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 May 31, 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  [X]




The number of shares outstanding of the Issuer’s common stock, par value $0.001 per share, as of July 10, 2009, was 15,853,089.





Simulations Plus, Inc.


FORM 10-Q


For the Quarterly Period Ended May 31, 2009





Table of Contents





PART I.    FINANCIAL INFORMATIONItem 1.
Financial Statements (Unaudited)
PageConsolidated Balance Sheets at May 31, 2009 (unaudited)  and August 31, 2008 (audited)
2Consolidated Statements of Operations for the three months and nine   months ended May 31, 2009 and 2008 (unaudited)
3Consolidated Statements of Cash Flows for the nine months ended  May 31, 2009 and 2008 (unaudited)
4Notes to Consolidated Financial Statements (unaudited)
5Item 2.
Management’s Discussion and Analysis or Plan of OperationsGeneral
15Results of Operations
20Liquidity and Capital Resources
24Item 3.
Quantitative and Qualitative Disclosures about Market Risk
24Item 4.
Controls and Procedures
24PART II.    OTHER INFORMATIONItem 1.
Legal Proceedings
26Item 2.
Changes in Securities
26Item 3.
Defaults upon Senior Securities
26Item 4.
Submission of Matters to a Vote of Security Holders
26Item 5.
Other Information
26Item 6.
Exhibits and Reports on Form 8-K
26Signature

27Exhibit – Certifications







i




Simulations Plus, Inc.
 Consolidated Balance Sheets
 at May 31, 2009 (unaudited) and August 31, 2008 (audited)




ASSETSMay 31, 2009


August 31, 2008Current assets

(unaudited)


(audited)Cash and cash equivalents

$
7,372,614


$
5,889,601Accounts receivable, net of allowance for doubtful accounts and estimated contractual discounts of $437,124 and $319,609


2,649,333



2,105,074Inventory


375,389



342,051Prepaid expenses and other current assets


84,930



195,330Deferred income taxes


300,200



318,400Total current assets


10,782,466



8,850,456Investment(note 8)


-



750,000Capitalized computer software development costs,net of accumulated amortization of $3,705,718 and $3,324,328


1,897,693



1,788,756Property and equipment, net (note 3)


48,722



102,633Customer relationships,net of accumulated amortization of $100,364 and $85,029


27,678



43,013Other assets


18,445



18,445Total assets

$
12,775,004


$
11,553,303LIABILITIES AND SHAREHOLDERS' EQUITYCurrent liabilitiesAccounts payable

$
265,580


$
181,230Accrued payroll and other expenses


525,853



537,363Accrued bonuses to officer


60,000



60,000Accrued warranty and service costs


40,199



33,899Accrued income tax


115,689



-Deferred revenue


42,333



83,333Total current liabilities


1,049,654



895,825Long-Term liabilitiesDeferred income taxes


789,300



742,400Total liabilities


1,838,954



1,638,225Commitments and contingencies (note 4)Shareholders' equity (note 5)Preferred stock, $0.001 par value10,000,000 shares authorizedno shares issued and outstanding


-



-Common stock, $0.001 par value50,000,000 shares authorized16,023,920 and 16,297,400 shares issued and outstanding


4,495



4,769Additional paid-in capital


6,100,504



6,328,185Retained Earnings


4,831,051



3,582,124Total shareholders' equity


10,936,050



9,915,078Total liabilities and shareholders' equity

$
12,775,004


$
11,553,303






2


Simulations Plus, Inc.
 Consolidated Statements of Operations
 For the Three Months and Nine Months Ended May 31, 2009 and 2008 (unaudited)




Three months ended May 31,


Nine months ended May 31,2009


2008


2009


2008(unaudited)


(unaudited)Net sales

$
2,713,524


$
2,968,353


$
7,303,536


$
7,131,837Cost of sales


543,087



623,756



1,622,456



1,565,209Gross profit


2,170,437



2,344,597



5,681,080



5,566,628Operating expensesSelling, general, and administrative


989,165



941,982



2,929,578



2,704,765Research and development


334,151



222,241



995,832



700,086Total operating expenses


1,323,316



1,164,223



3,925,410



3,404,851Income from operations


847,121



1,180,374



1,755,670



2,161,777Other income (expense)Interest income


20,105



54,492



73,098



146,715Miscellaneous income


514



10



557



35Gain on currency exchange


20,233



11,098



70,449



44,658Unrealized loss on investment


-



(57,925
)


-



(57,925
)Interest expense


-



(67
)


-



(67
)Total other income (expense)


40,852



7,608



144,104



133,416Income before income taxes


887,973



1,187,982



1,899,774



2,295,193Provision for income taxes


(318,840
)


(435,321
)


(650,846
)


(734,462
)Net income

$
569,133


$
752,661


$
1,248,928


$
1,560,731Basic earnings per share

$
0.04


$
0.05


$
0.08


$
0.10Diluted earnings per share

$
0.03


$
0.04


$
0.07


$
0.09Weighted-average common shares outstandingBasic


16,051,133



16,228,900



16,222,867



16,090,239Diluted


16,925,581



17,868,750



17,194,349



18,266,766






3




Simulations Plus, Inc.
 Consolidated Statements of Cash Flows
 for the Nine Months Ended May 31, 2009 and 2008 (unaudited)


Nine months ended  May 31,2009


2008Cash flows from operating activities

(unaudited)


(unaudited)Net income

$
1,248,928


$
1,560,731Adjustments to reconcile net income to net cash provided by operating activitiesDepreciation and amortization of property and equipment


16,609



40,460Amortization of customer relationships


15,335



19,823Amortization of capitalized computer software development costs


381,390



334,509Bad debts


219,998



62,947Stock-based compensation


129,660



52,540Deferred income taxes


65,100



567,400(Increase) decrease inAccounts receivable


(764,258
)


