Simulations Plus Inc

Previous wording

Simulations Plus, Inc., incorporated in 1996, is a premier developer of drug discovery and development software for modeling and simulation, and for the prediction of molecular properties utilizing both artificial intelligence and machine-learning-based technology. We also provide consulting services ranging from early drug discovery through preclinical and clinical development analysis and for submissions to regulatory agencies. Our software and consulting services are provided to major pharmaceutical, biotechnology, agrochemical, cosmetics, and food industry companies and academic and regulatory agencies worldwide for use in the conduct of industry-based research. The Company is headquartered in Southern California, with offices in Buffalo, NY; Research Triangle Park, NC; Pittsburgh, PA; and Paris, France. Our common stock has traded on the Nasdaq Global Select Market under the symbol “SLP” since May 13, 2021, prior to which it traded on the Nasdaq Capital Market under the same symbol.

Current wording

Since its incorporation in 1996, Simulations Plus, Inc. has been a leading provider in the biosimulation market, offering software and consulting services that support drug discovery, development, research, and regulatory submissions. Our solutions bridge artificial intelligence (AI)/machine learning, physiologically based pharmacokinetics, quantitative systems pharmacology/toxicology, and population PK/PD modeling approaches. Our technology is licensed and applied by major pharmaceutical and biotechnology companies, universities, and regulatory agencies worldwide. The Company is headquartered in Southern California, with offices in Buffalo, NY; Research Triangle Park, NC; Pittsburgh, PA; and Paris, France. Our common stock has traded on the Nasdaq Global Select Market under the symbol “SLP” since May 13, 2021, prior to which it traded on the Nasdaq Capital Market under the same symbol.

Previous wording

We are a global leader, delivering relevant, cost-effective software and creative and insightful consulting services. Pharmaceutical and biotechnology companies and hospitals use our software programs and scientific consulting services to guide early drug discovery (molecule design, screening, and lead optimization), preclinical and clinical development programs, and the development of generic medicines after patent expiration, including using our software products and services to enhance their understanding of the properties of potential new therapies and to use emerging data to improve formulations, select and justify dosing regimens, support the generic pharmaceutical product development industry, optimize clinical trial designs, and simulate outcomes in special populations, such as in elderly and pediatric patients.

Current wording

We are a global leader in modeling and simulation, delivering powerful software and insightful consulting services. Pharmaceutical and biotechnology companies and hospitals use our software platforms and scientific consulting services to guide early drug discovery (molecule design, screening, and lead optimization), preclinical and clinical development programs, and the development of generic medicines after patent expiration. Our software and services are also used to enhance clients’ understanding of the properties of potential new therapies and to use emerging data to improve formulations, select and justify dosing regimens, support the generic pharmaceutical product development industry, optimize clinical trial designs, and simulate outcomes in special populations, such as in elderly and pediatric patients.

Previous wording

Overall gross margin percentage was 68% and 78% for the three months ended November 30, 2023 and 2022, respectively.

Current wording

Overall gross margin percentage was 72% and 83% for the three months ended February 29, 2024, and February 28, 2023, respectively.

Previous wording

We incurred $2.1 million of research and development costs during the three months ended November 30, 2023. Of this amount, $0.9 million was capitalized as a part of capitalized software development costs and $1.2 million was expensed. We incurred $2.1 million of research and development costs during the three months ended November 30, 2022. Of this amount, $0.9 million was capitalized and $1.2 million was expensed. Research and development spend remained relatively consistent with a slight increase of $0.1 million, or 5%, for the three months ended November 30, 2023, compared to the three months ended November 30, 2022.

Current wording

We incurred $2.1 million of research and development costs during the three months ended February 29, 2024. Of this amount, $0.8 million was capitalized as a part of capitalized software development costs and $1.3 million was expensed. We incurred $2.0 million of research and development costs during the three months ended February 28, 2023. Of this amount, $0.7 million was capitalized and $1.3 million was expensed. Research and development spend remained relatively consistent with a slight increase of $0.1 million, or 7%, for the three months ended February 29, 2024, compared to the three months ended February 28, 2023.

Previous wording

Selling and marketing expenses increased by $0.5 million, or 34%, to $2.0 million for the three months ended November 30, 2023, compared to $1.5 million for the three months ended November 30, 2022. The increase was primarily due to higher marketing spend of $0.3 million, an increase in stock compensation of $0.1 million, and an increase of $0.1 million in sales commissions due to higher sales.

