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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 1998 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1937
For the transition period from _________ to _________
Commission file number: 000-21665
SIMULATIONS PLUS, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-4595609
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) identification No.)
1220 WEST AVENUE J
LANCASTER, CA 93534
(Address of principal executive offices including zip code)
(805) 723-7723
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [x] No [ ]
The number of shares outstanding of the Issuer's common stock, par value $0.001
per share, as of January 14, 1999, was 3,383,533.
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SIMULATIONS PLUS, INC.
FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 1998
Table of Contents
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Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet at November 30, 1998 (unaudited) 1
Consolidated Statements of Operations for the three months
ended November 30, 1998 and 1997 (unaudited) 2
Consolidated Statements of Cash Flows for the three months
ended November 30, 1998 and 1997 (unaudited) 3
Notes to Consolidated Financial Statements (unaudited) 4
Item 2. Management's Discussion and Analysis or Plan of Operations
General 7
Results of Operations 9
Liquidity and Capital Resources 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signature 15
Exhibit Index 16
</TABLE>
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SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
November 30, 1998
(Unaudited)
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ASSETS
Current assets:
Cash and cash equivalents (note 2) $ 139,210
Accounts receivable, net of allowance for
doubtful accounts of $14,078 436,071
Prepaid expenses 25,369
Inventory 305,546
-----------
Total current assets 906,196
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Capitalized computer software development costs,
net of accumulated amortization (note 6) 805,408
Furniture and equipment, net (note 4) 207,232
Other assets 12,801
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Total assets $ 1,931,637
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LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Advance line of credit $ 91,304
Accounts payable 234,266
Accrued payroll and other expenses 255,271
Accrued warranty and service costs 54,164
Current portion of capitalized lease obligations 29,024
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Total current liabilities 664,029
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Capitalized lease obligations, net of current portion 24,116
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Total liabilities 688,145
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Shareholders' equity
Common stock: $.001 par value, authorized
20,000,000 shares, issued and outstanding 3,383,533 (note 5) 3,384
Additional paid-in capital 4,629,270
Accumulated deficit (3,389,162)
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Total shareholders' equity 1,243,492
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Total liabilities and stockholders' equity $ 1,931,637
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</TABLE>
The accompanying footnotes are an integral part of these statements.
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SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended November 30, 1998 and 1997
(Unaudited)
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Three months ended
------------------------------
11/30/98 11/30/97
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Net sales $ 881,286 $ 543,063
Cost of sales 375,708 329,363
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Gross profit 505,578 213,700
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Operating expenses:
Selling, general & administration 619,625 611,886
Research and development 35,873 137,283
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Total operating expenses 655,498 749,169
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Loss from operations (149,920) (535,469)
Other income (expenses):
Income from grant 75,000 75,000
Interest revenue 3,426 20,408
Interest expense (2,339) (3,029)
----------- -----------
Loss before provision for income taxes (73,833) (443,090)
Provision (benefit) for income taxes 0 0
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Net loss $ (73,833) $ (443,090)
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Basic net loss per common share $ (0.02) $ (0.13)
=========== ===========
Diluted net loss per common share $ (0.02) $ (0.13)
=========== ===========
Weighted average # of common shares
outstanding 3,359,315 3,350,000
=========== ===========
</TABLE>
The accompanying footnotes are an integral part of these statements.
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SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended November 30, 1998 and 1997
(Unaudited)
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Three months ended
------------------------------
11/30/98 11/30/97
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Cash flows from operating activities:
Net loss $ (73,833) $ (443,089)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization of furniture and equipment 16,504 8,698
Amortization of capitalized software development costs 67,873 52,227
(Increase) decrease in:
Accounts receivable (60,301) 132,019
Inventory 43,129 50,211
Other assets 7,818 (4,731)
Income tax receivable 28,941 5,830
Increase (decrease) in:
Accounts payable (100,493) (79,709)
Accrued payroll and other expenses 69,888 (4,715)
Accrued warranty and service costs 5,668 1,011
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Net cash provided by (used in) operating activities 5,194 (282,248)
----------- -----------
Cash flows from investing activities:
Purchase of investments (917,598)
Purchase of furniture and equipment (45,387)
Capitalized computer software development cost (50,154) (188,092)
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Net cash used in investing activities (50,154) (1,151,077)
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Cash flows from financing activities:
Payments on line of credit (5,824)
Payments on capitalized lease obligations (8,160) (6,240)
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Net cash used in financing activities (13,984) (6,240)
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Net decrease in cash (58,944) (1,439,565)
Cash and cash equivalents, beginning of period 198,154 2,156,761
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Cash and cash equivalents, end of period $ 139,210 $ 717,196
=========== ===========
</TABLE>
The accompanying footnotes are an integral part of these statements.