(816,044
)Inventory


38,741



(29,314
)Other assets


110,400



(47,088
)Increase (decrease) inAccounts payable


84,350



68,478Accrued payroll and other expenses


(11,510
)


1,666Accrued bonuses to officers


-



(141,289
)Accrued income taxes


115,689



11,453Accrued warranty and service costs


6,300



(6,103
)Deferred revenue


(41,000
)


3,200Net cash provided by operating activities


1,615,732



1,683,369Cash flows from investing activitiesPurchases of property and equipment


(34,777
)


(67,775
)Proceeds from sale of assets


-



16,011Proceeds from sale of investments


750,000



-Capitalized computer software development costs


(490,327
)


(594,967
)Net cash provided by (used in) investing activities


224,896



(646,731
)Cash flows from financing activitiesRepurchase of common stock


(447,825
)


-Proceeds from the exercise of stock options


90,210



411,677Net cash provided by (used in) financing activities


(357,615
)


411,677Net increase in cash and cash equivalents

$
1,483,013


$
1,448,315Cash and cash equivalents, beginning of year


5,889,601



4,537,714Cash and cash equivalents, end of period

$
7,372,614


$
5,986,029Supplemental disclosures of cash flow informationInterest paid

$
-


$
67Income taxes paid

$
377,216


$
180,000






4




Simulations Plus, Inc.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)




Note 1: GENERAL





This report on Form 10-Q for the quarter ended May 31, 2009, should be read in conjunction with the Company's annual report on Form 10-KSB for the year ended August 31, 2008, filed with the SEC on November 26, 2008. As contemplated by the Securities and Exchange Commission under Article 10 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, 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 the American Institute of Certified Public Accountants ("AICPA") Statements of Position (SOP) No. 97-2, "Software Revenue Recognition."  Software products revenue is recorded when the following conditions
are met: 1) evidence of an 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 under SOP 97-2 are met.





Most license agreements have a term of one year; however, from time to time, we enter into multi-year license agreements. We generally unlock and invoice software one year at a time for multi-year licenses. Therefore, revenue is recognized one year at a time.





Cash and Cash Equivalents


For purposes of the statements of cash flows, we consider all highly liquid investments purchased with original maturities of three months or less to be cash equivalents.





Accounts Receivable


We maintain an allowance for doubtful accounts for estimated losses that may arise if any of our customers are unable to make required payments.  We specifically analyze the age of customer balances, historical bad debt experience, customer credit-worthiness, and changes in customer payment terms when making
estimates of the collectability of our trade accounts receivable balances.  If we determine that the financial conditions of any of our customers deteriorated, whether due to customer-specific or general economic issues, an increase in the allowance may be made.  Accounts receivable are written off when all collection attempts have failed.





Inventory


Inventory is stated at the lower of cost (first-in, first-out basis) or market and consists primarily of computers and peripheral computer equipment.





Capitalized Computer Software Development Costs


Software development costs are capitalized in accordance with SFAS No. 86, "Accounting for the Cost of Computer Software to be Sold, Leased, or otherwise Marketed."  Capitalization of software development costs begins upon the establishment of technological feasibility and is discontinued when the product is
available for sale.





The establishment of technological feasibility and the ongoing assessment for recoverability of capitalized software development costs require considerable judgment by management with respect to certain external factors including, but not limited to, anticipated future gross revenues, estimated economic life, and changes
in software and hardware technologies. Capitalized software development costs are comprised primarily of salaries and direct payroll-related costs and the purchase of existing software to be used in our software products.





Amortization of capitalized software development costs is provided on a product-by-product basis on the straight-line method over the estimated economic life of the products (not to exceed five years).  Amortization of software development costs amounted to $381,390 and $334,509 for the nine months ended May
31, 2009 and May 31, 2008, respectively.  We expect future amortization expense to vary due to increases in capitalized computer software development costs.





We test capitalized computer software costs for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable within a reasonable time.





6


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 our financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, accrued payroll and other expenses, accrued bonuses to officers, and accrued warranty and service costs, the carrying amounts approximate fair value due to their short maturities.





Shipping and Handling


Shipping and handling costs, recorded as cost of sales, amounted to $75,058 and $78,986 for the nine months ended May 31, 2009 and May 31, 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 SFAS No. 109, "Accounting for Income Taxes," which requires the recognition of deferred tax assets and liabilities for expected future tax consequences of events that have been included in the financial statements or tax returns.





Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income.  Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.  The provision for income taxes represents the tax payable for the period and the change during the period in deferred tax assets and liabilities.





In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting for uncertainty in income tax positions.  The
provisions of FIN 48 were effective for the Company on September 1, 2007.





At the end of fiscal year 2008, we recorded $424,000 in net deferred income tax liabilities.  For the nine months ended May 31, 2009, we recorded a provision for income taxes in the amount of $650,846, resulting in a net deferred tax liability of $489,100 at May 31, 2009.  The evaluation of the deferred
income tax assets is based on our history of generating taxable profits and our projections of future profits, as well as expected future tax rates.  As of May 31, 2009, we have determined that it is more likely than not that the deferred tax assets will be realized.  As such, no valuation allowance was recorded against the deferred tax assets.  Significant judgment is required in these evaluations, and differences in future results from our estimates could result in material differences
in the realization of these assets.





7


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 nine months ended May 31, 2009 and May 31, 2008 amounted to $15,335 and $19,823, respectively.  Accumulated amortization as of May 31, 2009 and May 31, 2008 was $100,364 and $79,169, respectively.





Earnings per Share


The Company reports earnings per share in accordance with SFAS No. 128, "Earnings per Share."  Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of common shares available.  Diluted earnings per share is computed similar to basic
earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive.  The components of basic and diluted earnings per share for the nine months ended May 31, 2009 and May 31, 2008 were as follows:





05/31/2009


05/31/2008NumeratorNet income attributable to common shareholders

$
1,248,928


$
1,560,731DenominatorWeighted-average number of common sharesoutstanding during the year


16,222,867



16,090,239Dilutive effect of stock options


971,482



2,176,527Common stock and common stockequivalents used for diluted earning per share


17,194,349



18,266,766





Stock-Based Compensation


Compensation costs related to stock options are determined in accordance with SFAS No. 123R using the modified prospective method.  Under this method, compensation cost recognized during the nine months ended May 31, 2009 includes: (1) compensation cost for all share-based payments granted prior to, but not
yet vested as of September 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123 amortized over the options’ vesting period, and (2) compensation cost for all share-based payments granted subsequent to September 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R, amortized on a straight-line basis over the options’ vesting period.  Stock-based compensation was $129,660 and $52,540
for the nine months ended May 31, 2009 and May 31, 2008, respectively, and is included in the condensed consolidated statements of operations as Selling, General and Administrative, and Research and Development expense.





Concentrations and Uncertainties


International sales accounted for 31% and 40% of net sales for the nine months ended May 31, 2009 and May 31, 2008, respectively.  For Simulations Plus, Inc., two customers accounted for 28% of net sales during the nine months ended May 31, 2009, compared with two customers accounting for 24% of net sales during
the nine months ended May 31, 2008.  For Words+, Inc., two government agencies accounted for 33% of net sales during the nine months ended May 31, 2009, compared with one government agency accounting for 22% and one customer accounting for 15% of net sales during the nine months ended May 31, 2008.





8


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, two customers comprised 56% of its accounts receivable at May 31, 2009, of which 21% is from our distributor represents several Japanese companies, and three customers comprised 58% of accounts receivable at May 31, 2008, of which 22% is from our distributor representing several Japanese companies.   For
Words+, two government agencies comprised 40% of its accounts receivable at May 31, 2009, and one government agency comprised 35% of its accounts receivable at May 31, 2008.





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




On March 19, 2008, the Financial Accounting Standards Board (FASB) announced the issuance of Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS No. 161”). SFAS No. 161 amends Statement
of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS No. 133”) and was issued in response to concerns and criticisms about the lack of adequate disclosure of derivative instruments and hedging activities. SFAS No. 161 is focused on requiring enhanced disclosure on 1) how and why an entity uses derivative instruments and hedging activities; 2) how derivative instruments and related hedging
activities are accounted for under SFAS No. 133; and 3) how derivative instruments and related hedging activities affect an entity’s cash flows, financial position and performance.




To accomplish the three objectives listed above, SFAS No. 161 requires: 1) qualitative disclosures regarding the objectives and strategies for using derivative instruments and engaging in hedging activities in the context of an entity’s overall risk exposure; 2) quantitative disclosures in tabular format of the
fair values of derivative instruments and their gains and losses; and 3) disclosures about credit-risk related contingent features in derivative instruments.





SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008.  Management believes the adoption of SFAS No. 161 for its financial assets and liabilities did not have a material impact on our consolidated financial statements.





In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. For financial assets and liabilities, SFAS 157 was effective
for the Company in the first fiscal quarter of 2009. As permitted by FSP-FAS 157-2, SFAS 157 is effective for nonfinancial assets and liabilities for the Company during the first fiscal quarter of 2010. Management believes the adoption of SFAS 157 for its financial assets and liabilities did not have a material impact on the Company’s consolidated financial statements and continues to evaluate the potential impact of the adoption of SFAS 157 related to its nonfinancial assets and liabilities.





In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”), which amends SFAS 141. SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, any resulting goodwill, and any noncontrolling interest in the acquiree. SFAS 141R also provides for disclosures to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141R will be effective for the Company in the first fiscal quarter of 2010 and must be applied prospectively to business combinations completed on or after that date.





In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of Accounting Research Bulletin No. 51” (“SFAS 160”), which establishes accounting and reporting standards for noncontrolling interests
(“minority interests”) in subsidiaries. SFAS 160 clarifies that a noncontrolling interest in a subsidiary should be accounted for as a component of equity separate from the parent’s equity. SFAS 160 will be effective for the Company in the first fiscal quarter of 2010 and must be applied prospectively, except for the presentation and disclosure requirements, which will apply retrospectively. The Company is currently evaluating the potential impact that the adoption of SFAS 160
may have on its consolidated financial statements.





In May 2009, the FASB issued SFAS No. 165, “Subsequent Event” (“FAS 165”), which provides guidance to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  FAS
165 also requires entities to disclose the date through which subsequent events were evaluated as well as the rational for why that date was selected.  This disclosure should alert all users of financial statements that an entity has not evaluated subsequent events after that date in the set of financial statements being presented.  FAS 165 is effective for interim and annual periods ending after June 15, 2009 and will be effective for the Company beginning with its annual period ending August
31, 2009.  Since FAS 165 at most requires additional disclosures, the Company does not expect the adoption to have a material impact on its consolidated financial position, results of operations or cash flows.





In June 2009, the FASB approved the “FASB Accounting Standards Codification” (the “Codification”) as the single source of authoritative nongovernmental U.S. GAAP to be launched on July 1, 2009.  The Codification does not change current U.S. GAAP, but is intended to simplify user access
to all authoritative U.S. GAAP by providing all the authoritative literature related to a particular topic in one place.  All existing accounting standard documents will be superseded and all other accounting literature not included in the Codification will be considered nonauthoritative.  The Codification is effective for interim and annual periods ending after September 15, 2009.  The Codification is effective for the Company in the interim period ending November 30, 2009 and it
does not expect the adoption to have a material impact on its consolidated financial position, results of operation or cash flows.