Current wording

Sales and marketing expenses increased by $0.2 million, or 13%, to $1.9 million for the three months ended February 29, 2024, compared to $1.7 million for the three months ended February 28, 2023. The increase was primarily due to the acquisition of Immunetrics which had an impact of $0.1 million, and an increase in stock compensation of $0.1 million.

Previous wording

Total other income was $1.4 million for the three months ended November 30, 2023, compared to total other income of $0.7 million for the three months ended November 30, 2022. The increase is primarily due to an increase in interest income of $0.5 million driven by an increase in interest rates as well as a decrease in the fair value of contingent consideration of $0.1 million related to the Immunetrics earnout liability.

Current wording

Total other income was $0.8 million for the three months ended February 29, 2024, compared to total other income of $1.0 million for the three months ended February 28, 2023. The decrease is primarily due to an increase in the fair value adjustment of the earnout liability of $0.4 million in the current period and a foreign currency loss of $0.1 million, partially offset by an increase in interest income of $0.4 million driven by an increase in interest rates on investment in debt securities. The increase in the fair value of the earnout liability is attributable to favorable developments to our revenue projections for Immunetrics and corresponds to a higher likelihood of achieving the earnout targets.

Previous wording

The provision for income taxes was $0.5 million for the three months ended November 30, 2023, compared to $0.4 million for the three months ended November 30, 2022. Our effective tax rate decreased to 19% mainly due to disqualifying dispositions of incentive stock options for the three months ended November 30, 2023, when compared to 23% for the three months ended November 30, 2022.

Current wording

The provision for income taxes was $1.2 million for the three months ended February 29, 2024, compared to $0.9 million for the three months ended February 28, 2023. Our effective tax rate increased to 23% for the three months ended February 29, 2024, from 18% for the three months ended February 28, 2023. The 18% effective tax rate for the three months ended February 28, 2023 was favorably affected by increased disqualifying dispositions of incentive stock options, which caused the effective tax rate to have increased comparatively for the three months ended February 29, 2024.

Previous wording

Gross profit increased by $0.6 million, or 6%, to $9.8 million for the three months ended November 30, 2023, compared to $9.3 million, for the three months ended November 30, 2022. The increase in gross profit is primarily due to an increase in gross profit for our software business of $1.4 million, or 27%, reflecting the strong revenue growth and operating leverage of our software business, partially offset by a decrease in gross profit for our services business of $0.9 million, or 21%, reflecting the reorganization of our internal structure as well as additional services headcount from the Immunetrics acquisition.

Current wording

Gross profit increased by $0.6 million, or 3%, to $23.1 million for thesix months ended February 29, 2024, compared to $22.4 million, for thesix months ended February 28, 2023. The increase in gross profit is primarily due to an increase in gross profit for our software business of $2.0 million, or 14%, reflecting the strong revenue growth and operating leverage of our software business, partially offset by a decrease in gross profit for our services business of $1.4 million, or 18%, resulting from the reorganization of our internal structure as well as additional services headcount from the Immunetrics acquisition.

Previous wording

As of November 30, 2023, the Company had $39.8 million in cash and cash equivalents, $74.1 million in short-term investments, and working capital of $121.1 million. Our principal sources of capital have been a follow-on public offering in August 2020 for $107.7 million and cash flows from our operations. We have achieved continuous positive operating cash flow over the last fourteen fiscal years.

Current wording

At February 29, 2024, the Company had $37.0 million in cash and cash equivalents, $71.5 million in short-term investments, and working capital of $113.4 million. The Company also has $9.0 million in long-term investments that do not exceed eighteen months and can readily be converted to cash when needed. Our principal sources of capital have been a follow-on public offering in August 2020 for $107.7 million and cash flows from our operations. We have achieved continuous positive operating cash flow over the last fourteen fiscal years.

Previous wording

On December 29, 2022, our Board of Directors authorized and approved a share repurchase program for up to $50 million of the outstanding shares of our common stock, including the repurchase of up to $20 million of our outstanding shares through an accelerated share repurchase transaction. Under the repurchase program, shares may be repurchased at our discretion based on ongoing assessment of the capital needs of our business, the market price of shares of our common stock, and general market conditions. Repurchases may be made pursuant to certain SEC regulations, which permit common shares to be repurchased when we would otherwise be prohibited from doing so under insider-trading laws. There is no time limit in place for the completion of our share repurchase program, and the program may be suspended or discontinued at any time. Except as was required by the ASR Agreement (as defined below), we are not obligated to repurchase any shares under the repurchase program. We have funded share repurchases to date, and will fund future repurchases, if any, through cash on hand and cash generated from operations.