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SIMULATIONS PLUS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1: GENERAL
As contemplated by the Securities and Exchange Commission under Item 310(b) of
Regulation S-B, the accompanying financial statements and footnotes have been
condensed and therefore do not contain all disclosures required by generally
accepted accounting principles. The interim financial data are unaudited;
however, in the opinion of Simulations Plus, Inc. (the "Company"), the interim
data include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results for the interim periods. Results
for interim periods are not necessarily indicative of those to be expected for
the full year.
Note 2: CASH AND CASH EQUIVALENTS
The Company maintains cash deposits at banks located in California. Deposits at
each bank are insured by the Federal Deposit Insurance Corporation up to
$100,000. As of November 30, 1998, the Company had no uninsured cash. In
addition, the Company had cash equivalents of $131,633 on deposit with a
high-quality financial institution that is uninsured. The Company has not
experienced any losses in such accounts and believes it is not exposed to any
significant credit risk on cash and cash equivalents.
Note 4: FURNITURE AND EQUIPMENT
Furniture and equipment consist of the following:
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Equipment $ 44,003
Computer equipment 293,748
Furniture and fixtures 45,036
Leasehold improvements 39,431
Demo Equipment 25,173
Rental Equipment 44,797
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492,188
Less accumulated depreciation 284,956
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$207,232
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</TABLE>
Note 5: STOCKHOLDERS' EQUITY
Issuance of warrants
In August and September 1996, the Company issued 100,000 and 150,000 warrants
associated with two notes in the amount of $200,000 and $300,000, respectively,
to
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purchase common stock. The warrants are exercisable at $4.00 per share and
expire five years from the date of grant. To date, these warrants have not been
exercised.
Issuance of Bridge Lenders Warrant
In December 1996 and January 1997, the Company issued to the Bridge Lenders
280,000 Warrants (the "Bridge Warrants") to purchase Common Stock. The Bridge
Warrants are exercisable at $2.50 per share and expire five years from the date
of grant. To date, these warrants have not been exercised.
Stock Option Plan
On January 2, 1998, the Company issued incentive stock options to various
employees to purchase an aggregate of 50,000 shares of the Company's Common
Stock at an exercise price of $4.25 which approximated the fair market value at
the date of grant. The options vest over five equal annual installments starting
from the date of grant. As of November 30, 1998, 12,000 shares were forfeited
and reissued along with a remaining 200,000 shares to various employees at an
exercise price of $1.31 per share, which was the fair market value at the date
of grant, October 30, 1998, with five year vesting periods.
Subscription Agreement
In November 1998, the Company entered into a Subscription Agreement whereby the
Company issued Common Stock in the amount of $33,533 with a 12-month lock-up
period in exchange for services received by the Company in making tenant
improvements to its new facility after relocating in July 1998. The value of
common stock issued was equal to the service received by the Company.
Note 6: SOFTWARE DEVELOPMENT COSTS
Software development costs are capitalized in accordance with Statement of
Financial Accounting Standards (SFAS) No. 86 "Accounting for the Cost of
Computer Software to be Sold, Leased or Otherwise Marketed." Capitalization of
software development costs begins upon the establishment of technological
feasibility and is discontinued when the product is available for sale. The
establishment of technological feasibility and the ongoing assessment for
recoverability of capitalized software development costs require considerable
judgment by management with respect to certain external factors, including, but
not limited to, technological feasibility, anticipated future gross revenues,
estimated economic life, and changes in software and hardware technologies.
Capitalized software development costs are comprised primarily of salaries and
direct payroll related costs, and the purchase of existing software to be used
in the Company's 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 three years). Management periodically
compares estimated net realizable value by product to the amount of software
development costs capitalized for that product
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to ensure the amount capitalized is not in excess of the amount to be recovered
through revenues. Any such excess of capitalized software development costs to
the expected net realizable value is expensed at that time.
Note 8: Income Taxes
The Company used the liability method of accounting for income taxes pursuant to
SFAS No. 109 "Accounting for Income Taxes."
