Simulations Plus, Inc.
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filings requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [_][ ] No [X]
The aggregate market value of the registrant's common stock held by non-affiliates of the registrant as of November 17, 2009,February 26, 2010, based upon the closing price of the common stock as reported by The Nasdaq Stock Market on such date, was approximately $12,000,000.$15,211,000. This calculation does not reflect a determination that persons are affiliates for any other purposes.
Certain portions of the definitive Proxy Statement to be delivered to shareholders in connection with the 20102011 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K.
Simulations Plus, Inc.
This document and the documents incorporated in this document by reference contain forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact contained in this document and the materials accompanying this document are forward-looking statements.
The forward-looking statements are based on the beliefs of our management, as well as assumptions made by and information currently available to our management. Frequently, but not always, forward-looking statements are identified by the use of the future tense and by words such as “believes,” expects,” “anticipates,” “intends,” “will,” “may,” “could,” “would,” “projects,” “continues,” “estimates” or similar expressions. Forward-looking statements are not guarantees of future performance and actual results could differ materially from those indicated by the forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause ourou r or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by the forward-looking statements.
The forward-looking statements contained or incorporated by reference in this document are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”) and are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. These statements include declarations regarding our plans, intentions, beliefs or current expectations.
Among the important factors that could cause actual results to differ materially from those indicated by forward-looking statements are the risks and uncertainties described under “Risk Factors” and elsewhere in this document and in our other filings with the SEC.Securities and Exchange Commission (“SEC”).
Forward-looking statements are expressly qualified in their entirety by this cautionary statement. The forward-looking statements included in this document are made as of the date of this document and we do not undertake any obligation to update forward-looking statements to reflect new information, subsequent events or otherwise.
We currently offer four software products for pharmaceutical research: ADMET Predictor™, MedChem Studio™ (formerly known as ClassPharmer™), DDDPlus™, and GastroPlus™.
Every drug molecule that fails in clinical trials, and every approved drug that gets withdrawn from the market, was bad from the time itits structure was first drawn by a chemist or generated by a computer. Theycomputer - they don’t become bad later.later in development. Expensive development activities that attempt to determine whether or not such failed molecules can become useful medicines are wasted resources. Thus, the ability to predict unsuitable characteristics of new molecules as early as possible offers the promise of avoiding costly programs that end up in late-stage failures. Although not every failure mode can be predicted in this manner, those that can provide a means to reduce the number of failures that frequently occur after years of work and millions ofsometimes more than a billion dollars (sometimes over $1 billion) have been spent.
Several independent studies have been published that compare the accuracy of software programs like ADMET Predictor. In eachalmost every case, ADMET Predictor has been ranked first in accuracy (it was ranked second in one study, but that study was later redone with a more difficultaccuracy. The specific set of test compounds and a newer version ofmolecules used in such studies, as well as the statistics used for comparison, often favors one program over others; however, across all published studies, ADMET Predictor and it was then ranked first). Not onehas been top-ranked far more than any other software product was consistently ranked in the top 4 across these studies. This is a remarkable accomplishment, considering the greater size and resources of many of our competitors.program.
Pharmaceutical companies spend enormous amounts of money conducting a wide variety of experiments on new molecules each year. Using suchtheir own proprietary data to build predictive models provides a second return on this investment; however, in the past, model-buildingmodel building has traditionally been a tedious activity performed by specialists. With ADMET Modeler integrated into ADMET Predictor, scientists without model-building experience can now use their own experimental data to quickly create high-quality predictive models.
ADMET Predictor is compatible with the popular Pipeline Pilot™ software offered by SciTegic, a subsidiary of Accelrys.Accelrys, Inc.. This software serves as a tool to allow chemists to run several different software programs in series to accomplish a set workflow for large numbers of molecules. In early discovery, chemists often work with hundreds of thousands or millions of “virtual” molecules – molecules that exist only in a computer. The chemist triescomputer files. Chemists need to decide which few molecules from these large “libraries” should be made and tested.tested or taken further in development. Using Pipeline Pilot with ADMET Predictor (and ClassPharmerMedChem Studio™ – see below), perhaps in conjunction with other software products, the chemistchemists can create and screen very large libraries faster and more efficiently than by running each programprogra m by itself. Perhaps the most important aspect of this process is obtaining accurate property predictions for new molecular structures, so that molecules are not filtered out of the process that would have been successful as medicines, and molecules that cannot become useful medicines are eliminated from wasteful further development activities. Because of ADMET Predictor’s accuracy, we believe we have a significant strategic advantage in this developing area of technology.
Our recognized world-class expertise in oral absorption and pharmacokinetics is evidenced by the fact that our staff members have been speakers or presenters at over 50 prestigious scientific meetings worldwide in the past five years. We frequently conduct contracted studies for large customers (including top 5 pharmaceutical companies) who have particularly difficult problems and who recognize our expertise in solving them, as well as for smaller customers who prefer to have studies run by our scientists rather than to license our software and train someone to use it. The demand for our consulting services has been increasing steadily, and we expect this trend to continue. Long-term collaborations and shorter-term consulting contracts serve both to showcase our technologies and as a way to build and strengthen customer relationships.relat ionships.
Although all of our development work cannot be disclosed for competitive reasons, some of our development efforts during this reporting period included:
We have continued to improve DDDPlus by adding capabilities and features requested by our customers and potential customers, as well as capabilities and features identified in-house.
This project was put on hold in September 2005 because the scientist responsible for MembranePlus, Dr. Viera Lukacova, was assigned to take over GastroPlus when the previous product manager left the company. She has done an outstanding job with GastroPlus, and has been promoted to Simulation Technologies Team leader. We are interviewing candidates to expand the Simulation Technologies Team, one of whom may work on MembranePlus under Dr. Lukacova’s direction.
We market our pharmaceutical software and consulting services through attendance and presentations at scientific meetings, exhibits at trade shows, seminars at pharmaceutical companies and government agencies, through our web pages on the Internet, and using various communication media to our compiled database of prospect and customer names. OurIn recent months we added an independent sales representative in Europe, and we have two independent representatives in China; however, our scientific team is also a key partthe majority of our sales and marketing team.team, assisting our Director of Marketing and Sales with trade shows, seminars, and customer training both via Internet and on-site. We believe that this is more effective than a completely separate sales team for several reasons: (1) customers appreciate talking directly with developersde velopers who can answer a wide range of technical questions about methods and features, (2) our scientists benefit from direct customer contact by gaining an appreciation for the environment and problems of the customer, and (3) the relationships we build through scientist-to-scientist contact are stronger than through salesperson-to-scientist contacts. Recently Mr. Ronal Creeley resigned from his position as vice president of marketing and sales for personal reasons, and Mr. John DiBella was promoted to Manager, Marketing and Sales. John was the original product manager and developer for DDDPlus, and moved into marketing and sales several years ago.
Our pharmaceutical software products are designed and developed entirely by our development team, with locations in Lancaster, Petaluma, San Jose, and San Diego, California. The principal materials and components used in the manufacture of simulation software products include CD-ROMs and instruction manuals, which are also produced in-house and through outside contractors. In-house graphic art and engineering talent enableenables us to accomplish this production in a cost-efficient manner.
In our pharmaceutical software and services business, we compete against a number of established companies that provide screening, testing and research services, and products that are not based on simulation software. There are also software companies whose products do not compete directly, but are sometimes closely related. Our competitors in this field include some companies with financial, personnel, research and marketing resources that are greater than ours. Management believes there is currently no significant competitive threat to GastroPlus or DDDPlus. ClassPharmerMedChem Studio and ADMET Predictor/ADMET Modeler operate in a more competitive environment; however, independent product comparisons have been very favorable toward our offerings, with ADMET Predictor consistently ranked first in predictivepredictiv e accuracy. Several other companies presently offer simulation or modeling software, or simulation-software-based services, to the pharmaceutical industry.
Major pharmaceutical companies conduct drug discovery and development efforts through their internal development staffs and through outsourcing some of this work. Smaller companies need to outsource a greater percentage of this research. Thus, we compete not only with other software suppliers, but also with the in-house development teams at some pharmaceutical companies.
We are not aware of any significant threat from competition in the area of gastrointestinal absorption simulation. Although competitive products exist, both new licenses and license renewals for GastroPlus have continued to grow in spite of this competition. We believe that we enjoy a dominant market share in this segment.
We believe the key factors in competing in this field are our ability to develop industry-leading simulation and modeling software and related products and services to effectively predict activities and ADMET-related behaviors of new drug-like compounds, to design new molecules with acceptable activity and ADMET properties, to develop and maintain a proprietary database of results of physical experiments that will serve as a basis for simulated studies and empirical models, to attract and retain a highly skilled scientific and engineering team, and to develop and maintain relationships with research and development departments of pharmaceutical companies, universities and government agencies.
We are actively seeking acquisitions to expand the pharmaceutical software and services business, and we are currently in discussions with other companies in this regard.business. Earlier attempts to acquire other companies werehave not successful. We believe the current discussions are with companies for which acceptable deal structures are more likely to be realized; however, there can be no assurances that anybeen successful either in arriving at mutually agreeable terms and conditions, or because of these deals will take place.adverse conditions discovered during our comprehensive due diligence process.
WORDS+
WORDS+PRODUCTS
Products
Our wholly owned subsidiary, Words+, Inc., has been an industry pioneer and technology leader for over 28 years infocused on introducing and improving augmentative and alternative communication and computer access software and devices for disabled persons. We intend to continue to be at the forefront of the development of new products. We will continue to enhance our major software products, E Z Keys™ and Say-it! SAM™, as well as our growing line of hardware products. We have also been pursuing acquisitions and other strategic alliances that are complementary to our existing augmentative and alternative communication and computer access business lines. In keepingpeople with this strategy we will begin processing ordersdisabilities for four new additions to our product line on December 1, 2009.over 29 years. The introduction of NetTalk, DuraSAM, Allora,EyeProTM, an eyegaze product, in 2010 has increased our revenue and Mind Express were featured at two national conferences and three regional conferences recently. The Allora (A type-and-talk device) and Mind Express (Augmentative Communication Software) are manufacturedmarketshare. Eyegaze technology allows people to operate a computer or communication device by Jabbla, Inc. in Belgium, and are in stocksimply looking at the time of this writing,screen, and demo units are out to distributors and orders are processing. NetTalk (an in-house-designed communication device based on small, light NetBook computers) and DuraSAM (a smaller, more durable, handheld communication device) are in the production phase, and are expected to be readyhas been a major breakthrough for delivery by December 7, 2009. Both of these products continue to expand the Say-it! SAM technologies acquired from SAM Communications, LLC of San Diego in December 2003. SAM-based products continue to account for a significant share of Words+ revenues. Allora and Mind Express broaden our product line immediately at low development cost so we can dedicate internal resources to other growth-oriented products and projects.people with severe disabilities.
Marketing and Distribution
MARKETING AND DISTRIBUTION
We market augmentative and alternative communication products through a network of employee representatives and independent dealers and resellers. Webinars and remote interaction using web-based evaluation, setup and training, introduced last year, have become standard parts of our operation. During the past fiscal yearlast two quarters, we added remote sales and service via internet interaction, including video support, to our marketing strategy. Professional webinar trainings are provided to customers and recommenders by a certified speech language pathologist. This enables us to provide immediate live customer interaction that used to require expensive, and time consuming, travel. Utilization of this technique is also improving the productivity of our professionals. In one case a professionalhave seen an increase in the home office provided evaluation assistancenumber of family members, caregivers, teachers, and aides attending the live and recorded webinars. This is a significant change in Floridathe speech pathologist-to-patient relationship, and interactiveallows the speech pathologists' professional experience and advice to extend beyond the therapy session to achieve more effective results for their clients. It has also allowed our sales force to spend less time training in Hawaii, during the same afternoon.and more time selling.
At the present time weWe currently have 39 sales representatives worldwide: 1 salaried sales manager and 2 salaried sales employees in California, 11 independent distributors and 6 independent resellers in the U.S., and 19 sales representatives overseas – 4 in Australia, and 1 each in New Zealand, Canada, England, Norway, Finland, The Netherlands, France, Ireland, Italy, Israel, Japan, Korea, Mexico, Malaysia, and Taiwan. We also have 2 inside support persons, who answer e-mails and telephone inquiries on our toll-free telephone line and who provide technical support. Additional outside sales persons and independent dealers and resellers are being actively recruited.
We direct our marketing efforts to speech pathologists, occupational therapists, rehabilitation engineers, special education teachers, disabled persons and relatives of disabled persons. We maintain a mailing list of over 10,000 people made up of these professionals, consumers and relatives, and we mail various marketing materials to this list. These materials include our catalog of products and announcements regarding new and enhanced products.
We participate in industry conferences held worldwide that are attended by speech pathologists, occupational and physical therapists, special education teachers, parents and consumers. We and others in the industry demonstrate our products at these conferences and present technical papers that describe the application of our technologies and research studies on the effectiveness of our products. Words+ attended three major national conferences in October and November 2010. We responded to calls for papers and presented five different professional sessions during these conferences, representing an all time high with more than twice our normal presentation activity. We also advertise in selected publications and websites of interest to persons in this market.
We estimate that for approximately 47% of our sales of augmentative and alternative communication (“AAC”) software and hardware, purchases are funded primarily by third parties such as Medicaid, Medicare and private insurance. School special education budgets, vocational rehabilitation, other governmental programs, private purchases and charitable assistance account for most of the other purchases. Medicare provides coverage for augmentative communication devices.
Our personnel provide advice and assistance to customers and prospective customers on obtaining third-party financial assistance for purchasing our products. Third-party funding grew slowly for the first 20 years of operation; however, the addition of Medicare coverage for AAC devices in 2001 resulted in significant increases in third-party funding in recent years. Our Medicare/Medicaid and other third-party-funded sales have grown, with the majority of total sales are now funded by a third party. Medicare/Medicaid sales are subject to funding caps that limit the amounts paid for our products, and payment by some agencies can be slow, making this market segment somewhat more difficult than others. Collection of accounts receivable has been a significant problem from certain state Medicaid agencies, Medicaid,Medicai d, and private insurance. Our financial reporting includes allowances for bad debts that are based on assumptions that we will collect a historical percentage of accounts receivable that fall in different aging categories: less than 6 months, 6-12 months, 12-24 months, and over 24 months. Although we domay not give up on any of the invoices that are included in the allowances for bad debts, we recognize that responsible financial reporting requires us to be conservative in these estimates. In order to reduce or eliminate such allowances going forward, we have recently (at the time of this writing in late November 2009) implemented new funding and billing software to streamline this process.
PRODUCTION
Disability software products are either loaded onto computer hard disk drives by our employees or copied to diskettes, CD-ROM, or memory cards, which is performed in-house. Most software customers also buy their notebook personal computers from us, which we purchase at wholesale prices and resell at a markup. We purchase microprocessors that are part of dedicated devices such as MessageMates™. We design our cases, printed circuit boards, labels and other components of products such as Sam communicators, MessageMates,, MicroCommPacs™SAM Communicator™ and our newpopular Conversa™ Sound Pack. We outsource the extrusion, machining and manufacturing of certain components. All final assembly and testing operations are done by our employees at our facility.
Our products are shipped from our Lancaster, California facility either directly to the customer or to the salesperson, dealer or reseller. Historically for major products, the outside salesperson, dealer or reseller either delivers the product or visits the customer after delivery to provide training. In our new remote location interaction sales and delivery model, more deliveries are being completed utilizing internet with video support for setup, and webinars plus individual live video interaction for training.
CompetitionCOMPETITION
The AAC industry in which we operate is highly competitive and some of our competitors have greater financial and personnel resources than ours. The industry is made up of about six major competitors including Words+, and a number of smaller ones. Based on personal conversations with our outside dealersFollowing the introduction of EyePro and customers, we believe that the other major competitors each have revenues ranging from $3 millionproducts to under $30 million, so that there are no large companies in this industry. We believe that acquisition of additional products that complement our current catalogue will provide faster growth than merelycatalog, we are now focused on developing new products in-house, and we are actively working to complete such acquisitions and alliances.in-house.
We believe that the competition in this industry is based primarily on the quality of products, quality of customer training and technical support, and quality and size of sales forces. Price is a competitive factor but we believe price is not as important to the customer as obtaining the product most suited to the customer’s needs, along with strong after-sale support. We believe that we are a leader in the industry in developing and producing some of the most technologically advanced products and in providing quality customer training and technical support. We believe that the potential exists for significant increases in the sales of our disability products; however, there are few barriers to entry in the form of proprietary or patented technology or trade secrets in this industry.ind ustry. While we believe that cost of product development and the need for specialized knowledge and experience in this industry would present some barrier to entry for new competition, other companies may enter this industry, including companies with substantially greater financial resources than ours. Furthermore, companies already in this industry may increase their market share through increased technology development and marketing efforts.
A recent development in the competitive environment is the appearance of communication devices based on the Apple iPod and iPad. This is a change in our industry, a change in service delivery and funding. We are working to determine how we fit in this environment. New Windows and Android phones will also have an impact.