Current wording

On December 29, 2022, our Board of Directors authorized and approved a share repurchase program for up to $50 million of the outstanding shares of our common stock, including the repurchase of up to $20 million of our outstanding shares through an accelerated share repurchase transaction. Under the repurchase program, shares may be repurchased at our discretion based on ongoing assessment of the capital needs of our business, the market price of shares of our common stock, and general market conditions. Repurchases may be made pursuant to certain SEC regulations, which permit shares of our common stock to be repurchased when we would otherwise be prohibited from doing so under insider-trading laws. There is no time limit in place for the completion of our share repurchase program, and the program may be suspended or discontinued at any time. Except as was required by the ASR Agreement (as defined below), we are not obligated to repurchase any shares under the repurchase program. We have funded share repurchases to date, and will fund future repurchases, if any, through cash on hand and cash generated from operations.

Previous wording

On June 16, 2023, the Company acquired Immunetrics through a reverse triangular merger, pursuant to which Immunetrics became a wholly owned subsidiary of the Company. As consideration for the acquisition, at closing, the Company paid the equity holders of Immunetrics a cash payment in the aggregate amount of approximately $13.7 million, and also paid the representative of the Immunetrics stockholders $250,000 as an expense fund to cover expenses that it incurs in its role as such (collectively, the “Closing Payments”). In addition to the Closing Payments, the Company held back $1.8 million to cover any negative working capital adjustments and Immunetrics’ indemnification obligations under the Merger Agreement (the “Holdback Amount”), the balance of which, less any deductions, if any, will be distributed to the Immunetrics stockholders after expiration of the applicable hold back period. Furthermore, the Company agreed to pay the Immunetrics equity holders an aggregate amount of up to $8.0 million in earnout payments, consisting of two payouts of up to $4.0 million each, if Immunetrics achieves certain revenue milestones for the calendar years 2023 and 2024 (the “Earnout Payments,” and together with the Closing Payments and Holdback Amount, the “Merger Consideration”). Pursuant to the agreement, we have up to 60 days after December 31, 2023 to calculate and notify the Immunetrics stockholder representative of the amount of the first earnout payment, if any, payable for year one under the Agreement, after which the Immunetrics stockholder representative will have up to 25 days to provide any objections to our earnout calculations. We will have five business days from the earlier of (i) the date that the Immunetrics stockholder representative confirms agreement with our calculations and (ii) 25 days from the date we notify the Immunetrics stockholder representative of the calculated amount of the first earnout payment, provided that we do not receive any objections or confirmation of our calculations from the Immunetrics stockholder representative prior to expiration of the period. We have not yet determined the final amount, if any, we will be required to pay under the first earnout payment; however, we intend to do so within the period provided under the agreement.

Current wording

On June 16, 2023, the Company acquired Immunetrics through a reverse triangular merger, pursuant to which Immunetrics became a wholly owned subsidiary of the Company. As consideration for the acquisition, at closing, the Company paid the equity holders of Immunetrics a cash payment in the aggregate amount of approximately $13.7 million, and also paid the representative of the Immunetrics stockholders $250,000 as an expense fund to cover expenses that it incurs in its role as such (collectively, the “Closing Payments”). In addition to the Closing Payments, the Company held back $1.8 million to cover any negative working capital adjustments and Immunetrics’ indemnification obligations under the Merger Agreement (the “Holdback Amount”), the balance of which, less any deductions, if any, will be distributed to the Immunetrics stockholders after expiration of the applicable hold back period. Furthermore, the Company agreed to pay the Immunetrics equity holders an aggregate amount of up to $8.0 million in earnout payments, consisting of two payouts of up to $4.0 million each, if Immunetrics achieves certain revenue milestones for the calendar years 2023 and 2024 (the “Earnout Payments,” and together with the Closing Payments and Holdback Amount, the “Merger Consideration”). In March 2024, the Company made the first cash earnout payments in the aggregate amount of $2.5 million to the former equity holders and employees of Immunetrics. As a result of the partial attainment, there is a catch-up opportunity for the second measurement period's earnout payment to increase from the target of $4.0 million to $5.5 million.