Note 9: Earnings Per Share
Effective February 28, 1998, the Company adopted SFAS No. 128 "Earnings Per
Share." All prior periods presented have been restated to confirm with SFAS No.
128.
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Item 2. Management's Discussion and Analysis or Plan of Operations
The following discussion should be read in conjunction with the financial
statements and the notes thereto appearing elsewhere in this quarterly report on
Form 10-QSB for the quarter ended November 30, 1998 (the "Form 10-QSB"). In
addition to historical information, this Form 10-QSB contains forward-looking
statements. The forward-looking statements contained herein are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those reflected in the forward-looking statements. Factors that
might cause such a difference include, but are not limited to, those discussed
in the section entitled "Management's Discussion and Analysis or Plan of
Operations." Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as of the
date hereof. Simulations Plus, Inc. undertakes no obligation to publicly revise
these forward-looking statements, or to reflect events or circumstances that
arise after the date hereof. Readers should carefully review the risk factors
described in other documents that the Company has filed and will continue to
file from time to time with the Securities and Exchange Commission.
GENERAL
Simulations Plus, Inc. (the "Company" or "Simulations Plus") and its wholly
owned subsidiary, Words+, Inc. ("Words+") produce two types of products: (1)
Simulations Plus, incorporated in 1996, develops and produces simulation
software for use in pharmaceutical research and for education. The Company is
currently producing and developing simulation software for pharmaceutical
research and for science courses for the high school, community college, and
university markets. The Company also provides contract research services to the
pharmaceutical industry, and (2) Words+, founded in 1981, produces computer
software and specialized hardware for use by persons with disabilities, as well
as a personal productivity software program for the retail market.
The types of simulation software under development by the Company are based on
the equations of chemistry and physics that describe or "model" the behavior of
things in the real world. The Company's GastroPlus(TM) pharmaceutical software
simulates the movement, dissolution, absorption, and clearance of drug compounds
in the human gastrointestinal tract. The Company's science experiment
simulations incorporate the equations of chemistry and physics for each
experiment (optics, electrical circuits, gravity, ideal gases, acid/base
titration, etc.)
The Company's pharmaceutical software provides cost-effective solutions to a
number of problems in pharmaceutical research as well as in the education of
pharmacy and medical students. The Company released an improved version of
GastroPlus(TM) in August 1998 and, in the first quarter of fiscal year 1999, the
Company entered into license agreements with Pfizer, Roche, Pharmaceia and
Upjohn, Zeneca, and Astra. An additional (extra-cost) Optimization Module was
released in November 1998 and is receiving enthusiastic interest from
pharmaceutical researchers. A second optional model, IVIV Correlation, is in
advanced development and is expected to be released in early 1999. Two other
modules are also in
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development, and both are expected to be released in 1999. These additional
modules will more than double the average sale price for an annual license. The
Company is actively working over 150 leads for additional sales. No assurances
can be given, however, that any additional sales will occur as a result of such
leads or that any such sales would be profitable to the Company.
In 1997, the Company executed a License Agreement with Therapeutic Systems
Research Laboratories, Inc. ("TSRL") to obtain exclusive rights to TSRL's
technology and database for drug compound absorption in animal and human test
subjects. Through the formation of this strategic alliance with TSRL, the
development costs and time for GastroPlus were significantly reduced, and the
Company's access to pharmaceutical markets was enhanced.
In the area of simulation software for pharmaceutical research, the Company is
currently pursuing the development of additional modules for GastroPlus(TM),
such as the IVIV Correlation Module, and the Metabolism and Efflux Module, as
well as the development of QMPRPlus(TM) as both a separate companion program and
as an optional module within GastroPlus(TM). The Company is also developing
HelixGen(TM), which predicts the receptor structure of certain transmembrane
proteins.
In the area of educational simulations, the Company's R&D activities include
continuing the development of science experiment simulation software for high
school and university-level science courses. The level of this effort was
reduced in August 1998 in order to conserve resources. This development effort
is now at a level of two engineers plus support from marketing and graphic arts
personnel as required. Current sales and the National Science Foundation grant
provide support for this level of effort. At the high school level, anticipated
new titles include simulated experiments for courses in Physical Science,
Physics, Chemistry, Biology and Earth Science. At the university level,
anticipated titles include more sophisticated simulations for Physics,
Chemistry, and Biology, as well as titles for studies in Engineering and
Medicine such as Heat Transfer, Fluid Mechanics, Thermodynamics, Gas Dynamics,
Kinematics and Dynamics, and Electronic Circuits.
