`
` SECURITIES AND EXCHANGE COMMISSION
` WASHINGTON, DC 20549
`
` FORM 10-QSB
`
` [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
` SECURITIES EXCHANGE ACT OF 1934
`
` For the quarterly period ended November 30, 2006 or
`
` [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
` SECURITIES EXCHANGE ACT OF 1937
`
` For the transition period from _________ to _________
`
` Commission file number: 001-32046
`
`
` SIMULATIONS PLUS, INC.
` ----------------------
` (Name of small business issuer in its charter)
`
`
` CALIFORNIA 95-4595609
` (State or other jurisdiction of (I.R.S. Employer
` Incorporation or Organization) identification No.)
`
`
` 42505 10TH STREET WEST
` LANCASTER, CA 93534-7059
` (Address of principal executive offices including zip code)
`
` (661) 723-7723
` (Issuer's telephone number, including area code)
`
`Check whether the issuer: (1) filed all reports required to be filed by Section
`13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
`for such shorter period that the registrant was required to file such reports),
`and (2) has been subject to such filing requirements for the past 90 days.
`
`Yes [X] No [ ]
`
`The number of shares outstanding of the Issuer's common stock, par value $0.001
`per share, as of January 15, 2007, was 7,479,548.
`
`
`Apotex v. Cellgene - IPR2023-00512
`Petitioner Apotex Exhibit 1048-0001
`
`

`

`
`
`
`
` SIMULATIONS PLUS, INC.
` FORM 10-QSB
` FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 2006
`
` Table of Contents
`
`
` PART I. FINANCIAL INFORMATION
`
`Item 1. Financial Statements (Unaudited) Page
` ----
`
` Consolidated Balance Sheet at November 30, 2006 (unaudited) 2
`
` Consolidated Statements of Operations for the three months
` ended November 30, 2006 and 2005 (unaudited) 4
`
` Consolidated Statements of Cash Flows for the three months
` ended November 30, 2006 and 2005 (unaudited) 5
`
` Notes to Consolidated Financial Statements (unaudited) 7
`
`Item 2. Management's Discussion and Analysis or Plan of Operations
`
` General 17
`
` Results of Operations 22
`
` Liquidity and Capital Resources 24
`
`Item 3. Quantitative and Qualitative Disclosures about Market Risk 25
`
`Item 4. Controls and Procedures 25
`
` PART II. OTHER INFORMATION
`
`Item 1. Legal Proceedings 26
`
`Item 2. Changes in Securities 26
`
`Item 3. Defaults upon Senior Securities 26
`
`Item 4. Submission of Matters to a Vote of Security Holders 26
`
`Item 5. Other Information 26
`
`Item 6. Exhibits and Reports on Form 8-K 26
`
`Signature 27
`Exhibit - Certifications
`
`
` 1
`
`Apotex v. Cellgene - IPR2023-00512
`Petitioner Apotex Exhibit 1048-0002
`
`

`

`
`
` SIMULATIONS PLUS, INC. AND SUBSIDIARY
` CONSOLIDATED BALANCE SHEET
` (UNAUDITED)
` NOVEMBER 30, 2006
`- -----------------------------------------------------------------------------------------
`
` ASSETS
`
`CURRENT ASSETS
` Cash and cash equivalents $ 2,102,782
` Accounts receivable, net of allowance for doubtful accounts
` and estimated contractual discounts of $32,711 1,214,114
` Current portion of contracts receivable, net of discounts of $2,242 186,138
` Inventory 233,906
` Prepaid expenses and other current assets 56,897
` Current portion of deferred tax 190,034
` ------------
`
` Total current assets 3,983,871
`
`CAPITALIZED COMPUTER SOFTWARE DEVELOPMENT COSTS,
` net of accumulated amortization of $2,534,905 1,400,231
`
`PROPERTY AND EQUIPMENT, net (note 4) 102,278
`CONTRACTS RECEIVABLE, net of discounts of $161 47,219
`CUSTOMER RELATIONSHIPS, net of accumulated amortization of $36,156 91,886
`DEFERRED TAX 889,816
`OTHER ASSETS 18,445
` ------------
`
` TOTAL ASSETS $ 6,533,746
` ============
`
`
` The accompanying notes are an integral part of these financial statements.
`
` 2
`
`Apotex v. Cellgene - IPR2023-00512
`Petitioner Apotex Exhibit 1048-0003
`
`