Previous wording

Net cash provided by operating activities was $0.2 million for the three months ended November 30, 2023. Our operating cash flows resulted in part from our net income of $1.9 million, which was generated by cash received from our customers, offset by cash payments we made to third parties for their services and employee compensation. In addition, $3.3 million related to changes in balances of operating assets and liabilities was subtracted from net income and $1.5 million related to non-cash charges was added to net income to reconcile to cash flow from operations.

Current wording

Net cash provided by operating activities was $6.0 million for the six months ended February 29, 2024. Our operating cash flows resulted in part from our net income of $6.0 million, which was generated by cash received from our customers, offset by cash payments we made to third parties for their services and employee compensation. In addition, $3.9 million related to changes in balances of operating assets and liabilities was subtracted from net income and $3.9 million related to non-cash charges was added to net income to reconcile to cash flow from operations.

Previous wording

Net cash provided by operating activities was $4.7 million for the three months ended November 30, 2022. Our operating cash flows resulted primarily from our net income of $1.2 million, which was generated by cash received from our customers, offset by cash payments we made to third parties for their services and employee compensation. In addition, $1.5 million related to changes in balances of operating assets and liabilities was added to net income and $1.9 million related to noncash charges was added to net income to reconcile to cash flow from operations.

Current wording

Net cash provided by operating activities was $10.2 million for the six months ended February 28, 2023. Our operating cash flows resulted primarily from our net income of $5.4 million. In addition, $0.6 million related to changes in balances of operating assets and liabilities was added to net income and $4.2 million related to noncash charges was added to net income to reconcile to cash flow from operations.

Previous wording

Net cash provided by operating activities decreased by $4.5 million during the three months ended November 30, 2023 compared to the three months ended November 30, 2022. $2.2 million of this change relates to accounts receivable, as the Company experienced strong cash collections from customers on older balances during the three months ended November 30, 2022. $0.8 million of this change relates to the Company's bonus payments, which increased during the three months ended November 30, 2023 due to growth in headcount and annual pay increases. $0.6 million of this change relates to the timing of our bi-weekly payroll such that 9 additional days were accrued for during the three months ended November 30, 2023.

Current wording

Net cash provided by operating activities decreased by $4.3 million during the six months ended February 29, 2024, compared to the six months ended February 28, 2023. $2.9 million of this change relates to accounts receivable, as the Company experienced strong cash collections from customers on older balances during the six months ended February 28, 2023, and increased revenues for the period ending February 29, 2024.

Previous wording

Net cash used in investing activities during the three months ended November 30, 2023, was $16.9 million, primarily due to the purchase of short-term investments of $30.5 million and computer software development costs of $0.9 million, offset by proceeds from maturities of short-term investments of $14.8 million.

Current wording

Net cash used in investing activities during the six months ended February 29, 2024, was $24.4 million, primarily due to the purchase of short-term investments of $49.0 million and computer software development costs of $1.7 million, offset by proceeds from maturities of short-term investments of $36.3 million.

Previous wording

Net cash used in investing activities during the three months ended November 30, 2022, was $6.4 million, primarily due to the purchase of short-term investments of $29.5 million and computer software development costs of $0.9 million, offset by proceeds from maturities of short-term investments of $24.1 million.

Current wording

Net cash used in investing activities during the six months ended February 28, 2023, was $1.1 million, primarily due to the purchase of short-term investments of $47.2 million and computer software development costs of $1.7 million, offset by proceeds from maturities of short-term investments of $48.2 million.

Previous wording

Net cash used in financing activities during the three months ended November 30, 2023, was $1.0 million, primarily due to dividend payments totaling $1.2 million, partially offset by proceeds from the exercise of stock options totaling $0.2 million.

Current wording

Net cash used in financing activities during the six months ended February 29, 2024, was $2.1 million, primarily due to dividend payments totaling $2.4 million, partially offset by proceeds from the exercise of stock options totaling $0.3 million.

Previous wording

Net cash used in financing activities during the three months ended November 30, 2022, was $0.5 million, primarily due to payments on contracts payable of $0.8 million related to the Lixoft acquisition, and dividend payments totaling $1.2 million.

Current wording

Net cash used in financing activities during the six months ended February 28, 2023, was $21.5 million, primarily due to share repurchases of $20.0 million and dividend payments totaling $2.4 million, partially offset by proceeds from the exercise of stock options totaling $1.0 million.

