SECURITIES
AND EXCHANGE COMMISSION
 Washington,
DC  20549
 
 FORM
10-Q
 
 [x]
              Quarterly
      Report Pursuant to Section 13 or 15(d) of the Security Exchange Act of
      1934 for the quarterly period ended November 30,
      2009
 
 [_]
              Transmission
      Report Pursuant to Section 13 or 15(d) of the Security Exchange Act of
      1937 for the transition period from ______ to
  ______
 
 Commission
file number:  001-32046
 
 Simulations
Plus, Inc.
 (Name of
registrant as specified in its charter)
  California
                
                95-4595609(State
      or other jurisdiction of
                  Incorporation
      or Organization)
                
                (I.R.S.
      Employer

                    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)
 
 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 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 [_]
  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.
  Large
accelerated filer [_]                                           Non-accelerated
filer [_]                                          Smaller
reporting company [x]
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).Yes
[_]No [_]
  The
number of shares outstanding of the Issuer’s common stock, par value $0.001 per
share, as of January 12, 2010, was 15,681,460.
  
 
 
 Simulations
Plus, Inc.
 FORM
10-Q
 For
the Quarterly Period Ended November 30, 2009
 
 Table of
Contents


PART
      I.FINANCIAL INFORMATIONItem
      1.  Financial Statements (Unaudited)
              PageConsolidated
      Balance Sheets at November 30, 2009 (unaudited) and August 31, 2009
      (audited)
              2Consolidated
      Statements of Operations for the three months ended November 30, 2009 and
      2008 (unaudited)
              3Consolidated
      Statements of Cash Flows for the three months ended November 30, 2009 and
      2008 (unaudited)
              4Notes
      to Consolidated Financial Statements (unaudited)
              5Item
      2.  Management’s Discussion and Analysis or Plan of
      OperationsGeneral
              16Results
      of Operations
              21Liquidity
      and Capital Resources
              23Item
      3.  Quantitative and Qualitative Disclosures about Market
      Risk
              23Item
      4.  Controls and Procedures
              23PART
      II.OTHER INFORMATIONItem
      1.  Legal Proceedings
              24Item
      2.  Changes in Securities
              24Item
      3.  Defaults upon Senior Securities
              24Item
      4.  Submission of Matters to a Vote of Security
      Holders
              24Item
      5.  Other Information
              24Item
      6.  Exhibits and Reports on Form 8-K
              24Signature
              25Exhibit
      – Certifications




SIMULATIONS
PLUS, INC. AND SUBSIDIARY
 CONSOLIDATED
BALANCE SHEETS
 November
30, 2009 (Unaudited) and August 31, 2009 (Audited)
 ASSETSNovember
      30, 2009
                
                
                August
      31, 2009Current
      assetsCash
      and cash equivalents
                
                $
                7,973,340
                
                
                $
                7,473,485Accounts
      receivable, net of allowance for doubtful accountsand estimated
      contractual discounts of $387,149 and $447,073
                
                
                1,831,307
                
                
                
                1,888,904Contracts
      receivable
                
                
                177,259
                
                
                
                79,565Inventory
                
                
                370,691
                
                
                
                325,926Prepaid
      expenses and other current assets
                
                
                58,870
                
                
                
                158,738Deferred
      income taxes
                
                
                338,516
                
                
                
                338,516Total
      current assets
                
                
                10,749,983
                
                
                
                10,265,134Capitalized computer software
      development costs,net
      of accumulated amortization of $3,994,139 and $3,843,743
                
                
                1,993,035
                
                
                
                1,942,893Property and equipment,
      net (note 4)
                
                
                47,644
                
                
                
                53,220Customer relationships,net of accumulated amortization of $108,717 and
      $104,728
                
                
                19,325
                
                
                
                23,314Other
      assets
                
                
                18,445
                
                
                
                18,445Total
      assets
                
                $
                12,828,432
                
                
                $
                12,303,006LIABILITIES
      AND SHAREHOLDERS' EQUITYCurrent
      liabilitiesAccounts
      payable
                
                $
                299,502
                
                
                $
                199,218Accrued
      payroll and other expenses
                
                
                576,874
                
                
                
                552,431Accrued
      bonuses to officers
                
                
                123,749
                
                
                
                60,000Accrued
      warranty and service costs
                
                
                35,101
                
                
                
                43,236Accrued
      income taxes
                
                
                36,591
                
                
                
                -Deferred
      revenue
                
                
                149,810
                
                
                
                82,190Total
      current liabilities
                
                
                1,221,627
                
                
                
                937,075Long-Term
      liabilitiesDeferred
      income taxes
                
                
                795,140
                
                
                
                795,140Total
      liabilities
                
                
                2,016,767
                
                
                
                1,732,215Commitments and
      contingencies (note 5)Shareholders' equity
      (note 6)Preferred
      stock, $0.001 par value10,000,000 shares authorized no shares
      issued and outstanding
                
                
                -
                
                
                
                -Common
      stock, $0.001 par value50,000,000 shares
      authorized 15,684,046 and 15,700,382 shares issued and
      outstanding
                
                
                4,155
                
                
                
                4,172Additional
      paid-in capital
                
                
                5,383,499
                
                
                
                5,572,411Retained
      earnings
                
                
                5,424,011
                
                
                
                4,994,208Total
      shareholders' equity
                
                
                10,811,665
                
                
                
                10,570,791Total
      liabilities and shareholders' equity
                
                $
                12,828,432
                
                
                $
                12,303,006
 The
accompanying notes are an integral part of these financial
statements.
 2
 
 SIMULATIONS
PLUS, INC. AND SUBSIDIARY
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 For
the Three Months Ended November 30,
 (Unaudited)
 2009
                
                
                2008Net
      sales
                
                $
                2,437,052
                
                
                $
                2,133,250Cost
      of sales
                
                
                606,889
                
                
                
                558,726Gross
      profit
                
                
                1,830,163
                
                
                
                1,574,524Operating
      expensesSelling,
      general, and administrative
                
                
                1,004,273
                
                
                
                903,690Research
      and development
                
                
                261,325
                
                
                
                269,085Total
      operating expenses
                
                
                1,265,598
                
                
                
                1,172,775Income
      from operations
                
                
                564,565
                
                
                
                401,749Other
      income (expense)Interest
      income
                
                
                22,486
                
                
                
                33,387Interest
      expense
                
                
                (302
                )
                
                
                -Miscellaneous
      income
                
                
                231
                
                
                
                43Gain
      on sales of property and equipment
                
                
                1,024
                
                
                
                -Gain
      on currency exchange
                
                
                73,232
                
                
                
                17,876Total
      other income (expense)
                
                
                96,671
                
                
                
                51,306Income
      before provision for income taxes
                
                
                661,236
                
                
                
                453,055Provision
      for income taxes
                
                
                (231,433
                )
                
                
                (141,333
                )Net
      income
                
                $
                429,803
                
                
                $
                311,722Basic
      earnings per share
                
                $
                0.03
                
                
                $
                0.02Diluted
      earnings per share
                
                $
                0.03
                
                
                $
                0.02Weighted-average
      common shares outstandingBasic
                
                
                15,648,630
                
                
                
                16,348,818Diluted
                
                
                16,775,287
                
                
                
                17,516,583
 The
accompanying notes are an integral part of these financial
statements.
 3
 
 SIMULATIONS
PLUS, INC. AND SUBSIDIARY
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 For
the Three Months Ended November 30,
 (Unaudited)
  2009
                
                
                2008Cash
      flows from operating activitiesNet
      income
                
                $
                429,803
                
                
                $
                311,722Adjustments
      to reconcile net income to net cashprovided by operating
      activitiesDepreciation
      and amortization of property and equipment
                
                
                6,377
                
                
                
                12,383Amortization
      of customer relationships
                
                
                3,989
                
                
                
                5,486Amortization
      of capitalized computer software development costs
                
                
                150,396
                
                
                
                123,831Bad
      debts
                
                
                (12,901
                )
                
                
                56,418Stock-based
      compensation
                
                
                52,450
                
                
                
                39,398Gain
      on sales of property and equipment
                
                
                (1,024
                )Deferred
      income taxes
                
                
                -
                
                
                
                12,700(Increase)
      decrease inAccounts
      receivable
                
                
                (2,619
                )
                
                
                (425,799
                )Inventory
                
                
                (44,765
                )
                
                
                8,017Other
      assets
                
                
                99,868
                
                
                
                69,996Increase
      (decrease) inAccounts
      payable
                
                
                100,284
                
                
                
                (15,776
                )Accrued
      payroll and other expenses
                
                
                24,443
                
                
                
                26,244Accrued
      bonuses to officers
                
                
                63,749
                
                
                
                23,845Accrued
      income taxes
                
                
                36,591
                
                
                
                128,633Accrued
      warranty and service costs
                
                
                (8,135
                )
                
                
                7,246Deferred
      revenue
                
                
                67,620
                
                
                
                (50,000
                )Net
      cash provided by operating activities
                
                
                966,126
                
                
                
                334,344Cash
      flows from investing activitiesPurchases
      of property and equipment
                
                
                (24,353
                )
                
                
                (7,348
                )Capitalized
      computer software development costs
                
                
                (200,538
                )
                
                
                (201,649
                )Net
      cash used in investing activities
                
                
                (224,891
                )
                
                
                (208,997
                )Cash
      flows from financing activitiesRepurchase
      of common stock
                
                
                (285,123
                )
                
                
                -Proceeds
      from the exercise of stock options
                
                
                43,743
                
                
                
                48,806Net
      cash provided by (used in) financing activities
                
                
                (241,380
                )
                
                
                48,806Net
      increase in cash and cash equivalents
                
                $
                499,855
                
                
                $
                174,153Cash
      and cash equivalents, beginning of year
                
                
                7,473,485
                
                
                
                5,889,601Cash
      and cash equivalents, end of period
                
                $
                7,973,340
                
                
                $
                6,063,754Supplemental
      disclosures of cash flow informationInterest
      paid
                
                $
                302
                
                
                $
                -Income
      taxes paid
                
                $
                130,232
                
                
                $
                -
 The
accompanying notes are an integral part of these financial
statements.
 4
  Simulations
Plus, Inc. and Subsidiary
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 November
30, 2009 and 2008
   Note 1:
GENERAL
 
 This
report on Form 10-Q for the quarter ended November 30, 2009, should be read in
conjunction with the Company's annual report on Form 10-K for the year ended
August 31, 2009, filed with the SEC on November 30, 2009. As contemplated by the
Securities and Exchange Commission under Article 8 of Regulation S-X, 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 includes
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.  Significant accounting policies for us include revenue
recognition, accounting for capitalized computer software development costs,
valuation of stock options, 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
 The
Company recognizes revenues related to software licenses and software
maintenance in accordance with guidance issued by the Financial Accounting
Standards Board (“FASB”).  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) collectability 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.
 
 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.
 
 5
 
 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 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 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 guidance issued by the
FASB.  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, 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, we consider 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 collectability 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 such as Medicare,
Medicaid, and private insurance companies.  Those estimated discounts
are reflected in the allowance for doubtful accounts and contractual
discounts.
 
 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 guidance issued by the
FASB.  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.
 
 6
 
 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 $150,366 and $123,831 for the three months ended
November 30, 2009 and 2008, respectively.  We expect future
amortization expense to vary due to increases in capitalized computer software
development costs.
 
 We test
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
      yearsComputer
      equipment
              3
      to 7 yearsFurniture
      and fixtures
              5
      to 7 yearsLeasehold
      improvements
              Shorter
      of life of asset or lease
 
 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 a new standard issued by the FASB.  This
standard 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 guidance was issued, which delayed the effective date of this
standard 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, additional guidance was issued by the FASB 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. This guidance was effective upon
issuance, including prior periods for which financial statements had not been
issued. The adoption of this guidance did not have an impact on our financial
position or operating results. Beginning September 1, 2008, assets 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 the standard are as
follows:
 
 
 7
 
 
 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 November 30, 2009
for assets and liabilities measured at fair value on a recurring
basis:
 
 Level
      I
              
              
              Level
      II
              
              
              Level
      III
              
              
              TotalCash
      and cash equivalents
              
              $
              7,973,340
              
              
              $
              -
              
              
              $
              -
              
              
              $
              7,973,340Total
      assets
              
              $
              7,973,340
              
              
              $
              -
              
              
              $
              -
              
              
              $
              7,973,340
 
 Shipping and
Handling
 Shipping
and handling costs, recorded as cost of sales, amounted to $28,293 and $26,241
for the three months ended November 30, 2009 and 2008,
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 guidance issued by the FASB 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 provision for income taxes represents
the tax payable for the period and the change during the period in deferred tax
assets and liabilities.
 
 The
difference between income tax expense attributable to continuing operations and
the amount of income tax expenses that would result from applying domestic
federal statutory rates to pre-tax income is mainly related to state income
taxes, offset by the utilization of research and development credits for federal
and state purposes. Our
policy is to include interest and penalties related to unrecognized tax benefits
in income tax expense.
 
 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 78 months under
the sum-of-the-years’-digits method.  Amortization expense for the
three months ended November 30, 2009 and 2008 amounted to $3,990 and $5,486,
respectively.  Accumulated amortization as of November 30, 2009 and
2008 was $108,717 and $90,515, respectively.
 
 
 8
 
 Earnings per
Share
 The
Company reports earnings per share in accordance with guidance issued by the
FASB.  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 three months ended November 30, 2009 and 2008 were as follows:
  11/30/2009
                
                
                11/30/2008NumeratorNet
      income attributable to common shareholders
                
                $
                462,865
                
                
                $
                311,722DenominatorWeighted-average
      number of common shares outstanding during the year
                
                
                15,648,630
                
                
                
                16,348,818Dilutive
      effect of stock options
                
                
                1,126,657
                
                
                
                1,167,765Common
      stock and common stock equivalents used for diluted earning per
      share
                
                
                16,775,287
                
                
                
                17,516,583
  Stock-Based
Compensation
 Compensation
costs related to stock options are determined in accordance with guidance issued
by the FASB using the modified prospective method.  Under this method,
compensation cost 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 guidance issued by the FASB,
amortized on a straight-line basis over the options’ vesting
period.  Stock-based compensation was $52,450 and $39,398 for the
three months ended November 30, 2009 and 2008, respectively, and is included in
the consolidated statements of operations as Consulting, and Research and
Development expense.
 
 Concentrations and
Uncertainties
 International
sales accounted for 31% and 22% of net sales for the three months ended November
30, 2009 and 2008, respectively.  For Simulations Plus, Inc., four
customers accounted for 40%, 9%, 8%, and 8% of net sales during the three months
ended November 30, 2009, compared with three customers accounting for 41%, 10%,
and 7% of net sales during the three months ended November 30,
2008.  For Words+, Inc., the third party billing, which includes
various government agencies, accounted for 72% of net sales during the three
months ended November 30, 2009, compared with 58% of net sales during the three
months ended November 30, 2008.
 
 The
Company operates in the computer software industry, which is highly competitive
and changes rapidly.  The Company's operating results could be
significantly affected by its ability to develop new products and find new
distribution channels for new and existing products.
 
 For
Simulations Plus, four customers comprised 20% (a dealer account representing
various customers), 19%, 17%, and 11% of its accounts receivable at November 30,
2009, and three customers comprised 48%, 15% (a dealer account representing
various customers), and 8% of accounts receivable at November 30,
2008.   For Words+, the third party billing which includes
various government agencies comprised 92% of its accounts receivable at November
30, 2009, and 87% of its accounts receivable at November 30, 2008.
 
 9
 
 The
Company’s subsidiary, Words+, Inc., purchases components for its main computer
products from four 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.
 
 Recently Issued Accounting
Pronouncements
  In
September 2009, the FASB issued guidance that 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 product’s essential functionality.  This
guidance applies to revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010, with early application
permitted.  The company expects to adopt this standard in the first
quarter of fiscal 2011.  The company is currently evaluating the
impact this guidance will have on the consolidated financial
statements.
  In
September 2009, the FASB issued guidance that requires 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.  This guidance also requires expanded qualitative and
quantitative disclosures regarding significant judgments made and changes in
applying the guidance.  This guidance applies to fiscal years
beginning after June 15, 2010, with early application permitted.  The
company expects to adopt the standard in the first quarter of fiscal
2011.  The company is currently evaluating the impact this guidance
will have on the consolidated financial statements.
  In June
2009, the FASB issued guidance that provides for the FASB Accounting Standards
Codification to become the single official source of authoritative,
nongovernmental generally accepted accounting principles in the United States.
This guidance 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 guidance which provides guidance on events that occur
after the balance sheet date but prior to the issuance of the financial
statements. This guidance distinguishes events requiring recognition in the
financial statements and those that may require disclosure in the financial
statements. Furthermore, this standard requires disclosure of the date through
which subsequent events were evaluated. this standard was effective for interim
and annual periods after June 15, 2009. The Company adopted this standard
for the annual reporting period ended August 31, 2009.
  In April
2008, the FASB issued guidance that amends the factors that should be considered
in developing renewal or extension assumptions used to determine the useful life
of a recognized intangible asset. The objective of the Staff Position is to
improve the consistency between the useful life of a recognized intangible asset
and the period of expected cash flows used to measure the fair value of the
asset.  This guidance is effective for fiscal years beginning after
December 15, 2008. The Company believes the adoption of this guidance is
not expected to have a material impact on the consolidated financial
statements.
  
 10
 
 In
December 2008, the FASB issued guidance that 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. This
guidance also provides for disclosures to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. This guidance is effective for the Company in the current fiscal
quarter of 2010 and must be applied prospectively to business combinations
completed on or after this fiscal quarter of 2010.  The Company
believes that the adoption of this guidance will not have a material effect on
the consolidated financial statements.
 
 In
December 2008, the FASB issued guidance which establishes accounting and
reporting standards for noncontrolling interests (“minority interests”) in
subsidiaries. This guidance clarifies that a noncontrolling interest in a
subsidiary should be accounted for as a component of equity separate from the
parent’s equity. This guidance is 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
believes that the adoption of the standard will not have a material effect
on the consolidated financial statements.
  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
4:  PROPERTY AND EQUIPMENT
 
 Property
and equipment as of November 30, 2009 consisted of the following:
 
 Equipment
              
              $
              80,830Computer
      equipment
              
              
              376,457Furniture
      and fixtures
              
              
              61,498Automobile
              
              
              21,769Leasehold
      improvements
              
              
              53,898Sub
      total
              
              
              594,452Less:
      Accumulated depreciation and amortization
              
              
              (546,808
              )Net
      Book Value
              
              $
              47,644
 
 Note
5:  COMMITMENTS AND CONTINGENCIES
 
 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 fiscal 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.
 
 
 11
 
 Litigation
 The
Company is not a party to any litigation at this time and is not aware of any
pending litigation of any kind.
 
 Note 6:
SHAREHOLDERS’ EQUITY
 
 Stock
Repurchase
 On
October 23, 2008, the 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 be drawn from the Company’s cash
reserves.
 
 The
details of repurchases made during the three months ended November 30, 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)As of 08/31/09
              
              
              846,842
              
              
              
              $
              1.2569
              
              
              
              $
              1,416,56409/01/09
      to 09/30/09
              
              
              82,630
              
              
              
              $
              1.6989
              
              
              
              $
              1,274,15510/01/09
      to 10/31/09
              
              
              52,364
              
              
              
              $
              1.5685
              
              
              
              $
              1,190,38611/01/09
      to 11/30/09
              
              
              42,061
              
              
              
              $
              1.4884
              
              
              
              $
              1,126,560As of 11/30/09
              
              
              1,023,897
              
              
              
              $
              1.3181
  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 Option Plan to 6,000,000. The
1996 Stock Option Plan terminated in September 2006 by its term.
 
 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.
 
 
 12
 
 TRANSACTIONS
IN FY 2010
 
 Number
      of Options
              
              
              Weighted-Average
      Exercise Price
                Per
      Share
              
              
              Weighted-Average
      Remaining Contractual LifeOutstanding,
      August 31, 2009
              
              
              2,862,536
              
              
              $
              0.97Exercised
              
              
              (223,500
              )
              
              $
              0.61Expired
              
              
              (172,000
              )
              
              $
              0.56Granted
              
              
              -
              
              
              $
              0.00Outstanding,
      November 30,  2009
              
              
              2,467,036
              
              
              $
              1.03
              
              
              
              4.176Exercisable,
      November 30, 2009
              
              
              1,814,636
              
              
              $
              0.78
              
              
              
              2.553
 
 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 4.18 years at November 30, 2009.  The exercise prices for
the options outstanding at November 30, 2009 ranged from $0.26 to $3.03, and the
information relating to these options is as follows:
 
 Exercise
      Price
              
              
              Awards
      Outstanding
              
              
              Awards
      ExercisableLow
              
              
              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
              
              1.2
      years
              
              $0.37
              
              
              771,436
              
              1.2
      years
              
              $0.37$0.51
              
              
              $0.75
              
              
              433,500
              
              0.4
      years
              
              $0.75
              
              
              433,500
              
              0.4
      years
              
              $0.75$0.76
              
              
              $1.25
              
              
              929,100
              
              6.9
      years
              
              $1.07
              
              
              543,100
              
              5.5
      years
              
              $1.14$1.26
              
              
              $3.03
              
              
              333,000
              
              8.3
      years
              
              $2.83
              
              
              66,600
              
              8.3
      years
              
              $2.832,467,036
              
              4.2
      years
              
              $1.03
              
              
              1,814,636
              
              2.6
      years
              
              $0.78
 
 Other Stock
Options
 As of
November 30, 2009, the Board of Directors holds options to purchase 63,000
shares of common stock at exercise prices ranging from $0.30 to $6.68, which
were granted prior to August 31, 2009.
 
 Transactions
      in FY10
              
              Number
      of Options
              
              
              Weighted-Average
      Exercise Price
                Per ShareOutstanding,
      August 31, 2009
              
              
              51,000
              
              
              $
              1.89Granted
              
              
              12,000
              
              
              $
              1.67Exercised
              
              
              -
              
              
              $
              -Expired
              
              
              -
              
              
              $
              -Outstanding,
      November 30, 2009
              
              
              63,000
              
              
              $
              1.85Exercisable,
      November 30, 2009
              
              
              42,000
              
              
              $
              1.63
 
 
 13
 
 Note
7:  RELATED PARTY TRANSACTIONS
 
 As of
November 30, 2009, included in accrued bonuses to officers was $60,000, which
represented 5% of the Company's FY09 net income before bonuses and taxes, not
exceeding $60,000, given to the Corporate Secretary, Virginia Woltosz, as an
annual bonus.  This last fiscal year’s bonus was paid in December
2009.
 
 The
accrued bonuses to officers at November 30, 2009 also include the bonus accrued
for the first fiscal quarter of FY10 in the amount of $63,749.  This
amount represents 5% of the net income before bonuses and taxes, not exceeding
$60,000, given to the Corporate Secretary, and 10% of the net income before
bonuses and taxes, not exceeding $27,500, given to the Company’s
CEO.
 
 Note
8:  SEGMENT AND GEOGRAPHIC REPORTING
 
 We
account for segments and geographic revenues in accordance with guidance issued
by FASB.  Our reportable segments are strategic business units that
offer different products and services.  Results for each segment and
consolidated results are as follows for the three months ended November 30, 2009
and 2008 (in thousands):
 
 November
      30, 2009Simulations
      Plus, Inc
              
              
              Words
      +, Inc.
              
              
              Eliminations
              
              
              TotalNet
      Sales
              
              $
              1,735
              
              
              $
              702
              
              
              
              
              
              $
              2,437Income
      (loss) from operations
              
              
              578
              
              
              
              (13
              )
              
              
              
              
              
              565Identifiable
      assets
              
              
              12,435
              
              
              
              2,032
              
              
              $
              (1,639
              )
              
              
              12,828Capital
      expenditures
              
              
              14
              
              
              
              10
              
              
              
              
              
              
              
              24Depreciation
      and Amortization
              
              
              147
              
              
              
              14
              
              
              
              
              
              
              
              161
 
 November
      30, 2008Simulations
      Plus, Inc
              
              
              Words
      +, Inc.
              
              
              Eliminations
              
              
              TotalNet
      Sales
              
              $
              1,430
              
              
              $
              703
              
              
              
              
              
              $
              2,133Income
      (loss) from operations
              
              
              423
              
              
              
              (21
              )
              
              
              
              
              
              402Identifiable
      assets
              
              
              11,657
              
              
              
              1,862
              
              
              $
              (1,433
              )
              
              
              12,086Capital
      expenditures
              
              
              -
              
              
              
              7
              
              
              
              
              
              
              
              7Depreciation
      and Amortization
              
              
              122
              
              
              
              20
              
              
              
              
              
              
              
              142
  
 14
  In
addition, the Company allocates revenues to geographic areas based on the
locations of its customers.  Geographical revenues for the three
months ended November 30, 2009 and 2008 were as follows (in
thousands):
 
 November
      30, 2009North
      America
                
                
                Europe
                
                
                Asia
                
                
                Oceania
                
                
                South
      America
                
                
                TotalSimulations
      Plus, Inc.
                
                $
                995
                
                
                $
                425
                
                
                $
                315
                
                
                $
                -
                
                
                $
                -
                
                
                $
                1,735Words+,
      Inc.
                
                
                686
                
                
                
                9
                
                
                
                -
                
                
                
                7
                
                
                
                -
                
                
                
                702Total
                
                $
                1,681
                
                
                $
                434
                
                
                $
                315
                
                
                $
                7
                
                
                $
                -
                
                
                $
                2,437
 November
      30, 2008North
      America
              
              
              Europe
              
              
              Asia
              
              
              Oceania
              
              
              South
      America
              
              
              TotalSimulations
      Plus, Inc.
              
              $
              987
              
              
              $
              240
              
              
              $
              203
              
              
              $
              -
              
              
              $
              -
              
              
              $
              1,430Words+,
      Inc.
              
              
              678
              
              
              
              7
              
              
              
              5
              
              
              
              13
              
              
              
              -
              
              
              
              703Total
              
              $
              1,665
              
              
              $
              247
              
              
              $
              208
              
              
              $
              13
              
              
              $
              -
              
              
              $
              2,133
 
 Note
9:  EMPLOYEE BENEFIT PLAN
 
 The
Company maintains a 401(K) Plan for all eligible employees, and makes matching
contributions equal to 100% of the employee’s elective deferral, not to exceed
4% of total employee compensation.  We can also elect to make a
profit-sharing contribution.  Contributions by the Company to this
Plan amounted to $21,208 and $19,376 for the three months ended November 30,
2009 and 2008, respectively.
 
 Note
10:  SUBSEQUENT EVENT
 
 Since
December 2008, the Company has been buying back its own shares, and planned to
continue its share repurchase in accordance with its share repurchase plan,
which authorizes up to $2.5 million for the repurchase program through December
1, 2009.  The details of shares repurchased are listed in the
following table:
 
 Period
              
              Total
      Number of Shares Purchased
              
              
              Average
      Price Paid per Share
              
              
              Remaining
      Funds Available Under the Share Repurchase Plan12/01/2009(End
      of program)
              
              
              2,586
              
              
              $
              1.3823
              
              
              $
              1,122,985Total
      Repurchased During Program Period
              
              
              1,026,483
              
              
              $
              1.3182
  The
Company has evaluated subsequent events through January 13, 2010, which is the
date the condensed consolidated financial statements were issued.
 
 
 15
 
 Item 2.
Management's
Discussion and Analysis or Plan of Operations
 
 Forward-Looking
Statements
 
 Certain
statements in this Quarterly Report on Form 10-Q, or the "Report," are
"forward-looking statements."  These forward-looking statements
include, but are not limited to, statements about the plans, objectives,
expectations and intentions of Simulations Plus, Inc., a California corporation
(referred to in this Report as the "Company") and other statements contained in
this Report that are not historical facts. Forward-looking statements in this
Report or hereafter included in other publicly available documents filed with
the Securities and Exchange Commission, or the "Commission," reports to our
stockholders and other publicly available statements issued or released by us
involve known and unknown risks, uncertainties and other factors which could
cause our actual results, performance (financial or operating) or achievements
to differ from the future results, performance (financial or operating) or
achievements expressed or implied by such forward-looking
statements.  Such future results are based upon management's best
estimates based upon current conditions and the most recent results of
operations. When used in this Report, the words "expect," "anticipate,"
"intend," "plan," "believe," "seek," "estimate" and similar expressions are
generally intended to identify forward-looking statements, because these
forward-looking statements involve risks and uncertainties.  There are
important factors that could cause actual results to differ materially from
those expressed or implied by these forward-looking statements, including our
plans, objectives, expectations and intentions and other factors.
 
 General
 
 BUSINESS
 
 Simulations
Plus, Inc. (together with its subsidiary referred to as the “Company,” “us,”
“we,” or “our”) and its wholly owned subsidiary, Words+, Inc. (“Words+”) produce
different types of products: (1) Simulations Plus, incorporated in 1996,
develops and produces software for use in pharmaceutical research and for
education, as well as provides contract research services to the pharmaceutical
industry.  Simulations Plus has also taken over responsibility for
producing a personal productivity software program called Abbreviate! originally
spun out of products for the disabled by Words+ for the retail market, and (2)
Words+, founded in 1981, produces computer software and specialized hardware for
use by persons with disabilities. For the purposes of this document, we
sometimes refer to the two businesses as “Simulations Plus” when referring to
the business that is pharmaceutical software and services, educational software,
and Abbreviate!, and “Words+” when referring to the business that is focused on
assistive technologies for persons with disabilities.
 
 SIMULATIONS
PLUS
 
 PRODUCTS
 We
currently offer four software products for pharmaceutical research: ADMET
PredictorTM, ClassPharmerTM, DDDPlusTM, and GastroPlusTM.  In addition to
pharmaceutical research products, we offer a personal productivity software,
“Abbreviate!” through the on-line Apple store as well as a Windows XP version
through our website.
 
 ADMET
Predictor
 Every
drug molecule that fails in clinical trials, and every approved drug that gets
withdrawn from the market, was bad from the time its structure was first drawn
by a chemist or generated by a computer. They don’t become bad later. 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 of dollars (sometimes
over $1.5 billion) have been spent.
 
 
 16
 
 ADMET
(Absorption, Distribution, Metabolism, Excretion and Toxicity) Predictor
provides a collection of highly sophisticated and statistically significant
numerical models that predict various properties of chemical compounds from just
their molecular structures.  Our models are built using machine
learning approaches that are based primarily on artificial neural network
ensembles (groups of artificial neural networks) that have been demonstrated to
provide the most accurate prediction capabilities in any commercially available
software today.
 
 This
capability means a chemist can merely draw a molecule diagram and get estimates
of these properties, even though the molecule has never existed. Drug companies
continually search through millions of such “virtual” molecular structures as
they attempt to find new drugs. It has been estimated that there are somewhere
on the order of 1062
possible drug-like molecular structures. That is such a huge number that it is
difficult to comprehend. If we could evaluate a trillion molecules (1012) per
second (we cannot), it would still take 1050
seconds to evaluate them all -- that’s about 1042
years. The age of the universe is said to be less than 1010
years. Clearly, we will never be able to make and test all of them, so
computerized methods are the only hope to even scratch the surface of the total
“chemical space” for potential pharmaceutical products.
 
 The vast
majority of drug-like molecules are not suitable as medicines for various
reasons. Some have such low solubility that they will not dissolve well, some
have such low permeability through cell walls that they will not be absorbed
well, some degrade so quickly that they are not stable enough to have a useful
shelf life, some bind to proteins (such as albumin) in blood to such a high
extent that little unbound drug is available to reach the target, and many will
produce a variety of adverse effects. Identification of such properties in the
computer (“in silico”)
enables researchers to eliminate poor compounds quickly and early before
spending time and money to make them and run experiments to identify their
weaknesses. Today, many molecules can be eliminated on the basis of the
properties predicted by ADMET Predictor.
 
 Several
independent studies have been published that compare the accuracy of software
programs like ADMET Predictor. In almost every case, ADMET Predictor has been
ranked first in accuracy. The specific set of molecules used in such studies, as
well as the statistics used for comparison, may favor one program over others;
however, across all published studies, ADMET Predictor has been top-ranked far
more than any other program. This is a remarkable accomplishment, considering
the greater size and resources of many of our competitors.
 
 ADMET
Predictor includes ADMET ModelerTM. ADMET Modeler was first released in July of
2003 as a separate product, and was integrated into ADMET Predictor in 2006.
This powerful program automates the training of the predictive models used in
ADMET Predictor, so they are produced in a small fraction of the time once
required. For example, new toxicity models were developed in a matter of a few
hours once we completed the tedious effort of “cleaning up” the databases (which
often contain a significant number of errors). Prior to the availability of
ADMET Modeler, we would have needed as much as three months for each new model
after cleaning the databases to obtain similar results.
 
 Pharmaceutical
companies spend enormous amounts of money conducting a wide variety of
experiments on new molecules each year. Using such data to build predictive
models provides a second return on this investment; however, in the past, model
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 PilotTM software offered by
SciTegic, a subsidiary of Accelrys. 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 computer files. The chemist needs to decide which few
molecules from these large “libraries” should be made and tested. Using Pipeline
Pilot with ADMET Predictor (and ClassPharmerTM – see below), perhaps in
conjunction with other software products, the chemist can create and screen very
large libraries faster and more efficiently than by running each program by
itself.
 
 
 17
 
 During
the first quarter, efforts on our Small Business Innovation Research (SBIR)
grant with the National Institutes of Health (NIH) have continued with excellent
progress. One technical issue relates to training classification models with
highly unbalanced data sets, i.e., data sets where most of the molecules do not
have a particular attribute (such as a toxicity) and only a small number do.
This has always been a challenging mathematical problem for modelers, and we
have been working on new approaches to ensure that the predictive models
generated provide the greatest possible utility from such unbalanced data sets.
Also during the first quarter, we have worked on the ability to predict which
atoms in a molecule are most likely to be affected by metabolism by certain
enzymes. This is an exciting new capability that is a part of our SBIR grant
effort, and we expect it will add an important new capability to ADMET Predictor
when it is completed.
 
 ClassPharmerTM
 ClassPharmer
continues to evolve into an ever more powerful tool for medicinal and
computational chemists. Coupled with ADMET Predictor, the two programs provide
an unmatched capability for chemists to search through huge libraries of
compounds to find the most interesting classes and molecules that are active
against a particular target. In addition, ClassPharmer with ADMET Predictor can
take an interesting (but not acceptable) molecule and generate high quality
analogs (i.e., similar new molecules) using several different algorithms to
generate new molecules that are both active against a target while also being
acceptable in a variety of ADMET (Absorption, Distribution, Metabolism,
Excretion and Toxicity) properties.
 
 ClassPharmer’s
molecule design capabilities provide ways for chemists to rapidly generate large
numbers of novel chemical structures based on intelligence from compounds that
have already been synthesized and tested, or from basic chemical reactions
selected by the user. Export of results is available in Microsoft ExcelTM format
as well as other convenient file formats requested by users.
 
 During
the first quarter, considerable work has gone into “refactoring” the
ClassPharmer code to make it faster and more compact, as well as to improve the
options available to the user for visualizing various types of information
generated by the program.
 
 DDDPlus
 DDDPlus
sales have continued to grow as more and more formulation scientists recognize
the value of this one-of–a–kind simulation software in their work. During 2009,
improvements were added to further enhance the value of this product, including
numerous user convenience features, as well as more sophisticated handling of
dosage forms that incorporate multiple polymers for controlled release
formulations. A major new release of DDDPlus was released in late April 2009,
which included making the program match the user interface in our flagship
GastroPlus product as closely as possible since many formulation scientists can
use both programs. Additions to the programs capabilities and built-in databases
for excipient ingredients and dissolution media have also been
made.
 
 Development
efforts on DDDPlus were minimal during the first quarter because of a heavy load
of contract consulting studies that required staff time to complete on
schedule.
 
 GastroPlus
 GastroPlus
continues to enjoy its “gold standard” status in the industry for its class of
simulation software. At the recent annual conference of the American Association
of Pharmaceutical Scientists in Los Angeles in November 2009, GastroPlus was
mentioned by every speaker in several different sessions. No other competitive
product received such recognition. GastroPlus is used industry-wide from early
drug discovery through preclinical development and into early clinical
trials.
 
 
 18
   At an
international conference in Shanghai, China, in May 2008, Pfizer scientists
presented a scientific poster describing a two-year study in which all four
commercially available PBPK (physiologically based pharmacokinetics) simulation
programs were compared for their ability to predict human pharmacokinetics from
preclinical (animal and in
vitro) data. The study was divided into two arms: intravenous and oral
dosing. GastroPlus was ranked first in both arms. No other software was ranked
consistently second or third. This independent evaluation, which was
accomplished via analysis of 21 Pfizer proprietary compounds with data from
early discovery all the way through human trials, provides the strongest
possible validation of the superiority of GastroPlus in pharmaceutical research
and development.
 
 The
insight gained through GastroPlus simulations can guide project decisions in
various ways. Among the kinds of knowledge gained through such simulations are:
(1) the best estimate for “first dose in human” for a new drug prior to Phase I
trials, (2) whether a potential new drug compound is likely to be absorbed at
high enough levels to achieve the desired blood concentrations needed for
effective therapy, (3) whether the absorption process is affected by certain
enzymes and transporter proteins in the intestinal tract that may cause the
amount of drug reaching the blood to be very different after absorption from one
region of the intestine to another, (4) when certain properties of a new
compound are probably adequately estimated through computer (“in silico”) predictions (such
as from ADMET Predictor) or simple experiments rather than through more
expensive and time-consuming in vitro or animal
experiments, (5) what the likely variations in blood and tissue concentration
levels of a new drug would be in a large population, in different age groups or
in different ethnic groups, and (6) whether a new formulation for an existing
approved drug is likely to demonstrate “bioequivalence” (equivalent blood
concentration versus time) to the currently marketed dosage form in a human
trial.
 
 In
November 2009 we released the current version of GastroPlus (version 6.1). This
release provides new capabilities for dosing to the oral cavity via lingual (on
the tongue), sublingual (under the tongue), and buccal (inside the cheek) dosage
forms. We also added better prediction of the dissolution and absorption of
certain low-solubility drugs by incorporating the distribution of bile salts in
the intestinal tract for both fasted and fed conditions, and a separate
improvement that better handles the dissolution and absorption of nanoparticle
formulations.
 
 Work on
Version 7.0 was also initiated during the first quarter. This will be a very
important new release that will incorporate the drug-drug interaction simulation
capability that we’ve been developing under our funded collaboration with Roche.
Beta versions of the drug-drug interaction module have been in testing at Roche
for several months with excellent results. This new version will also include
the ocular drug delivery model from our funded collaboration with Pfizer and the
pulmonary drug delivery model we developed under our funded collaboration with
GlaxoSmithKline. We believe this combination of capabilities will put GastroPlus
further in front of the limited competition we see in this market
niche.
 
 Our
marketing intelligence and reorder history indicate that GastroPlus continues to
dominate its market niche in the number of users worldwide. In addition to
virtually every major pharmaceutical company, licenses include government
agencies in the U.S and abroad, a growing number of smaller pharmaceutical and
biotech companies, generic drug companies, and drug delivery companies
(companies that design the tablet or capsule for a drug compound that was
developed by another company). Although these companies are smaller than the
pharmaceutical giants, they can also save considerable time and money through
simulation. We believe this part of the industry, which includes many hundreds
of companies, represents major growth potential for GastroPlus. Our experience
has been that the number of new companies adopting GastroPlus has been growing
steadily, adding to the base of annual licenses each year. In addition,
consolidation by larger companies has not affected our sales to date. In fact,
those companies have adopted in silico tools at
ever-greater levels, and our licenses have increased at renewal time even in the
face of such consolidation. As an example, our largest renewal this quarter was
for one of the top-five pharmaceutical companies for an annual license for
GastroPlus, for a total of just over $990,000, up approximately 29% from just
over $770,000 last year.
 
 19
   Contract Research and
Consulting Services
 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 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. Revenues recognized from consulting
services (not included funded collaborations – only consulting for specific drug
projects) during the first quarter of FY10 were approximately $207,000 compared
with just over $171,000 in the first quarter of FY09, and we estimate
approximately $250,000 of study income for the second quarter based on work in
progress, compared with approximately $140,000 in the second quarter of
FY09.
 
 Government-Funded
Research
 We are
well along in our $525,000 Phase II SBIR (Small Business Innovation Research)
grant awarded by the NIH (National Institutes of Health). This SBIR grant
provides funds that allow us to expand staff and grow the product line without
adversely affecting earnings, because the expenses associated with the efforts
in the grant study are funded largely through the grant with some company
support.
 
 WORDS+
SUBSIDIARY
 
 PRODUCTS
 Our
wholly owned subsidiary, Words+, Inc., has been an industry pioneer and
technology leader for over 28 years in 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 KeysTM and Say-it! SAMTM, 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 keeping with this strategy
we will begin processing orders for four new additions to our product line on
December 1, 2009. The introduction of NetTalk, DuraSAM, Allora, 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 manufactured by Jabbla, Inc. in Belgium, and are in
stock at the time of this writing, 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 ready 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.
 
 
 20
 
 Results
of Operations
 
 Comparison
of Three Months Ended November 30, 2009 and 2008.
 
 The
following table sets forth our consolidated statements of operations (in
thousands) and the percentages that such items bear to net
sales:
 
 Three
      Months Ended11/30/09
              
              
              11/30/08Net
      sales
              
              $
              2,437
              
              
              
              100%
              
              
              $
              2,133
              
              
              
              100%Cost
      of sales
              
              
              607
              
              
              
              24.9
              
              
              
              559
              
              
              
              26.2Gross
      profit
              
              
              1,830
              
              
              
              75.1
              
              
              
              1,574
              
              
              
              73.8Selling,
      general and administrative
              
              
              1,004
              
              
              
              41.2
              
              
              
              904
              
              
              
              42.4Research
      and development
              
              
              261
              
              
              
              10.7
              
              
              
              269
              
              
              
              12.6Total
      operating expenses
              
              
              1,265
              
              
              
              51.9
              
              
              
              1,173
              
              
              
              55.0Income
      from operations
              
              
              565
              
              
              
              23.2
              
              
              
              402
              
              
              
              18.8Other
      income
              
              
              96
              
              
              
              3.9
              
              
              
              51
              
              
              
              2.4Net
      income before taxes
              
              
              661
              
              
              
              27.1
              
              
              
              453
              
              
              
              21.2(Provision
      for) income taxes
              
              
              (231
              )
              
              
              (9.5
              )
              
              
              (141
              )
              
              
              (6.6
              )Net
      income
              
              $
              430
              
              
              
              17.6%
              
              
              $
              312
              
              
              
              14.6%
 
 Net
Sales
 Our
consolidated net sales increased $304,000, or 14.2%, to $2,437,000 in the first
fiscal quarter of Fiscal Year 2010 (“1QFY10”) from $2,133,000 in the first
fiscal quarter of Fiscal Year 2009 (“1QFY09)”.  Sales from
pharmaceutical software and services increased approximately $305,000, or 21.3%,
while our Words+, Inc. subsidiary’s sales between 1QFY10 and 1QFY09 were almost
the same with a marginal decrease of $1,000, or 0.1%.  We attribute
the increase in pharmaceutical software and services revenues due to an
approximately $252,000 increase for license renewals, with the majority from new
customers and orders for additional module licenses from existing customers, and
an increase of approximately $52,000 in study contracts and a
Grant.
 
 For
Words+ sales, revenues from “Say-it! SAM” and ConversaTM increased: however this
increase was offset by the decrease in revenue from Freedom products, resulting
in only a 0.1% difference in revenues between 1QFY10 and 1QFY09.
 
 Cost of
Sales
 Consolidated
cost of sales increased $48,000, or 8.6%, to $607,000 in Q1FY10 from $559,000 in
Q1FY09, and as a percentage of revenue, cost of sales decreased
1.3%.  For pharmaceutical software and services, cost of sales
increased $67,000, or 30.4%, and as a percentage of revenue, cost of sales
increased to 16.7% in Q1FY10 from 15.5% in Q1FY09.  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 $27,000, or 23.67%, in 1QFY10 compared
with 1QFY09.  Royalty expense, another significant portion of cost of
sales, increased approximately $18,000, or 23.2%, in 1QFY10 compared with
1QFY09.  We pay a royalty on GastroPlus basic software sales but not
on its modules or other software sales.  We also pay royalties on the
Enslein Metabolism Module in our ADMET Predictor software in accordance with our
agreement with Enslein Research, Inc., which provides 50% of revenues received
from licenses of the Enslein Metabolism Module to Enslein Research,
Inc.  The cost of sales for contract studies, which consists mainly of
salaries for scientists, increased approximately $22,000 as our revenue from
study contracts increased, because these activities are not capitalizable
software development activities.
 
 21
 
 For
Words+, cost of sales decreased $19,000, or 5.7%, and as a percentage of
revenue, cost of sales also decreased to 45.2% in 1QFY10 from 47.9% in
1QFY09.
  Gross
Profit
 Consolidated
gross profit increased $256,000, or 16.2%, to $1,830,000 in 1QFY10 from
$1,574,000 in 1QFY09.  We attribute this increase to the increased
revenues from pharmaceutical software and services, and the increase in Words+
gross profit.
 
 Selling, General and
Administrative Expenses
 Consolidated
selling, general and administrative (SG&A) expenses increased $100,000, or
11.1%, to $1,004,000 in 1QFY10 from $904,000 in 1QFY09.  As a percent
of sales, SG&A decreased to 41.2% from 42.4% in 1QFY09.  For
Simulations Plus, SG&A increased $79,000, or 14.6%.  The major
increases in SG&A expense were travel, advertisement, commissions, bonuses
to officers, recruiting, and telephone.  This increase outweighed
decreases in expenses for trade shows, salaries, and payroll taxes.
 
 For
Words+, SG&A expenses increased $21,000, or 5.9%, due to increases in
commission expenses, increases in salaries and payroll-related expenses,
equipment repairs, and legal fees.  These increases outweighed bad
debts, decreases in technical service costs, and depreciation.
 
 Research and
Development
 We
incurred approximately $462,000 of research and development costs for both
companies during 1QFY10.  Of this amount, $201,000 was capitalized and
$261,000 was expensed.  In 1QFY09, we incurred $471,000 of research
and development costs, of which $202,000 was capitalized and $269,000 was
expensed. The
decrease of $9,000, or 1.9%, in total research and development expenditures from
1QFY09 to 1QFY10 was due to more R&D salaries being recorded as cost of
sales for contract studies during 1QFY10 than in 1QFY09.
  Other income
(expense)
 Net other
income (expense) in 1QFY10 increased by $45,000, or 89.0%, to $96,000 in 1QFY10
from $51,000 in 1QFY09.  This is due primarily to increase in gain
from currency exchange which outweighed lower interest rates on our Money Market
accounts.
 
 Provision for Income
Taxes
 The
provision for income taxes increased by $90,000 or 63.7%, to
$231,000 in 1QFY10 from $141,000 in 1QFY09 due to an increase in net income;
however the tax rate increased to 35% in 1QFY10 from 31.2% in
1QFY09.
 
 Net
Income
 Consolidated
net income increased by $151,000, or 48.6%, to $463,000 in 1QFY10 from $312,000
in 1QFY09.  We attribute this increase in profit due to the increases
in revenue from pharmaceutical software and services and other income which
outweighed an increase in expenses.
 
 
 22
 
 Liquidity
and Capital Resources
 
 Our
principal sources of capital have been cash flows from our
operations.  We have achieved continuous positive operating cash flow
in the last six 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 terms 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.
 
 Item 3.
Quantitative and Qualitative
Disclosures about Market Risk
  Our risk
from exposure to financial markets is limited to foreign exchange variances and
fluctuations in interest rates. We may be subject to some foreign exchange
risks.  Most of our business transactions are in U.S. dollars,
although we generate significant revenues from customers
overseas.  The exception is that we were compensated in Japanese yen
by some Japanese customers and one European customer.  As a result, we
experienced a larger gain in Q1FY10 than Q1FY09 from currency
exchange.  In the future, if foreign currency transactions increase
significantly, then we may mitigate this effect through foreign currency forward
contracts whose market-to-market gains or losses are recorded in "Other Income
or expense" at the time of the transaction.  To date, exchange rate
exposure has not resulted in a material impact.
  Item 4.
Controls and
Procedures
  (a)
              Evaluation of disclosure
      controls and procedures.
 As of the
end of the period covered by this report, the Company carried out an evaluation,
under the supervision and with the participation of the Company’s management,
including the Company’s Chief Executive Officer and Chief Financial Officer, of
the effectiveness of the design and operation of the Company’s disclosure
controls and procedures pursuant to Exchange Act Rule 13a-14.  Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company’s disclosure controls and procedures are effective in
timely alerting them to material information relating to the Company required to
be included in the Company’s periodic SEC filings.
 
 (b)
              Changes in internal controls
      over financial reporting.
 There
were no changes in the Company’s internal controls over financial reporting
during the Company’s most recent fiscal quarter that have materially affected,
or are reasonably likely to materially affect, the Company’s internal controls
over financial reporting.
 
 23
 
 Part
II.  Other Information
 
 Item
1.                 
   Legal
Proceedings
 
 The
Company is not a party to any legal proceedings and is not aware of any pending
legal proceedings of any kind.
 
 Item
2.                  
  Changes in
Securities
 None.
 
 Item
3.                
    Defaults Upon Senior
Securities
 None.
 
 Item
4.               
     Submission of Matters to a
Vote of Security Holders
 None.
 
 Item
5.              
      Other
Information
 None.
 
 Item
6.               
     Exhibits and Reports on form
8-K
 
 (a)
              Exhibits:
  31.1–2
                Certification
      of Chief Executive Officer and Chief Financial Officer32
                Certification
      pursuant to Sec. 906 of the Sarbanes-Oxley Act of 200210.46
                Simulations
      Plus, Inc. 2007 Stock Option Plan (the “2007 Option
  Plan”).
  24
 
 SIGNATURE
 
 In
accordance with Section 13 or 15 (d) of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Lancaster, State of California, on
January 13, 2009.
  Simulations
      Plus, Inc.Date:  January
      12, 2010
                By:
                /s/ MOMOKO BERANMomoko
      BeranChief
      Financial Officer
 25