY04 decreased by $2,000, which
is attributable primarily to eliminated interest expense on leased equipment.
There was a loss on sale of assets for $2,000 in the third fiscal quarter of
FY03, however there was no such expense in the third fiscal quarter of FY04.
Provision for Income Taxes
--------------------------
Considering Net Operating Loss (NOL) carried forward to the Company's Federal
income tax liability and tax credits applicable to the State of California
Income tax liability, there is no provision for the third fiscal quarters of
FY04 and FY03.
Net Income
----------
Consolidated net income for the three months' operations decreased by $95,000,
or 41.9%, to $132,000 in the third quarter of FY04 compared to $227,000 in the
third quarter of FY03. Management attributes this decrease in profit primarily
to the net loss created by Words+, Inc., its subsidiary. The Company recently
announced to restructure Words+, Inc. in order to minimize the expenses and
expecting improvement in the net income.
16
Comparison of Nine months Ended May 31, 2004 and May 31, 2003.
--------------------------------------------------------------
The following table sets forth our consolidated statement of operations (in
thousands) and the percentages that such items bear to net sales:
----------------------------------------------
Nine Months Ended
----------------------------------------------
05/31/04 05/31/03
---------------------- ----------------------
Net sales $ 3,741 100% $ 3,458 100%
Cost of sales 1,194 31.9 1,119 32.4
---------- ---------- ---------- ----------
Gross profit 2,547 68.1 2,339 67.6
---------- ---------- ---------- ----------
Selling, general and administrative 1,962 52.5 1,639 47.4
Research and development 415 11.1 265 7.7
---------- ---------- ---------- ----------
Total operating expenses 2,377 63.5 1,904 55.1
---------- ---------- ---------- ----------
Income from operations 170 4.5 435 12.6
---------- ---------- ---------- ----------
Other income (expenses) 61 1.6 (8) (0.2)
---------- ---------- ---------- ----------
Net income before taxes 231 6.2 427 12.4
---------- ---------- ---------- ----------
Provision for income taxes 0 0 0 0
---------- ---------- ---------- ----------
Net income $ 231 6.2% $ 427 12.4%
========== ========== ========== ==========
Net Sales
---------
Consolidated net sales increased $283,000, or 8.2%, to $3,741,000 for the nine
months ended May 31, 2004 compared to $3,458,000 for the nine months ended May
31, 2003. Simulations Plus, Inc.'s sales from pharmaceutical and educational
software increased approximately $284,000, or 16.7%, while our Words+, Inc.
subsidiary's sales decreased approximately $1,000, or 0.1%, for the same
nine-month periods. The increase in our pharmaceutical software sales is
attributable in part to the exercise of an option exercised during the 1st
quarter for an additional geographic location under the large multi-year order
we received during the 4th quarter of FY03. This option added a fifth site for
the modified "ADME Partners" program under that license agreement, which
provides virtually unlimited licenses for the use of our GastroPlus(TM),
QMPRPlus(TM), and QMPRchitect(TM) software products with all optional modules.
The increase is also due in part to another multi-year global license the
Company received from one of our largest pharmaceutical customers during the 2nd
and 3rd quarters of FY04. Management attributes the decrease in Words+ sales
primarily to the decrease in software sales to overseas customers and lower
"TuffTalker Plus" sales, which outweighed the increased sales of our "Freedom
2000" product line, a special Medicare-approved dedicated device, and "Say-it!
SAM."
Cost of Sales
-------------
Consolidated cost of sales increased $75,000, or 6.7%, to $1,194,000 for the
nine months ended May 31, 2004 from $1,119,000 for the nine months ended May 31,
2003. As a percentage of revenues, cost of sales decreased by 0.5% for the nine
months ended May 31. For Simulations Plus, cost of sales increased $40,000, or
18.6%. A significant portion of cost of sales is the systematic amortization of
capitalized software development costs, which increased $26,000, or 29.0%, and
an increase in royalty expense of $14,000, or 10.9% which represents royalty
payments to TSRL. As a percentage of revenues, cost of sales increased 0.2%
between the first nine months of FY04 and FY03, 13.0% in FY04 and 12.8% in FY03.
Management attributes this slight increase in percentage of cost of sales
primarily to a proportional increase in amortization of capitalized software
development costs compared to sales.
17
For Words+, cost of sales increased $35,000, or 3.9%. The change in percentage
of cost of sales between the first nine months of FY04 and FY03 was an increase
of 2.0%. Management attributes the percentage increase in cost of sales for
Words+ primarily to the fact that the percentage of sales generated by products
with higher profit margins, such as software, was less than products with lower
profit margins, such as complete computer-based systems.
Gross Profit
------------
Consolidated gross profit increased $207,000, or 8.9%, to $2,546,000 for the
nine months ended May 31, 2004 from $2,239,000 for the nine months ended May 31,
2003. Management attributes this increase to a significant increase in
pharmaceutical software sales, resulting approximately in a 27% increase in
gross profit for these sales. This increase outweighed a decrease in gross
profit generated by Words+ products. As a part of its restructuring process for
the Words+ subsidiary, the Company increased prices and reduced purchased
equipment costs; however, the this action did not take effect until the middle
of the 3rd fiscal quarter of FY04.