TRAINING AND TECHNICAL SUPPORT
Customer training and technical support are important factors in customer satisfaction for both our pharmaceutical and disability products, and we believe we are an industry leader in providing customer training and technical support in both of our business areas. For pharmaceutical software, we provide in-house seminars at customers’ sites. These seminars often serve as initial training in the event the potential customer decides to license or evaluate our software. Technical support is provided after the sale in the form of on-site training (at customer’s expense), web meeting, telephone, fax, and e-mail assistance to users during the customer's license period. We have used Internet meetings extensively to provide demonstrations and customer assistance, resulting in rapid response to requests worldwide and reducing our travel time and expenses.
For Disability Products,disability products, our salesperson, dealer or reseller provideshistorically provided initial training to the customer for major systems -- typically two to four hours. This training is typically provided not only to the user of the product but also to speech pathologists, occupational therapists, rehabilitation engineers, teachers, parents and others who will assist the user. This initial training for the purchase of full systems is often provided as a part of the price of the product. Additional training and service calls are available for a fee. Live and recorded webinars introduced last year have significantly changed our service delivery model, making it more accessible to people who need training, and reducing the amount of time our sales force spends traveling and providing on-sit e, one-on-one training and support. Our salespeople still visit in person whenever appropriate, but the professional on-line training and support have greatly reduced this need. Feedback from surveys and increasing webinar attendance indicate improved customer satisfaction with our products and service delivery. The remote service delivery model is becoming an expectation in our industry and we have already implemented it.
Technical support for both pharmaceutical software and disability products is provided by our life sciences team and our inside sales and support staff based at our headquarters facilities in Lancaster, California. We provide free telephone support offering unlimited toll-free numbers in the U.S. and Canada, and e-mail and web-based support for all of our pharmaceutical software and disability products worldwide. Technical support for pharmaceutical software products is minimal, averaging a few person-hours per month. Technical support for Words+ products varies from none for most customers to as much as several hours for others. Words+ dealers usually train new customers at the customer's location, which significantly reduces technical support demands on our staff.
10We believe that our ability to grow and remain competitive in our markets is strongly dependent on significant investment into research and development (“R&D”). R&D activities include both enhancement of existing products and development of new products. Development of new products and adding functionality to existing products are capitalized in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 985-20. R&D expenditures were approximately $1,857,000 during fiscal year 2010, of which $887,000 was capitalized. R&D expenditures during fiscal year 2009 were approximately $1,975,000, of which $674,000 was capitalized.
Our pharmaceutical business R&D activities during fiscal year 2010 were focused on improving our ADMET Predictor/ADMET Modeler, MedChem Studio, and GastroPlus products.
Our R&D activities for our Words+ subsidiary were focused on development of our new EyePro™ eyegaze product line, improvement of a tablet-computer-based system called Conversa, and two new hardeare development projects that we are not ready to announce at this time.
EMPLOYEES
As of August 31, 2009,2010, we employed 3839 full-time and 21 part-time employees, including 1819 in research and development, 98 in marketing and sales, 7 in administration and accounting and 6 in production. Currently 1314 employees hold Ph.D.’s and 1 is a Ph.D. candidate in their respective science or engineering disciplines. Additionally, 4disciplines and one is a Ph.D. candidate. Addtionally, 3 employees hold one or more Master’s degrees. Most of the senior management team and Board of Directors hold graduate degrees. We believe that our future success will depend, in part, on our ability to continue to attract, hire and retain qualified personnel. The competition for such personnel in the pharmaceutical industry and in the augmentative and alternative communication device and computer software industry is intense. None of our employeese mployees is represented by a labor union, and we have never experienced a work stoppage. We believe that our relations with our employees are good.
PATENTS
We own two patents that were acquired as part of our 2005 acquisition of certain assets of Bioreason, Inc., and we are applyinghave applied for a patent related to a product development that is under way by our Words+ subsidiary. We primarily protect our intellectual property through copyrights and trade secrecy. Our intellectual property consists primarily of source code for computer programs and data files for various applications of those programs in both the pharmaceutical software and the disability products businesses. In the disability products business, electronic device schematics, mechanical drawings, and design details are also intellectual property. The expertise of our technical staff is a considerable asset closely related to intellectual property, and attracting and retaining highly qualified scientists and engineersengine ers is essential to our business.
EFFECT OF GOVERNMENT REGULATIONS
Our pharmaceutical software products are tools used in research and development and are neither approved nor approvable by the Food and Drug AdministrationFDA or other government agency. At the recent meeting of the American Association of Pharmaceutical Scientists in Los Angeles in November 2009, one of the major pharmaceutical companies stated in a presentation that as a result of GastroPlus simulations, the FDA waived the requirement for additional human trials in one of their projects. This is an important development as it shows that the cost of the software can be recouped many times over via the cost and time savings that can be achieved with proper simulations.agencies.
Most of our products for the disabled are funded by Medicare or Medicaid, schools, the Veteran’s Administration, and other insurance programs. Changes in government regulations regarding the allowability of augmentative communication aids and other assistive technology under such funding could affect our business.
ITEM 1A – RISK FACTORS
Not Applicableapplicable because the Company is a smaller reporting company.
ITEM 1B – UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2 – DESCRIPTION OF PROPERTY–PROPERTIES
We lease approximately 13,500 square feet of space underin Lancaster, California. The original agreement had a five-year term with two (2), three-(3) year options to extendextend. Since the leaseoriginal five-year term will expire in Lancaster, California.February 2011, we have exercised the first of the two three-year options. The base rent started at the rate of $18,445 per month plus common area maintenance fees. The base rental rate increases at 4% annually, and currently it is $20,748$21,578 plus Common Area Maintenancecommon area maintenance fees. We believe that this new facility is sufficient for our current needs and growth for the near future.
ITEM 3 – LEGAL PROCEEDINGS
On April 6, 2006 we received notice fromThe Company is not a liquidator for the former French subsidiary of Bioreason (Bioreason SARL), saying that the liquidator had initiatedparty to any legal action against Simulations Plus in the French courts with respect to ClassPharmer distribution rights to European customers,proceedings and is claiming commissions andnot aware of any pending legal fees with respect to European customers. We filed a counterclaim for our rights and lost sales against Bioreason SARL's assets by sending a debt recovery declaration to the liquidator on June 15, 2006.proceedings of any kind.
On April 9, 2008, we received the approval of the settlement agreement from the commercial division of French Ordinary Court. This means that the settlement agreement is now enforceable, and this case is finally closed. Both parties dropped all claims and we are not liable for any amounts.
ITEM 4 – SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of fiscal year 2009.
ITEM 4 – [RESERVED]
PART II
ITEM 5 – MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our Common Stock is currently traded on the NASDAQ Stock Market (NASDAQ) under the symbol “SLP”. According to the records of our transfer agent, we had about 58approximately 57 shareholders of record and approximately 1,550 beneficial owners as of August 31, 2009.2010. The following table sets forth the low and high sale prices for theour Common Stock as listed on the AMEXNASDAQ for the last two fiscal years. The Boardboard of directors declared a 2-for-1 stock split in August 2006 and another 2-for-1 split in October 2007, and our common stock has been trading at the post-split priceprices since October 2, 2007. The prices in the table below reflect the post-split price.prices. We have not paid cash dividends on our Common Stock. We currently intend to retain our earnings for future growth, and therefore do not anticipate paying cash dividends in the foreseeable future. Any further determination as to the payment of dividends will be at the discretion of our Board of Directors and will depend among other things, on our financial condition, results of operations, capital requirements and such other factors as the Board of Directors deems relevant.
On October 23, 2008, theour board of directors authorized a share repurchase program enabling the buyback of up to $2.5 million in shares during a 12-month period beginning Monday, October 27, 2008. The actual repurchase started on December 2, 2008; therefore the board of directors extended it through December 1, 2009 in order to have a full 12-month period. The Company has opened an account with Morgan Stanley Smith Barney for the purchase of such securities. Funds for any stock purchases will beare drawn from the Company’s cash reserves. At the time of this writing, theThe Company has repurchased 1,008,6311,026,483 shares at an average price of $1.3215$1.3823 per share forprior to December 1, 2009.
On January 10, 2010, the board of directors authorized a totalsecond share repurchase program (Phase II) effective as of $1,326,365.February 15, 2010. The renewed program enables the Company to buy back up to one million shares during a 12-month period. Under the Phase II program, the Company has purchased 718,089 shares at an average price of $2.6952 per share as of November 19, 2010.
All numbersThe following table shows low and high sales price for the last eight fiscal quarters.
| | Low Sales Price | | | High Sales Price | |
FY10: | | | | | | |
Quarter ended August 31, 2010 | | | 2.04 | | | | 2.52 | |
Quarter ended May 31, 2010 | | | 1.67 | | | | 2.50 | |
Quarter ended February 28, 2010 | | | 1.35 | | | | 1.72 | |
Quarter ended November 30, 2009 | | | 1.32 | | | | 1.79 | |
| | | | | | | | |
FY09: | | | | | | | | |
Quarter ended August 31, 2009 | | | 1.20 | | | | 1.86 | |
Quarter ended May 31, 2009 | | | 0.90 | | | | 1.25 | |
Quarter ended February 28, 2009 | | | 0.87 | | | | 1.12 | |
Quarter ended November 30, 2008 | | | 1.01 | | | | 1.90 | |
EQUITY COMPENSATION PLAN INFORMATION
The following table provides a summary of Equity Compensation Plan Information.
Equity Compensation Plan Information (1) |
Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) |
| (a) | (b) | (c) |
Equity compensation plans approved by security holders | 1,493,902 | $ 1.13 | 346,834 |
Equity compensation plans not approved by security holders | 0 | 0 | 0 |
Total | 1,493,902 | | 346,834 |
(1) | The Company is authorized to issue stock options under the following compensation arrangement: |
| a. | 4,000 shares per year per person to Directors as a part of their annual stipends. |
| b. | 50 shares for each $1,000 of net income before taxes at the end of each fiscal year (up to a maximum of 120,000 options) to CEO over the term of the current employment agreement |
STOCK REPURCHASE
The details of repurchases made during the forth fiscal quarter ended August 31, 2010 are listed in the table below have been adjusted for the split that was effective on October 1, 2007.following table.
| | Low Sales Price | | High Sales Price | |
FY09: | | | | | | |
| Quarter ended August 31, 2009 | 1.20 | | | 1.86 | |
| | | | | | |
| Quarter ended May 31, 2009 | 0.90 | | | 1.25 | |
| | | | | | |
| Quarter ended February 28, 2009 . | 0.87 | | | 1.12 | |
| | | | | | |
| Quarter ended November 30, 2008 | 1.01 | | | 1.90 | |
| | | | | | |
FY08: | | | | | | |
| Quarter ended August 31, 2008 . | 1.40 | | | 2.18 | |
| | | | | | |
| Quarter ended May 31, 2008 . | 1.55 | | | 2.40 | |
| | | | | | |
| Quarter ended February 28, 2008 . | 2.75 | | | 4.97 | |
| | | | | | |
| Quarter ended November 30, 2007 . | 4.45 | | | 8.39 | |
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Program | Remaining Shares Authorized for Repurchase Under the Share Repurchase Plan – Phase II |
06/01/10 to 06/30/10 | 33,665 | $2.3670 | 33,665 | 709,258 |
07/01/10 to 07/31/10 | 18,789 | $2.4433 | 18,789 | 690,469 |
08/01/10 to 08/31/10 | 10,878 | $2.4283 | 10,878 | 679,591 |
Total | 63,332 | $2.4001 | 63,332 | |
ITEM 6 – SELECTED FINANCIAL DATA
Not Applicableapplicable because the Company is a smaller reporting company.
ITEM 7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONFINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and related notes included elsewhere in this Report.Annual Report on Form 10-K.
Management Overview
Fiscal year 2010 was a record year comprised of four record quarters. We believe the continued growth of our pharmaceutical software and services business segment is the result of increasing adoption of simulation and modeling software tools such as those we produce, as well as the expertise we offer as consultants to assist companies involved in the research and development of new medicines, which has resulted in a continuing series of study contracts with pharmaceutical companies ranging from several of the largest in the world to a number of medium-sized and smaller companies in the U.S. and Europe.
During FY10 we released major upgrades to three of our four pharmaceutical software offerings, we made substantial progress on our SBIR grant from the NIH, and we further expanded our Life Sciences staff. Our financial performance enabled us to continue to increase our cash deposits, remain debt-free, and continue to invest in the aggressive marketing and sales activities we began in early 2009 in order to reach a wider customer base.
We have not been successful in identifying and completing any acquisitions in spite of a number of investigations and due diligence activities. In each case, either due diligence revealed undesirable aspects of the potential acquisition, or terms and conditions agreeable to both sides were not able to be reached. It is our intent to continue to search for acquisition opportunities that would be compatible with our current businesses and that would be immediately accretive, i.e., adding to both revenues and earnings.
We have used some of our cash to repurchase shares of our common stock because we believe that reducing the number of fully diluted shares provides greater value to our shareholders than receiving a low interest rate on cash deposits, and because we believe that our cash deposits after such repurchases remain sufficient to accomplish any reasonable potential acquisitions as well as to maintain sufficient cash reserves to ensure meeting operational needs for the foreseeable future.
Our Words+ subsidiary has begun to turn around. Although the results for the entire FY10 were slightly negative, the fourth fiscal quarter resulted in a profit of over $130,000, driven partly by the introduction of our new EyePro eyegaze system in May 2010. We expect this trend to continue going forward; however, there can be no assurances that it will.
Results of Operations
The following sets forth selected items from our statements of operations (in thousands) and the percentages that such items bear to net sales for the fiscal years ended August 31, 20092010 (“FY09”FY10”) and August 31, 20082009 (“FY08”FY09”).
| | FY09 | | | FY08 | | | FY10 | | | FY09 | |
Net sales | | $ | 9,143 | | | | 100.0% | | | $ | 8,968 | | | | 100.0% | | | $ | 10,712 | | | | 100.0 | % | | $ | 9,143 | | | | 100.0 | % |
Cost of sales | | | 2,321 | | | | 25.4 | | | | 2,100 | | | | 23.4 | | | | 2,546 | | | | 23.8 | | | | 2,321 | | | | 25.4 | |
Gross profit | | | 6,822 | | | | 74.6 | | | | 6,868 | | | | 76.6 | | | | 8,166 | | | | 76.2 | | | | 6,822 | | | | 74.6 | |
Selling, general, and administrative | | | 3,896 | | | | 42.6 | | | | 3,699 | | | | 41.3 | | | | 4,325 | | | | 40.4 | | | | 3,896 | | | | 42.6 | |
Research and development | | | 1,114 | | | | 12.2 | | | | 991 | | | | 11.1 | | | | 970 | | | | 9.1 | | | | 1,114 | | | | 12.2 | |
Total operating expenses | | | 5,010 | | | | 54.8 | | | | 4,690 | | | | 52.3 | | | | 5,295 | | | | 49.5 | | | | 5,010 | | | | 54.8 | |
Income from operations | | | 1,812 | | | | 19.9 | | | | 2,178 | | | | 24.3 | | | | 2,871 | | | | 26.7 | | | | 1,812 | | | | 19.9 | |
Interest income | | | 94 | | | | 1.0 | | | | 185 | | | | 2.1 | | | | 101 | | | | 0.9 | | | | 94 | | | | 1.0 | |
Interest expense | | | | (1 | ) | | | (0.0 | ) | | | - | | | | - | |
Miscellaneous Income | | | 1 | | | | 0.0 | | | | - | | | | - | | | | 1 | | | | 0.0 | | | | 1 | | | | 0.0 | |
Gain on sale of assets | | | - | | | | - | | | | - | | | | - | | | | 2 | | | | 0.0 | | | | - | | | | - | |
Gain on currency exchange | | | 120 | | | | 1.3 | | | | 83 | | | | 0.9 | | | | 130 | | | | 1.2 | | | | 120 | | | | 1.3 | |
Total other income | | | 215 | | | | 2.4 | | | | 268 | | | | 3.0 | | | | 233 | | | | 2.1 | | | | 215 | | | | 2.4 | |
Net income before taxes | | | 2,027 | | | | 22.2 | | | | 2,446 | | | | 27.3 | | | | 3,104 | | | | 28.8 | | | | 2,027 | | | | 22.2 | |
Provision for income taxes | | | (615 | ) | | | (6.7 | ) | | | (721 | ) | | | (8.0 | ) | | | (948 | ) | | | (8.8 | ) | | | (615 | ) | | | (6.7 | ) |
Net income | | $ | 1,412 | | | | 15.4% | | | $ | 1,725 | | | | 19.2% | | | | 2,156 | | | | 20.0 | % | | | 1,412 | | | | 15.4 | % |
FY09FY10 COMPARED WITH FY08FY09
Net Sales
Consolidated net sales increased $175,000,$1,569,000, or 2.0%17.2%, to $10,712,000 in FY10 from $9,143,000 in FY09 from $8,968,000 in FY08.FY09. Sales from pharmaceutical software and services increased approximately $246,000,$1,320,000, or 4.1%20.9%; however, ourand Words+, Inc. subsidiary’s’s sales decreasedincreased approximately $71,000,$249,000, or 2.4%, for the year. We attribute the increase in pharmaceutical software sales and services primarily to increases in contract studiesthe number of licenses with new and collaborations.
existing customers, as well as licensing of new modules to existing customers. A price increase on pharmaceutical software products instituted in the second quarter (with the effect being seen primarily in the 3rd and 4th quarters) is an additional factor re sulting in increased revenues, accounting for approximately 20% of the $1,320,000 increase. The other 80% increase is a result of increases in number of software licenses, study contracts, and grant revenue. We attribute the decreaseincrease in Words+ sales primarily to decreases in sales of “Freedom”our “Conversa” product with preloaded “Say-it! SAM” software and “TuffTalker Plus” which were discontinued in FY08, and hardwareour new EyePro product. Increased revenues from these products such as MessageMates andoutweighed decreased revenues from other input devices. Those declines in sales outweighed increased sales of our “Say-it SAM!” and “Conversa” products.