`

`
`
` SIMULATIONS PLUS, INC. AND SUBSIDIARY
` CONSOLIDATED BALANCE SHEET
` (UNAUDITED)
` NOVEMBER 30, 2006
`- -------------------------------------------------------------------------------
`
`
` LIABILITIES AND SHAREHOLDERS' EQUITY
`
`CURRENT LIABILITIES
` Accounts payable $ 140,548
` Accrued payroll and other expenses 373,561
` Accrued bonuses to officers 10,430
` Accrued warranty and service costs 34,852
` Deferred revenue 157,173
` ------------
`
` Total current liabilities 716,564
`
`LONG TERM DEFERRED REVENUE 62,501
` ------------
`
` Total liabilities 779,065
` ------------
`
`COMMITMENTS AND CONTINGENCIES (note 5)
`
`SHAREHOLDERS' EQUITY (note 6)
` Preferred stock, $0.001 par value
` 10,000,000 shares authorized
` no shares issued and outstanding --
` Common stock, $0.001 par value
` 20,000,000 shares authorized
` 7,449,496 shares issued and outstanding 3,802
` Additional paid-in capital 5,287,207
` Retained Earnings 463,672
` ------------
`
` Total shareholders' equity 5,754,681
` ------------
`
` TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 6,533,746
` ============
`
`
` The accompanying notes are an integral part of these financial statements.
`
` 3
`
`Apotex v. Cellgene - IPR2023-00512
`Petitioner Apotex Exhibit 1048-0004
`
`

`

`
`
` SIMULATIONS PLUS, INC. AND SUBSIDIARY
` CONSOLIDATED STATEMENTS OF OPERATIONS
` FOR THE THREE MONTHS ENDED NOVEMBER 30,
` (UNAUDITED)
`- --------------------------------------------------------------------------------------------
`
` 2006 2005
` ------------- -------------
`
`NET SALES $ 1,456,451 $ 818,815
`
`COST OF SALES 441,440 331,597
` ------------- -------------
`
`GROSS PROFIT 1,015,011 487,218
` ------------- -------------
`
`OPERATING EXPENSES
` Selling, general, and administrative 756,777 628,756
` Research and development 183,627 97,222
` ------------- -------------
`
` Total operating expenses 940,404 725,978
` ------------- -------------
`
`INCOME (LOSS) FROM OPERATIONS 74,607 (238,760)
` ------------- -------------
`
`OTHER INCOME (EXPENSE)
` Interest income 15,928 3,481
` Miscellaneous income 358 50
` Gain (Loss) on currency exchange 2,972 (5,302)
` ------------- -------------
`
` Total other income (expense) 19,258 (1,771)
` ------------- -------------
`
`INCOME (LOSS) BEFORE INCOME TAXES 93,865 (240,531)
`
`BENEFIT FROM (PROVISION FOR) INCOME TAXES
` Benefit from (provision for) income tax (20,650) 42,000
` ------------- -------------
`
` Total benefit from (provision for) income taxes (20,650) 42,000
` ------------- -------------
`
`NET INCOME (LOSS) $ 73,215 $ (198,531)
` ============= =============
`
`BASIC EARNINGS (LOSS) PER SHARE $ 0.01 $ (0.03)
` ============= =============
`
`Diluted earnings (loss) per share $ 0.01 $ (0.03)
` ============= =============
`
`WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING*
` BASIC 7,444,551 7,298,668
` ============= =============
`
` DILUTED 8,548,560 7,298,668
` ============= =============
`
` * The number of shares at November 30, 2005 have been retroactively restated to reflect
` a 2-for-1 stock split that occurred on August 14, 2006.
`
`
` The accompanying notes are an integral part of these financial statements.
`
` 4
`
`Apotex v. Cellgene - IPR2023-00512
`Petitioner Apotex Exhibit 1048-0005
`
`

`

`
`
` SIMULATIONS PLUS, INC. AND SUBSIDIARY
` CONSOLIDATED STATEMENTS OF CASH FLOWS
` FOR THE THREE MONTHS ENDED NOVEMBER 30,
` (UNAUDITED)
`- -----------------------------------------------------------------------------------------------
`
` 2006 2005
` ------------- -------------
`CASH FLOWS FROM OPERATING ACTIVITIES
` Net income (loss) $ 73,215 $ (198,531)
` Adjustments to reconcile net income to net cash
` provided by operating activities
` Depreciation and amortization of property and
` equipment 11,604 11,860
` Amortization of customer relationships 8,478 --
` Amortization of capitalized software development
` costs 107,178 45,709
` Stock-based compensation 6,451 --
` Contribution of Equipment at book value 774 --
`
` (Increase) decrease in
` Accounts receivable 372,475 442,031
` Inventory 3,142 (31,890)
` Deferred tax 20,650 (42,000)
` Other assets 24,399 (23,316)
` Increase (decrease) in
` Accounts payable (74,870) 33,408
` Accrued payroll and other expenses 8,649 (17,127)
` Accrued bonuses to officers (88,323) --
` Accrued income taxes (1,600) (1,600)
` Accrued warranty and service costs 100 4,278
` Deferred revenue 90,213 (69,854)
` ------------- -------------
`
` Net cash provided by operating activities 562,535 152,968
` ------------- -------------
`
`CASH FLOWS FROM INVESTING ACTIVITIES
` Purchases of property and equipment (18,272) (10,656)
` Purchases of Bioreason's assets -- (826,192)
` Proceeds from sale of assets -- 2,218
` Capitalized computer software development costs (132,967) (142,539)
` ------------- -------------
`
` Net cash used in investing activities (151,239) (977,169)
` ------------- -------------
`
`CASH FLOWS FROM FINANCING ACTIVITIES
` Proceeds from the exercise of stock options 6,450 1,955
` ------------- -------------
`
` Net cash provided by financing activities 6,450 1,955
` ------------- -------------
`
` Net increase (decrease) in cash and cash
` equivalents $ 417,746 $ (822,246)
`
`
` The accompanying notes are an integral part of these financial statements.
`
` 5
`
`Apotex v. Cellgene - IPR2023-00512
`Petitioner Apotex Exhibit 1048-0006
`
`

`

`
`
` SIMULATIONS PLUS, INC. AND SUBSIDIARY
` CONSOLIDATED STATEMENTS OF CASH FLOWS
` FOR THE THREE MONTHS ENDED NOVEMBER 30,
` (UNAUDITED)
`- -----------------------------------------------------------------------------------
`
` 2006 2005
` ------------ ------------
`
`CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,685,036 1,754,042
` ------------ ------------
`
`CASH AND CASH EQUIVALENTS, END OF PERIODS $ 2,102,782 $ 931,796
` ============ ============
`
`
`SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
`
` INTEREST PAID $ -- $ --
` ============ ============
`
` INCOME TAXES PAID $ 1,600 $ 1,600
` ============ ============
`
`
` The accompanying notes are an integral part of these financial statements.
`
` 6
`
`
`Apotex v. Cellgene - IPR2023-00512
`Petitioner Apotex Exhibit 1048-0007
`
`

`

`
`
` SIMULATIONS PLUS, INC.
`
` NOTES TO CONDENSED FINANCIAL STATEMENTS
` (Unaudited)
`
`
`Note 1: GENERAL
`
`As contemplated by the Securities and Exchange Commission under Item 310(b) of
`Regulation S-B, the accompanying financial statements and footnotes have been
`condensed and therefore do not contain all disclosures required by generally
`accepted accounting principles. The interim financial data are unaudited;
`however, in the opinion of Simulations Plus, Inc. ("we", "our", "us"), the
`interim data include all adjustments, consisting only of normal recurring
`adjustments, necessary for a fair statement of the results for the interim
`periods. Results for interim periods are not necessarily indicative of those to
`be expected for the full year.
`
`
`Note 2: SIGNIFICANT ACCOUNTING POLICIES
`
`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. Critical accounting policies for us include revenue
`recognition, accounting for capitalized software development costs, and
`accounting for income taxes.
`
`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
`- -------------------
`We recognize revenues related to software licenses and software maintenance in
`accordance with the American Institute of Certified Public Accountants ("AICPA")
`Statements of Position (SOP) No. 97-2, "Software Revenue Recognition." Product
`revenue is recorded at the time of unlocking the software on the customer's
`computer(s), net of estimated allowances and returns. Post-contract customer
`support ("PCS") obligations are insignificant; therefore, revenue for PCS is
`recognized at the same time, and the costs of providing such support services
`are accrued and amortized over the obligation period.
`
`As a by-product of ongoing improvements and upgrades for our software, some
`modifications are provided to customers who have already licensed software at no
`additional charge. We consider these modifications to be minimal, as they are
`not changing the basic functionality or utility of the software, but rather
`adding convenience, such as being able to plot some additional variable on a
`graph in addition to the numerous variables that had been available before. Such
`software modifications for any single product have been typically once or twice
`per year, sometimes more, sometimes less. Thus, they are infrequent. We provide,
`for a fee, additional training and service calls to our customers and recognize
`revenue at the time the training or service call is provided.
`
`
` 7
`
`Apotex v. Cellgene - IPR2023-00512
`Petitioner Apotex Exhibit 1048-0008
`
`