Selling, General and Administrative Expenses
--------------------------------------------
Consolidated selling, general and administrative expenses increased $323,000, or
19.7%, to $1,962,000 for the nine months ended May 31, 2004 from $1,639,000 for
the nine months ended May 31, 2003. For Simulations Plus, selling, general and
administrative expenses increased $205,000, or 29.7%. The major increases in
expenses were in the categories of taxes due to sales to foreign countries,
Accounting fees, Legal fees, commissions, salary/bonus, payroll taxes, 401(k)
matching, insurance, printer lease, and travel. These increases outweighed small
decreases in printing cost, depreciation, and vacation expense.
For Words+, expenses increased $117,000, or 12.4%. The increases in expenses
were in the categories of selling expenses, such as commissions, catalog, and
trade shows, travel, as well as insurance, salary/bonus, payroll taxes, repairs
and depreciation. These increases outweighed decreases in advertising, contract
labor, dues/subscriptions, utilities, supplies, postage, and technical service
costs.
Research and Development
------------------------
We incurred approximately $722,000 of research and development costs for both
companies during the first nine months of FY04. Of this amount, $307,000 was
capitalized and $415,000 was expensed. For the first nine months of FY03, we
incurred $427,000 of research and development costs, of which $162,000 was
capitalized and $265,000 was expensed. The increase of $295,000 or 69.1% in
research and development expenditure from the first nine months of FY03 to the
same period of FY04 was due to the purchase of the Say-it! SAM technology, staff
expansion, and salary/bonus increases.
Other income (expense)
----------------------
Interest income for the first nine months of FY04 increased by $62,000 due
primarily to the amortization of present value discounts on long-term
receivables. Interest expense declined by $5,000 for the same time period which
is attributable to eliminated interest expense on leased equipment since all
leased equipment has been paid off or traded in. There was a loss on sale of
assets for $2,000 for the first nine months of FY03, however there was no such
expense for the same time period of FY04.
Provision for Income Taxes
--------------------------
Considering Net Operating Loss (NOL) carried forward to the Company's Federal
income tax liability and tax credits applicable to the State of California
Income tax liability, there is no provision for the first nine months of FY04
and FY03.
18
Net Income
----------
Consolidated net income for the nine months' operations decreased by $196,000,
or 46.0%, to $231,000 for the nine months ended May 31, 2004 compared to
$427,000 for the nine months ended May 31, 2003. Management attributes this
decrease in profit primarily to the net loss created by Words+, Inc., its
subsidiary. The Company recently announced to restructure Words+, Inc. in order
to minimize the expenses and expecting improvement in the net income.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of capital have been cash flows from its
operations and a bank line of credit. The Company has available a $500,000
revolving line of credit from a bank. Interest is payable on a monthly basis at
the bank's prime rate plus 1.5%. At May 31, 2004, the outstanding balance under
the revolving line of credit was zero. The revolving line of credit is secured
by the Company's assets, consisting of tangible personal property (except goods
in transit), is personally guaranteed by the Company's President, and expires in
May 2005.
The Company believes that existing capital and anticipated funds from operations
will be sufficient to meet its anticipated cash needs for working capital and
capital expenditures for the foreseeable future. Thereafter, if cash generated
from operations is insufficient to satisfy the Company's capital requirements,
the Company may have to sell additional equity or debt securities or obtain
expanded credit facilities. In the event such financing is needed in the future,
there can be no assurance that such financing will be available to the Company,
or, if available, that it will be in amounts and on terms acceptable to the
Company. If cash flows from operations become insufficient to continue
operations at the current level, and if no additional financing is obtained,
management will restructure the Company in a way to preserve its pharmaceutical
and disability businesses while maintaining expenses within operating cash
flows.
Item 3. 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 providing timely
alert to them for 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
controls over financial reporting.
19
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
---------------------------------------------------
(1) On March 11, 2004, the Registrant held its annual meeting of
shareholders. The following proposals were submitted to a vote of
security holders at the meeting.
Election of directors
---------------------
Walter Woltosz
Virginia Woltosz
Dr. David Z. D'Argenio
Dr. Richard Weiss
(2) Ratification of the selection of Singer, Lewak, Greenbaum & Goldstein,
LLP 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.
Broker
Proposal Yes No Abstain Non-Votes Total
-------- ------------ ------------ ------------ ------------ ------------
(1) 3,057,286 -- -- -- 3,057,286
(2) 3,054,986 -- 2,300 -- 3,057,286
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
99.1 Press release dated March 9, 2004. (Incorporated by reference
to the Company's Form 8-K filed on March 10, 2004.)
(b) Reports on Form 8-K
On March 9, 2004, Simulations Plus, Inc. issued a press
release announcing that it has been approved for listing on
the American Stock Exchange and expects to commence trading
under the ticker symbol "SPL" beginning Wednesday, March 17,
2004.
20
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 14, 2004.
Simulations Plus, Inc.
Date: July 14, 2004 By: /s/ MOMOKO BERAN
----------------
Momoko Beran
Chief Financial Officer
21