Cost of Sales
Consolidated cost of sales increased $221,000,$225,000, or 10.5%9.7%, to $2,546,000 in FY10 from $2,321,000 in FY09, from $2,100,000 in FY08, andhowever, as a percentage of revenue, cost of sales increased 2.4%decreased 1.6%. For pharmaceutical software and services, cost of sales increased $275,000,$140,000, or 34.4%13.0%, andhowever, as a percentage of revenue, cost of sales increaseddecreased to 15.9% in FY10 from 17.0% in FY09 from 13.2% in FY08.FY09. A significant portion of cost of sales for pharmaceutical software products is the systematic amortization of capitalized software development costs, which is an independent fixed cost rather than a variable cost related to sales. This amortization cost increased approximately $50,000,$124,000, or 11.7%26%, in FY09FY10 compared with FY08.FY09. Royalty expense, another significant portion of cost of sales, increased approximately $38,000,$28,000, or 10.1%7%, in FY09FY10 compared with FY08.FY09. We pay a royalty on GastroPlus basic software sales but not on its modules or other software sales.modules. We also pay royalties on the Enslein Metabolism Module in our ADMET Predictor software in accordance with our agreement with Enslein Research, Inc. The cost of contract studies, which are mainly salaries for Scientists, increased as our revenue from study contracts increased, because these activities are not capitalizable software development activities.
For Words+, cost of sales decreased $54,000,increased $85,000, or 4.1%6.8%, and as a percentage of revenue, cost of sales were almost the same with a slight decrease of 0.8% to 43.1% in FY10 from 43.9% in FY09 from 44.7% in FY08.FY09.
Gross Profit
Consolidated gross profit decreased $46,000,increased $1,344,000, or 0.7%19.7%, to $8,166,000 in FY10 from $6,822,000 in FY 09 from $6,868,000 in FY08.FY09. We attribute this decreaseincrease to increased sales of pharmaceutical software and services in addition to increased sales of Words+ products, which was greater than the increase in cost of sales in pharmaceutical software and services and the decrease in gross profit from Words+ operations, which outweighed increases in revenue from pharmaceutical software and services.goods sold.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses for FY09FY10 increased by $197,000,$429,000, or 5.3%11.0%, to $3,896,000,$4,325,000, compared to $3,699,000$3,896,000 for FY08.FY09. As a percentage of sales, SG&A expenses decreased to 40.4% from 42.6% in FY09. For Simulations Plus, SG&A expenses increased $124,000,$242,000, or 5.6%10.4%. As a percentage of sales, SG&A for Simulations Plus decreased to 33.7% from 36.9%. The major increases in expenses were trade showaccounting fees incurred for filing of amended tax returns, valuation services and travel expenses dueassociated with investigating potential acquisitions, investor relations, selling expenses as we continue to attendingattend more trade shows, increased air fares, and increased personal vehicle mileage allowances. Increases in salariessalary and payroll-related expenses, such as health insurance, 401(K) and payroll taxes, and consultant fees are also added to SG&A. During FY08, we had one-time expenses such as fees paid for tax credit research fees, valuation service fees, and fees paid to the American Stock Exchange for stock splits, while no such expenses were incurred in FY09, resulting in some decreases in SG&A. However, those decreases did not offset the increases in other expenses mentioned above.expenses.
For Words+, expenses increased by $73,000,$188,000, or 4.9%. There was a shift12.0% due to increases in expense from one category to another from FY08 to FY09. In March 08, we hired a marketing consultant who became an employed sales manager of Words+, increasingtravel, commissions, salaries and travel expenses while reducing consultant fees. The other increases were website developing fees, payroll, and payroll-related expenses, such as health insurance, 401(K) and payroll taxes. Thoseexpenses. These increases outweighed decreasesdecreased in commissions and depreciation.allowances for bad debts.
Research and Development
We incurred approximately $1,975,000$1,857,000 of research and development (“R&D”) costs for both companies during FY09.FY10. Of this amount, $674,000$887,000 was capitalized and $1,114,000$970,000 was expensed as R&D and $187,000&D. As we record hours spent for studies, $175,000 was expensed as cost of sales. During FY08FY09 we incurred approximately $1,719,000$1,788,000 of research and development costs, of which approximately $728,000$674,000 was capitalized and approximately $991,000$1,114,000 was expensed. The 14.9%hours spent for studies during FY09 was expensed as cost of sales which amounted $187,000. The 4.9% increase in research and development expenditure from FY08FY09 to FY09FY10 was due primarily to increases in salary expenses due to expanding the staff in the Life Sciences Department, as well asnew hires and salary increases for existing staffemployees, which outweighed a reduced allocation of part of our CEO’s salary that had been spent on R&D, reflecting changes in both companies, which was reduced by the amount recorded ashis activities to a cost of sales for contract studies.
greater focus on business development and other administrative duties.
Income from operations
During FY09,FY10, we generated income from operations of $1,812,000,$2,871,000, as compared to $2,178,000$1,812,000 for FY08, a decreaseFY09, an increase of 16.8%58.4%. We attribute this increase to increases in revenue from both pharmaceutical software and services and Words+ operations, and a decrease toin R&D expenses, which was greater than the increases in cost of goods sold, SG&A expenses, and R&D costs, which outweighed the increased revenue generated by sales of pharmaceutical softwareselling and study contract services, in addition to a decrease in income from Words+ operations. Our heavier investment in R&D and marketing and sales activities is expected to result in increased sales in the coming quarters.general administrative expenses.
Other Income and (Expense)
The net of other income over other expense for FY09 decreasedFY10 increased by $53,000,$18,000, or 19.8%8.9%, to $215,000,$233,000, compared to $268,000$215,000 for FY08.FY09. This is due primarily to decreasedincreased interest income on Money Marketmoney market accounts which outweighedand gains on currency exchange.
Provision for Income Taxes
Provision for income taxes for FY09 decreasedFY10 increased by $106,000,$333,000, or 14.7%54.3%, to $615,000,$948,000, compared to $721,000$615,000 for FY08. In FY08, we hired aFY09 due to our estimation of higher provision for income tax credit specialist company, Tax Projects Group, to identify potential unusedin FY10. The tax credits. As a resultrate used in this report is lower than the standard rate because of several months of research covering the previous 3 tax years (2006, 2005, and 2004), they discovered an additional $276,000 of unused R&D tax credits. This increase in R&Dvarious tax credits allowed us to reduce our income tax provision to as low as 29% in FY08. In FY09, we had such a credit for the current year’s expenses only. Details are provided in the notes to the financial statements.generated during this reporting period.
Net Income
Net income for FY09 decreasedFY10 increased by $313,000,$744,000, or 18.2%52.7%, to $1,412,000,$2,156,000, compared to $1,725,000$1,412,000 for FY08.FY09. We attribute this decreaseincrease in net income primarily to increased sales for both companies and other income, and decreased R&D expense which was greater than the increases in cost of goods sold, SG&A expenses, and higher R&D costs, which outweighed the increased revenues from pharmaceutical software sales and services.taxes.
SEASONALITY
Sales of ourin the pharmaceutical products and services business segment (“Simulations Plus” in the table below) exhibit minimalsome seasonal fluctuation,fluctuations, with the firstfourth fiscal quarter almost always below average for all quarters, except FY 2005,for(June-August) generally having the last 12 years.lowest sales over the past three fiscal years because of summer vacations and reduced activities at our customer’s sites. This unaudited net sales information has been prepared on the same basis as the annual information presented elsewhere in this Annual Report on Form 10-K and, in the opinion of management, reflects all adjustments (consisting of normal recurring entries) necessary for a fair presentation of the information presented. Net sales for any quarter are not necessarily indicative of sales for any future period.
| | Net Simulations Plus Sales (in thousands) | |
FY | | First Quarter | | | Second Quarter | | | Third Quarter | | | Fourth Quarter | | | Total | |
| | | | | | | | | | | | | | | |
2009 | | | 1,430 | | | | 1,779 | | | | 1,985 | | | | 1,107 | | | | 6,301 | |
2008 | | | 1,438 | | | | 1,550 | | | | 1,975 | | | | 1,092 | | | | 6,055 | |
2007 | | | 824 | | | | 1,808 | | | | 1,659 | | | | 1,465 | | | | 5,756 | |
2006 | | | 199 | | | | 884 | | | | 1,096 | | | | 1,007 | | | | 3,186 | |
2005 | | | 524 | | | | 410 | | | | 662 | | | | 473 | | | | 2,069 | |
2004 | | | 642 | | | | 742 | | | | 603 | | | | 869 | | | | 2,856 | |
2003 | | | 507 | | | | 582 | | | | 614 | | | | 1,403 | | | | 3,106 | |
2002 | | | 390 | | | | 554 | | | | 504 | | | | 595 | | | | 2,043 | |
2001 | | | 221 | | | | 373 | | | | 305 | | | | 282 | | | | 1,181 | |
2000 | | | 151 | | | | 467 | | | | 143 | | | | 174 | | | | 935 | |
1999 | | | 87 | | | | 93 | | | | 117 | | | | 164 | | | | 461 | |
1998 | | | 11 | | | | 11 | | | | 13 | | | | 27 | | | | 62 | |
16
period; however, because our pharmaceutical software is l icensed on an annual basis, renewals are almost always within the same quarter year after year. | | Net Simulations Plus Sales (in thousands) | |
FY | | First Quarter | | | Second Quarter | | | Third Quarter | | | Fourth Quarter | | | Total | |
2010 | | | 1,735 | | | | 2,227 | | | | 2,325 | | | | 1,334 | | | | 7,621 | |
2009 | | | 1,430 | | | | 1,779 | | | | 1,985 | | | | 1,107 | | | | 6,301 | |
2008 | | | 1,438 | | | | 1,550 | | | | 1,975 | | | | 1,092 | | | | 6,055 | |
2007 | | | 824 | | | | 1,808 | | | | 1,659 | | | | 1,465 | | | | 5,756 | |
2006 | | | 199 | | | | 884 | | | | 1,096 | | | | 1,007 | | | | 3,186 | |
2005 | | | 524 | | | | 410 | | | | 662 | | | | 473 | | | | 2,069 | |
2004 | | | 642 | | | | 742 | | | | 603 | | | | 869 | | | | 2,856 | |
2003 | | | 507 | | | | 582 | | | | 614 | | | | 1,403 | | | | 3,106 | |
2002 | | | 390 | | | | 554 | | | | 504 | | | | 595 | | | | 2,043 | |
2001 | | | 221 | | | | 373 | | | | 305 | | | | 282 | | | | 1,181 | |
2000 | | | 151 | | | | 467 | | | | 143 | | | | 174 | | | | 935 | |
1999 | | | 87 | | | | 93 | | | | 117 | | | | 164 | | | | 461 | |
1998 | | | 11 | | | | 11 | | | | 13 | | | | 27 | | | | 62 | |
We believe that sales
Sales of our disability products business segment (“Words+ products”) to schools were slightly seasonal prior to FY06,our fiscal year ended August 31, 2006, with greater sales to schools during our third and fourth fiscal quarter (March-May and June-August), as shown in the table below.
| | Net Words+ Sales (in thousands) | |
FY | | First Quarter | | | Second Quarter | | | Third Quarter | | | Fourth Quarter | | | Total | |
| | | | | | | | | | | | | | | |
2009 | | | 704 | | | | 678 | | | | 728 | | | | 732 | | | | 2,842 | |
2008 | | | 545 | | | | 630 | | | | 994 | | | | 744 | | | | 2,913 | |
2007 | | | 632 | | | | 726 | | | | 972 | | | | 772 | | | | 3,102 | |
2006 | | | 620 | | | | 598 | | | | 692 | | | | 759 | | | | 2,669 | |
2005 | | | 543 | | | | 622 | | | | 762 | | | | 757 | | | | 2,684 | |
2004 | | | 497 | | | | 626 | | | | 630 | | | | 598 | | | | 2,351 | |
2003 | | | 571 | | | | 538 | | | | 646 | | | | 624 | | | | 2,379 | |
| | Net Words+ Sales (in thousands) | |
FY | | First Quarter | | | Second Quarter | | | Third Quarter | | | Fourth Quarter | | | Total | |
2010 | | | 702 | | | | 723 | | | | 794 | | | | 872 | | | | 3,091 | |
2009 | | | 704 | | | | 678 | | | | 728 | | | | 732 | | | | 2,842 | |
2008 | | | 545 | | | | 630 | | | | 994 | | | | 744 | | | | 2,913 | |
2007 | | | 632 | | | | 726 | | | | 972 | | | | 772 | | | | 3,102 | |
2006 | | | 620 | | | | 598 | | | | 692 | | | | 759 | | | | 2,669 | |
2005 | | | 543 | | | | 622 | | | | 762 | | | | 757 | | | | 2,684 | |
2004 | | | 497 | | | | 626 | | | | 630 | | | | 598 | | | | 2,351 | |
2003 | | | 571 | | | | 538 | | | | 646 | | | | 624 | | | | 2,379 | |
LIQUIDITY AND CAPITAL RESOURCES
Our principal sourcessource of capital havehas been the cash flowsflow from our operations. We have achieved continuous positive operating cash flow inover the last seveneight fiscal years. We believe that our existing capital and anticipated funds from operations will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for the foreseeable future. Thereafter, if cash generated from operations is insufficient to satisfy our capital requirements, we may open a revolving line of credit with a bank, or we 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 us, or, if available, that it will be in amounts and on termst erms acceptable to us. 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.
INFLATIONWe are not aware of any trends or demands, commitments, or uncertainties that are reasonably likely to result in a decrease in liquidity of our assets. The trend over the last eight years has been increasing cash deposits from our operating cash flows, and we expect that trend to continue for the foreseeable future. We have no material commitments for capital expenditures as of the end of the latest fiscal period. We plan to continue our share repurchase program through the ending date of February 15, 2011; however, the exact amount of shares to be repurchased will depend on current market conditions and share prices on the NASDAQ stock exchange. If we repurchase all of the remaining 381,971 authorized shares (as of November 19, 2010) prior to February 15, 2011, at the current share price as of November 26, 2010, approximately $1.1 million in cash would be used. This would be offset by the additional cash flow, if any, generated from operations prior to February 15, 2011.
We continue to seek opportunities for strategic acquisitions. If one or more such acquisition is identified, a substantial portion of our cash reserves may be required to complete it; however, we intend to maintain sufficient cash reserves after any acquisition to provide reasonable assurance that outside financing will not be necessary to continue operations. If we identify an attractive acquisition that would require more cash to complete than we are willing or able to use from our cash reserves, we will consider financing options to complete the acquisition, including obtaining loans and issuing additional securities.
UNUSUAL OR INFREQUENT EVENTS
There have been no unusual or infrequent events or other significant economic changes that have affected reported income.
KNOWN TRENDS OR UNCERTAINTIES
We are not aware of any trends or uncertainties expected to impact net sales or revenues from continuing operations. The recent trend toward consolidation in the pharmaceutical industry has not had a negative effect on our sales to that industry, and we believe that the need for improved productivity in the research and development activities directed toward developing new medicines will continue to result in increasing adoption of simulation and modeling tools such as those we produce. For Words+, the ability of government agencies to continue to fund assistive technology for the disabled may be impacted by the current financial difficulties within federal, state, and local governments; however, we are not aware of any reductions in such funding to date.
New product developments in both the pharmaceutical and disability business segments could result in increased revenues and earnings if they are accepted by our markets; however, there can be no assurances that new products will result in significant improvements to revenues or earnings. For competitive reasons, we do not disclose all of our new product development activities.
Our continued quest for acquisitions in the pharmaceutical business segment could result in a significant change to revenues and earnings if one or more such acquisitions is completed. It is our intent to only complete acquisitions that would add to both revenues and earnings; however, there can be no assurances that any acquisitions that may be completed will in fact result in both increased revenues and earnings.
EFFECT OF CHANGING PRICES
A price increase on most of our pharmaceutical software products instituted in January 2010 has resulted in a contribution to increased revenues in that business segment. We attribute approximately 20% of the increased revenues in the pharmaceutical business segment for the fourth fiscal quarter of FY10 to these price increases, and the remaining 80% to new business.
INFLATION
We have not been affected materially by inflation during the periods presented, and no material effect is expected in the near future.