`

`
`
`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 now unlock and invoice software one year
`at a time for multi-year licenses. Therefore, revenue is now recognized one year
`at a time. This eliminates the extreme variability in our reported revenues and
`earnings that we experienced in the past caused by booking multi-year license
`revenues up front.
`
`Cash and Cash Equivalents
`- -------------------------
`For purposes of the statements of cash flows, we consider all highly liquid
`investments purchased with original maturities of three months or less to be
`cash equivalents.
`
`Accounts Receivable
`- -------------------
`We maintain an allowance for doubtful accounts for estimated losses that may
`arise if any of our customers are unable to make required payments. We
`specifically analyze the age of customer balances, historical bad debt
`experience, customer credit-worthiness, and changes in customer payment terms
`when making estimates of the uncollectability of our trade accounts receivable
`balances. If we determine that the financial conditions of any of our customers
`deteriorated, whether due to customer-specific or general economic issues, an
`increase in the allowance may be made. Accounts receivable are written off when
`all collection attempts have failed.
`
`Our long-term receivables are discounted at the present value. The discount is
`amortized over the life of the receivable and recognized as interest income. The
`balance as of November 30, 2006 represents receivables which we purchased as a
`part of Bioreason's assets.
`
`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." 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 $107,178 and $45,709 for the three months ended
`November 30, 2006 and 2005, 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. As a result, we have written off $1,763
`during this fiscal quarter.
`
`
` 8
`
`Apotex v. Cellgene - IPR2023-00512
`Petitioner Apotex Exhibit 1048-0009
`
`

`

`
`
`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 5 years
`
`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 our 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.
`
`Shipping and Handling
`- ---------------------
`Shipping and handling costs, recorded as cost of sales, amounted to $8,191 and
`$9,000 for the three months ended November 30, 2006 and 2005, 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," which requires
`the recognition of deferred tax assets and liabilities for 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 provision for income taxes represents the tax payable for the period and the
`change during the period in deferred tax assets and liabilities.
`
`At the end of fiscal year 2006, we recorded $1,100,500 in deferred tax assets.
`For the first quarter of fiscal year 2007 (FY07), we recorded a provision for
`deferred taxes in the amount of $20,650, resulting in a deferred tax asset of
`$1,079,850 at November 30, 2006. The evaluation of the deferred tax assets is
`based on our history of generating taxable profits and our projections of future
`profits as well as expected future tax rates to determine if the realization of
`the deferred tax asset is more-likely-than-not. Significant judgment is required
`in these evaluations, and differences in future results from our estimates,
`could result in material differences in the realization of these assets.
`
`
` 9
`
`Apotex v. Cellgene - IPR2023-00512
`Petitioner Apotex Exhibit 1048-0010
`
`

`

`
`
`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.
`
`Customer relationships
`- ----------------------
`The Company purchased customer relationships as a part of the acquisition of
`certain assets of Bioreason, Inc. in November 2005. Customer relationships was
`recorded at a cost of $128,042, and is being amortized over 66 months.
`Amortization expense and accumulated amortization as of November 30, 2006
`amounted to $8,478 and $36,156, respectively.
`
`Earnings per Share
`- ------------------
`The Company reports earnings per share in accordance with SFAS No. 128,
`"Earnings per Share." 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 similar 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, 2006 and 2005 were as follows (the number of shares reflects the
`effect of a 2-for-1 stock split for comparison purpose):
`
`
` 2006 2005
` ----------- -----------
`
`Numerator
` Net income (loss) attributable to common
` shareholders $ 73,215 $ (198,531)
`
`Denominator
` Weighted-average number of common shares
` outstanding during the year 7,444,551 7,298,668
` Dilutive effect of stock options 1,104,009 -0-
`
`Common stock and common stock
` equivalents used for diluted earning per share 8,548,560 7,298,668
`
`
`Stock-Based Compensation
`- ------------------------
`Prior to September 1, 2006, we accounted for employee stock options grants in
`accordance with APB No. 25, and adopted the disclosure-only provision o