Simulations Plus, Inc.

Previous wording

Revenues increased by $2.3 million, or 14%, to $18.5 million for the three months ended May 31, 2024, compared to $16.2 million for the three months ended May 31, 2023. This increase is primarily due to a $1.3 million, or 12%, increase in software-related revenue and a $1.0 million, or 18%, increase in service-related revenue when compared to the three months ended May 31, 2023.

Current wording

Revenues increased by $4.4 million, or 31%, to $18.9 million for the three months ended November 30, 2024, compared to $14.5 million for the three months ended November 30, 2023. This increase is primarily due to a $3.1 million, or 41%, increase in software-related revenue and a $1.3 million, or 19%, increase in service-related revenue when compared to the three months ended November 30, 2023. The software-related revenue increase of $3.1 million, or 41%, compared to the three months ended November 30, 2023, was primarily due to additional revenue from ALI of $1.7 million, higher revenues from CPP-software of $0.7 million, and higher revenues from QSP-software $0.4 million. The service-related revenue increase of $1.3 million, or 19%, compared to the three months ended November 30, 2023, was primarily due to additional revenue from MC of $1.9 million, offset by lower revenue from QSP-services of $0.3 million and lower revenue from CPP-services of $0.2 million.

Previous wording

Gross profit remained mostly consistent at $13.3 million for the three months ended May 31, 2024, compared to $13.3 million for the three months ended May 31, 2023. Although, the gross profit remained mostly consistent, gross profit increased in our software business by $0.8 million, or 8%, and decreased for our services business by $0.8 million, or 23%.

Current wording

Gross profit increased by $0.4 million or 4%, to $10.2 million for the three months ended November 30, 2024, compared to $9.8 million for the three months ended November 30, 2023. The gross profit increased in our software business by $1.5 million, or 22%, and decreased for our services business by $1.1 million, or 34%.

Previous wording

Overall gross margin percentage was 71% and 82% for the three months ended May 31, 2024, and 2023, respectively.

Current wording

Overall gross margin percentage was 54% and 68% for the three months ended November 30, 2024 and 2023, respectively.

Previous wording

We incurred $2.1 million of research and development costs during the three months ended May 31, 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 $1.8 million of research and development costs during the three months ended May 31, 2023. Of this amount, $0.9 million was capitalized and $0.9 million was expensed. Research and development spend remained relatively consistent with a slight increase of $0.3 million, or 15%, for the three months ended May 31, 2024, compared to the three months ended May 31, 2023. This corresponds to a 1% increase in research and development expense as a percentage of revenue.

Current wording

We incurred $2.6 million of research and development costs during the three months ended November 30, 2024. Of this amount, $0.7 million was capitalized as a part of capitalized software development costs and $1.8 million was expensed. We incurred $2.2 million of research and development costs during the three months ended November 30, 2023. Of this amount, $0.9 million was capitalized and $1.2 million was expensed. Research and development spend increased by $0.4 million, or 19%, for the three months ended November 30, 2024, compared to the three months ended November 30, 2023, primarily due to an increase of $0.4 million from the acquisition of Pro-ficiency. This corresponds to a 2% increase in research and development expense as a percentage of revenue.

Previous wording

Sales and marketing expenses increased by $0.7 million, or 43%, to $2.4 million for the three months ended May 31, 2024, compared to $1.7 million for the three months ended May 31, 2023. This corresponds to a 3% increase in sales and marketing expense as a percentage of revenue. The increase was primarily due to $0.4 million of compensation-related increases driven by an increase in stock compensation expense of $0.1 million, the addition to our team of a Chief Revenue Officer, sales commissions on the strong revenue growth year over year, and general annual salary adjustments for existing employees. Additionally, the acquisition of Immunetrics increased sales and marketing expenses by $0.1 million.

Current wording

Sales and marketing expenses increased by $0.9 million, or 43%, to $2.9 million for the three months ended November 30, 2024, compared to $2.0 million for the three months ended November 30, 2023. This corresponds to a 1% increase in sales and marketing expense as a percentage of revenue. The increase was primarily due to an increase of $0.6 million from the acquisition of Pro-ficiency.

Previous wording

General, and administrative (“G&A”) expenses increased by $1.1 million, or 17%, to $7.7 million for the three months ended May 31, 2024, compared to $6.5 million for the three months ended May 31, 2023. This corresponds to a 1% increase in G&A expense as a percentage of revenue. The increase is primarily driven by a $0.5 million increase in mergers and acquisition expenses, $0.5 million of increase in compensation costs due to general annual salary adjustments for existing employees, an increase of $0.2 million from the acquisition of Immunetrics, an increase in professional fees of $0.2 million, and an increase in software license costs of $0.1 million, partially offset by $0.5 million shift from G&A expense to cost of revenues, as referenced above, due to the reorganization of our internal structure from divisions based on prior acquisitions to business units organized around key product and service offerings.

Current wording

General, and administrative (“G&A”) expenses decreased by $0.3 million, or 5%, to $5.4 million for the three months ended November 30, 2024, compared to $5.7 million for the three months ended November 30, 2023. This corresponds to an 11% decrease in G&A expense as a percentage of revenue. The decrease is primarily driven by a $0.8 million shift from G&A expense to cost of revenues, as referenced above, due to the reorganization of our internal structure from divisions to business units, offset by an increase of $0.4 million from the acquisition of Pro-ficiency.

Previous wording

The provision for income taxes was $0.8 million for the three months ended May 31, 2024, compared to $0.9 million for the three months ended May 31, 2023. Our effective tax rate remained consistent at 19% for the three months ended May 31, 2024 compared to the three months ended May 31, 2023.

Current wording

The provision for income taxes was $0.1 million for the three months ended November 30, 2024, compared to $0.5 million for the three months ended November 30, 2023. Our effective tax rate was at 24% for the three months ended November 30, 2024, compared to 19% for the three months ended November 30, 2023.

Previous wording

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. We expect existing cash, cash equivalents, short-term investments, cash generated by ongoing operations, and working capital, will be sufficient to fund our operating activities and cash commitments for investing and financing activities, including the dividend distribution on August 5, 2024, and material capital expenditures, for at least the next 12 months and beyond.

Current wording

Our principal sources of capital have been cash flows from our operations. We expect existing cash, cash equivalents, short-term investments, cash generated by ongoing operations, and working capital, will be sufficient to fund our operating activities and cash commitments for investing and financing activities, and material capital expenditures, for the next 12 months and beyond.

Previous wording

We continue to seek opportunities for strategic acquisitions, investments, and partnerships. If we identify an attractive strategic opportunity that would require more cash to complete than we are willing or able to use from our cash reserves, we will consider financing options to complete the transaction, including obtaining loans and issuing additional securities.

Current wording

We continue to seek opportunities for strategic acquisitions, investments, and partnerships. If one or more strategic opportunities are identified, a substantial portion of our cash reserves may be required to complete it. If we identify an attractive strategic opportunity that would require more cash to complete than we are willing or able to use from our cash reserves, we may consider financing options to complete the transaction, including obtaining loans or selling our securities. Additionally, our quest for strategic opportunities could result in a significant change to our liquidity position and/or our results of operations if any such opportunities are completed.

Previous wording

Except as discussed elsewhere in this Quarterly Report on Form 10-Q (this “Report”), we are not aware of any trends or demands, commitments, events, or uncertainties that are reasonably likely to result in a decrease in liquidity of our assets. The trend over the last ten years has been positive operating cash flows, and we expect that trend to continue for the foreseeable future.

Current wording

Except as discussed elsewhere in this Quarterly Report, we are not aware of any trends or demands, commitments, events, or uncertainties that are reasonably likely to result in a decrease in liquidity of our assets.

Previous wording

At May 31, 2024, the Company had $109.1 million in cash and cash equivalents, $9.9 million in short-term investments, and working capital of $124.3 million. Short-term investments consist of highly liquid investment-grade fixed-income securities, diversified among industries and issuers. The investments are U.S. dollar-denominated securities. Our fixed-income investments are exposed to interest rate risk and credit risk. The settlement risk related to these investments is insignificant given that the short-term investments held are primarily highly liquid investment-grade fixed-income securities and can readily be converted to cash when needed.

Current wording

At November 30, 2024, the Company had $6.2 million in cash and cash equivalents, $12.0 million in short-term investments, and working capital of $30.7 million. Short-term investments consist of highly liquid investment-grade fixed-income securities, diversified among industries and issuers. The investments are U.S.-dollar-denominated securities. Our fixed-income investments are exposed to interest rate risk and credit risk. The settlement risk related to these investments is insignificant, given that the short-term investments held are primarily highly liquid investment-grade fixed-income securities and can readily be converted to cash when needed.

Previous wording

Net cash provided by operating activities was $18.8 million for the nine months ended May 31, 2023. Our operating cash flows resulted primarily from our net income of $9.4 million. In addition, $4.9 million related to changes in balances of operating assets and liabilities was added to net income and $4.4 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 $0.2 million for the three months ended November 30, 2023. Our operating cash flows resulted primarily from our net income of $1.9 million. In addition, $3.3 million related to changes in balances of operating assets and liabilities was added to net income and $1.5 million related to noncash charges was added to net income to reconcile to cash flow from operations. The changes in balances of other liabilities of $2.1 million were primarily driven by annual bonus payments of $3.1 million offset by bonus accrual of $1.0 million. The changes in balances of prepaid expenses and other current assets is primarily due to increase in prepaid expenses of $1.1 million.

Previous wording

Net cash provided by investing activities during the nine months ended May 31, 2023, was $6.8 million, primarily due to the proceeds from maturities of short-term investments of $82.0 million, offset by purchase of short-term investments of $71.8 million and computer software development costs of $2.6 million.

Current wording

Net cash used in investing activities during the three months ended November 30, 2024, was $3.1 million, primarily due to purchase of short-term investments of $3.5 million and computer software development costs of $0.6 million, offset by proceeds from maturities of short-term investments of $1.5 million.

Previous wording

Net cash provided by investing activities during the nine months ended May 31, 2024, was $45.5 million, primarily due to the proceeds from maturities of short-term investments of $71.1 million, offset by purchase of short-term investments of $67.2 million and computer software development costs of $2.5 million.

Current wording

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

Previous wording

Net cash used in financing activities during the nine months ended May 31, 2024, was $5.6 million, primarily due to dividend payments totaling $3.6 million and a the first cash earnout payments in the aggregate amount of $2.5 million to the former equity holders and employees of Immunetrics, partially offset by proceeds from the exercise of stock options totaling $0.5 million.

Current wording

Net cash provided by financing activities during the three months ended November 30, 2024, was $0.3 million, primarily due to proceeds from the exercise of stock options totaling $0.3 million.

Previous wording

Net cash used in financing activities during the nine months ended May 31, 2023, was $22.1 million, primarily due to share repurchases of $20.0 million and dividend payments totaling $3.6 million, partially offset by proceeds from the exercise of stock options totaling $1.5 million.

Current wording

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

Previous wording

Subsequent to the quarter ended May 31, 2023, on June 11, 2024, the Company 100% of the issued and outstanding capital stock of Pro-ficiency pursuant to the terms of a Stock Purchase Agreement (the “Purchase Agreement”), by and among the Company, Pro-ficiency, each of the stockholders of Pro-ficiency (collectively, the “Sellers”) and WRYP Stockholders Services, LLC, solely in its capacity as the Sellers’ Representative, pursuant to which Pro-ficiency became a wholly owned subsidiary of the Company. As consideration for the acquisition, the Company agreed to pay the Sellers an aggregate of $100 million in cash, subject to post-closing adjustments for net working capital, closing cash, indebtedness, and transaction expenses (collectively, the “Purchase Price”). An aggregate of $1 million of the Purchase Price was placed in escrow to fund payment obligations of the Sellers with respect to post-closing Purchase Price adjustments and post-closing indemnification obligations of the Sellers, and another portion of the Purchase Price was deposited into an account to reimburse the Seller Representative for any fees and expenses incurred by the Seller Representative in performing its duties under the Purchase Agreement as the representative of the Sellers.

Current wording

On June 11, 2024, the Company entered into a Stock Purchase Agreement, by and among the Company, Pro-ficiency, each of the stockholders of Pro-ficiency (collectively, the “Sellers”) and WRYP Stockholders Services, LLC, solely in its capacity as the Sellers’ Representative (the “Purchase Agreement”). Pursuant to the Purchase Agreement, at closing on June 11, 2024, (the “Closing”), the Company purchased 100% of the issued and outstanding capital stock of Pro-ficiency (the “Acquisition”) from the Sellers for an aggregate purchase price of $100 million in cash, subject to post-closing adjustments for net working capital, closing cash, indebtedness, and transaction expenses (collectively, the “Purchase Price”). An aggregate of $1 million of the Purchase Price was placed in escrow to fund payment obligations of the Sellers with respect to post-Closing Purchase Price adjustments and post-Closing indemnification obligations of the Sellers, and another portion of the Purchase Price was deposited into an account to reimburse the Seller Representative for any fees and expenses incurred by the Seller Representative in performing its duties under the Purchase Agreement as the representative of the Sellers. As a result of the Acquisition, at Closing, Pro-ficiency became a wholly-owned subsidiary of the Company.

Previous wording

In connection with the Acquisition, the Company has obtained a customary buyer’s representation and warranty insurance policy (the “R&W Insurance Policy”) providing for up to $10 million in coverage in the case of breaches of representations and warranties of the Sellers and Pro-ficiency contained in the Purchase Agreement, subject to certain exclusions and an initial $0.5 million retention. The Company, on the one hand, and the Sellers, on the other hand, each bore one-half of the cost of obtaining the R&W Insurance Policy.

Current wording

In connection with the Acquisition, the Company obtained a customary buyer’s representation and warranty insurance policy (the “R&W Insurance Policy”) providing for up to $10 million in coverage in the case of breaches of representations and warranties of the Sellers and Pro-ficiency contained in the Purchase Agreement, subject to certain exclusions and an initial $0.5 million retention. The Company, on the one hand, and the Sellers, on the other hand, each bore one-half of the cost of obtaining the R&W Insurance Policy.

Previous wording

For the nine months ended May 31, 2024, we did not repurchase any shares and for the nine months ended May 31, 2023, we repurchased 492,041 shares through our share repurchase program. All repurchases were made using cash resources. As of May 31, 2024, $30 million remains available for additional repurchases under our authorized repurchase program. However, we are not obligated to repurchase any additional shares, and the timing, manner, price, and actual amount of further share repurchases will depend on a variety of factors, including stock price, market conditions, other capital management needs and opportunities, and corporate and regulatory considerations. The share repurchase program has no expiration date but may be terminated at any time at our Board of Directors’ discretion.

Current wording

For the three months ended November 30, 2024 and 2023, respectively, we did not repurchase any shares of Company stock. As of November 30, 2024, $30 million remains available for additional repurchases under our authorized repurchase program. However, we are not obligated to repurchase any additional shares, and the timing, manner, price, and actual amount of further share repurchases will depend on a variety of factors, including stock price, market conditions, other capital management needs and opportunities, and corporate and regulatory considerations. The share repurchase program has no expiration date but may be terminated at any time at our Board of Directors’ discretion.

Previous wording

The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance, and collectability of consideration is probable. Contracts generally have fixed pricing terms and are not subject to variable pricing. The Company considers the nature and significance of each specific performance obligation under a contract when allocating the proceeds under each contract. Accounting for contracts includes significant judgement in the estimation of estimated hours/cost to be incurred on consulting contracts, and thedi minimis nature of the post-sales costs associated with software sales.

Current wording

The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance, and collectability of consideration is probable. Contracts generally have fixed pricing terms and are not subject to variable pricing. The Company considers the nature and significance of each specific performance obligation under a contract when allocating the proceeds under each contract. Accounting for contracts includes significant judgement in the estimation of estimated hours/cost to be incurred on consulting contracts, and thede minimis nature of the post-sales costs associated with software sales.

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 $0.8 million and $0.9 million for the three months ended May 31, 2024, and May 31, 2023, respectively, and $2.6 million and $2.6 million for the nine months ended May 31, 2024, and May 31, 2023, respectively.