OFF-BALANCE SHEET ARRANGEMENTS
As of August 31, 2010, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.
We do not have relationships or transactions with persons or entities that derive benefits from their non-independent relationship with us or our related parties.
RECENTLY ISSUED ACCOUNTING STANDARDS
In September 2009, the FASBFinancial Accounting Standards Board (“FASB”) issued Emerging Issues Task ForceAccounting Standards Update (“EITF”ASU”) 09-3, “Applicability of AICPA Statement of Position 94-2 to Certain Arrangements That Include Software Elements” (“EITF 09-3”). EITF 09-32009-14 which amends Statement of Position (“SOP”) 97-2, “Software Revenue Recognition”, to exclude tangible products containing software components and non-software components that function together to deliver the products’product’s essential functionality. EITF 09-3ASU 2009-14 applies to revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early application permitted with EITFEmerging Issues Task Force (“EITF”) 08-1. The company expectsWe expect to adopt this standard in the first quarter of fiscal 2011. The company isWe are currently evaluating the impact EITF 09-3ASU 2009-14 will have on theour consolidated financialfin ancial statements.
In September 2009, the FASB issued Emerging Issues Task Force (“EITF”) 08-1,ASU 2009-13, “Revenue Arrangements with Multiple Deliverables” (“EITF 08-1”). EITF 08-1ASU 2009-13 amends EITF 00-21, “Revenue Arrangements with Multiple Deliverables”, to require an entity to use an estimated selling price when vendor-specific objective evidence or acceptable third-party evidence does not exist for any products or services included in a multiple element arrangement. The arrangement consideration should be allocated among the products and services based upon their relative selling prices, thus eliminating the use of the residual method of allocation. EITF 08-1ASU 2009-13 also requires expanded qualitative and quantitative disclosures regarding significant judgments made and changes in applying the guidance. EITF 08-1 60;ASU 2009-13 applies to fiscal years beginning after June 15, 2010, with early application permitted. The company expectsWe expect to adopt thethis standard in the first quarter of fiscal 2011. The company isWe are currently evaluating the impact EITF 08-1ASU 2009-13 will have on theour consolidated financial statements.
In June 2009, the FASB issued Statement No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162 (“FAS 168”). This statement provides for the FASB Accounting Standards Codification to become the single official source of authoritative, nongovernmental generally accepted accounting principles in the United States. FAS 168 does not change GAAP but reorganizes the literature. This statement is effective for interim and annual periods ending after September 15, 2009.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events (“SFAS No. 165”), which provides guidance on events that occur after the balance sheet date but prior to the issuance of the financial statements. SFAS No. 165 distinguishes events requiring recognition in the financial statements and those that may require disclosure in the financial statements. Furthermore, SFAS No. 165 requires disclosure of the date through which subsequent events were evaluated. SFAS No. 165 is effective for interim and annual periods after June 15, 2009. The Company adopted SFAS No. 165 for the annual reporting period ended August 31, 2009.
In April 2008, the FASB issued FSP-FAS No. 142-3, Determination of the Useful Life of Intangible Assets (“FAS 142-3”). FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). The objective of the Staff Position is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141 (Revised 2007): Business Combinations (“SFAS 141R”) and other GAAP. FAS 142-3 is effective for fiscal years beginning after December 15, 2008. Management is currently evaluating the effect on the Company’s consolidated financial positions, results of operations and cash flows. The Company believes adoption will not have a material impact on the Company’s consolidated financial statements.
In April 2009, the FASB issued FSP-FAS No. 107-1 and APB 28-1, Disclosures about Fair Value of Financial Instruments (“FAS No. 107-1/APB 28-1”). This FSP extends to interim periods certain disclosures about fair value of financial instruments for publicly traded companies and amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods. This FSP is effective for interim reporting periods ending after June 15, 2009. The Company’s adoption of FAS No. 107-1/APB 28-1 is not expected to have a material effect on the Company’s consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. For financial assets and liabilities, SFAS 157 will be effective for the Company in the first fiscal quarter of 2009. As permitted by FSP-FAS 157-2, SFAS 157 is effective for nonfinancial assets and liabilities for the Company during the first fiscal quarter of 2010. Management believes the adoption of SFAS 157 for its financial assets and liabilities will not have a material impact on the Company’s consolidated financial statements and continues to evaluate the potential impact of the adoption of SFAS 157 related to its nonfinancial assets and liabilities.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits companies to choose to measure many financial instruments and certain other items at fair value. SFAS 159 was effective for the Company in the first fiscal quarter of 2009. The Company believes the adoption of SFAS 159 did not have a material impact on the Company’s consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”), which replaces SFAS 141. SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any resulting goodwill, and any noncontrolling interest in the acquiree. SFAS 141R also provides for disclosures to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141R will be effective for the Company in first fiscal quarter of 2010 and must be applied prospectively to business combinations completed on or after that date.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of Accounting Research Bulletin No. 51” (“SFAS 160”), which establishes accounting and reporting standards for noncontrolling interests (“minority interests”) in subsidiaries. SFAS 160 clarifies that a noncontrolling interest in a subsidiary should be accounted for as a component of equity separate from the parent’s equity. SFAS 160 will be effective for the Company in the first fiscal quarter of 2010 and must be applied prospectively, except for the presentation and disclosure requirements, which will apply retrospectively. The Company is currently evaluating the potential impact that adoption of SFAS 160 may have on its consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133” (“SFAS 161”), which requires enhanced disclosures about an entity’s derivative and hedging activities. SFAS 161 will be effective for The Company second fiscal quarter of 2009.
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. Critical accounting policies for us include revenue recognition, accounting for capitalized software development costs, and accounting for income taxes.
Revenue Recognition
We recognize revenue related to software licenses and software maintenance in accordance with the American Institute of Certified Public Accountants ("AICPA"FASB Accounting Standard Codification (“ASC”) Statements of Position (SOP) No. 97-2, "Software Revenue Recognition." 985-605. Product revenue is recorded when the following conditions are met: 1) evidence of arrangement exists, such as signed Purchase Orderspurchase orders from customers or executed contracts, 2) delivery has been made, such as unlocking the software on the customer’s computer(s), 3) the amount is fixed, and 4) it is collectible. Post-contract customer support ("PCS") obligations are insignificant; therefore, revenue for PCS is recognized at the same time, and the costs of providing such support services are accrued and amortized over the obligation period.
As a byproduct of ongoing improvements and upgrades to our software, some modifications are provided to customers who have already licensed software during their license term at no additional charge. We consider these modifications to be minimal, as they are not changing the basic functionality or utility of the software, but rather adding convenience, such as being able to plot some additional variable on a graph in addition to the numerous variables that had been available before. Such software modifications for any single product have been typically once or twice per year, sometimes more, sometimes less. Thus, they are infrequent. We provide, for a fee, additional training and service calls to our customers and recognize revenue at the time the training or service call is provided.
We enter into one-year license agreements with most of our customers for the use of our pharmaceutical software products. However, from time to time, we enter into multi-year license agreements. We unlock and invoice software one year at a time for multi-year licenses. Therefore, revenue is recognized one year at a time.
We recognize contract study revenue either equally over the term of the contract or using the percentage of completion method, depending upon how the contract studies are engaged, in accordance with AICPA SOP 81-1.FASB ASC 605-35. To recognize revenue using the percentage of completion method, we must determine whether we meet the following criteria: 1) there is a long-term, legally enforceable contract, and 2) it is possible to reasonably estimate the total project costs, and 3) it is possible to reasonably estimate the extent of progress toward completion.
Capitalized Computer Software Development Costs
Software development costs are capitalized in accordance with SFAS No. 86, "Accounting for the Cost of Computer Software to be Sold, Leased, or otherwise Marketed."FASB ASC 985-20. Capitalization of software development costs begins upon the establishment of technological feasibility and is discontinued when the product is available for sale.
The establishment of technological feasibility and the ongoing assessment for recoverability of capitalized software development costs require considerable judgment by management with respect to certain external factors including, but not limited to, technological feasibility, anticipated future gross revenues, estimated economic life, and changes in software and hardware technologies. Capitalized software development costs are comprised primarily of salaries and direct payroll-related costs and the purchase of existing software to be used in our software products.
Amortization of capitalized software development costs is provided on a product-by-product basis on the straight-line method over the estimated economic life of the products (not to exceed five years). Amortization of software development costs amounted to $519,415$644,014 and $466,735$519,415 for the fiscal years ended August 31, 20092010 and 2008,2009, respectively. We expect future amortization expense to vary due to increases in capitalized computer software development costs.
We test capitalized computer software costs for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable within a reasonable time.
Income Taxes
We utilize SFAS No. 109, "Accounting for Income Taxes," FASB ASC 740-10 which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns.
Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The objectives of accountingprovision for income taxes are to recognizerepresents the amount of taxestax payable or refundable for the current yearperiod and the change during the period in deferred tax liabilitiesassets 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.
The Company has adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48 (“FIN 48”), - “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109”. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB statement 109, “Accounting for Income Taxes”, and prescribes a recognition threshold of more likely than not and a measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In making this assessment, a company must determine whether it is more likely than not that a tax position will be sustained upon examination, based solely on the technical merits of the position and must assume that the tax position will be examined by taxing authorities. Our review of prior year tax positions using the criteria and provisions presented in FIN 48 did not result in a material impact on the Company’s financial position or results of operations.
Stock-Based Compensation
The Company accounts for stock options using the modified prospective method in accordance with SFAS No. 123R.FASB ASC 718-10. Under this method, compensation costs includes: (1) compensation cost for all share-based payments granted prior to, but not yet vested as of September 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123 amortized over the options’ vesting period, and (2) compensation cost for all share-based payments granted subsequent to September 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R,FASB ASC 718-10, amortized on a straight-line basis over the options’ vesting period.
Principles of Consolidation
The consolidated financial statements include the accounts of Simulations Plus, Inc. and its wholly owned subsidiary, Words+, Inc. All significant intercompany accounts and transactions are eliminated in consolidation.
Estimates
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. Significant accounting policies for us include revenue recognition, accounting for capitalized software development costs, and accounting for income taxes.
ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable because the Company is a smaller reporting company.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The responses to this item are included elsewhere in this Form 10-K (see pages F1 – F27)F26) and incorporated herein by reference.
ITEM 9 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
There have been no changes to our public accountants during the past two years.
ITEM 9A(T)9A – CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintainare responsible for maintaining disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Disclosure controls and procedures are controls and other procedures designed to ensure that materialthe information relatedrequired to our companybe disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SECSecurities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial offic er as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As of the end of the period covered by this report, we carried out anBased on our management’s evaluation under the supervision and with(with the participation of our Chief Executive Officer ("CEO")principal executive officer and Chief Financial Officer ("CFO"), of the effectiveness of the design and operationprincipal financial officer) of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)as required by Rule 13a-15 under the Securities Exchange Act, of 1934). Based upon that evaluation, our CEOprincipal executive officer and CFOprincipal financial officer have concluded as of the date of such evaluation, that our disclosure controls and procedures were effective.
effective at the reasonable assurance level as of August 31, 2010, the end of the fiscal year covered by this report.
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal controls over financial reporting, as defined in Exchange Act Rule 13a-15(f). Our internal controls over financial reporting are designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal controls over financial reporting based on the framework established by the Committee of Sponsoring Organizations for the Treadway Commission. Based on our evaluation under the framework, including the completion and review of internal review assessment forms and the completion and review of financial reporting information systems and controls checklists in the framework, our management concluded that our internal control over financial reporting was effective as of August 31, 2009.2010.
Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
This annual report does not include an attestation report ofChanges in Internal Control over Financial Reporting
In connection with the evaluation required by Exchange Act Rule 13a-15(d), our independent registered public accounting firm regarding internal controls over financial reporting. Our management's report was not subject to attestation by our independent registered public accounting firm pursuant to temporary rules ofmanagement, including the SECChief Executive Officer and Chief Financial Officer, concluded that permit us to provide only management's report in this annual report.
Nono changes were madeoccurred in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during our most recent fiscal quarter that have materially affected or are reasonably likely to materially affect, our internal controls over financial reporting.
Our management, including our CEO and CFO, does not expect that our disclosure controls or internal controls over financial reporting will prevent all errors or all instances of fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and any design may not succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitation of a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
ITEM 9B - OTHER INFORMATION
Not applicable.
PART III
ITEM 10 - DRECTORS– DIRECTORS, AND EXECUTIVE OFFICERS, OF THE REGISTRANT; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACTAND CORPORATE GOVERNANCE
Code of Ethics
We have adopted a code of ethics, which applies to all our employees, including our Chief Executive Officer, Chief Financial Officer and persons performing similar function. The full text of our code of ethics can be found in the “Investor ” section of our website accessible to the public at www.simulations-plus.com, by clicking the Corporate Overview link.
Changes to Procedures for Recommending Nominees to the Board of Directors
There have been no material changes to the procedures by which security holders may recommend nominees to our board of directors since we last described such procedures.
The remaining information required by Item 10 is incorporated by reference from the Company’s definitive proxy statement (the “Proxy Statement”) for its 20092011 Annual Shareholders’ Meeting.
ITEM 11 – EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference from the Company’s Proxy Statement for its 20092011 Annual Shareholders’ Meeting.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by Item 12 is incorporated by reference from the Company’s Proxy Statement for its 20092011 Annual Shareholders’ Meeting.
ITEM 13 – CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by Item 13 is incorporated by reference from the Company’s Proxy Statement for its 20092011 Annual Shareholders’ Meeting.
ITEM 14 – PRINCIPAL ACCOUNTANTACCOUNTING FEES AND SERVICES
The information required by Item 14 is incorporated by reference from the Company’s Proxy Statement for its 20092011 Annual Shareholders’ Meeting.
PART IV
ITEM 15 – EXHIBITS, AND FINANCIAL STATEMENT SCHEDULES
(a) | The following exhibits are filed as part of this report as required by Item 601 of Regulation S-B: |
(a) (1) Financial Statements. The consolidated financial statements are included in this Annual Report.
(2) Financial Statement Schedules. All financial statement schedules have been omitted since the information is either not applicable or required or was included in the financial statements or notes included in this Annual Report on Form 10-K.
(3) List of Exhibits required by Item 601 of Regulation S-K. See part (b) below.
(b) Exhibits. The following exhibits are filed as part of this report. Those exhibits marked with a (†) refer to management contracts or compensatory plans or arrangements.
