SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 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: 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 January 14, 2005, was 3,616,143.
SIMULATIONS PLUS, INC.
FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 2004
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
----
Consolidated Balance Sheet at November 30, 2004 (unaudited) 2
Consolidated Statements of Operations for the three months
ended November 30, 2004 and 2003 (unaudited) 4
Consolidated Statements of Cash Flows for the three months
ended November 30, 2004 and 2003 (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 20
Item 3. Quantitative and Qualitative Disclosures about Market Risk 21
Item 4. Controls and Procedures 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities 22
Item 3. Defaults upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
Signature 23
Exhibit - Certifications 24
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
at November 30, 2004
(Unaudited)
================================================================================
ASSETS
CURRENT ASSETS
Cash and cash equivalents $1,048,378
Accounts receivable, net of allowance for doubtful accounts
of $14,406 and present value discount of $17,135 (note 6) 1,390,432
Inventory (note 7) 327,829
Prepaid expenses and other current assets 94,686
Deferred tax 186,000
----------
Total current assets 3,047,325
CAPITALIZED COMPUTER SOFTWARE DEVELOPMENT COSTS,
net of accumulated amortization of $2,007,854 (note 4) 664,643
PROPERTY AND EQUIPMENT, net (note 8) 76,504
DEFERRED TAX 1,210,000
OTHER ASSETS 11,150
----------
TOTAL ASSETS $5,009,622
==========
The accompanying notes are an integral part of these financial statements.
2
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
at November 30, 2004
(Unaudited)
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 135,353
Accrued payroll and other expenses 237,714
Accrued bonuses to officers 77,626
Accrued income taxes 1,600
Accrued warranty and service costs 31,197
Current portion of deferred revenue 11,416
------------
Total current liabilities 494,906
Deferred revenue 17,131
Other long-term liabilities (note 10) 2,561
------------
Total liabilities 514,598
------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
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
3,581,343 shares issued and outstanding (note 9) 3,582
Additional paid-in capital 5,016,671
Accumulated deficit (525,229)
------------
Total shareholders' equity 4,495,024
------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 5,009,622
============
The accompanying notes are an integral part of these financial statements.
3
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended November 30,
(Unaudited)
================================================================================
2004 2003
------------ ------------
NET SALES $ 1,066,474 $ 1,138,733
COST OF SALES 322,128 351,746
------------ ------------
GROSS PROFIT 744,346 786,987
------------ ------------
OPERATING EXPENSES
Selling, general, and administrative 631,945 605,823
Research and development 113,692 143,393
------------ ------------
Total operating expenses 745,637 749,216
------------ ------------
INCOME (LOSS) FROM OPERATIONS (1,291) 37,771
------------ ------------
OTHER INCOME (EXPENSE)
Interest income 16,771 20,487
Interest expense (284) (366)
Gain on exchange of currency 2,111 --
Gain on sale of assets 5,200 --
------------ ------------
Total other income 23,798 20,121
------------ ------------
INCOME BEFORE BENEFIT FROM INCOME TAXES 22,507 57,892
BENEFIT FROM INCOME TAXES
Benefit from (provision for) income tax -- (11,173)
Change in valuation allowance -- --
------------ ------------
Total provision for income taxes -- (11,173)
------------ ------------
NET INCOME $ 22,507 $ 46,719
============ ============
BASIC EARNINGS PER SHARE $ 0.01 0.01
============ ============
Diluted earnings per share $ 0.01 $ 0.01
============ ============
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING
BASIC 3,571,191 3,417,202
============ ============
DILUTED 4,143,687 4,128,092
============ ============
The accompanying notes are an integral part of these financial statements.