9


Note 3:  PROPERTY AND EQUIPMENT





Property and equipment as of May 31, 2009 consisted of the following:





Equipment

$
80,830Computer equipment


366,897Furniture and fixtures


61,498Automobile


21,769Leasehold improvements


53,898Sub total


584,892Less: Accumulated depreciation and amortization


(536,170
)Net Book Value

$
48,722





Note 4:  COMMITMENTS AND CONTINGENCIES





Employee Agreement


On August 9, 2007, the Company entered into an employment agreement with its President/Chief Executive Officer that expires in August 2009.  The employment agreement provides for an annual salary of $250,000.  At the CEO’s request, this new agreement did not include an annual bonus, which had
ranged up to $150,000 in all previous agreements.  Thus, a savings to the Company of up to $75,000 per year has been realized as a result of this new agreement over the previous agreement.  The agreement also provides that 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. The Compensation Committee of the Board of Directors is currently reviewing this agreement prior to its expiration on August 31 in order to determine terms for the next agreement to be effective September 1.





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 5: SHAREHOLDERS’ EQUITY





Stock Repurchase


Since December 2008, the Company has been buying back and canceling its own shares, and plans to continue its share repurchase in accordance with its share repurchase plan, which authorizes up to $2.5 million for the repurchase program through October 2009.  The details of repurchases made during the nine months
ended May 31, 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 Plan12/01/08 to 12/31/08
90,632
$0.9764
$2,411,50901/01/09 to 01/31/09
105,752
$1.0352
$2,302,03202/01/09 to 02/28/09
73,118
$1.0086
$2,228,28703/01/09 to 03/31/09
73,315
$0.9575
$2,158,08604/01/09 to 04/30/09
55,580
$1.0045
$2,102,25405/01/09 to 05/31/09
44,083
$1.1360
$2,052,175As of 05/31/09
442,480
$1.0121







10


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 250,000 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 500,000.  In February 2000, the shareholders approved an increase in the number of shares that may be granted under the Option Plan to 1,000,000.  In December 2000, the shareholders approved an increase in the number of shares that may be granted under the Option Plan to 1,250,000.  Furthermore, in February 2005, the shareholders approved an additional 250,000 shares, resulting in the total number of shares that may be granted under the Option Plan to 1,500,000.
All of the preceding numbers of options are based on numbers of options prior to the two-for-one stock split on August 14, 2006. 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 500,000 shares (1,000,000 shares after a 2-for-1stock split on October 1, 2007) of common stock had been reserved for issuance.





Options Outstanding & Exercisable at May 31, 2009Number of Options


Weighted-Average
Exercise Price
Per ShareOutstanding, August 31, 2008


2,714,536


$
0.92Granted


392,000


$
1.09Exercised


(169,000
)

$
0.54Expired/Cancelled


(3,000
)

$
3.02Outstanding, May 31, 2009


2,934,536


$
0.96Exercisable, May 31, 2009


2,230,136


$
0.73








Options Outstanding & Unvested at May 31, 2009Number Outstanding


Weighted- Average
Vesting Period
(in years)


Weighted- Average Fair Market PriceNon-Vested, August 31, 2008.


414,000



2.65


$
1.64Granted


392,000






$
0.77Vested


(98,600
)





$
1.41Cancelled


(3,000
)





$
2.27Non-Vested, May 31, 2009


704,400



2.49


$
1.18





11


The fair value of the options granted during the first nine months of fiscal year 2009 is estimated at $301,840.  The fair value of these options was estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for the first nine months of fiscal
year 2009: dividend yield of 0%, expected volatility of 69.78%, risk-free interest rate of 2.67%, and expected life of 7.68 years. The weighted-average fair values of options granted during the first nine months of fiscal year 2009 was $0.77, and the weighted-average exercise prices of options granted during the first nine months of fiscal year 2009 was $1.09.  The total fair value of non-vested stock options as of May 31, 2009 was $831,192 and is amortizable over a weighted-average period of 2.49 years.





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 4.1 years at May 31, 2009.  The exercise prices for the options outstanding at May 31, 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



836,936


1.6 years


$
0.37



836,936

1.6 years


$
0.37$0.51


$0.75



795,500


0.7 years


$
0.66



795,500

0.7 years


$
0.66$0.76


$1.25



969,100


7.4 years


$
1.06



541,100

6.0 years


$
1.14$1.26


$3.03



333,000


8.8 years


$
2.83



56,600

8.7 years


$
3.032,934,536


4.1 years


$
0.96



2,230,136

2.5 years


$
0.73





Other Stock Options


As of May 31, 2009, the independent members of the Board of Directors hold options to purchase 63,824 shares of common stock at exercise prices ranging from $0.30 to $6.68.





Number of Options
Weighted-average exercise priceOptions Outstanding
63,824

$     1.59Options Exercisable
45,624

$     1.04





Note 6:  SEGMENT AND GEOGRAPHIC REPORTING





We account for segments and geographic revenues in accordance with SFAS No. 131, “Disclosure about Segments of an Enterprise and Related Information.”  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 nine months ended May 31, 2009 and May 31, 2008 (in thousands):




12





May 31, 2009Simulations Plus, Inc
Words +, Inc.
Eliminations
TotalNet Sales
$  5,194
$  2,110

$  7,304Income (loss) from operations
1,326
(77)

1,249Identifiable assets
12,417
2,045
$  (1,687)
12,775Capital expenditures
15
20

35Depreciation and Amortization
374
39

413








May 31, 2008Simulations Plus, Inc
Words +, Inc.
Eliminations
TotalNet Sales
$  4,963
$  2,169

$  7,132Income (loss) from operations
2,054
108

2,162Identifiable assets
10,825
2,212
$  (1,683)
11,354Capital expenditures
-
68

68Depreciation and Amortization
13
27

40








In addition, the Company allocates revenues to geographic areas based on the locations of its customers.  Geographical revenues for the nine months ended May 31, 2009 and May 31, 2008 were as follows (in thousands):





May 31, 2009


North America
Europe
Asia
Oceania
South America
TotalSimulations Plus, Inc.
3,023
1,457
714
-
-
$ 5,194Words+, Inc.
2,027
24
17
42
-
2,110Total
5,050
1,481
731
42
-
7,304





May 31, 2008


North America
Europe
Asia
Oceania
South America
TotalSimulations Plus, Inc.
2,527
1,632
804
-
-
4,963Words+, Inc.
1,778
336
22
31
2
2,169Total
4,305
1,968
826
31
2
7,132








Note 7:  EMPLOYEE BENEFIT PLAN





We maintain a 401(K) Plan for all eligible employees.  We make 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 $60,661 and $53,059 for the nine months ended May 31, 2009 and May 31, 2008, respectively.





Board of Directors approved that Bonus and Commissions to be excluded for the Company matching effective as of January 1, 2009.





13


Note 8:  INVESTMENT





On January 2, 2009, the Company received a confirmation from UBS Financial Services, Inc. that all Auction Rated Securities (ARS) were sold and payment was settled on January 5, 2009.  As a result, the par value of $750,000 plus accrued interest of $301 became available to the Company as cash on January 5, 2009.  The
ARSs were presented as an investment at August 31, 2008.





Note 9:  SUBSEQUENT EVENT





Since December 2008, the Company has been buying back its own shares, and plans to continue its share repurchase in accordance with its share repurchase plan, which authorizes up to $2.5 million for the repurchase program through October 2009.  The details of repurchases made since May 31, 2009 are listed in
the following table. Thus, adding these shares to those described above through May 31, the total number of shares repurchased through July 10, 2009 was 648,135.





Period

Total Number of Shares Purchased

Average Price Paid per Share

Remaining Funds Available Under the Share Repurchase Plan06/01/2009
to  06/30/2009

171,740 *

$1.3885

$1,813,72407/01/2009
through 07/10/2009

33,915

$1.5721

$1,760,406Total

205,655

$1.4188





* Includes repurchase of 50,000 shares at $1.24 on June 5, 2009 from Walter Woltosz, CEO of the Company.





From June 1, 2009 to July 10, 2009, an additional 34,824 stock options to purchase shares have been exercised by employees and board of directors that generated $13,621 in cash.


14


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. (the “Company” or “Simulations Plus”, or "we" or "our") and its wholly owned subsidiary, Words+, Inc. (“Words+”) produce different types of products: (1) Simulations Plus, incorporated in 1996, develops and produces software for use in pharmaceutical research
and for education, and also provides contract research services to the pharmaceutical industry, and (2) Words+, founded in 1981, produces computer software and specialized hardware for use by persons with disabilities. For the purposes of this document, we sometimes refer to the two businesses as “Simulations Plus” when referring to the business that is primarily pharmaceutical software and services, and “Words+” when referring to the business that is primarily assistive technologies for
persons with disabilities.




SIMULATIONS PLUS





PRODUCTS


We currently offer four software products for pharmaceutical research: ADMET PredictorTM, ClassPharmerTM, DDDPlusTM, and GastroPlusTM.





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 it 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 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 occur after years of work and millions of dollars have been spent.




15


ADMET (Absorption, Distribution, Metabolism, Excretion and Toxicity) Predictor consists of a library of statistically significant numerical models that predict various properties of chemical compounds from just their molecular structures.  Our models are built using a machine learning approach that is based
primarily on artificial neural network ensembles (groups of artificial neural networks) that has 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 billion molecules (109) per second, it would take 1053 seconds to evaluate them all -- that’s about 1045 years.
The age of the universe is said to be less than 1010 years. Clearly, we will never be able to make and test evaluate 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 the intestinal wall that they will not be absorbed well as an oral dose (about 80% of medications), some degrade so quickly
that they are not stable enough to have a useful shelf life, some bind to proteins (like albumin) in blood to such a high extent that little unbound drug is available to reach the target, and many will be toxic in various ways. Identification of such properties in the computer enables researchers to eliminate poor compounds without spending time and money to make them and run experiments to identify their weaknesses. Today, many molecules can be eliminated on the basis of computer predictions provided by ADMET
Predictor.





Several independent studies have been published that compare the accuracy of software programs like ADMET Predictor. In each case, ADMET Predictor has been ranked first in accuracy (it was ranked second in one study, but that study was later redone with a more difficult set of test compounds and a newer version of ADMET
Predictor, and it was then ranked first). Not one other software product was consistently in the top 4 in these studies. 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.





16


During this reporting period, improvement of ADMET Predictor/Modeler has continued. Under a funded collaboration with Pfizer, we added the capability for scientists to run large molecular libraries through ADMET Predictor to generate the predicted dose amount that would be required to achieve an effective concentration
level for each potential new drug.  This capability requires the integration of the customer’s experimental data with predictions when no experiments have been run, so that the effects of a wide variety of properties that interact to result in a plasma concentration can be predicted. This is accomplished by the integration of a small GastroPlus engine within ADMET Predictor that runs the simulations needed to estimate plasma concentrations.





We expect to release the next version in late July 2009.  This new version will also include a new set of toxicity predictions, expanding the program’s capabilities into this important, and almost unlimited area (because there are so many kinds of toxicities).  Every new predicted property that
can be used to help triage bad compounds early in discovery has the potential to save large amounts of time and money.





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 a computer. The chemist tries to decide which few molecules from these large “libraries” should be made and tested. Using Pipeline Pilot with ADMET Predictor (and ClassPharmer – see below), perhaps in conjunction with other software products, the chemist can create and screen very large libraries faster and more efficiently than running each program by itself.





In August 2008, we had resubmitted a Phase II NIH SBIR (Small Business Innovation Research) grant proposal. After the end of this reporting period, we were advised that this grant will be funded at a level of $375,000. We have continued this work under our own funding, and we’ve demonstrated further improvements
in predictive capability, which we are incorporating into the next release of ADMET Predictor.





ClassPharmer


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 molecule and generate high quality analogs (i.e., similar new molecules) using several different algorithms to ensure that the new molecules are both active against the target while also being acceptable in a variety of ADMET (Absorption, Distribution, Metabolism, Excretion and Toxicity) properties.





Improvements during the third quarter were focused on incorporating more new features requested by our users around the world, as well as adding other new capabilities identified in-house. We released ClassPharmer 4.6 in January 2009, and we expect another release in the near future with a new “scaffold hopping”
feature.  This feature enables chemists to substitute the core (scaffold) portion of a molecule while retaining other atoms around the periphery.  In previous versions, ClassPharmer had only the inverse capability – to replace the atoms surrounding the core.  Scaffold hopping has been a technique with growing interest among chemists, and we expect that added to ClassPharmer already best-in-class performance, this new capability will attract additional ClassPharmer users.




17


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.





DDDPlus


DDDPlus sales have continued to grow as formulation scientists continue to recognize the value of this one-of–a–kind simulation software in their work. Improvements have been added to further enhance the value of this product, including numerous user convenience features have been added, as well as more sophisticated
handling of dosage forms that incorporate multiple polymers for controlled release. Work on the next update of DDDPlus has 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. A major new release of DDDPlus was released in late April 2009.





GastroPlus


GastroPlus continues to enjoy its “gold standard” status in the industry for its class of simulation software. It is used from early drug discovery through preclinical development and into early clinical trials. 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 on the market 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 information provided through GastroPlus simulations guides project decisions in various ways. Among the kinds of knowledge gained through such simulations are: (1) the best “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 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
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 May 2008 we announced the current release of GastroPlus (version 6.0) – a major new release that includes several important improvements to the program. We improved the PKPlusTM Module to enable it to fit pharmacokinetic models to multiple data sets, including both intravenous and oral dosage forms. The
feedback we have received from customers for that change has been enthusiastic.  We made further improvements to the new sophisticated kidney model to simulate how drugs are cleared in urine. We added numerous convenience features requested by our users. We also added the ability of the program to track metabolites of a parent drug, including metabolites of metabolites, to as many levels as desired. This is a significant new capability because it allows the user to predict how much of each metabolite
will be generated, and into which tissues the metabolite is likely to partition. Some metabolites can be therapeutically active, while others can be toxic, so knowing how much is produced and where it goes is valuable information to assess the likelihood of both therapeutic and adverse effects.





18


Since last May, the improvements to GastroPlus have been many and complex. Most of these developments were funded through our funded collaborations with three of the top five pharmaceutical companies in the world.  We are adding ocular delivery of drugs under one collaboration, pulmonary delivery under another,
and drug-drug interaction analysis under a third. These capabilities will further extend the commanding lead GastroPlus enjoys in the marketplace.





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.





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.





WORDS+ SUBSIDIARY





PRODUCTS


Our wholly owned subsidiary, Words+, Inc., has been an industry pioneer and technology leader for over 27 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 line of hardware products. We are also considering acquisitions of other products, businesses and companies that are complementary to our existing augmentative and alternative communication and computer access business lines. We acquired the Say-it! SAM technologies from SAM Communications, LLC of San Diego in December 2003. This acquisition gave us our smallest, lightest augmentative communication
system, which is based on a Hewlett-Packard iPAQ personal digital assistant (PDA). PDA-based communication devices have been very successful in the augmentative communication market, and this technology purchase enabled us to move into this market segment faster and at lower cost than developing the product ourselves. SAM-based products now account for a significant share of Words+ revenues. Since the acquisition of the Say-it! SAM technologies, we have continued to add new functionality to the SAM software and
to offer it on additional hardware platforms.





19


During last fiscal year, after the introduction of the newest Say-it! SAM version late in the first quarter, sales of our new PDA-based (personal-digital-assistant-based) Say-it! SAM augmentative communication device set new records, contributing nicely to the highest quarter in our history in the third quarter.  Just
before the end of the last quarter we introduced the ConversaTM.  This product offers the most human-sounding synthetic speech output available in the marketplace utilizing AT&T synthetic voices and our new custom designed Sound Pack.  To quote one young adult client who changed to the Conversa after using a variety of augmentative communication devices from our competitors for most of her life “I actually sound like a regular woman for the first time in my life!” We are
adding the Sound Pack design to other products.





We have clients utilizing new access methods such as the Fiber Optic Switch that is a new part of our product line, a new EMG (muscle signal) switch called Libertas and eye gaze systems from a variety of manufacturers, and we are regularly evaluating and interfacing new access technology.





Results of Operations





Comparison of Three Months Ended May 31, 2009 and May 31, 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 Ended05/31/09


05/31/08Net sales

$
2,713



100%


$
2,968



100%Cost of sales


543



20.0



624



21.0Gross profit


2,170



80.0



2,344



79.0Selling, general and administrative


989



36.5



942



31.7Research and development


334



12.3



222



7.5Total operating expenses


1,323



48.8



1,164



39.2Income from operations


847



31.2



1,180



39.8Other income


41



1.5



8



0.3Net income before taxes


888



32.7



1,188



40.0(Provision for) income taxes


(319
)


(11.8
)


(435
)


(14.7
)Net income

$
569



20.9%


$
753



25.4%





Net Sales


Consolidated net sales decreased $255,000, or 8.6%, to $2,713,000 in the third fiscal quarter of 2009 (3QFY09) from $2,968,000 in the third fiscal quarter of 2008 (3QFY08).  Our sales from pharmaceutical and educational software increased approximately $10,000, or 0.5%; and our Words+, Inc. subsidiary’s
sales decreased approximately $265,000, or 26.7%, for the quarter.  We attribute the increase in pharmaceutical software sales primarily to new software licensing, new customers, and sale of new modules to existing customers as well as increases in the number of licenses with existing customers, and our funded collaborations with large pharmaceutical companies that outweighed the loss of a few small customers and a decline in renewal license revenues of approximately
$124,000 that resulted in an order from one large pharmaceutical company that was received late, and so was unlocked and its revenue recognized in the 4th fiscal quarter vs. the 3rd quarter.





20


We attribute the decrease in Words+ sales primarily to a decrease in “Freedom” products with “EZKeys” or “Say-it! SAM” software, which are based on Windows XP systems, and accessories to go with those products.  Another factor is due to decline in revenue from Say-it! SAM”
handheld speech output devices.  In 3QFY08, we had significant revenues from our “Say-it! SAM” speech output device kits without PDA hardware for an overseas wholesaler; however we did not have such an order in 3QFY09.





Cost of Sales


Consolidated cost of sales decreased $81,000, or 12.9%, to $543,000 in 3QFY09 from $624,000 in 3QFY08.  Cost of sales as a percentage of revenue for 3QFY09 slightly decreased by 1.0% to 20.0% from 21.0% in 3QFY08.  For Simulations Plus, cost of sales increased $25,000, or 11.8%.  As a percentage
of revenue, cost of sales also increased to 12.0% in 3QFY09 from 10.8% in 3QFY08.  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 $31,000, or 35.8%, in 3QFY09 compared with 3QFY08.  Royalty expense, which is a variable cost, relates to sales of our GastroPlus
core program as well as our new ADMET Predictor Enslein Metabolism module, decreased approximately $6,000, or 4.5%, in 3QFY09 compared with 3QFY08 due to decreases in sales from those products.





For Words+, cost of sales decreased $106,000, or 25.8%.  As a percentage of revenue, cost of sales were very identical, 41.8% in 3QFY09 from 41.3% in 3QFY08.





Gross Profit


Consolidated gross profit decreased $174,000, or 7.4%, to $2,170,000 in 3QFY09 from $2,344,000 in 3QFY08.  We attribute this decrease to an increase in sales of pharmaceutical software was not large enough to cover an increase in cost of goods sold in addition to a decrease in gross profit from Words+ products.





Selling, General and Administrative Expenses


Consolidated selling, general and administrative (SG&A) expenses increased $47,000, or 5.0%, to $989,000 in 3QFY09 from $942,000 in 3QFY08.  For Simulations Plus, SG&A increased $73,000, or 13.1%.  As a percentage of sales, SG&A also increased to approximately 31.9% in 3QFY09 from approximately
28.4% in 3QFY08.  The major increases in SG&A expenses were expanded trade show expenses, travel expenses, and consultant fees which outweighed decreases in commissions and professional fees.





For Words+, SG&A expenses decreased $26,000, or 6.9%, due primarily to decreases in commissions, depreciation, repairs, and contributions.  These decreases outweighed increases in bad debts, depreciation, and salaries which are results of a consultant becoming an employee and 2 additional sales employees.





Research and Development


We incurred approximately $472,000 of consolidated research and development costs during 3QFY09.  Of this amount, $138,000 was capitalized and $334,000 was expensed.  In 3QFY08, we incurred $428,000 of consolidated research and development costs, of which $206,000 was capitalized and $222,000 was expensed.  The
increase of $44,000, or 10.3%, in total research and development expenditures from 3QFY08 to 3QFY09 was due primarily to salaries of new hires and salary increases to existing staff.





21


Other income (expense)


Net other income (expense) in 3QFY09 increased by $33,000, or 437.02%, to $41,000 in 3QFY09 from $8,000 in 3QFY08.  This is due primarily to an unrecognized loss incurred in Auction Rate Securities (ARS) held in 3QFY08 with UBS Financial Services Inc. Those ARSs were redeemed at full face value plus interest
in early 2009 so the loss never materialized.





Provision for Income Taxes


Our provision for income taxes decreased by $116,000, or 26.7%, to $319,000 in 3QFY09 from $435,000.  As a percentage of net income, the tax is increased from 36.6% in 3QFY08 to 35.9% in 3QFY09 due primarily to our estimation of higher provision
for income tax in fiscal year 2009.





Net Income


Consolidated net income decreased by $184,000, or 24.4%, to $569,000 in 3QFY09 from $753,000 in 3QFY08.  We attribute this decrease in profit primarily to the increases in operating expenses, tax provision and a decrease in gross profit.




Comparison of Nine Months Ended May 31, 2009 and May 31, 2008.





The following table sets forth our consolidated statements of operations (in thousands) and the percentages that such items bear to net sales:





Nine Months Ended05/31/09


05/31/08Net sales

$
7,303



100%


$
7,132



100%Cost of sales


1,622



22.2



1,565



21.9Gross profit


5,681



77.8



5,567



78.1Selling, general and administrative


2,929



40.1



2,705



37.9Research and development


996



13.6



700



9.8Total operating expenses


3,925



53.7



3,405



47.7Income from operations


1,756



24.0



2,162



30.3Other income


144



2.0



133



1.9Net income before taxes


1,900



26.0



2,295



32.2(Provision for) income taxes


(651
)


(8.9
)


(735
)


(10.3
)Net income

$
1,249



17.1%


$
1,561



21.9%




Net Sales


Consolidated net sales increased $171,000, or 2.4%, to $7,303,000 in the first nine months of fiscal year 2009 (FY09) from $7,132,000 in the first nine months of fiscal year 2008 (FY08).  Our sales from pharmaceutical software and services increased approximately $231,000, or 4.7%, however, our Words+, Inc.
subsidiary’s sales decreased approximately $60,000, or 2.7%, for the first nine months of fiscal year 2009.





We attribute the increase in pharmaceutical software sales primarily to increased licenses, both to new customers and for new modules, additional licenses to renewal customers, funded collaborations, and contract studies.





We attribute the decrease in Words+ sales primarily to decrease in sales of “TuffTalker” and “MessageMate”, mounting systems, and “Freedom” products with EZKeys software which are based on Windows XP systems.  Those decreases outweighed an increase in revenue from our new “ConversaTM”
with Say-it! SAM software.





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Cost of Sales


Consolidated cost of sales increased $57,000, or 3.7%, to $1,622,000 in FY09 from $1,565,000 in FY08.  Cost of sales as a percentage of revenue for the first nine months of FY09 and FY08 were almost identical with a small increase of 0.3%.  For Simulations Plus, cost of sales increased $55,000, or
8.9%.  As a percentage of revenue, cost of sales increased slightly from 12.5% in FY08 to 13.0% in FY09.  A significant portion of cost of sales for pharmaceutical software products is the systematic amortization of capitalized software development costs, which is an independent fixed cost rather than a variable cost related to sales.  This amortization cost increased approximately $44,000, or 14.4%, in FY09 compared with FY08.  Royalty expense increased approximately
$11,000, or 3.6%, in FY09 compared with FY08.





For Words+, cost of sales increased $2,000, or 0.2%.  As a percentage of revenue, cost of sales was almost identical, with a small increase of 1.3% between FY09 and FY08.  We attribute the small percentage increase in cost of sales for Words+ primarily to sales from products with high-cost tablets
systems.  Those costs were offset by a decrease in production wages, and royalty costs which is also a part of cost of sales, resulting in a smaller percentage increase.





Gross Profit


Consolidated gross profit increased $114,000, or 2.1%, to $5,681,000 in FY09 from $5,567,000 in FY08.  We attribute this increase to increased sales of pharmaceutical software and services which outweighed a decrease in gross profit from Words+ products.





Selling, General and Administrative Expenses


Consolidated selling, general and administrative (SG&A) expenses increased $225,000, or 8.3%, to $2,929,000 in FY09 from $2,705,000 in FY08.  For Simulations Plus, SG&A increased $121,000, or 7.3%.  As a percentage of sales, SG&A slightly increased 0.9%, from 33.3% in FY08 to 34.2% in FY09.  The
major increases in SG&A expenses were expanded trade shows due to our more aggressive marketing and sales campaign this year, travel, consulting fees, salaries, and 401k expenses, which outweighed decreases in commissions and investor relations (namely a payment to AMEX for a stock split).





For Words+, SG&A expenses increased $104,000, or 9.9%.  As a percentage of sales, SG&A increased 6.3%, from 48.4% in FY08 to 54.7% in FY09.  We attribute this increase in SG&A primarily to an increase in write-off of potential bad debts and salary expenses by hiring sales employees which
outweighed a decrease in contract labor and depreciation expense.





Research and Development


We incurred approximately $1,487,000 of research and development costs for both companies during the first nine months of FY09.  Of this amount, $491,000 was capitalized and $996,000 was expensed.  In the first nine months of FY08, we incurred $1,295,000 of research and development costs, of which
$595,000 was capitalized and $700,000 was expensed.  The increase of $192,000, or 14.8%, in total research and development expenditures from the first nine months of FY08 to the first nine months of FY09 was due to a combination of salaries for new hires and salary increases and bonuses to existing staff.





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Other income


Net other income in the first nine months of FY09 increased by $11,000, or 8.0%, from $133,000 to $144,000.  This is due primarily to an unrecognized loss incurred in Auction Rate Securities (ARS) held in 3QFY08 with UBS Financial Services Inc.  Those ARSs were redeemed at full face value plus interest
in early 2009, so the loss never materialized. This reduction in unrecognized loss was offset by decreased interest revenues from Money Market accounts.





Provision for Income Taxes


The provision for income taxes decreased by $84,000, or 11.4%, to $651,000 in the first nine months of FY09 from $735,000 in the first nine months of FY08.  As a percentage of net income, the tax rate increased from 32.0% in the nine months of FY08 to 34.3% in the nine months of FY09.  This increase
is due primarily to our estimation of higher provision for income tax in fiscal year 2009.  The tax rate used in this report is still lower than standard rate because of current R&D tax credits generated and used during this reporting period.





Net Income (loss)


Consolidated net income decreased by $312,000, or 20.0%, to $1,249,000 in the first nine months of FY09 from $1,561,000 in the first nine months of FY08.  We attribute this decrease in profit primarily to increases in operating expenses, the increased provision rate for income taxes which outweighed increases
in gross profit.





Liquidity and Capital Resources





Our principal sources of capital have been cash flows from our operations.  We have achieved continuous positive operating cash flow over 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. In January 2009, the $750,000 investment in Auction Rate Securities was repurchased by UBS Financial Services, Inc. at par value plus interest.





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 small gain from currency exchange in the first nine months of FY09.  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.




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Item 4. Controls and Procedures




(a)
Evaluation of disclosure controls and procedures.





(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.





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Part II.  Other Information





Item 1.
Legal ProceedingsThe 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 SecuritiesSince December 2008, the Company has been buying back its own shares, and plans to continue its share repurchase in accordance with its share repurchase plan, which authorizes up to $2.5 million for the repurchase program through October 2009.  As a result, the Company has bought back 442,480 shares by the end
of May 31, 2009.Item 3.
Defaults Upon Senior SecuritiesNone.Item 4.
Submission of Matters to a Vote of Security HoldersNone.Item 5.
Other InformationNoneItem 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 2002





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SIGNATURE





In accordance with Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Lancaster, State of California, on July 15, 2009.




Simulations Plus, Inc.Date:  July 15, 2009
By:
/s/MOMOKO BERANMomoko BeranChief Financial Officer









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