EXHIBIT | |
NUMBER | DESCRIPTION |
| | |
| 3.1 | Articles of Incorporation of the Registrant (1)Simulations Plus, Inc. (7) |
| 3.2 | Amended and Restated Bylaws of the Registrant (1)Simulations Plus, Inc. (7) |
| 4.1 | Articles of Incorporation of the RegistrantSimulations Plus, Inc. (incorporated by reference to Exhibit 3.1 hereof) and Bylaws of the RegistrantSimulations Plus, Inc. (incorporated by reference to Exhibit 3.2 hereof) |
| 4.2 | Form of Common Stock Certificate (1) |
| 4.3 | Share Exchange Agreement (1) |
| 10.1 | Simulations Plus, Inc. 1996 Stock Option Plan (the “Option Plan”) and termsforms of agreements relating thereto (1)+ (†) |
| 10.2 | Subscription Agreement with Patricia Ann O’Neil (1) |
| 10.3 | Security Agreement with Patricia Ann O’Neil (1) |
| 10.4 | Promissory Note made by the Registrant in favor of Patricia Ann O’Neil (1) |
| 10.5 | Warrants to purchase 150,000 shares of Common Stock of the Registrant issued to Patricia Ann O’Neil (1) |
| 10.6 | First Amendment to Agreement with Patricia Ann O’Neil (1) |
| 10.7 | Subscription Agreement with Fernando Zamudio (1) |
| 10.8 | Security Agreement with Fernando Zamudio (1) |
| 10.9 | Promissory Note made by the Registrant in favor of Fernando Zamudio (1) |
| 10.10 | Warrant to purchase 100,000 shares of Common Stock of the Registrant issued to Fernando Zamudio (1) |
| 10.11 | Employment Agreement by and between the Registrant and Walter S. Woltosz (1) + |
| 10.12 | Performance Warrant Agreement by and between the Registrant and Walter S. Woltosz + Virginia E. Woltosz (2) + |
| 10.13 | Software Acquisition Agreement by and Between the Registrant and Michael B. Bolger (1) |
| 10.14 | Sublease Agreement dated May 7, 1993 by and between the Registrant and Westholme Partners (along with Consent to Sublease and master lease agreement) (1) |
| 10.15 | Lease Agreements dated August 22, 1996 by and between Words+, Inc. and Abbey-Sierra LLC (1) |
| 10.16 | Form of 10% Amended and Restated Promissory Note issued in connection with the Registrant’s Private Placement (2) |
| 10.17 | Form of Subscription Agreement relative to the Registrant’s Private Placement (1) |
| 10.18 | Form of Lock-Up Agreement with Bridge Lenders (2) |
| 10.19 | Form of Indemnification Agreement (1) |
| 10.20 | Form of Lock-Up Agreement with the Woltosz’ (2) |
| 10.21 | Letter of Intent by and between the Registrant and Therapeutic Systems Research Laboratories (1) |
| 10.22 | Form of Representative’s Warrant to be issued by the Registrant in favor of the Representative (2) |
| 10.23 | Form of Warrant issued to Bridge Lenders (2) |
| 10.24 | Exclusive Software License Agreement by and between the Registrant and Therapeutic Systems Research Laboratories (3) |
| 10.25 | Grant Award Letter from National Science Foundation (4) |
| 10.26 | Distribution Agreement with Teijin Systems Technology LTD. (4) |
| 10.27 | Lease Agreements by and between Simulations Plus, Inc. and Martin Properties, Inc. (4)Therapeutic Systems Research Laboratories dated June 30, 1997. (2) |
| 10.28 | Software OEM Agreement for Assistive Market Developer by and between Words+, Inc. and Digital Equipment Corporation. (4) |
| 10.29 | Purchase Agreement by and between Words+, Inc. and Epson America, Inc. (4) |
| 10.30 | License Agreement with Absorption Systems, LP. (5) |
| 10.31 | Service contract with The Kriegsman Group. (5) |
| 10.32 | Letter of Engagement with Banchik & Associates. (5) |
| 10.33 | Letter of Intent for Cooperative Alliance with Absorption Systems, LP. (5) |
| 10.34 | OEM/Remarketing Agreement between Words+, Inc. and Eloquent Technology, Inc. (6) |
| 10.35 | Lease Option Agreement by and between Simulations Plus, Inc. and Martin Properties, Inc. (8) |
| 10.36 | Auto Rental Lease Agreement by and between Simulations Plus, Inc. and Walter and Virginia Woltosz (8)
|
| 10.37 | Registration Statement – 1,250,000 shares of the Company’s 1996 Stock Options. (9) |
| 10.38 | Employment Agreement by and between the Company and Walter S. Woltosz (10) |
| 10.39 | An addendum to Lease Agreement (11) |
| 10.40 | Business Lending Agreement with Wells Fargo Bank (11) |
| 10.41 | Technology Transfer Agreement withbetween Sam Communications, LLC. (12)(6) |
| 10.42 | Employment Agreement by and between the Company and Walter S. Woltosz (14) |
| 10.43 | Lease Agreement by and between Simulations Plus, Inc. and Venture Freeway, LLC. (15)(3) |
10.45 | 10.44 | Employment Agreement by and between the Company and Walter S. Woltosz (16)(4) (†) |
10.46 | 10.45Simulations Plus, Inc. 2007 Stock Option Plan (the “2007 Option Plan”) (5 (†) |
10.47 | Employment AgreementLease extension agreement by and between the CompanySimulations Plus, Inc. and Walter S. Woltosz (17)Crest Development (7) |
21.1 | | List of Subsidiaries (7) |
23.1 | | Consent of Rose, Snyder and Jacobs (7) |
| 31.1 | Section 302Rule 13a-14(a)/15d-14(a) – Certification of Chief Executive Officer (CEO). (17)(7) |
| 31.2 | Section 302Rule 13a-14(a)/15d-14(a) – Certification of Chief Financial Officer (CFO). (17)(7) |
| 32 | Section 9061350 – Certification of CEO and CFO. (17) |
| | (7) |
________________
|
|
| (1) | Incorporated by reference to the Company’s Registration Statement on Form SB-2 (Registration No. 333-6680) filed on March 25, 1997 (the “Registration Statement”).1997. |
| (2) | Incorporated by reference to Pre-Effective Amendmentthe Company’s Form 10-KSB filed December 15, 1997 (Commission file No. 1 to the Registration Statement filed on May 27, 1997.333-05400-LA). |
| (3) | Incorporated by reference to the Company’s Form 10-KSB for the fiscal year ended August 31, 1997.filed December 15, 1997 (Commission file No. 333-05400-LA). |
| (4) | Incorporated by reference to the Company’s Form 10-KSB for the fiscal year ended August 31, 1998.10-K filed November 30, 2010 (Commission file No. 001-32046). |
| (5) | Incorporated by reference to the Company’s Form 10-KSB for the fiscal year ended August 31, 1999.10-Q filed January 13, 2010 (Commission No. 001-32046) |
| (6) | Incorporated by reference to the Company’s Form 10-KSB for the fiscal year ended August 31, 2000. |
| (7) | Incorporated by reference to the Company’s Form 8-K10-K/A filed on March 1, 2001.2010 (Commission file No. 001-32046). |
| (8) | Incorporated by reference to the Company’s Form 10-KSB for the fiscal year ended August 31, 2001. |
| (9) | Incorporated by reference to the Company’s Registration Statement on Form S-8 (Registration No. 333-91592) filed on June 28, 2002 (the “Registration Statement”). |
| (10) | Incorporated by reference to the Company’s Form 10-KSB for the fiscal year ended August 31, 2002. |
| (11) | Incorporated by reference to the Company’s Form 10-KSB for the fiscal year ended August 31, 2003. |
| (12) | Incorporated by reference to the Company’s Form 8-K filed on December 29, 2003. |
| (13) | Incorporated by reference to the Company’s Form 10-KSB for the fiscal year ended August 31, 2004. |
| (14) | Incorporated by reference to the Company’s Form 10-KSB for the fiscal year ended August 31, 2005. |
| (15) | Incorporated by reference to the Company’s Form 10-KSB for the fiscal year ended August 31, 2006. |
| (16) | Incorporated by reference to the Company’s Form 10-KSB for the fiscal year ended August 31, 2007 |
| (17)(7) | Filed herewith. |
(c) Financial Statement Schedule.
None.See Item 15(a)(2) above.
SIGNATURES
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 November 25, 2009.29, 2010.
| SIMULATIONS PLUS, INC. | |
| | | |
Date | By: | /s/ Momoko A. Beran | |
| |
| By /s/ Momoko A. Beran |
| Momoko A. Beran | |
| | Chief Financial Officer | |
| | | |
In accordance with Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on November 25, 2009.on.
Signature | | Title |
| |
| |
| |
/s/ Walter S. Woltosz | | Chairman of the Board of Directors |
Walter S. Woltosz | | and Chief Executive Officer (Principal executive officer) |
| | |
| | |
/s/ VirginiaVirginia E. Woltosz | | |
Virginia E. Woltosz | | Secretary and Director of the Company |
| |
| |
/s/ Dr. David Z. D’Argenio | | |
Dr. David Z. D’Argenio | | Director |
| | |
| | |
/s/ Dr. Richard R. Weiss
| | |
Dr. Richard R. Weiss | | Director |
| | |
| | |
/s/ Harold W. Rosenberger
| | |
Harold W. Rosenberger | | Director |
| | |
| | |
/s/ Momoko A. Beran | | |
Momoko A. Beran | | Chief Financial Officer of the CompanyCompany(Principal financial officer and principal accounting officer) |
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONTENTS
August 31, 20092010 and 20082009
| | Page |
| | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | F2 |
| | |
CONSOLIDATED FINANCIAL STATEMENTS | |
| | |
| Consolidated Balance Sheets | F3 |
| | |
| Consolidated Statements of Operations | F4 |
| | |
| Consolidated Statements of Shareholders’ Equity | F5 |
| | |
| Consolidated Statements of Cash Flows | F6 |
| | |
| Notes to Consolidated Financial Statements | F7 – F25F23 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Simulations Plus, Inc.
Lancaster, California
We have audited the accompanying consolidated balance sheets of Simulations Plus, Inc. (a California corporation) and Subsidiary as of August 31, 20092010 and 20082009 and the related consolidated statements of operations, shareholders’ equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards established by the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Simulation Plus, Inc. and Subsidiary as of August 31, 20092010 and 2008,2009, and the consolidated results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
Rose, Snyder & Jacobs
A Corporation of Certified Public Accountants
Encino, California
November 24, 2009
26, 2010
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
FOR THE YEARS ENDED
ASSETS | |
| | | | | | |
| | August 31, | |
| | 2010 | | | 2009 | |
Current assets | | | | | | |
Cash and cash equivalents | | $ | 9,631,762 | | | $ | 7,473,485 | |
Income tax refund receivable | | | 225,510 | | | | - | |
Accounts receivable, net of allowance for doubtful accounts and estimated contractual discounts of $421,118 and $447,073 | | | 1,291,350 | | | | 1,888,904 | |
Contracts receivable | | | 184,081 | | | | 79,565 | |
Inventory | | | 554,867 | | | | 325,926 | |
Prepaid expenses and other current assets | | | 138,163 | | | | 158,738 | |
Deferred income taxes | | | 364,264 | | | | 338,516 | |
Total current assets | | | 12,389,997 | | | | 10,265,134 | |
| | | | | | | | |
Capitalized computer software development costs, | | | | | | | | |
net of accumulated amortization of $4,487,757 and $3,843,743 | | | 2,186,419 | | | | 1,942,893 | |
Property and equipment, net (note 3) | | | 55,984 | | | | 53,220 | |
Customer relationships, net of accumulated amortization of $118,442 and $104,728 | | | 9,600 | | | | 23,314 | |
Other assets | | | 18,445 | | | | 18,445 | |
| | | | | | | | |
Total assets | | $ | 14,660,445 | | | $ | 12,303,006 | |
| | | | | | | | |
| | | | | | | | |
LIABILITIES AND SHAREHOLDERS' EQUITY | |
Current liabilities | | | | | | | | |
Accounts payable | | $ | 239,424 | | | $ | 199,218 | |
Accrued payroll and other expenses | | | 511,106 | | | | 552,431 | |
Accrued bonuses to officer | | | 60,000 | | | | 60,000 | |
Accrued income taxes | | | 261,861 | | | | - | |
Accrued warranty and service costs | | | 35,586 | | | | 43,236 | |
Deferred revenue | | | 96,092 | | | | 82,190 | |
Total current liabilities | | | 1,204,069 | | | | 937,075 | |
| | | | | | | | |
Long-term liabilities | | | | | | | | |
Deferred income taxes | | | 410,523 | | | | 795,140 | |
| | | | | | | | |
Total liabilities | | | 1,614,592 | | | | 1,732,215 | |
| | | | | | | | |
Commitments and contingencies (note 4) | | | | | | | | |
| | | | | | | | |
Shareholders' equity (note 5) | | | | | | | | |
Preferred stock, $0.001 par value 10,000,000 shares authorized no shares issued and outstanding | | | - | | | | - | |
Common stock, $0.001 par value 50,000,000 shares authorized 15,833,006 and 15,700,382 shares issued and outstanding | | | 4,304 | | | | 4,172 | |
Additional paid-in capital | | | 5,891,268 | | | | 5,572,411 | |
Retained earnings | | | 7,150,281 | | | | 4,994,208 | |
| | | | | | | | |
Total shareholders' equity | | | 13,045,853 | | | | 10,570,791 | |
| | | | | | | | |
Total liabilities and shareholders' equity | | $ | 14,660,445 | | | $ | 12,303,006 | |
ASSETS | |
| | | | | | |
| | August 31, | |
| | 2009 | | | 2008 | |
Current assets | | | | | | |
Cash and cash equivalents | | $ | 7,473,485 | | | $ | 5,889,601 | |
Accounts receivable, net of allowance for doubtful accounts and estimated contractual discounts of $447,073 and $319,609 | | | 1,888,904 | | | | 2,105,074 | |
Contracts receivable | | | 79,565 | | | | - | |
Inventory | | | 325,926 | | | | 342,051 | |
Prepaid expenses and other current assets | | | 158,738 | | | | 195,330 | |
Deferred income taxes | | | 338,516 | | | | 318,400 | |
Total current assets | | | 10,265,134 | | | | 8,850,456 | |
| | | | | | | | |
Investment | | | - | | | | 750,000 | |
Capitalized computer software development costs, | | | | | | | | |
net of accumulated amortization of $3,843,743 and $3,324,328 | | | 1,942,893 | | | | 1,788,756 | |
Property and equipment, net | | | 53,220 | | | | 102,633 | |
Customer relationships, net of accumulated amortization of $104,728 and $85,029 | | | 23,314 | | | | 43,013 | |
Other assets | | | 18,445 | | | | 18,445 | |
| | | | | | | | |
Total assets | | $ | 12,303,006 | | | $ | 11,553,303 | |
| | | | | | | | |
| | | | | | | | |
LIABILITIES AND SHAREHOLDERS' EQUITY | |
Current liabilities | | | | | | | | |
Accounts payable | | $ | 199,218 | | | $ | 181,230 | |
Accrued payroll and other expenses | | | 552,431 | | | | 537,363 | |
Accrued bonuses to officer | | | 60,000 | | | | 60,000 | |
Accrued warranty and service costs | | | 43,236 | | | | 33,899 | |
Deferred revenue | | | 82,190 | | | | 83,333 | |
Total current liabilities | | | 937,075 | | | | 895,825 | |
| | | | | | | | |
Long-term liabilities | | | | | | | | |
Deferred income taxes | | | 795,140 | | | | 742,400 | |
| | | | | | | | |
Total liabilities | | | 1,732,215 | | | | 1,638,225 | |
| | | | | | | | |
Commitments and contingencies (note 6) | | | | | | | | |
| | | | | | | | |
Shareholders' equity | | | | | | | | |
Preferred stock, $0.001 par value | | | | | | | | |
10,000,000 shares authorized | | | | | | | | |
no shares issued and outstanding | | | - | | | | - | |
Common stock, $0.001 par value | | | | | | | | |
50,000,000 shares authorized | | | | | | | | |
15,700,382 and 16,297,400 shares issued and outstanding | | | 4,172 | | | | 4,769 | |
Additional paid-in capital | | | 5,572,411 | | | | 6,328,185 | |
Retained earnings | | | 4,994,208 | | | | 3,582,124 | |
| | | | | | | | |
Total shareholders' equity | | | 10,570,791 | | | | 9,915,078 | |
| | | | | | | | |
Total liabilities and shareholders' equity | | $ | 12,303,006 | | | $ | 11,553,303 | |
The accompanying notes are an integral part of these consolidated financial statements.
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDEDFor the years ended
| | August 31, | | | August 31, | |
| | 2009 | | | 2008 | | | 2010 | | | 2009 | |
| | | | | | | | | | | | |
Net sales | | $ | 9,143,271 | | | $ | 8,967,970 | | | $ | 10,711,829 | | | $ | 9,143,271 | |
| | | | | | | | | | | | | | | | |
Cost of sales | | | 2,321,592 | | | | 2,100,055 | | | | 2,545,709 | | | | 2,321,592 | |
| | | | | | | | | | | | | | | | |
Gross profit | | | 6,821,679 | | | | 6,867,915 | | | | 8,166,120 | | | | 6,821,679 | |
| | | | | | | | | | | | | | | | |
Operating expenses | | | | | | | | | | | | | | | | |
Selling, general, and administrative | | | 3,895,995 | | | | 3,699,273 | | | | 4,325,621 | | | | 3,895,995 | |
Research and development | | | 1,113,855 | | | | 990,491 | | | | 969,871 | | | | 1,113,855 | |
| | | | | | | | | | | | | | | | |
Total operating expenses | | | 5,009,850 | | | | 4,689,764 | | | | 5,295,492 | | | | 5,009,850 | |
| | | | | | | | | | | | | | | | |
Income from operations | | | 1,811,829 | | | | 2,178,151 | | | | 2,870,628 | | | | 1,811,829 | |
| | | | | | | | | | | | | | | | |
Other income (expense) | | | | | | | | | | | | | | | | |
Interest income | | | 93,874 | | | | 185,399 | | | | 101,545 | | | | 93,874 | |
Miscellaneous income | | | 607 | | | | 36 | | | | 1,231 | | | | 607 | |
Gain on currency exchange | | | 120,350 | | | | 82,659 | | | | 130,150 | | | | 120,350 | |
Gain on sale of assets | | | | 1,993 | | | | - | |
Interest expense | | | - | | | | (68 | ) | | | (1,045 | ) | | | - | |
| | | | | | | | | | | | | | | | |
Total other income (expense) | | | 214,831 | | | | 268,026 | | | | 233,874 | | | | 214,831 | |
| | | | | | | | | | | | | | | | |
Income before income taxes | | | 2,026,660 | | | | 2,446,177 | | | | 3,104,502 | | | | 2,026,660 | |
| | | | | | | | | | | | | | | | |
Provision for income taxes | | | | | | | | | | | | | | | | |
Deferred income taxes | | | (32,628 | ) | | | (437,400 | ) | | | (289,829 | ) | | | (32,628 | ) |
Current Income taxes | | | (581,948 | ) | | | (283,208 | ) | | | (658,600 | ) | | | (581,948 | ) |
| | | | | | | | | | | | | | | | |
Net income | | $ | 1,412,084 | | | $ | 1,725,569 | | | $ | 2,156,073 | | | $ | 1,412,084 | |
| | | | | | | | | | | | | | | | |
Basic earnings per share | | $ | 0.09 | | | $ | 0.11 | | | $ | 0.14 | | | $ | 0.09 | |
| | | | | | | | | | | | | | | | |
Diluted earnings per share | | $ | 0.08 | | | $ | 0.10 | | | $ | 0.13 | | | $ | 0.08 | |
| | | | | | | | | | | | | | | | |
Weighted-average common | | | | | | | | | | | | | | | | |
shares outstanding | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Basic | | | 16,126,471 | | | | 16,133,822 | | | | 15,831,294 | | | | 16,126,471 | |
| | | | | | | | | | | | | | | | |
Diluted | | | 17,187,547 | | | | 18,141,287 | | | | 16,513,018 | | | | 17,187,547 | |
The accompanying notes are an integral part of these consolidated financial statements.