4
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended November 30,
(Unaudited)
=======================================================================================
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 22,507 $ 46,719
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization of property and
equipment 10,696 8,060
Amortization of capitalized software development
costs 31,869 52,552
(Gain) or loss on sale of assets (5,200) --
(Increase) decrease in
Accounts receivable 314,601 140,788
Inventory 30,761 (44,571)
Other assets 21,358 44,382
Increase (decrease) in
Accounts payable (17,533) (962)
Accrued payroll and other expenses 18,306 5,097
Accrued bonuses to officers -- (133,538)
Accrued income taxes -- --
Accrued warranty and service costs (1,299) (5,571)
Deferred revenue (2,854) (6,454)
------------ ------------
Net cash provided by operating activities 423,212 106,502
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (23,529) (2,970)
Proceeds from sale of assets 7,895 --
Capitalized computer software development costs (120,032) (48,209)
------------ ------------
Net cash used in investing activities (135,666) (51,179)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the exercise of stock options 26,566 36,798
------------ ------------
Net cash provided by financing activities 26,566 36,798
------------ ------------
The accompanying notes are an integral part of these financial statements.
5
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended November 30,
(Unaudited)
=======================================================================================
2004 2003
------------ ------------
Net increase in cash and cash equivalents $ 314,112 $ 92,121
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 734,266 260,733
------------ ------------
CASH AND CASH EQUIVALENTS, END OF THE THREE MONTHS $ 1,048,378 $ 352,854
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
INTEREST PAID $ 284 $ 366
============ ============
INCOME TAXES PAID $ 1,600 $ 47,000
============ ============
SUPPLEMENTAL SCHEDULE OF NON-CASH TRANSACTIONS
1 During the first fiscal quarter of 2004, 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.
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 $7,383 in the first
quarter of fiscal year 2005. If we had not changed our expected economic life,
we would have amortized $24,899.
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 November 30, 2004, the unamortized discount amount on such receivable was
$17,135. The discounted balance of long-term receivables of $526,865 is due to
be collected before the end of fiscal year 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 November 30, 2004 consisted of the following:
Equipment $ 165,300
Computer equipment 295,131
Furniture and fixtures 52,704
Leasehold improvements 38,215
-------------
551,350
Less accumulated depreciation and amortization (474,846)
-------------
$ 76,504
=============
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. 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 November 30, 2004, options to purchase 1,029,616 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 fiscal quarter of 2005, 16,900 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:
Three Three
Months Months
2004 2003
----------- -----------
Net income
As reported $ 22,507 $ 46,719
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 (62,988) (63,252)
----------- -----------
PRO FORMA NET LOSS $ (40,481) $ (16,533)
=========== ===========
Earnings (loss) per common share
Basic - as reported $ 0.01 $ 0.01
Basic - Pro forma $ (0.01) $ (0.00)
Diluted - as reported $ 0.01 $ 0.01
Diluted - Pro forma $ (0.01) $ (0.00)
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 three months ended November 30, 2004
and November 30, 2003:
November 30, 2004
--------------------------------------------------------------------------
Simulations Plus, Words +, Inc. Eliminations Total
Inc
------------------- ------------------- ------------------ ---------------
Net Sales 523,452 543,022 1,066,474
Income (loss) from operations 41,405 (18,898) 22,507
Identifiable assets 5,584,743 1,237,573 (1,812,694) 5,009,622
Capital expenditures 3,354 20,175 23,529
Depreciation and Amortization 3,508 7,188 10,696
11
November 30, 2003
--------------------------------------------------------------------------
Simulations Plus, Words +, Inc. Eliminations Total
Inc
------------------- ------------------- ------------------ ---------------
Net Sales 642,293 496,440 1,138,733
Income (loss) from operations 135,148 (97,377) 37,771
Identifiable assets 4,219,623 651,521 (963,279) 3,907,865
Capital expenditures - 2,970 2,970
Depreciation and Amortization 3,957 4,103 8,060
In addition, the Company allocates revenues to geographic areas based on the
locations of its customers. Geographical revenues for the three months ended
November 30, 2004 and November 30, 2003 were as follows (in thousands):
November 30, 2004
------------------------------------------------------------------------------
North America South
Europe Asia Oceania America Total
--------------- ------------ ------------ ------------ ------------ ----------
Simulations Plus, Inc. 327 77 119 -0- -0- 523
Words+, Inc. 494 30 15 8 -0- 543
Total 821 107 134 8 -0- 1,066
November 30, 2003
------------------------------------------------------------------------------
North South
America Europe Asia Oceania America Total
--------------- ------------ ------------ ------------ ------------ ----------
Simulations Plus, Inc. 172 52 418 -0- -0- 642
Words+, Inc. 431 45 8 7 5 496
Total 603 97 426 7 5 1,138
Note 13: SUBSEQUENT EVENT
Since December 1, 2004, an additional 33,700 stock options to purchase shares
have been exercised by employees.
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 three software products for pharmaceutical research:
GastroPlus(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.
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.
13
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 now in
final 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 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.
Recent product improvements included 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. ADMET Predictor is now one of the few programs available in the
world that provides accurate prediction of pKas, and we believe the predictive
accuracy of the pKa model in ADMET Predictor is unsurpassed.
With the recent release of ADMET Predictor 1.0, we have 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.
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.
Our third core product, ADMET Modeler(TM), (formerly QMPRchitect(TM)), was
released in July of 2003. This powerful program is used to generate the
predictive models used in ADMET Modeler 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.
14
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.
We continue to enhance GastroPlus, ADMET Predictor, and ADMET Modeler, and we
are developing new core products to add to our catalog of software for
pharmaceutical research. Two products scheduled to be released in early 2005 are
DDDPlus(TM) and MembranePlus(TM). These products are described further below.
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, 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 expect the
module to be released for sale in early 2005. 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 is one of the most promising
technologies for predicting human pharmacokinetics from animal data
15
(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 was
developed in response to customer requests from several of the largest
pharmaceutical companies in the world.
(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(TM) software described below. We plan to incorporate it into GastroPlus
in calendar 2005.
(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. We demonstrated a nearly final version of DDDPlus at the
American Association of Pharmaceutical Scientists conference in early November
2004. We expect to release the full version by the end of calendar 2004. DDDPlus
simulates how different tablets and capsules disintegrate and dissolve during in
vitro (laboratory) dissolution 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. We've
been encouraged by the level of interest we've received as we've demonstrated
beta versions of the software at various shows and customer sites.
(4) ADMET Predictor(TM) upgrades
--------------------------------
We will continue to add new molecular descriptors and new predicted ADMET
properties to ADMET Predictor. We recently announced the release of ADMET
Predictor 1.0 with structure drawing depiction and six toxicity predictions, as
well as improved pKa prediction and other user convenience improvements.
16
WORDS+
------
PRODUCTS
--------
Our wholly owned subsidiary, Words+, Inc. has been an industry technology leader
for over 23 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 our 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. This acquisition gave us
our smallest, lightest augmentative communication system, which is based on a
Compaq iPAQ personal digital assistant (PDA). PDA-based communication devices
have been very successful in the augmentative 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. Say-it! SAM sales grew
rapidly in 2004 and we expect this product to continue to be successful in 2005.
At the Closing the Gap conference in October 2004, we demonstrated our new
Windows CE tablet-computer-based augmentative communication system, called the
SAM Tablet. This received enthusiastic responses from both potential customers
and Words+ dealers alike. We believe that tablet-based communication systems are
in high demand in this market, and that this addition fills a hole we had in our
product line.
17
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED NOVEMBER 30, 2004 AND 2003.
The following table sets forth our consolidated statements of operations (in
thousands) and the percentages that such items bear to net sales:
Three Months Ended
------------------------------------------------------------
11/30/04 11/30/03
------------------------------- ----------------------------
Net sales $ 1,066 100% $ 1,139 100%
Cost of sales 322 30.2 352 30.9
---------------- -------------- ------------- --------------
Gross profit 744 69.8 787 69.1
---------------- -------------- ------------- --------------
Selling, general and administrative 632 59.3 606 53.2
Research and development 114 10.7 143 12.6
---------------- -------------- ------------- --------------
Total operating expenses 746 70.0 749 65.8
---------------- -------------- ------------- --------------
Income (loss) from operations (2) (0.2) 38 3.3
---------------- -------------- ------------- --------------
Other income (expenses) 24 2.3 20 1.8
---------------- -------------- ------------- --------------
Net income before taxes 22 2.1 58 5.1
---------------- -------------- ------------- --------------
Provision for income taxes - - 11 1.0
---------------- -------------- ------------- --------------
Net income $ 22 2.1% $ 47 4.1%
================ ============== ============= ==============
NET SALES
Consolidated net sales decreased $73,000, or 6.4%, to $1,066,000 in the first
fiscal quarter of 2005 (FY05) from $1,139,000 in the first fiscal quarter of
2004 (FY04). Our sales from pharmaceutical and educational software decreased
approximately $119,000, or 18.5%; however, our Words+, Inc. subsidiary's sales
increased approximately $46,000, or 9.3%, for the quarter. Management attributes
the decrease in pharmaceutical software sales to three factors: (1) analytical
study contract revenues was zero in FY05, while we had $32,000 in study contract
revenues in FY04, (2) the amount of the new one-year global license in FY05 was
somewhat less than the amount we received from a multi-year "ADME Partners"
license in FY04, and (3) revenues from renewal orders were much lower in FY05
compared with FY04 because four customers slipped their renewals into the second
quarter in FY 05. Despite these decreases, pharmaceutical revenues in FY05 were
sustained with orders from new customers, which expands the foundation for
future annual license renewal revenues, upon which our compound growth is based.
Management attributes the increase in Words+ sales primarily to the sales growth
in products of "Say-it! SAM" and "TuffTalker", which accounted over 40% of total
sales in FY04, compared with less than 5% of total sales in FY03. This increase
outweighed the decrease in Freedom product sales.
18
COST OF SALES
Consolidated cost of sales decreased $30,000, or 8.5%, to $322,000 in the first
fiscal quarter of FY05 from $352,000 in the first fiscal quarter of FY04. The
percentage of cost of sales in the first fiscal quarter of FY05 is almost the
same as the first fiscal quarter of FY04. For Simulations Plus, cost of sales
decreased $30,000, or 39.0%. A significant portion of cost of sales is the
systematic amortization of capitalized software development costs, which
decreased $39,000, or 83.9%, and an increase in royalty expense of $8,000, or
25.0% which represents royalty payments to TSRL. As a percentage, cost of sales
decreased from 12.1% in FY04 to 9.1% in FY05. Management attributes this
decrease in percentage of cost of sales primarily to a change in estimate of
pharmaceutical software product life, which we reassessed to be 5 years
beginning with this quarter. Thus, quarterly amortization of capitalized
software development costs decreased.
For Words+, cost of sales increased $1,000, or 0.4%. As a percentage, cost of
sales decreased 4.5% between the first 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 restructure of Words+
in fiscal year 2004.
GROSS PROFIT
Consolidated gross profit decreased $43,000, or 5.5%, to $744,000 in the first
quarter of FY05 from $787,000 in the first quarter of FY04. Management
attributes this decrease to lower pharmaceutical software sales which outweighed
an increase in gross profit generated by Words+ products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Consolidated selling, general and administrative expenses increased $26,000, or
4.3%, to $632,000 in the first fiscal quarter of FY05 from $606,000 in the first
fiscal quarter of FY04. For Simulations Plus, selling, general and
administrative expenses increased $51,000, or 16.9%. The major increases in
expenses were in the categories of equipment lease, insurance, legal and
accounting, investor relation's fees, and salary increases along with
payroll-related expenses such as health insurance, payroll taxes, and 401(k)
matching contributions. These increases outweighed small decreases in bank
charges, employee benefits, and depreciation.
For Words+, expenses decreased $25,000, or 8.1%, due to a reduction in salary
and payroll related expenses such as health insurance, payroll taxes and 401(k)
matching contributions, catalog expenses, and dues/subscriptions. These
decreases outweighed increases in selling expenses, such as commissions to sales
reps, trade shows and travel expenses.
RESEARCH AND DEVELOPMENT
We incurred approximately $234,000 of research and development costs for both
companies during the first quarter of FY05. Of this amount, $120,000 was
capitalized and $114,000 was expensed. In the first quarter of FY04, we incurred
$191,000 of research and development costs, of which $48,000 was capitalized and
$143,000 was expensed. The increase of $43,000, or 22.5%, in research and
development expenditure from the first quarter of FY04 to the first quarter of
FY05 was due to salary increases and purchase of software development tools.
19
OTHER INCOME (EXPENSE)
The net of other income (expense) in the first quarter of FY05 increased by
$3,000. The amortization of present value discount on long-term receivables
decreased by $4, however we gained $5,000 on sale of equipments and $2,000 on
currency exchange.
PROVISION FOR INCOME TAXES
Although the Company had a Net Operating Loss (NOL) carried forward which was
applied to the Company's Federal income tax liability, the State of California
suspended the NOL carry forward for two years beginning with fiscal years that
began after January 2003, resulting in a $11,000 tax due to the state of
California for the first quarter FY04. We do not expect any tax due to the state
of California for the first quarter of FY05.
NET INCOME
Consolidated net income for the three months' operations decreased by $25,000,
or 53.2%, to $22,000 in the first quarter of FY05 compared to $47,000 in the
first quarter of FY04. Management attributes this decrease in profit primarily
to the decrease in sales, and increases in selling, general and administrative
expenses which outweighed decreases in cost of sales, research and development
expenses, provision for income taxes, and increase in other income.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of capital have been cash flows from its
operations and a bank line of credit. The Company 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 November 30, 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 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.
20
Item 3. Quantitative and Qualitative Disclosures about Market Risk
----------------------------------------------------------
Our risk from exposure to financial markets risk 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 the U.S. dollars
although we generate significant revenues from customers overseas. The exception
is that we were compensated in Japanese yen by one of Japanese customers. As a
result, we experienced a small gain from currency exchange gain in the first
fiscal quarter of 2005. In the future, if the foreign currency transactions
increase significantly increase, then we may mitigate this effect through
foreign currency forward contracts whose market-to-market gains or losses are
recorded in "Other Income" 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 Director of Finance concluded that
the Company's disclosure controls and procedures are effective
in timely alerting them to material information relating to
the Company required to be included in the Company's periodic
SEC filings.
(b) CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING. There
was no change in Company's internal control over financial
reporting during the Company's most recent fiscal quarter that
has materially affected, or is reasonably likely to materially
affect, the Company's Internal control over financial
reporting.
21
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
99.1 Press release dated September 3, 2004. (Incorporated by
reference to the Company's Form 8-K filed on September 3,
2004.)
(b) Reports on Form 8-K
On September 3, 2004, Simulations Plus, Inc. issued a press
release announcing changes in independent auditor. Following
the press release, Form 8K was filed on September 3, 2004.
On September 22, 2004, Simulations Plus, Inc. filed Form 8K/A
revising our documents in response to SEC's comments regarding
Form 8K filed on September 3, 2004.
22
SIGNATURE
In accordance with Section 13 or 15 (d) of the Securities Exchange Act of 1934,
the Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Lancaster, State of California, on
January 14, 2005.
Simulations Plus, Inc.
Date: January 14, 2005 By: /s/ MOMOKO BERAN
----------------
Momoko Beran
Chief Financial Officer
23