Previous wording

(1) Contracts payable are related to our Merger Agreement that the Company entered into with Immunetrics on June 16, 2023. Under the terms of the agreement, we agreed to pay the former stockholders of Immunetrics earnout payments up to an $8.0 million, consisting of two payouts of up to $4.0 million each, subject to a potential catch-up increase in certain circumstances. Additionally, a portion of the consideration, in an amount equal to $1.8 million, which was held-back by the Company at closing to cover any negative net working capital adjustments (if any) and Immunetrics’ indemnification obligations under the Merger Agreement.

Current wording

(1) Contracts payable are related to the Merger Agreement that the Company entered into with Immunetrics and certain other parties on June 16, 2023. Under the terms of the agreement, we agreed to pay the former equityholders of Immunetrics earnout payments up to $8.0 million, consisting of two payouts of up to $4.0 million each, subject to a potential catch-up increase in certain circumstances. In March 2024, the Company made the first cash earnout payments in the aggregate amount of $2.5 million to the former equity holders and employees of Immunetrics. Additionally, a portion of the consideration for the acquisition, in an amount equal to $1.8 million, was held-back by the Company at closing to cover any negative net working capital adjustments (if any) and Immunetrics’ indemnification obligations under the Merger Agreement.

Previous wording

The establishment of technological feasibility and the ongoing assessment for recoverability of capitalized computer 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. Total capitalized computer software development costs were $0.9 million and $0.9 million for the three months ending November 30, 2023 and 2022, respectively.

Current wording

The establishment of technological feasibility and the ongoing assessment for recoverability of capitalized computer 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. Total capitalized computer software development costs were $0.8 million and $0.7 million for the three months ended February 29, 2024 and February 28, 2023, respectively, and $1.8 million and $1.6 million for the six months ended February 29, 2024 and February 28, 2023, respectively.

Previous wording

Amortization of capitalized computer software development costs is calculated 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 $0.4 million and $0.4 million for the fiscal three months ending November 30, 2023, and 2022, respectively. We expect future amortization expense to vary due to increases in capitalized computer software development costs.

Current wording

Amortization of capitalized computer software development costs is calculated 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 $0.4 million and $0.4 million for the three months ended February 29, 2024, and February 28, 2023, respectively, and $0.8 million and $0.8 million for the fiscal six months ended February 29, 2024, and February 28, 2023, respectively. We expect future amortization expense to vary due to increases in capitalized computer software development costs.

Previous wording

Goodwill is tested for impairment at the reporting unit level, which is one level below or the same as an operating segment. As of November 30, 2023, after completion of the Company's internal reorganization, the Company determined that it had five reporting units: CPP, QSP, PBPK, Cheminformatics, and Regulatory Strategies.

Current wording

Goodwill is tested for impairment at the reporting unit level, which is one level below or the same as an operating segment. As of February 29, 2024, after completion of the Company's internal reorganization, the Company determined that it had five reporting units: CPP, QSP, PBPK, Cheminformatics, and REG.

Previous wording

As of November 30, 2023, the entire balance of goodwill was attributed to two of the Company's reporting units, CPP and QSP. Intangible assets subject to amortization are reviewed for impairment whenever events or circumstances indicate that the carrying amount of these assets may not be recoverable. No impairment losses were recorded during the three months ended November 30, 2023 and 2022, respectively.

Current wording

As of February 29, 2024, the entire balance of goodwill was attributed to two of the Company's reporting units, CPP and QSP. Intangible assets subject to amortization are reviewed for impairment whenever events or circumstances indicate that the carrying amount of these assets may not be recoverable. No impairment losses were recorded during the three and six months ended February 29, 2024, and February 28, 2023, respectively.

Previous wording

The Company accounts for stock options in accordance with ASC 718-10, “Compensation-Stock Compensation”. Under this method, compensation costs include the estimated grant-date fair value of awards amortized over the options’ vesting period. Stock-based compensation costs, not including shares issued to directors for services, was $1.3 million and $0.9 million for the three months ended November 30, 2023 and 2022, respectively.

Current wording

The Company accounts for stock options in accordance with ASC 718-10, “Compensation-Stock Compensation.” Under this method, compensation costs include the estimated grant-date fair value of awards amortized over the options’ vesting period. Stock-based compensation costs, not including shares issued to directors for services, was $1.6 million and $1.2 million for the three months ended February 29, 2024, and February 28, 2023, respectively, and $2.9 million and $2.0 million for the six months ended February 29, 2024, and February 28, 2023, respectively.