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED AUGUSTFor the years ended August 31,
| | | | | | | | Additional | | | | | | | |
| | Common Stock | | | Paid-In | | | | | | | |
| | Shares | | | Amount | | | Capital | | | Retained Earnings | | | Total | |
| | | | | | | | | | | | | | | |
Balance, August 31, 2008 | | | 16,297,400 | | | | 4,769 | | | | 6,328,185 | | | | 3,582,124 | | | | 9,915,078 | |
| | | | | | | | | | | | | | | | | | | | |
Exercise of stock options | | | 249,824 | | | | 250 | | | | 124,514 | | | | | | | | 124,764 | |
| | | | | | | | | | | | | | | | | | | | |
Stock-based Compensation | | | | | | | | | | | 183,294 | | | | | | | | 183,294 | |
| | | | | | | | | | | | | | | | | | | | |
Stock Repurchases | | | (846,842 | ) | | | (847 | ) | | | (1,063,582 | ) | | | | | | | (1,064,429 | ) |
| | | | | | | | | | �� | | | | | | | | | | |
Net income | | | | | | | | | | | | | | | 1,412,084 | | | | 1,412,084 | |
| | | | | | | | | | | | | | | | | | | | |
Balance, August 31, 2009 | | | 15,700,382 | | | $ | 4,172 | | | $ | 5,572,411 | | | $ | 4,994,208 | | | $ | 10,570,791 | |
| | | | | | | | | | | | | | | | | | | | |
Exercise of stock options | | | 632,674 | | | | 632 | | | | 94,290 | | | | | | | | 94,922 | |
| | | | | | | | | | | | | | | | | | | | |
Stock-based Compensation | | | | | | | | | | | 127,597 | | | | | | | | 127,597 | |
| | | | | | | | | | | | | | | | | | | | |
Stock Repurchases | | | (500,050 | ) | | | (500 | ) | | | (1,033,607 | ) | | | | | | | (1,034,107 | ) |
| | | | | | | | | | | | | | | | | | | | |
Deferred tax adjustments | | | | | | | | | | | 1,130,577 | | | | | | | | 1,130,577 | |
| | | | | | | | | | | | | | | | | | | | |
Net income | | | | | | | | | | | | | | | 2,156,073 | | | | 2,156,073 | |
| | | | | | | | | | | | | | | | | | | | |
Balance, August 31, 2010 | | | 15,833,006 | | | $ | 4,304 | | | $ | 5,891,268 | | | $ | 7,150,281 | | | $ | 13,045,853 | |
| | | | | | | | Additional | | | | | | | |
| | Common Stock | | | Paid-In | | | | | | | |
| | Shares | | | Amount | | | Capital | | | Retained Earnings | | | Total | |
| | | | | | | | | | | | | | | |
Balance, August 31, 2007 | | | 15,761,400 | | | $ | 4,233 | | | $ | 5,803,820 | | | $ | 1,856,555 | | | $ | 7,664,608 | |
| | | | | | | | | | | | | | | | | | | | |
Exercise of stock options | | | 536,000 | | | | 536 | | | | 434,157 | | | | - | | | | 434,693 | |
| | | | | | | | | | | | | | | | | | | | |
Stock-based Compensation | | | - | | | | - | | | | 90,208 | | | | - | | | | 90,208 | |
| | | | | | | | | | | | | | | | | | | | |
Net income | | | - | | | | - | | | | - | | | | 1,725,569 | | | | 1,725,569 | |
| | | | | | | | | | | | | | | | | | | | |
Balance, August 31, 2008 | | | 16,297,400 | | | | 4,769 | | | | 6,328,185 | | | | 3,582,124 | | | | 9,915,078 | |
| | | | | | | | | | | | | | | | | | | | |
Exercise of stock options | | | 249,824 | | | | 250 | | | | 124,514 | | | | - | | | | 124,764 | |
| | | | | | | | | | | | | | | | | | | | |
Stock-based Compensation | | | - | | | | - | | | | 183,294 | | | | - | | | | 183,294 | |
| | | | | | | | | | | | | | | | | | | | |
Stock Repurchases | | | (846,842 | ) | | | (847 | ) | | | (1,063,582 | ) | | | - | | | | (1,064,429 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net income | | | - | | | | - | | | | - | | | | 1,412,084 | | | | 1,412,084 | |
| | | | | | | | | | | | | | | | | | | | |
Balance, August 31, 2009 | | | 15,700,382 | | | $ | 4,172 | | | $ | 5,572,411 | | | $ | 4,994,208 | | | $ | 10,570,791 | |
The accompanying notes are an integral part of these consolidated financial statements.
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
For the years ended
| | August 31, | | | August 31, | |
| | 2009 | | | 2008 | | | 2010 | | | 2009 | |
Cash flows from operating activities | | | | | | | | | | | | |
Net income | | $ | 1,412,084 | | | $ | 1,725,564 | | | $ | 2,156,073 | | | $ | 1,412,084 | |
Adjustments to reconcile net income to net cash provided by operating activities | | | | | | | | | | | | | | | | |
Depreciation and amortization of property and equipment | | | 21,893 | | | | 50,997 | | | | 25,215 | | | | 21,893 | |
Amortization of customer relationships | | | 19,699 | | | | 25,683 | | | | 13,714 | | | | 19,699 | |
Amortization of capitalized computer software development costs | | | 519,415 | | | | 466,735 | | | | 644,014 | | | | 519,415 | |
Bad debts | | | 219,998 | | | | 62,947 | | | | 176,978 | | | | 219,998 | |
Excess tax benefits from share-based arrangements | | | | (1,130,577 | ) | | | - | |
Stock-based compensation | | | 183,294 | | | | 90,208 | | | | 127,597 | | | | 183,294 | |
Gain on sale of equipment | | | | (1,993 | ) | | | - | |
Deferred income taxes | | | 32,628 | | | | 437,400 | | | | 289,829 | | | | 32,628 | |
(Increase) decrease in | | | | | | | | | | | | | | | | |
Accounts receivable | | | (83,397 | ) | | | (60,349 | ) | |
Accounts receivable and Contracts receivable | | | | 335,216 | | | | (83,397 | ) |
Income tax refundable | | | | 298,641 | | | | - | |
Inventory | | | 88,205 | | | | (92,924 | ) | | | (228,940 | ) | | | 88,205 | |
Other assets | | | 36,592 | | | | (121,661 | ) | |
Prepaid expenses and other assets | | | | 24,532 | | | | 36,592 | |
Increase (decrease) in | | | | | | | | | | | | | | | | |
Accounts payable | | | 17,988 | | | | (20,016 | ) | | | 42,741 | | | | 17,988 | |
Accrued payroll and other expenses | | | 15,068 | | | | 45,751 | | | | (41,327 | ) | | | 15,068 | |
Accrued bonuses to officers | | | - | | | | (141,289 | ) | |
Accrued income taxes | | | - | | | | (71,300 | ) | | | 167,993 | | | | | |
Accrued warranty and service costs | | | 9,337 | | | | (4,269 | ) | | | (7,651 | ) | | | 9,337 | |
Deferred revenue | | | (1,143 | ) | | | 83,333 | | | | 13,902 | | | | (1,143 | ) |
| | | | | | | | | | | | | | | | |
Net cash provided by operating activities | | | 2,491,661 | | | | 2,476,815 | | | | 2,905,957 | | | | 2,491,661 | |
| | | | | | | | | | | | | | | | |
Cash flows from investing activities | | | | | | | | | | | | | | | | |
Purchases of property and equipment | | | (44,560 | ) | | | (81,940 | ) | | | (51,532 | ) | | | (44,560 | ) |
Investment in securities | | | - | | | | (750,000 | ) | |
Proceeds from sale of investments | | | 750,000 | | | | - | | | | - | | | | 750,000 | |
Capitalized computer software development costs | | | (673,552 | ) | | | (727,681 | ) | | | (887,541 | ) | | | (673,552 | ) |
| | | | | | | | | | | | | | | | |
Net cash provided by (used in) investing activities | | | 31,888 | | | | (1,559,621 | ) | | | (939,073 | ) | | | 31,888 | |
| | | | | | | | | | | | | | | | |
Cash flows from financing activities | | | | | | | | | | | | | | | | |
Repurchase of common stock | | | (1,064,429 | ) | | | - | | | | (1,034,106 | ) | | | (1,064,429 | ) |
Excess tax benefits from share-based arrangements | | | | 1,130,577 | | | | - | |
Proceeds from the exercise of stock options | | | 124,764 | | | | 434,693 | | | | 94,922 | | | | 124,764 | |
| | | | | | | | | | | | | | | | |
Net cash provided by (used in) financing activities | | | (939,665 | ) | | | 434,693 | | | | 191,393 | | | | (939,665 | ) |
| | | | | | | | | | | | | | | | |
Net increase in cash and cash equivalents | | $ | 1,583,884 | | | $ | 1,351,887 | | | $ | 2,158,277 | | | $ | 1,583,884 | |
| | | | | | | | | | | | | | | | |
Cash and cash equivalents, beginning of year | | | 5,889,601 | | | | 4,537,714 | | | | 7,473,485 | | | | 5,889,601 | |
| | | | | | | | | | | | | | | | |
Cash and cash equivalents, end of period | | $ | 7,473,485 | | | $ | 5,889,601 | | | $ | 9,631,762 | | | $ | 7,473,485 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | |
Supplemental disclosures of cash flow information | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Interest paid | | $ | - | | | $ | 68 | | | $ | 1,045 | | | $ | - | |
| | | | | | | | | | | | | | | | |
Income taxes paid | | $ | 549,122 | | | $ | 450,000 | | | $ | 390,696 | | | $ | 549,122 | |
The accompanying notes are an integral part of these consolidated financial statements.
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 20092010 and 2008
2009
NOTE 1 - ORGANIZATION AND LINES OF BUSINESS
Organization
Simulations Plus, Inc. was incorporated on July 17, 1996. On August 29, 1996, the shareholders of Words+, Inc. exchanged their 2,000 shares of Words+, Inc. common stock for 2,200,000 (Pre-split) shares of Simulations Plus, Inc. common stock, and Words+, Inc. became a wholly owned subsidiary of Simulations Plus, Inc. (collectively, the "Company").
Lines of Business
The Company designs and develops pharmaceutical simulation software to promote cost-effective solutions to a number of problems in pharmaceutical research and in the education of pharmacy and medical students. The Company also develops and sells interactive, educational software programs that simulate science experiments conducted in middle school, high school, and junior college science classes as well as a productivity software program called Abbreviate! that was moved from the Words+ subsidiary to Simulations Plus. In addition, the Company’s subsidiary designs and develops computer software and manufactures augmentative communication devices and computer access products that provide a voice for those who cannot speak and allow physically disabled persons to operate a standard computer.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
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.
Principles of Consolidation
The consolidated financial statements include the accounts of Simulations Plus, Inc. and its wholly owned subsidiary, Words+, Inc. All significant intercompany accounts and transactions are eliminated in consolidation.
Revenue Recognition
The Company recognizes revenues related to software licenses and software maintenance in accordance with the American Institute of Certified Public Accountants ("AICPA"Financial Accounting Standard Board (“FASB”) Statements of PositionAccounting Standard Codification (“SOP”ASC”) No. 97-2, "Software Revenue Recognition."985-605. Software products revenue is recorded when the following conditions are met: 1) evidence of arrangement exists, 2) delivery has been made, 3) the amount is fixed, and 4) collectibility is probable. Post-contract customer support ("PCS") obligations are insignificant; therefore, revenue for PCS is recognized at the same time as the licensing fee, and the costs of providing such support services are accrued and amortized over the obligation period. For Words+ products, the revenue is recorded at the time of shipment, net of estimated allowances and returns.
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 20092010 and 2008
2009
As a byproduct of ongoing improvements and upgrades for the new programs and new modules of software, some modifications are provided to customers who have already purchased software at no additional charge. Other software modifications result in new, additional cost modules that expand the functionality of the software. These are licensed separately. We consider the modifications that are provided without charge to be minimal, as they do not significantly change the basic functionality or utility of the software, but rather add convenience, such as being able to plot some additional variable on a graph in addition to the numerous variables that had been available before, or adding some additional calculations to supplement the information provided from running the software. Such software modifications for any single product have typically occurred once or twice per year, sometimes more, sometimes less. Thus, they are infrequent. The Company provides, for a fee, additional training and service calls to its customers and recognizes revenue at the time the training or service call is provided.
Generally, we enter into one-year license agreements with customers for the use of our pharmaceutical software products. We recognize revenue on these contracts when all the criteria under SOP 97-2 are met.
Most license agreements have a term of one year; however, from time to time, we enter into multi-year license agreements. We generally unlock and invoice software one year at a time for multi-year licenses. Therefore, revenue is recognized one year at a time.
We recognize the revenue from collaboration research and the revenue from grants equally over their terms. However, we recognize contract study revenue either equally over the term of the contract or using the percentage of completion method, depending upon how the contract studies are engaged, in accordance with AICPA SOP 81-1.FASB ASC 605-35. To recognize revenue using the percentage of completion method, we must determine whether we meet the following criteria: 1) there is a long-term, legally enforceable contract and 2) it is possible to reasonably estimate the total project costs, and 3) it is possible to reasonably estimate the extent of progress toward completion.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents.
Accounts Receivable
The Company maintains an allowance for doubtful accounts for estimated losses that may arise if any of its customers are unable to make required payments. Management specifically analyzes the age of customer balances, historical bad debt experience, customer credit-worthiness, and changes in customer payment terms when making estimates of the collectibility of the Company’s trade accounts receivable balances. If the Company determines that the financial conditions of any of its customers deteriorated, whether due to customer-specific or general economic issues, an increase in the allowance may be made. Accounts receivable are written off when all collection attempts have failed. The Company also estimates the contractual discount obligation for third party funding suchsuc h as Medicare, Medicaid, and private insurance companies. Those estimated discounts are reflected in the allowance for doubtful accounts and contractual discounts.
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Inventory
Inventory is stated at the lower of cost (first-in, first-out basis) or market and consists primarily of computers and peripheral computer equipment.
Capitalized Computer Software Development Costs
Software development costs are capitalized in accordance with SFAS No. 86, "Accounting for the Cost of Computer Software to be Sold, Leased, or Otherwise Marketed."FASB ASC 985-20. Capitalization of software development costs begins upon the establishment of technological feasibility and is discontinued when the product is available for sale.
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2009 and 2008
The establishment of technological feasibility and the ongoing assessment for recoverability of capitalized software development costs require considerable judgment by management with respect to certain external factors including, but not limited to, technological feasibility, anticipated future gross revenues, estimated economic life, and changes in software and hardware technologies. Capitalized computer software development costs are comprised primarily of salaries and direct payroll-related costs and the purchase of existing software to be used in the Company's software products.
Amortization of capitalized computer software development costs is provided on a product-by-product basis on the straight-line method over the estimated economic life of the products (not to exceed five years). Amortization of software development costs amounted to $519,415$644,014 and $466,735$519,415 for the years ended August 31, 20092010 and 2008,2009, respectively. We expect future amortization expense to vary due to increases in capitalized computer software development costs.
Management tests capitalized computer software development costs for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
Property and Equipment
Property and equipment are recorded at cost, less accumulated depreciation and amortization. Depreciation and amortization are provided using the straight-line method over the estimated useful lives as follows:
| Equipment | 5 years |
| Computer equipment | 3 to 7 years |
| Furniture and fixtures | 5 to 7 years |
| Leasehold improvements | Shorter of life of asset or lease |
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Maintenance and minor replacements are charged to expense as incurred. Gains and losses on disposals are included in the results of operations.
Fair Value of Financial Instruments
For certain of the Company's financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, accrued payroll and other expenses, accrued bonuses to officers, and accrued warranty and service costs, the carrying amounts approximate fair value due to their short maturities.