Current wording

Software development costs are capitalized in accordance with ASC 985-20, “Costs of Software to Be Sold, Leased, or 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 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 $0.7 million and $0.9 million for the three months ended November 30, 2024 and 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 $0.5 million and $0.4 million for the three months ended May 31, 2024, and May 31, 2023, respectively, and $1.3 million and $1.2 million for the fiscal nine months ended May 31, 2024, and May 31, 2023, 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 $0.8 million and $0.4 million, respectively for the three months ended November 30, 2024 and 2023, respectively. We expect future amortization expense to vary due to increases in capitalized computer software development costs.

Previous wording

The Company performs valuations of assets acquired and liabilities assumed on each acquisition accounted for as a business combination and recognizes the assets acquired and liabilities assumed at their acquisition date fair value. Acquired intangible assets include customer relationships, software, trade name, and noncompete agreements. The Company determines the appropriate useful life by performing an analysis of expected cash flows based on historical experience of the acquired businesses. Intangible assets are amortized over their estimated useful lives using the straight-line method, which approximates the pattern in which the majority of the economic benefits are expected to be consumed.

Current wording

The Company performs valuations of assets acquired and liabilities assumed on each acquisition accounted for as a business combination and recognizes the assets acquired and liabilities assumed at their acquisition-date fair value. Acquired intangible assets include customer relationships, software, trade names, and noncompete agreements. The Company determines the appropriate useful life by performing an analysis of expected cash flows based on historical experience of the acquired businesses. Intangible assets are amortized over their estimated useful lives using the straight-line method, which approximates the pattern in which the majority of the economic benefits are expected to be consumed.

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 May 31, 2024, after completion of the Company's internal reorganization, the Company determined that it had five reporting units: Cheminformatics, PBPK, QSP, CPP, and REG.

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 November 30, 2024, after completion of the Company's internal reorganization, the Company determined that it had six reporting units: CHEM, PBPK, QSP, CPP, MC, and ALI.

Previous wording

As of May 31, 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 nine months ended May 31, 2024, and May 31, 2023, respectively.

Current wording

As of November 30, 2024, the entire balance of goodwill was attributed to four of the Company's reporting units, CPP, QSP, ALI, and MC. 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, 2024 and 2023, respectively.

Previous wording

The Company accounted for the acquisitions of Cognigen, DILIsym, Lixoft, and Immunetrics using the acquisition method of accounting where the assets acquired and liabilities assumed are recognized based on their respective estimated fair values. The excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Determining the fair value of certain acquired assets and liabilities is subjective in nature and often involves the use of significant estimates and assumptions, including, but not limited to, the selection of appropriate valuation methodology, projected revenue, expenses, and cash flows, weighted-average cost of capital, discount rates, and estimates of terminal values. Business acquisitions are included in the Company's condensed consolidated financial statements as of the date of the acquisition.

Current wording

The Company accounted for the acquisitions using the acquisition method of accounting where the assets acquired and liabilities assumed are recognized based on their respective estimated fair values. The excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Determining the fair value of certain acquired assets and liabilities is subjective in nature and often involves the use of significant estimates and assumptions, including, but not limited to, the selection of appropriate valuation methodology, projected revenue, expenses, and cash flows, weighted-average cost of capital, discount rates, and estimates of terminal values. Business acquisitions are included in the Company's consolidated financial statements as of the date of the acquisition.

Previous wording

Research and development costs are charged to expense as incurred until technological feasibility has been established, or when the costs are for maintenance and minor modification of existing software products that do not add significant new capabilities to the products. These costs include salaries, laboratory experiment, and purchased software that was developed by other companies and incorporated into, or used in the development of, our final products.

Current wording

Research and development costs are charged to expense as incurred until technological feasibility has been established, or when the costs are for maintenance and minor modification of existing software products that do not add significant new capabilities to the products. These costs include salaries and benefits, laboratory experiments, and purchased software that was developed by other companies and incorporated into, or used in the development of, our final products.

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 $1.7 million and $1.1 million for the three months ended May 31, 2024, and May 31, 2023, respectively, and $4.6 million and $3.2 million for the nine months ended May 31, 2024, and May 31, 2023, 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 $1.7 million and $1.3 million, for the three months ending November 30, 2024 and 2023, respectively.