SIMULATIONS PLUS, INC. Forward-Looking Statements
This document and the documents incorporated in this document by reference contain forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact contained in this document and the materials accompanying this document are forward-looking statements.
The forward-looking statements are based on the beliefs of our management, as
well as assumptions made by and information currently available to our
management. Frequently, but not always, forward-looking statements are
identified by the use of the future tense and by words such as "believes,"
expects," "anticipates," "intends," "will," "may," "could," "would," "projects,"
"continues," "estimates" or similar expressions. Forward-looking statements are
not guarantees of future performance and actual results could differ materially
from those indicated by the forward-looking statements. Forward-looking
statements involve known and unknown risks, uncertainties, and other factors
that may cause our or our industry's actual results, levels of activity,
performance, or achievements to be materially different from any future results,
levels of activity, performance, or achievements expressed or implied by the
forward-looking statements.
The forward-looking statements contained or incorporated by reference in this
document are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended ("Securities Act"), and Section 21E of the
Securities Exchange Act of 1934, as amended ("Exchange Act"), and are subject to
the safe harbor created by the Private Securities Litigation Reform Act of 1995.
These statements include declarations regarding our plans, intentions, beliefs,
or current expectations.
Among the important factors that could cause actual results to differ materially
from those indicated by forward-looking statements are the risks and
uncertainties described under "Risk Factors" in our Annual Report on Form 10-K
for the year ended August 31, 2022 , filed with the Securities and Exchange
Commission ("SEC") on October 28, 2022 , and elsewhere in this document and in
our other filings with the SEC .
Forward-looking statements are expressly qualified in their entirety by this
cautionary statement. The forward-looking statements included in this document
are made as of the date of this document and we do not undertake any obligation
to update forward-looking statements to reflect new information, subsequent
events, or otherwise.
General
BUSINESS
OVERVIEW
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 ("AI")
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 ; 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.
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
--------------------------------------------------------------------------------Table of Contents
formulations, select and justify dosing regimens, support the generics industry, optimize clinical trial designs, and simulate outcomes in special populations, such as in elderly and pediatric patients.
Results of Operations
Comparison of Three Months Ended
(in thousands) Three Months Ended November 30,
2022 2021 $ Change % Change
Revenue $ 11,964 $ 12,417 $ (453) (4) %
Cost of revenue 2,671 2,756 (85) (3) %
Gross profit 9,293 9,661 (368) (4) %
Research and development 1,166 882 284 32 %
Selling, general, and administrative 7,249 4,988 2,261 45 %
Total operating expenses 8,415 5,870 2,545 43 %
Income from operations 878 3,791 (2,913) (77) %
Other income, net 740 65 675 1038 %
Income before income taxes 1,618 3,856 (2,238) (58) %
Provision for income taxes (373) (830) 457 (55) %
Net income $ 1,245 $ 3,026 $ (1,781) (59) %
Revenues
Revenues decreased by $0.5 million , or 4%, to $12.0 million for the three months
ended November 30, 2022 , compared to $12.4 million for the year ended
November 30, 2021 . This decrease is primarily due to a $1.3 million , or 17%,
decrease in software-related revenue, driven by timing of the software license
renewals and foreign currency exchange rate fluctuations, partially offset by an
increase of $0.8 million , or 17%, in service-related revenue when comparing the
three months ended November 30, 2022 , and 2021.
Cost of revenues
Cost of revenues remained relatively consistent with a slight decrease of$0.1 million , or 3%, for the three months endedNovember 30, 2022 , compared to the three months endedNovember 30, 2021 . The decrease is primarily due to a$0.2 million , or 12%, decrease in service-related cost of revenue, offset by an increase of$0.2 million , or 20%, in software-related cost of revenue when compared to the three months endedNovember 30, 2021 .
Gross profit
Gross profit decreased by$0.4 million , or 4%, to$9.3 million for the three months endedNovember 30, 2022 , compared to$9.7 million , for the three months endedNovember 30, 2021 . The decrease in gross profit is due to a decrease in gross profit for our software business of$1.4 million , or 22%, partially offset by an increase in gross profit for our services business of$1.1 million , or 35%.
Overall gross margin percentage was 78% and 78% for the three months ended
Research and development
We incurred$2.1 million of research and development costs during the three months endedNovember 30, 2022 . Of this amount,$0.9 million was capitalized as a part of capitalized software development costs and$1.2 million was expensed. We incurred$1.7 million of research and development costs during the three months endedNovember 30, 2021 . Of this amount,$0.8 million was capitalized and$0.9 million was expensed. --------------------------------------------------------------------------------
Table of Contents
Selling, general, and administrative expenses
Selling, general, and administrative ("SG&A") expenses increased by $2.3
million , or 45%, to $7.2 million for the three months ended November 30, 2022 ,
compared to $5.0 million for the three months ended November 30, 2021 . The
increase was primarily due to an increase in personnel costs of $1.2 million , an
increase in merger and acquisition costs of $0.3 million , an increase of $0.2
million in commission to distributors, and an increase in travel costs of $0.1
million .
As a percent of revenues, SG&A expense was 61% for the three months ended
Other income
Total other income was
Provision for income taxes
The provision for income taxes was
Results of Operations by Business Unit
Comparison of Three Months Ended
Revenues
(in thousands) Three Months Ended November 30,
2022 2021 Change ($) Change (%)
Software $ 6,074 $ 7,362 $ (1,288) (17) %
Services 5,890 5,055 835 17 %
Total $ 11,964 $ 12,417 $ (453) (4) %
Cost of Revenues
(in thousands) Three Months Ended November 30,
2022 2021 Change ($) Change (%)
Software $ 885 $ 735 $ 150 20 %
Services 1,786 2,021 (235) (12) %
Total $ 2,671 $ 2,756 $ (85) (3) %
--------------------------------------------------------------------------------
Table of Contents
Gross Profit
(in thousands) Three Months Ended November 30,
2022 2021 Change ($) Change (%)
Software $ 5,189 $ 6,627 $ (1,438) (22) %
Services 4,104 3,034 1,070 35 %
Total $ 9,293 $ 9,661 $ (368) (4) %
Software Business
For the three months ended November 30, 2022 , the revenue decrease of $1.3
million , or 17%, compared to the three months ended November 30, 2021 , was
primarily due to lower revenues from GastroPlus® of $1.0 million and lower
revenues from Absorption, Distribution, Metabolism, Excretion, and Toxicity
Predictor ("ADMET Predictor®") of $0.4 million driven by timing of the software
license renewals and foreign currency exchange rate fluctuations. Cost of
revenues increased by $0.2 million , or 20%, during the same periods, and gross
profit decreased by $1.4 million , or 22%, primarily due to the decrease in
revenues.
Services Business
For the three months endedNovember 30, 2022 , the revenue increase of$0.8 million , or 17%, compared to the three months endedNovember 30, 2021 , was primarily due to higher revenues from physiologically based pharmacokinetics ("PBPK") of$0.6 million and an increase in revenues from pharmacokinetic and pharmacodynamic ("PKPD") of$0.5 million , partially offset by a decrease in revenues from quantitative systems pharmacology/quantitative systems toxicology ("QSP/QST") of$0.4 million . Cost of revenues decreased by$0.2 million , or 12%. Gross profit increased by$1.1 million , or 35%, for the same periods.
Liquidity and Capital Resources
As ofNovember 30, 2022 , the Company had$49.4 million in cash and cash equivalents,$82.1 million in short-term investments, and working capital of$140.7 million . Our principal sources of capital have been cash flows from our operations. We have achieved continuous positive operating cash flow over the last thirteen fiscal years. OnDecember 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 under certainSEC regulations, which would 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. We are not obligated to repurchase any shares under the repurchase program. We expect to fund share repurchases, if any, through cash on hand and cash generated from operations. We believe that our existing capital and anticipated funds from operations will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for the foreseeable future, including to complete our recently approved share repurchase program, if we so choose. Thereafter, if cash generated from operations is insufficient to satisfy our capital requirements, we may have to sell additional equity or debt securities or obtain a new credit facility. In the event such financing is needed in the future, there can be no assurance that such financing will be available to us, or, if available, that it will be in amounts and on terms acceptable to us. If cash flows from operations became insufficient to continue operations at the current level, and if no additional financing was obtained, then management would restructure the Company in a way to preserve its pharmaceutical business while maintaining expenses within operating cash flows. -------------------------------------------------------------------------------- Table of Contents We continue to seek opportunities for strategic acquisitions, investments, and partnerships. If one or more such strategic opportunities are identified, a substantial portion of our cash reserves may be required to complete it; however, we intend to maintain sufficient cash reserves to provide reasonable assurance that outside financing will not be necessary to continue operations. 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. Except as discussed elsewhere in this Quarterly Report on Form 10-Q, 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 increasing cash deposits from our operating cash flows, and we expect that trend to continue for the foreseeable future. Cash Flows Operating Activities Net cash provided by operating activities was$4.7 million for the three months endedNovember 30, 2022 . Our operating cash flows resulted in part 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 non-cash charges was added to net income to reconcile to cash flow from operations. Net cash provided by operating activities was$3.6 million for the three months endedNovember 30, 2021 . Our operating cash flows resulted primarily from our net income of$3.0 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,$1.9 million related to changes in balances of operating assets and liabilities was subtracted from net income and$2.4 million related to non-cash charges was added to net income to reconcile to cash flow from operations. Investing Activities Net cash used for investing activities during the three months endedNovember 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 . Net cash provided by investing activities during the three months endedNovember 30, 2021 , was$2.0 million , primarily due to the proceeds from maturities of short-term investments totaling$16.1 million , offset by purchase of short-term investments of$12.7 million and computer software development costs of$0.8 million . Financing Activities
Net cash used in financing activities during the three months ended
Net cash used in financing activities during the three months ended
Working Capital
AtNovember 30, 2022 , we had working capital of$140.7 million , a ratio of current assets to current liabilities of 18.5 and a ratio of debt to equity of 0.1. AtAugust 31, 2022 , we had working capital of$139.1 million , a ratio of current assets to current liabilities of 19.0 and a ratio of debt to equity of 0.1. --------------------------------------------------------------------------------
Table of Contents
Known Trends or Uncertainties
We have seen some consolidation in the pharmaceutical industry during economic downturns, although these consolidations have not had a negative effect on our total revenues from that industry. Should customer delays, holds, program cancellations, or consolidations and downsizing in the industry continue to occur, those events could adversely impact our revenues and earnings going forward. We believe that the need for improved productivity in the research and development activities directed toward developing new medicines will continue to result in increasing adoption of simulation and modeling tools such as those we produce. New product developments in our pharmaceutical business segments could result in increased revenues and earnings if they are accepted by our markets; however, there can be no assurances that new products will result in significant improvements to revenues or earnings. For competitive reasons, we do not disclose all of our new product development activities. Historically we have paid cash dividends of$0.06 per share to holders of shares of our common stock on a quarterly basis. The declaration of any future dividends will be determined by the Board of Directors each quarter and will depend on earnings, financial condition, capital requirements, and other factors.
Our continued quest for acquisitions could result in a significant change to revenues and earnings if one or more such acquisitions are completed.
The potential for growth in new markets (e.g., healthcare) is uncertain. We will continue to explore these opportunities until such time as we either generate revenues or determine that resources would be more efficiently used elsewhere.
Critical Accounting Estimates
Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted inthe United States of America . The preparation of the condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements, and the reported amounts of expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including those related to recoverability and useful lives of long-lived assets, stock compensation, valuation of derivative instruments, allowances, contingent consideration, contingent value rights, fixed payment arrangements, and going concern. Management bases its estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The methods, estimates, and judgments used by us in applying these critical accounting policies have a significant impact on the results we report in our condensed consolidated financial statements. Our significant accounting policies and estimates are included in our Annual Report on Form 10-K for the fiscal year endedAugust 31, 2022 (the "Annual Report"), filed with theSEC onOctober 28, 2022 . Information regarding our significant accounting policies and estimates can also be found in Note 2, Significant Accounting Policies, to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
© Edgar Online, source