Effective September 1, 2008, we adopted SFAS 157, Fair Value MeasurementsA. SFAS 157 does not require any new fair value measurements; rather, it defines fair value, establishes a framework for measuring fair value in accordance with existing GAAP and expands disclosures about fair value measurements. In February 2008, FASB Staff Position (FSP) FAS 157-2, Effective Date of FASB Statement No. 157 was issued, which delays the effective date of SFAS 157 to fiscal years and interim periods within those fiscal years beginning after November 15, 2008 for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). We elected to defer the adoption of the Standard for these non-financial assets and liabilities and are currently evaluating the impact, if any, that the deferred provisions of the Standard will have on our consolidated financial statements. In October 2008, FSP FAS 157-3, Fair Value Measurements, was issued, which clarifies the application of SFAS 157 in an inactive market and provides an example to demonstrate how the fair value of a financial asset is determined when the market for that financial asset is inactive. FSP FAS 157-3 was effective upon issuance, including prior periods for which financial statements had not been issued. The adoption of SFAS 157 for our financial assets and liabilities and FSP FAS 157-3 did not have an impact on our financial position or operating results. Beginning September 1, 2008, assetsssets and liabilities recorded at fair value in the Consolidated Balance Sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. The categories, as defined by SFAS 157,the standard, are as follows:
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2009 and 2008
Level Input: | | Input Definition: |
Level I | | Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date. |
Level II | | Inputs, other than quoted prices included in Level I, that are observable for the asset or liability through corroboration with market data at the measurement date. |
Level III | | Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. |
The following table summarizes fair value measurements by level at August 31, 20092010 for assets and liabilities measured at fair value on a recurring basis:
| | Level I | | Level II | | Level III | | Total | | | Level I | | Level II | | Level III | | Total | |
Cash and cash equivalents | | $ | 7,473,485 | | $ | - | | $ | - | | | $ | 7,473,485 | | | $ | 9,631,762 | | $ | - | | $ | - | | | $ | 9,631,762 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Total assets | | $ | 7,473,485 | | | $ | - | | | $ | | | | $ | 7,473,485 | | | $ | 9,631,762 | | | $ | - | | | $ | | | | $ | 9,631,762 | |
Advertising
The Company expenses advertising costs as incurred. Advertising costs for the years ended August 31, 2010 and 2009 were $40,000 and 2008 were $34,000, and $10,000, respectively.
Shipping and Handling
Shipping and handling costs are recorded as cost of sales and amounted to $103,000$114,000 and $107,000$103,000 for the years ended August 31, 20092010 and 2008,2009, respectively.
Research and Development Costs
Research and development costs are charged to expense as incurred until technological feasibility has been established. These costs consist primarily of salaries and direct payroll-related costs. It also includes purchased software which was developed by other companies and incorporated into, or used in the development of, our final products.
Income Taxes
The Company utilizes SFAS No. 109, "Accounting for Income Taxes,"FASB ASC 740-10 which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns.
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 20092010 and 2008
2009
Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The provision for income taxes represents the tax payable for the period and the change during the period in deferred tax assets and liabilities.
Earnings per Share
The Company reports earnings per share in accordance with SFAS No. 128, "Loss per Share."FASB ACS 260-10. Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of common shares available. Diluted earnings per share is computed similarsimilarly to basic earnings 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. The components of basic and diluted earnings per share for the years ended August 31, 20092010 and 20082009 were as follows:
| | 2009 | | | 2008 | | | 2010 | | | 2009 | |
Numerator | | | | | | | | | | | | |
Net income attributable to common shareholders | | $ | 1,412,084 | | | $ | 1,725,569 | | | $ | 2,156,073 | | | $ | 1,412,084 | |
| | | | | | | | | | | | | | | | |
Denominator | | | | | | | | | | | | | | | | |
Weighted-average number of common shares | | | | | | | | | |
outstanding during the year | | | 16,126,471 | | | | 16,133,822 | | |
Weighted-average number of common shares outstanding during the year | | | | 15,831,294 | | | | 16,126,471 | |
Dilutive effect of stock options | | | 1,061,076 | | | | 2,007,465 | | | | 681,724 | | | | 1,061,076 | |
| | | | | | | | | | | | | | | | |
Common stock and common stock | | | | | | | | | |
equivalents used for diluted earnings per share | | | 17,187,547 | | | | 18,141,287 | | |
Common stock and common stock equivalents used for diluted earnings per share | | | | 16,513,018 | | | | 17,187,547 | |
Stock-Based Compensation
The Company accounts for stock options using the modified prospective method in accordance with SFAS No. 123R.FASB ACS 718-10. Under this method, compensation costs include: (1) compensation cost for all share-based payments granted prior to, but not yet vested as of September 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFASStatement of Financial Accounting Standard (“SFAS”) No. 123 amortized over the options’ vesting period, and (2) compensation cost for all share-based payments granted subsequent to September 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R, amortized on a straight-line basis over the options’ vesting period. Stock-based compensation was $127,597 and $183,294 and $90,208 forf or the years ended August 31, 20092010 and 2008,2009, respectively, and areis included in the consolidated statements of operations as Consulting, Salaries, and Research and developmentDevelopment expense.
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 20092010 and 2008
2009
Concentrations and Uncertainties
Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash, cash equivalents and trade accounts receivable. The Company holds cash and cash equivalents at banks located in California, with balances that often exceed FDIC insured limits. Historically, the Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents. However, considering the current banking environment, the Company is looking in toinvestigating alternative ways to minimize ourits exposure to such risks. While the Company may be exposed to credit losses due to the nonperformance of its counterparties, the Company does not expect the settlement of these transactions to have a materialma terial effect on its results of operations, cash flows or financial condition.
International sales accounted for 32%34% and 38%32% of net sales for the years ended August 31, 20092010 and 2008,2009, respectively. For Simulations Plus, Inc. (pharmaceutical segment), two customers accounted for 12% (one is a dealer account representing various end users) accounted for 13% eachcustomers) and the third customer accounted for 12%11% of net sales for the year ended August 31, 2009.2010. For the year ended August 31, 2008, the same2009, two customers accounted for 16%13% each (one is a dealer account) and the third customer accounted for 14% of net sales.
For Words+, Inc., onethird-party billing, which includes various government agencyagencies as well as private insurance companies, accounted for 21%65% and 21%50% of net sales duringfor the years ended August 31, 2010 and 2009, respectively. If changes are made in government funding policies for Words+ products, Words+ revenue may be impacted. We continually evaluate and 2008, respectively.monitor regulatory developments in funding matters, and we do not expect Medicare and Medicaid of all 50 states to discontinue their funding of Words+ products; however, there can be no assurances that the current level of revenue from third parties will continue.
The Company operatesWe operate in the computer software industry, which is highly competitive and changes rapidly. The Company'sOur operating results could be significantly affected by itsour ability to develop new products and find new distribution channels for new and existing products.
For Simulations Plus (pharmaceutical segment), one customer comprised 43% (a dealer account representing various customers) and 16% of accounts receivable at August 31, 2010, and two customers comprised of 39%, (one is a dealer account representing various customers) and 14% of accounts receivable at August 31, 2009. Three customersFor Words+, third-party billing, which includes various government agencies, comprised 25%, 17% and 17%84% of its accounts receivable at August 31, 2008. For Words+, one government agency comprised 25%2010 and 34%87% of its accounts receivable at August 31, 20092009. Collection of those accounts receivable in a timely manner is critical in Words+’ cash flow and 2008, respectively.its operations. We have three dedicated funding/billing personnel who continually track such collections.
The Company’s subsidiary, Words+, Inc., purchases components for the main computer products from three manufacturers. Words+, Inc. also uses a number of pictographic symbols that are used in its software products which are licensed from a third party. The inability of the Company to obtain computers used in its products or to renew its licensing agreement to use pictographic symbols could negatively impact the Company's financial position, results of operations, and cash flows.
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 20092010 and 2008
2009
Recently Issued Accounting Standards
In September 2009, the FASB issued Emerging Issues Task Force (“EITF”) 09-3, “Applicability of AICPA Statement of Position 94-2 to Certain Arrangements That Include Software Elements” (“EITF 09-3”). EITF 09-3ASU 2009-14 which amends Statement of Position (“SOP”) 97-2, “Software Revenue Recognition”, to exclude tangible products containing software components and non-software components that function together to deliver the products’product’s essential functionality. EITF 09-3ASU 2009-14 applies to revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early application permitted with EITF 08-1. The company expectsWe expect to adopt this standard in the first quarter of fiscal 2011. The company isWe are currently evaluating the impact EITF 09-3ASU 2009-14 will have on theour consolidated financial statements.
In September 2009, the FASB issued Emerging Issues Task Force (“EITF”) 08-1,ASU 2009-13, “Revenue Arrangements with Multiple Deliverables” (“EITF 08-1”). EITF 08-1ASU 2009-13 amends EITF 00-21, “Revenue Arrangements with Multiple Deliverables”, to require an entity to use an estimated selling price when vendor-specific objective evidence or acceptable third-party evidence does not exist for any products or services included in a multiple element arrangement. The arrangement consideration should be allocated among the products and services based upon their relative selling prices, thus eliminating the use of the residual method of allocation. EITF 08-1ASU 2009-13 also requires expanded qualitative and quantitative disclosures regarding significant judgments made and changes in applying the guidance. EITF 08-1 60;ASU 2009-13 applies to fiscal years beginning after June 15, 2010, with early application permitted. The company expectsWe expect to adopt thethis standard in the first quarter of fiscal 2011. The company isWe are currently evaluating the impact EITF 08-1ASU 2009-13 will have on the financial statements.
In June 2009, the FASB issued Statement No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162 (“FAS 168”). This statement provides for the FASB Accounting Standards Codification to become the single official source of authoritative, nongovernmental generally accepted accounting principles in the United States. FAS 168 does not change GAAP but reorganizes the literature. This statement is effective for interim and annual periods ending after September 15, 2009.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events (“SFAS No. 165”), which provides guidance on events that occur after the balance sheet date but prior to the issuance of the financial statements. SFAS No. 165 distinguishes events requiring recognition in the financial statements and those that may require disclosure in the financial statements. Furthermore, SFAS No. 165 requires disclosure of the date through which subsequent events were evaluated. SFAS No. 165 is effective for interim and annual periods after June 15, 2009. The Company adopted SFAS No. 165 for the annual reporting period ended August 31, 2009.
In April 2008, the FASB issued FSP-FAS No. 142-3, Determination of the Useful Life of Intangible Assets (“FAS 142-3”). FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). The objective of the Staff Position is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141 (Revised 2007): Business Combinations (“SFAS 141R”) and other GAAP. FAS 142-3 is effective for fiscal years beginning after December 15, 2008. Management is currently evaluating the effect on the Company’s consolidated financial positions, results of operations and cash flows. The Company believes the adoption of SFAS 159 will not have a material impact on the Company’s consolidated financial statements.
In April 2009, the FASB issued FSP-FAS No. 107-1 and APB 28-1, Disclosures about Fair Value of Financial Instruments (“FAS No. 107-1/APB 28-1”). This FSP extends to interim periods certain disclosures about fair value of financial instruments for publicly traded companies and amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods. This FSP is effective for interim reporting periods ending after June 15, 2009. The Company’s adoption of FAS No. 107-1/APB 28-1 is not expected to have a material effect on the Company’s consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. For financial assets and liabilities, SFAS 157 will be effective for the Company in the first fiscal quarter of 2009. As permitted by FSP-FAS 157-2, SFAS 157 is effective for nonfinancial assets and liabilities for the Company during the first fiscal quarter of 2010. Management believes the adoption of SFAS 157 for its financial assets and liabilities will not have a material impact on the Company’s consolidated financial statements and continues to evaluate the potential impact of the adoption of SFAS 157 related to its nonfinancial assets and liabilities.
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2009 and 2008
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits companies to choose to measure many financial instruments and certain other items at fair value. SFAS 159 will be effective for the Company in the first fiscal quarter of 2009. The Company believes the adoption of SFAS 159 will not have a material impact on the Company’sour consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”), which replaces SFAS 141. SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any resulting goodwill, and any noncontrolling interest in the acquiree. SFAS 141R also provides for disclosures to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141R will be effective for the Company in first fiscal quarter of 2010 and must be applied prospectively to business combinations completed on or after that date.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of Accounting Research Bulletin No. 51” (“SFAS 160”), which establishes accounting and reporting standards for noncontrolling interests (“minority interests”) in subsidiaries. SFAS 160 clarifies that a noncontrolling interest in a subsidiary should be accounted for as a component of equity separate from the parent’s equity. SFAS 160 will be effective for the Company in the first fiscal quarter of 2010 and must be applied prospectively, except for the presentation and disclosure requirements, which will apply retrospectively. The Company is currently evaluating the potential impact that adoption of SFAS 160 may have on its consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133” (“SFAS 161”), which requires enhanced disclosures about an entity’s derivative and hedging activities. SFAS 161 will be effective for The Company second fiscal quarter of 2009.
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2009 and 2008
NOTE 3 – INVESTMENT
The Company owned Auction Rated Securities (“ARS”) through UBS Financial Services Inc. On August 8, 2008, UBS announced a comprehensive settlement, in principle, to all who hold ARS, that they will buy back ARS, at par, from most clients during a two-year time period beginning January 2, 2009. On January 2, 2009, UBS bought back all of our ARS, and we no longer hold such an investment.
NOTE 43 – PROPERTY AND EQUIPMENT
Property and equipment at August 31, 20092010 and 2009. consisted of the following:
| | | 2010 | | | 2009 | |
Automobile | | $ | 21,769 | | | $ | 21,769 | | | $ | 21,769 | |
Equipment | | | 80,830 | | | | 80,830 | | | | 80,830 | |
Computer equipment | | | 376,680 | | | | 403,635 | | | | 376,680 | |
Furniture and fixtures | | | 61,498 | | | | 61,498 | | | | 61,498 | |
Leasehold improvements | | | 53,898 | | | | 53,898 | | | | 53,898 | |
| | | 594,675 | | | | 621,630 | | | | 594,675 | |
Less accumulated depreciation and amortization | | | 541,455 | | |
Less accumulated depreciation and Amortization | | | | 565,646 | | | | 541,455 | |
| | | | | | | | | |
Total | | $ | 53,220 | | | $ | 55,984 | | | $ | 53,220 | |
Depreciation expense was $21,893$25,215 and $50,997$21,893 for the years ended August 31, 20092010 and 2008,2009, respectively.
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 54 - COMMITMENTS AND CONTINGENCIES
Leases
We lease approximately 13,500 square feet of space under a five-year term with two (2), three (3)-year options to extend the lease. The base rent is $18,445 per month plus common area maintenance fees. The base rental rate increases at 4% annually. Rent expense, including common area maintenance fees, was $271,748$278,788 and $266,189$271,748 for the years ended August 31, 2010 and 2009, and 2008, respectively. The lease will be matured on February 1, 2011 with anDuring the year ended August 31, 2010, the Company exercised its option to extend.extend the term of the lease to February 2, 2014.
On October 30, 2006, the Company entered into an equipment lease agreement. In this agreement, the Company leased a Ricoh Copier/Printer for 36 months with the option of earlier termination with a 60-day written notice. On October 30, 2009, we renewed the same agreement for another 36 months with an increment of 1 cent on color printing which reflects their material cost.
Future minimum lease payments under non-cancelable operating leases with remaining terms of one year or more at August 31, 20092010 were as follows:
Years Ending August 31, | | | |
2010 | | | 254,787 | |
2011 | | | 107,890 | |
| | $ | 362,677 | |
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2009 and 2008
Years Ending August 31, | | |
2011 | | 264,979 |
2012 | | 275,578 |
2013 | | 286,601 |
2014 | | 121,362 |
| $ | 948,520 |
Employment Agreement
On August 31, 2009, the Company entered into an employment agreement with its President/Chief Executive Officer that expires in August 2011. The employment agreement provides for an annual base salary of $275,000 per year, and a performance bonus in an amount not to exceed 10% of Employee’s salary, or $27,500 per year, at the end of each fiscal year. The specific amount of the bonus to be awarded will be determined by the Compensation Committee of the Board of Directors, based on the financial performance and achievements of the Company for the previous fiscal year. The agreement also provides Employee stock options, exercisable for five years, to purchase fifty (50) shares of Common Stock for each one thousand dollars ($1,000) of net income before taxes at the end of each fiscalfisca l year up to a maximum of 120,000 options over the term of the agreement. The Company may terminate the agreement upon 30 days' written notice if termination is without cause. The Company's only obligation would be to pay its President the greater of a) 12 months salary or b) the remainder of the term of the employment agreement from the date of notice of termination.
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
License Agreement
In 1997, the Company entered into an agreement with Therapeutic Systems Research Laboratory ("TSRL") to jointly develop a computer simulation software program of the absorption of drug compounds in the gastrointestinal tract. Upon execution of a definitive License Agreement on July 9, 1997, TSRL received an initial payment of $75,000, and thereafter, the Company is obligated to pay a royalty of 20% of the net sales of the basic GastroPlus software without additional modules.
In September 2007, the Company entered into an agreement with Enslein Research, Inc. (“Enslein”) to jointly create a new metabolism module as part of ADMET Predictor. The fee for the exclusive license to the Enslein Data, in the form of a royalty, is 50% of the gross sales revenues of the ADMET Predictor Enslein Metabolism Module, and a $50,000 bonus at the time the sale ofcumulative revenue from ADMET Predictor Enslein Metabolism moduleModule sales reaches 25 annual licenses.$250,000.
For the years ended August 31, 20092010 and 2008,2009, Simulations Plus, Inc. incurred royalties of approximately $413,000$441,000 and $375,000,$413,000, respectively.
The Company’s subsidiary, Words+, Inc., entered into royalty agreements with several vendors to apply their software & technologies into the finished goods to be sold. For the years ended August 31, 20092010 and 2008,2009, Words+ incurred royalties of $31,925approximately $26,000 and $42,775,$32,000, respectively.
