-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SNVntQHsepyzNfqngWEf46XyxeqjN7Sg7rBoU+FpiS4jwP3EEWzE8Cxfpnw+eA7O PXfo5r82EppfTBSbinvcPg== 0000950148-99-000089.txt : 19990115 0000950148-99-000089.hdr.sgml : 19990115 ACCESSION NUMBER: 0000950148-99-000089 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981130 FILED AS OF DATE: 19990114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIMULATIONS PLUS INC CENTRAL INDEX KEY: 0001023459 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 954595609 FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 333-05600-LA FILM NUMBER: 99506527 BUSINESS ADDRESS: STREET 1: 40015 SIERRA HIGHWAY STREET 2: BLDG B-145 CITY: PALMDALE STATE: CA ZIP: 93550 BUSINESS PHONE: 8052668500 MAIL ADDRESS: STREET 1: 40015 SIERRA HWY BLDG B0-110 STREET 2: 40015 SIERRA HWY BLDG B0-110 CITY: PALMDALE STATE: CA ZIP: 93550 10QSB 1 FORM 10-QSB 1 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. 2 SIMULATIONS PLUS, INC. FORM 10-QSB FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 1998 Table of Contents
Page ---- 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
3 SIMULATIONS PLUS, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET November 30, 1998 (Unaudited) 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 ----------- 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 ----------- Total assets $ 1,931,637 =========== 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 ----------- Total current liabilities 664,029 ----------- Capitalized lease obligations, net of current portion 24,116 ----------- Total liabilities 688,145 ----------- 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) ----------- Total shareholders' equity 1,243,492 ----------- Total liabilities and stockholders' equity $ 1,931,637 ===========
The accompanying footnotes are an integral part of these statements. 1 4 SIMULATIONS PLUS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS For the three months ended November 30, 1998 and 1997 (Unaudited)
Three months ended ------------------------------ 11/30/98 11/30/97 ----------- ----------- Net sales $ 881,286 $ 543,063 Cost of sales 375,708 329,363 ----------- ----------- Gross profit 505,578 213,700 ----------- ----------- Operating expenses: Selling, general & administration 619,625 611,886 Research and development 35,873 137,283 ----------- ----------- Total operating expenses 655,498 749,169 ----------- ----------- 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 ----------- ----------- Net loss $ (73,833) $ (443,090) =========== =========== 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 =========== ===========
The accompanying footnotes are an integral part of these statements. 2 5 SIMULATIONS PLUS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS For the three months ended November 30, 1998 and 1997 (Unaudited)
Three months ended ------------------------------ 11/30/98 11/30/97 ----------- ----------- 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 ----------- ----------- 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) ----------- ----------- Net cash used in investing activities (50,154) (1,151,077) ----------- ----------- Cash flows from financing activities: Payments on line of credit (5,824) Payments on capitalized lease obligations (8,160) (6,240) ----------- ----------- Net cash used in financing activities (13,984) (6,240) ----------- ----------- Net decrease in cash (58,944) (1,439,565) Cash and cash equivalents, beginning of period 198,154 2,156,761 ----------- ----------- Cash and cash equivalents, end of period $ 139,210 $ 717,196 =========== ===========
The accompanying footnotes are an integral part of these statements. 3 6 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: Equipment $ 44,003 Computer equipment 293,748 Furniture and fixtures 45,036 Leasehold improvements 39,431 Demo Equipment 25,173 Rental Equipment 44,797 -------- 492,188 Less accumulated depreciation 284,956 -------- $207,232 ========
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 4 7 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 5 8 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. 6 9 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 7 10 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. 8 11 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.)
Three Months Ended ------------------------------------------------ 11/30/98 11/30/97 ------------------- ------------------- Net sales $ 881 100.0% $ 543 100.0% Cost of sales 376 42.7 329 60.6 ----- ----- ----- ----- Selling, general and administrative 619 70.2 612 112.7 Research and development 36 4.1 137 25.2 ----- ----- ----- ----- 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)% ===== ===== ===== =====
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 9 12 712.2%, 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 10 13 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 11 14 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. 12 15 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 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 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 EX-27 2 FINANCIAL DATA SCHEDULE
5 1 U.S. DOLLARS 3-MOS AUG-31-1999 SEP-01-1998 NOV-30-1998 1 139,210 0 450,149 (14,078) 305,546 906,196 492,188 (284,956) 1,931,637 664,029 0 0 0 3,384 1,240,108 1,931,637 881,286 881,286 375,708 655,498 0 0 2,339 (73,833) 0 0 0 0 0 (73,833) (0.02) (0.02)
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