In October 1997, the Company was awarded a $300,000 Phase II follow-on grant
which is funded in four equal payments of $75,000 every six months for an
eighteen month period. The payments were received in October 1997, April 1998,
and October 1998 at $75,000 each. The Company is expecting to receive the last
payment in April 1999 after submitting its final report. This grant is funded to
further develop software to allow physically disabled science students to
perform simulated laboratory experiments on a computer with minimal physical
input. The Company is using its expertise and technology from its Words+
subsidiary in designing and building computer access products for the
physically-disabled, as well as its expertise in developing scientific
educational simulation software, in developing these programs. These programs
are also designed to be used by able-bodied students so that the same programs
will be attractive to and used by both physically disabled and able-bodied
persons.
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The Company's wholly owned subsidiary, Words+, Inc. has been in business since
1981. Words+ is a technology leader in designing and developing augmentative and
alternative communication computer software and hardware devices for persons who
cannot speak due to physical disabilities. Words+ products enable a disabled
person to operate a computer and to communicate through a voice synthesizer,
through movements as slight as the blink of an eye. The Company's most famous
user is theoretical astrophysicist Professor Stephen Hawking, author of the
best-selling A Brief History of Time.
The Company believes it has been an industry technology leader in introducing
and improving augmentative and alternative communication and computer access
software and devices for disabled persons and intends to continue to be at the
forefront of the development of new products. The Company will continue to
enhance its major software products, E Z Keys and Talking Screen, as well as its
growing line of hardware products. The Company will also consider acquisitions
of other products, businesses and companies that are complementary to its
existing augmentative and alternative communication and computer access business
lines.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED NOVEMBER 30, 1998 AND 1997.
The following table sets forth the Company's consolidated statements of
operations (in thousands) and the percentages that such items bear to net sales:
(Due to rounding, the numbers appearing in the following table may not foot;
please refer to the Company's consolidated statements of operations.)
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Three Months Ended
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11/30/98 11/30/97
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Net sales $ 881 100.0% $ 543 100.0%
Cost of sales 376 42.7 329 60.6
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Selling, general and administrative 619 70.2 612 112.7
Research and development 36 4.1 137 25.2
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Total operating expenses 655 74.3 749 137.9
----- ----- ----- -----
Loss from operations (150) (17.0) (535) (98.5)
Income from grant 75 8.5 75 13.8
Interest revenue 3 0.3 20 3.7
Interest expense (2) (0.2) (3) (0.6)
----- ----- ----- -----
Net loss $ (74) (8.4)% $(443) (81.6)%
===== ===== ===== =====
</TABLE>
Net Sales
The consolidated net sales increased $338,000, or 62.2%, to $881,000 in the
first fiscal quarter of 1999 from $543,000 in the first fiscal quarter of 1998.
Simulations Plus, Inc.'s sales, from pharmaceutical and educational software,
increased approximately $77,000, or
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712.2%, and Words+, Inc.'s sales increased approximately $261,000, or 49.1% for
the quarter. Management attributes the increase in consolidated net sales to the
first sales from Pharmaceutical software launched in the first quarter of FY
1999, and to increased sales from its Words+ subsidiary. Pharmaceutical software
sales contributed over 18% of the total increase in consolidated sales for the
quarter. The increase in Words+ sales is due primarily to the result of the
expanded field sales force from one year ago, and to its MultiLevel MessageMate
and Freedom 2000 communication products being well received by the marketplace.
The Company has noticed an increase in Words+ orders commencing in February 1998
continuing through today, however, no assurance can be given as to whether this
trend will continue.
Cost of Sales
The consolidated cost of sales increased $47,000, or 14.3%, to $376,000 in the
first fiscal quarter of 1999 from $329,000 in the first fiscal quarter of 1998,
however, the percentage of cost of sales decreased by 17.9%. For Simulations
Plus, the cost of sales increased $17,000, or 50.0%, of which the significant
portion of the cost of sales is the systematic amortization of capitalized
software cost, which resulted in 41.2 % increase in amortization cost. For
Words+, the cost of sales increased $30,000, or 10.2%, however, the change in
percentage of cost of sales between the first fiscal quarter of 1999 and 1998 is
improved by 14.5%. Management attributes the percentage decrease in cost of
sales from 60.6% in the first quarter of FY 1998 to 42.7% in the first quarter
of FY 1999 primarily to three reasons: (1) the technological improvement and
price reduction in the computer hardware industry, which allows us to obtain
better quality computers at a lower price, (2) the percentage decrease in labor
cost due to the efficiency and utilization of full capacity of available labor
resources, and (3) while amortization costs are systematic and more or less
equal, the percentage of sales for these costs decreases when sales increase.
Selling, General and Administrative Expenses
The consolidated selling, general and administrative ("SG&A")expenses increased
$7,000, or 1.1%, to $619,000 in the first fiscal quarter of 1999 from $612,000
in the first fiscal quarter of 1998. For Simulations Plus, the SG&A expenses
decreased $34,000, or 14.8%, primarily due to the downsizing of educational
software development activities as the Company reduced staff, significant
reductions in educational software marketing expenses, and other associated
overhead costs. For Words+, SG&A expenses increased $41,000, or 10.7% due to the
expansion of the sales force, related increases in salaries and wages, and
increased printing, trade show and advertising costs.
Research and Development
The Company incurred approximately $86,000 of research and development costs for
both companies during the first quarter of FY 1999. Of this amount, $50,000 was
capitalized and $36,000 was expensed in this period. In the first quarter of FY
1998, the Company incurred $325,000 of research and development costs, of which
$188,000 was capitalized and $137,000 was expensed. The 73.5% decrease in
research and development expenditure
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from the first quarter of 1998 to the first quarter of 1999 was due to
significant reduction in development of educational simulation software and
reduction in Words+'s R&D expense.
Income from grant
During the first fiscal quarter of 1999, the Company received the third $75,000
payment of a $300,000 Phase II SBIR grant from the National Science Foundation
(the "NSF") to further develop the FutureLab(TM) series. The first payment of
$75,000 was received in the first fiscal quarter of 1998. The purpose of the
grant is to develop software to allow physically disabled students to perform
simulated laboratory experiments on a computer.
Interest Revenue
Interest revenue for the first fiscal quarter of 1999 decreased to $3,000 from
$20,000 in the first fiscal quarter of 1998. This decrease is primarily due to
the interest earned on investment activities in commercial notes through a
highly-qualified financial institution being reduced because portions of the
capital resources were used in the Company's operations.
Interest Expense
Interest expense for the first fiscal quarter of 1999 decreased by $1,000, to
$2,000 from $3,000 in the first fiscal quarter of 1998. This decrease is
attributable primarily to the reduction in interest on capitalized lease
obligations as they get closer to the maturity of the lease. The interest
expense of $2,000 in the first fiscal quarter of 1999 represents the interest
portion of the Company's capitalized lease obligations and interest on a
revolving line of credit.
Net Loss
The consolidated net loss for the three months ended November 30, 1998 decreased
by $369,000, or 83.3%, to $74,000 in the first fiscal quarter of 1999 compared
to $443,000 in the first fiscal quarter of 1998. Management attributes this
decrease primarily to the significant increase in sales outweighing the small
increase in cost of sales, SG&A, and decrease in research and development
expense compared to the three months ended November 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of capital have been cash flows from its
operations, a bank line of credit, a government grant, cash loans from the
officers on an as-needed basis, accruing and not paying full salaries to certain
executive officers and managers, and remaining proceeds from the Company's
initial public offering.
The Company has available a $100,000 revolving line of credit from a bank.
Interest is payable on a monthly basis at the bank's prime rate plus 3.0%. The
outstanding balance
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under the revolving line of credit as of November 30, 1998 was $91,000. The
revolving line of credit is not secured by any of the assets of the Company but
is personally guaranteed by Mr. Walter S. Woltosz, the Company's Chief Executive
Officer, President and Chairman of the Board of Directors.
Beginning in August 1998, certain executive officers and managers accepted
reduced salaries on a temporary basis in order to protect the cash assets of the
Company. The unpaid portions of salaries are accrued and will be paid at such
future time as management deems the Company's cash flow and cash reserves are
sufficient to make such payment without adverse effects to the Company's
financial position.
In October 1997, the Company was awarded a follow-on $300,000 Phase II grant
from the National Science Foundation, the purpose of which was to help fund the
Company's development of educational simulation software for the school and home
study markets. The grant is being paid in four equal payments of $75,000
semi-annually. The first three payments on such grant were received in October
1997, April 1998 and October 1998. The Company is expecting to receive the last
payment in April 1999.
The Company believes that existing capital and anticipated funds from
operations, cost reductions from downsizing certain segments of operations, and
temporary salary reductions for senior management will be sufficient to meet its
anticipated cash needs for working capital and capital expenditures for at least
the next 13 months. However, if anticipated funds from operations are
insufficient to satisfy the Company's capital requirements, the Company may have
to sell additional equity or debt securities or obtain expanded credit
facilities. In the event such financing is needed in the future, there can be no
assurance that such financing will be available to the Company, or, if cash
flows from operations are insufficient to continue operations at the current
level, and if no additional financing is obtained, then management may
restructure the Company in a way to preserve its pharmaceutical and disability
businesses while maintaining expenses within operating cash flows.
In order to maintain quotation of its securities on the NASDAQ SmallCap Market
("NASDAQ"), the Company has to maintain certain minimum financial requirements.
As of November 30, 1998, the Company's net assets were $1,243,492, which is
below the continued listing requirements for the NASDAQ SmallCap market,
specifically, the net tangible assets of $2,000,000. If the Company is unable to
increase its net tangible assets to meet the NASDAQ's requirement for continued
listing, the Company's securities may be delisted from NASDAQ. In such event,
trading, if any, in the shares of Common Stock would thereafter be conducted in
the over-the-counter markets in the so-called "pink sheets" or on the NASDAQ's
"electronic Bulletin Board." Consequently, the liquidity of the Company's
securities could be impaired, not only in the number of securities which could
be bought and sold, but also through delays in the timing of the transactions,
reductions in security analysts' and the news media's coverage of the Company,
and lower prices for the Company's securities than otherwise might be attained.
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If the Company's securities were to be delisted from NASDAQ, they could become
subject to Rule 15g-9 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), which imposes additional sales practice requirements on
broker-dealers that sell such securities to persons other than established
customers and "accredited investors" (generally, individuals with net worth in
excess of $1,000.000 or annual incomes exceeding $200,000, or $300,000 together
with their spouses). For transactions covered by this rule, a broker-dealer must
make a special suitability determination for the purchaser and have received the
purchaser's written consent to the transaction prior to the sale. Consequently,
the rule may adversely affect the ability of broker-dealers to sell the
Company's securities acquired in the secondary market.
Securities and Exchange Commission ("Commission") regulations define a "penny
stock" to be any non-NASDAQ equity security that has a market price (as therein
defined) of less than $5.00 per share or with an exercise price of less than
$5.00 per share, subject to certain exceptions. For any transaction involving a
penny stock, unless exempt, the rules require delivery, prior to any transaction
in a penny stock, of a disclosure schedule prepared by the Commission relating
to the penny stock market. Disclosure is also required to be made about
commissions payable to both the broker-dealer and the registered representative
and current quotations for the securities. Finally, monthly statements are
required to be sent disclosing recent price information for the penny stock held
in the account and information on the limited market in penny stocks.
The foregoing required penny stock restrictions will not apply to the Company's
securities if such securities are listed on NASDAQ and have certain price and
volume information provided on a current and continuing basis or meet certain
minimum tangible assets or average revenue criteria. There can be no assurance
that the Company's securities will qualify for exception from these
restrictions. In any event, even if the Company's securities were exempt from
such restrictions, it would remain subject to Section 15(b)(6) of the Exchange
Act, which gives the Commission the authority to prohibit any person that is
engaged in unlawful conduct while participating in a distribution of penny stock
from associating with a broker-dealer or participating in the distribution of a
penny stock, if the Commission finds that such a restriction would be in the
public interest. If the Company's securities were subject to the rules on penny
stocks, the market liquidity for the Company's securities would be severely
adversely affected.
Management realizes that there are urgent needs for additional funds to meet one
of the listing requirements, net tangible assets, and to continue its research,
development, and marketing activities at its current level of expenditures in
the pharmaceutical and educational software areas. Accordingly, the Company has
signed an agreement with The Kriegsman Group, a southern California based
investment banking firm, to assist the Company in raising additional investment
capital, although there can be no assurance that such financing will be
available to the Company, or, if available, that it will be in amounts and on
terms acceptable to the Company.
13
<PAGE> 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
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:
27 Financial Data Schedule.
(b) Reports on Form 8-K
None.
14
<PAGE> 17
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Simulations Plus, Inc.
Date: January 14, 1998 By: /s/ MOMOKO BERAN
------------------------
Momoko Beran
Chief Financial Officer
15
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