Legal Matters
On April 6, 2006 we received notice from
We are not a liquidator for the former French subsidiary of Bioreason (Bioreason SARL), saying that the liquidator had initiated legal action against Simulations Plus in the French courts with respectparty to ClassPharmer distribution rights to European customers, and is claiming commissions and legal fees with respect to European customers. We filed a counterclaim for our rights and lost sales against Bioreason SARL's assets by sending a debt recovery declaration to the liquidator on June 15, 2006.
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2009 and 2008
On April 9, 2008, we received the approval of the settlement agreement from the commercial division of French Ordinary Court. This means that the settlement agreement is now enforceable, andany litigation at this case is finally closed. Both parties dropped all claimstime and we are not liable foraware of any amounts.
pending litigation of any kind.
NOTE 65 - SHAREHOLDERS' EQUITY
Stock Repurchase
On October 23, 2008, the boardBoard of directorsDirectors authorized a share repurchase program (Phase I) enabling the buyback of up to $2.5 million in shares during a 12-month period beginning Monday, October 27, 2008. The actual repurchase started on December 2, 2008; therefore the boardBoard of directorsDirectors extended it through December 1, 2009 in order to have a full 12-month period. The Company hasWe opened an account with Morgan Stanley Smith Barney for the purchase of such securities. Funds for any stock purchases will beare drawn from the Company’sour cash reserves.
On January 10, 2010, the Board of Directors authorized a renewed share repurchase program (Phase II) effective as of February 15, 2010. The renewed program enables the Company to buy back up to one million shares during a 12-month period.
The details of repurchases made during the nine monthsyears ended August 31, 2010 and 2009 are listed in the following table:
Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Remaining Funds Available Under the Share Repurchase Plan (including broker’s fees) |
12/01/08 to 12/31/08 | | 90,632 | | | $0.9764 | | | $2,409,631 | |
01/01/09 to 01/31/09 | | 105,752 | | | $1.0352 | | | $2,296,807 | |
02/01/09 to 02/28/09 | | 73,118 | | | $1.0086 | | | $2,221,124 | |
03/01/09 to 03/31/09 | | 73,315 | | | $0.9575 | | | $2,149,168 | |
04/01/09 to 04/30/09 | | 55,580 | | | $1.0045 | | | $2,091,896 | |
05/01/09 to 05/31/09 | | 44,083 | | | $1.1360 | | | $2,041,649 | |
06/01/09 to 06/30/09 | | 171,740* | | | $1.3885 | | | $1,799,550 | |
07/01/09 to 07/31/09 | | 131,308 | | | $1.5321 | | | $1,596,486 | |
08/01/09 to 08/31/09 | | 101,314 | | | $1.7467 | | | $1,416,478 | |
As of 08/31/09 | | 846,842 | | | $1.2569 | | | | |
* Includes repurchase of 50,000 shares at $1.24 on June 5, 2009 from Walter Woltosz, CEO of the Company.
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 20092010 and 2008
2009
Period | Total Number of Shares Purchased | Average Price Paid per Share | Remaining Funds Available Under the Share Repurchase Plan (including broker’s fees) |
12/02/08 to 12/31/08 | 90,632 | | $0.9764 | | $2,409,631 | |
01/01/09 to 01/31/09 | 105,752 | | $1.0352 | | $2,296,807 | |
02/01/09 to 02/28/09 | 73,118 | | $1.0086 | | $2,221,124 | |
03/01/09 to 03/31/09 | 73,315 | | $0.9575 | | $2,149,168 | |
04/01/09 to 04/30/09 | 55,580 | | $1.0045 | | $2,091,896 | |
05/01/09 to 05/31/09 | 44,083 | | $1.1360 | | $2,041,649 | |
06/01/09 to 06/30/09 | 171,740 | * | $1.3885 | | $1,799,550 | |
07/01/09 to 07/31/09 | 131,308 | | $1.5321 | | $1,596,486 | |
08/01/09 to 08/31/09 | 101,314 | | $1.7467 | | $1,416,478 | |
09/01/09 to 09/30/09 | 82,630 | | $1.6989 | | $1,274,155 | |
10/01/09 to 10/31/09 | 52,364 | | $1.5685 | | $1,190,386 | |
11/01/09 to 11/30/09 | 42,061 | | $1.4884 | | $1,126,560 | |
12/01/09 | 2,586 | | $1.3823 | | $1,122,985 | |
Phase I Total | 1,026,483 | | $1.3823 | | | |
Period | Total Number of Shares Purchased | Average Price Paid per Share | Remaining Shares Authorized for Repurchase Under the Share Repurchase Plan – Phase II |
04/01/10 to 04/30/10 | 86,976 | | $2.2237 | | 913,024 | |
05/01/10 to 05/31/10 | 170,101 | | $2.3515 | | 742,923 | |
06/01/10 to 06/30/10 | 33,665 | | $2.3670 | | 709,258 | |
07/01/10 to 07/31/10 | 18,789 | | $2.4433 | | 690,469 | |
08/01/10 to 08/31/10 | 10,878 | | $2.4283 | | 679,591 | |
Phase II Total | 320,409 | | $2.3264 | | | |
Stock Option Plan
In September 1996, the Board of Directors adopted, and the shareholders approved, the 1996 Stock Option Plan (the "Option Plan") under which a total of 1,000,000 shares of common stock had been 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 2,000,000. In February 2000, the shareholders approved an increase in the number of shares that may be granted under the Option Plan to 4,000,000. In December 2000, the shareholders approved an increase in the number of shares that may be granted under the Option Plan to 5,000,000. Furthermore, in February 2005, the shareholders approved an additional 1,000,000 shares, resulting in the total number of shares that may be granted under the OptionOpt ion Plan to 6,000,000. The 1996 Stock Option Plan terminated in September 2006 by its term.
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On February 23, 2007, the Board of Directors adopted and the shareholders approved the 2007 Stock Option Plan under which a total of 1,000,000 shares of common stock had been reserved for issuance.
The number of shares described above are adjusted reflecting the two-for-one stock splits on August 14, 2006 and October 1, 2007,2007.
The following table summarizes the stock option transactions.
TRANSACTIONS IN FY 20092010 AND 20082009
Transactions in FY08 | | Number of Options | | | Weighted-Average Exercise Price Per Share | |
| | | | | | |
Outstanding, August 31, 2007 | | | 3,209,736 | | | $ | 0.69 | |
Granted | | | 287,000 | | | $ | 3.01 | |
Exercised | | | (536,000 | ) | | $ | 0.81 | |
Expired/Canceled | | | (246,200 | ) | | $ | 0.64 | |
| | | | | | | | |
Outstanding, August 31, 2008 | | | 2,714,536 | | | $ | 0.91 | |
Exercisable, August 31, 2008 | | | 2,300,536 | | | $ | 0.66 | |
Transactions in FY09 | | Number of Options | | | Weighted-Average Exercise Price Per Share | | | Weighted-Average Remaining Contractual Life | |
| | | | | | | | | |
Outstanding, August 31, 2008 | | | 2,714,536 | | | $ | 0.91 | | | | |
Granted | | | 392,000 | | | $ | 1.09 | | | | |
Exercised | | | (237,000 | ) | | $ | 0.51 | | | | |
Canceled/Forfeited | | | (3,000 | ) | | $ | 3.02 | | | | |
Expired | | | (4,000 | ) | | $ | 0.38 | | | | |
| | | | | | | | | | | |
Outstanding, August 31, 2009 | | | 2,862,536 | | | $ | 0.97 | | | | 3.927 | |
Exercisable, August 31, 2009 | | | 2,158,136 | | | $ | 0.74 | | | | 2.346 | |
Transactions in FY09 | | Number of Options | | | Weighted-Average Exercise Price Per Share | | | | Weighted-Average Remaining Contractual Life |
| | | | | | | | | |
Outstanding, August 31, 2008 | | | 2,714,536 | | | $ | 0.91 | | | | |
Granted | | | 392,000 | | | $ | 1.09 | | | | |
Exercised | | | (237,000 | ) | | $ | 0.51 | | | | |
Canceled/Forfeited | | | (3,000 | ) | | $ | 3.02 | | | | |
Expired | | | (4,000 | ) | | $ | 0.38 | | | | |
| | | | | | | | | | | |
Outstanding, August 31, 2009 | | | 2,862,536 | | | $ | 0.97 | | | | 3.927 |
Exercisable, August 31, 2009 | | | 2,158,136 | | | $ | 0.74 | | | | 2.346 |
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2009 and 2008
OPTIONS OUTSTANDING & UNVESTED AT AUGUST 31, 2008 AND 2009
Options Outstanding & Unvested at August 31, 2008
| | Number Outstanding | | | Weighted Average Fair Market Price | |
Non Vested at 8/31/2007 | | | 170,000 | | | $ | 0.32 | |
Granted | | | 287,000 | | | $ | 2.23 | |
Vested | | | (42,000 | ) | | $ | 0.32 | |
Cancelled | | | (1,000 | ) | | $ | 2.27 | |
| | | | | | | | |
Non Vested at 8/31/2008 | | | 414,000 | | | $ | 1.64 | |
Options Outstanding & Unvested at August 31, 2009
| | Number Outstanding | | | Weighted Average Fair Market Price | |
Non Vested at 8/31/2008 | | | 414,000 | | | $ | 1.64 | |
Granted | | | 392,000 | | | $ | 0.77 | |
Vested | | | (98,600 | ) | | $ | 1.41 | |
Cancelled | | | (3,000 | ) | | $ | 2.27 | |
| | | | | | | | |
Non Vested at 8/31/2009 | | | 704,400 | | | $ | 1.04 | |
Transactions in FY10 | | Number of Options | | | Weighted-Average Exercise Price Per Share | | | Weighted-Average Remaining Contractual Life | |
| | | | | | | | | |
Outstanding, August 31, 2009 | | | 2,862,536 | | | $ | 0.97 | | | | |
Granted | | | 252,666 | | | $ | 1.79 | | | | |
Exercised | | | (931,800 | ) | | $ | 0.60 | | | | |
Canceled/Forfeited | | | (41,000 | ) | | $ | 1.39 | | | | |
Expired | | | (648,500 | ) | | $ | 1.44 | | | | |
| | | | | | | | | | | |
Outstanding, August 31, 2010 | | | 1,493,902 | | | $ | 1.13 | | | | 4.248 | |
Exercisable, August 31, 2010 | | | 934,036 | | | $ | 0.87 | | | | 3.245 | |
The fair value of the options granted during FY09the year ended August 31, 2010 is estimated at $307,571.$225,650. The fair value of these options was estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for the fiscal year ended August 31, 2009:2010: dividend yield of 0%, pre-vest forfeiture rate of 2.32% to 40.71%, expected volatility of 54.71% to 79.91%, risk-free interest rate of 0.43% to 2.35%, and expected life of 1.0 to 5.0 years. The total fair value of non-vested stock options as of August 31, 2010 was $509,478 and is amortizable over a weighted average period of 2.82 years.
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the previous fiscal year ended August 31, 2009, the fair value of the options granted is estimated at $307,571. The assumptions were dividend yield of 0%, expected volatility of 67.78% to 81.34%, risk-free interest rate of 2.67% to 3.17%, and expected life of 7 to 7.7 years. The weighted-average fair values of options granted during FY09 and FY08 were $0.78 and $2.22, respectively. The weighted-average exercise prices of options granted during FY09 and FY08 were $1.09, and $3.01, respectively. The total fair value of non-vested stock options as of
During the years ended August 31, 2009 was $734,8252010 and is amortizable over a weighted average period2009,, the Company recognized an income tax benefit of 2.37 years.$1,130,577 and $0, respectively, relating to stock-based compensation arrangements.
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2009 and 2008
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which do not have vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
The weighted-average remaining contractual life of options outstanding issued under the Plan was 3.94.2 years at August 31, 2009.2010. The exercise prices for the options outstanding at August 31, 20092010 ranged from $0.26 to $3.03,$3.02, and the information relating to these options is as follows:
Exercise Price | | Awards Outstanding | | Awards Exercisable |
Low | High | | Quantity | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price | | Quantity | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price | |
$0.26 | | $0.50 | | | 771,436 | | 1.5 years | | $0.37 | | | 771,436 | | 1.5 years | | $0.37 | | |
$0.51 | | $0.75 | | | 789,000 | | 0.4 years | | $0.66 | | | 789,000 | | 0.4 years | | $0.66 | | |
$0.76 | | $1.25 | | | 969,100 | | 7.1 years | | $1.06 | | | 541,100 | | 5.7 years | | $1.14 | | |
$1.26 | | $3.03 | | | 333,000 | | 8.5 years | | $2.83 | | | 56,600 | | 8.5 years | | $3.03 | | |
| | | | | 2,862,536 | | | | | | | 2,158,136 | | | | | | |
Exercise Price | | | Awards Outstanding | | | Awards Exercisable | |
Low | | | High | | | Quantity | | Weighted Average Remaining Contractual Life | | Weighted Average Exercise Price | | | Quantity | | Weighted Average Remaining Contractual Life | | Weighted Average Exercise Price | |
$ | 0.26 | | | $ | 0.75 | | | | 392,236 | | 0.6 years | | $ | 0.36 | | | | 392,236 | | 0.6 years | | $ | 0.36 | |
$ | 0.76 | | | $ | 1.25 | | | | 725,000 | | 5.9 years | | $ | 1.08 | | | | 502,200 | | 5.0 years | | $ | 1.13 | |
$ | 1.26 | | | $ | 3.02 | | | | 376,666 | | 4.9 years | | $ | 2.03 | | | | 39,600 | | 7.6 years | | $ | 2.69 | |
| | | | | | | | | 1,493,902 | | | | | | | | | 934,036 | | | | | | |
Intrinsic Value of options outstanding and options exercisable
| | Intrinsic Value of Options Outstanding | | | Intrinsic Value of Options Exercisable | | | Intrinsic Value of Options Exercised | | | Intrinsic Value of Options Outstanding | | | Intrinsic Value of Options Exercisable | | | Intrinsic Value of Options Exercised | |
FY10 | | | $ | 2,029,935 | | | $ | 1,499,527 | | | $ | 931,631 | |
FY09 | | $ | 2,713,395 | | | $ | 2,354,206 | | | $ | 191,400 | | | $ | 2,713,395 | | | $ | 2,354,206 | | | $ | 191,400 | |
FY08 | | $ | 2,436,621 | | | $ | 2,685,289 | | | $ | 2,108,540 | | |
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 20092010 and 2008
2009
Other Stock Options
As of August 31, 2009,2010, the Board of Directors holds options to purchase 51,00071,000 shares of common stock at exercise prices ranging from $0.30 to $6.68, which were granted prior to August 31, 2009.$6.68.
Transactions in FY09 | | Number of Options | | | Weighted-Average Exercise Price Per Share | | | Number of Options | | | Weighted-Average Exercise Price Per Share | |
| | | | | | | | | | | | |
Outstanding, August 31, 2008 | | | 58,324 | | | $ | 1.58 | | |
Outstanding, August 31, 2009 | | | | 51,000 | | | $ | 1.89 | |
Granted | | | 5,500 | | | $ | 1.78 | | | | 24,000 | | | $ | 2.06 | |
Exercised | | | (12,824 | ) | | $ | 0.42 | | | | (4,000 | ) | | $ | 0.63 | |
| | | | | | | | | | | | | | | | |
Outstanding, August 31, 2009 | | | 51,000 | | | $ | 1.89 | | |
Exercisable, August 31, 2009 | | | 39,800 | | | $ | 1.62 | | |
Outstanding, August 31, 2010 | | | | 71,000 | | | $ | 2.02 | |
Exercisable, August 31, 2010 | | | | 46,850 | | | $ | 1.99 | |
NOTE 76 - INCOME TAXES
The components of the income tax provision for the years ended August 31, 20092010 and 20082009 were as follows:
| | 2009 | | | 2008 | | | 2010 | | | 2009 | |
Current | | | | | | | | | | | | |
Federal | | $ | (491,258 | ) | | $ | (271,908 | ) | | $ | (531,586 | ) | | $ | (491,258 | ) |
State | | | (90,690 | ) | | | (11,300 | ) | | | (127,014 | ) | | | (90,690 | ) |
| | | (581,948 | ) | | | (283,208 | ) | | | (658,600 | ) | | | (581,948 | ) |
Deferred | | | | | | | | | | | | | | | | |
Federal | | | (14,912 | ) | | | (443,000 | ) | | | (260,843 | ) | | | (14,912 | ) |
State | | | (17,716 | ) | | | 5,600 | | | | (28,986 | ) | | | (17,716 | ) |
| | | | | | | | | | | (289,829 | ) | | | (32,628 | ) |
| | | | | | | | | |
Total | | $ | (614,576 | ) | | $ | (720,608 | ) | | $ | (948,429 | ) | | $ | (614,576 | ) |
A reconciliation of the expected income tax (benefit) computed using the federal statutory income tax rate to the Company's effective income tax rate is as follows for the years ended August 31, 20092010 and 2008: