SIMULATIONS PLUS, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)

0

Forward-looking statements

This document and the documents incorporated herein 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, 2021, filed with the Securities and Exchange
Commission ("SEC") on October 27, 2021, 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 modeling
and simulation software for drug discovery and development, including the
prediction of properties of molecules utilizing artificial-intelligence and
machine-learning-based technologies. We also provide consulting services ranging
from early drug discovery through preclinical and clinical trial development to
regulatory submissions in support of product approval. Our software and
consulting services are provided to major pharmaceutical, biotechnology,
agrochemical, cosmetics, and food industry companies. They are also provided to
academic agencies for use in education and in the conduct of industry-based
research and to regulatory agencies for product approval. The Company is
headquartered in Southern California, with additional offices in Buffalo, NY;
Durham, 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 generate revenue by delivering relevant, cost-effective software and creative
and insightful consulting services. Pharmaceutical and biotechnology companies
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 development of generic medicines after patent
expiration, including using our software products and services to enhance their
understanding of the properties of potential new medicines and to use emerging
data to improve 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.
                                       26

————————————————– ——————————

Contents

Impacts of the COVID-19 pandemic on our activities

For a discussion of the impacts on, and risks to, our business from COVID-19,
please refer to "Our business is subject to risks arising from epidemic
diseases, such as the recent outbreak of the COVID-19 illness" included in Item
1A Risk Factors in our Annual Report on Form 10-K for the fiscal year ended
August 31, 2021, filed with the SEC on October 27, 2021.

RECENT DEVELOPMENTS

Abbreviated mergers

Effective September 1, 2021, the Company merged Cognigen Corporation and
DILIsym, Services, Inc. (wholly owned subsidiaries of the Company) with and into
Simulations Plus, Inc. through short-form mergers (the "Mergers"). To effectuate
the Mergers, the Company filed Certificates of Ownership with the Secretaries of
State of the states of Delaware (Cognigen's and DILIsym's state of
incorporation) and California (the Company's state of incorporation).
Consummation of the Mergers was not subject to approval of the Company's
stockholders and did not impact the rights of the Company's stockholders.

Summary of trading results

Comparison of the three months ended May 31, 2022 and 2021:

(in thousands)                                          Three Months Ended May 31,
                                              2022           2021        $ Change      % Change
Revenue                                   $   14,959      $ 12,777      $  2,182           17  %
Cost of revenue                                2,559         2,471            88            4  %
Gross profit                                  12,400        10,306         2,094           20  %
Research and development                         655           670           (15)          (2) %
Selling, general and administrative            6,799         5,094         1,705           33  %
Total operating expenses                       7,454         5,764         1,690           29  %
Income from operations                         4,946         4,542           404            9  %
Other income (expense), net                     (112)          (51)          (61)         120  %
Income before income taxes                     4,834         4,491           343            8  %
Provision for income taxes                      (747)         (704)          (43)           6  %
Net income                                $    4,087      $  3,787      $    300            8  %


Revenue

Consolidated revenue increased by $2.2 million or 17% to $15.0 million for the
three months ended May 31, 2022, compared to consolidated revenue of $12.8
million for the three months ended May 31, 2021. This increase is primarily due
to a $1.3 million or 16% increase in software-related revenue and a $833
thousand or 19% increase in service-related revenue when compared to the three
months ended May 31, 2021.

Cost of Revenue

Consolidated cost of revenue increased by $88 thousand or 4% to $2.6 million for
the three months ended May 31, 2022, compared to $2.5 million for the three
months ended May 31, 2021. The increase is primarily due to a $158 thousand or
9% increase in service-related cost of revenue, partially offset by a $70
thousand or 9% decrease in software-related cost of revenue when compared to the
three months ended May 31, 2021.
                                       27

————————————————– ——————————

Contents

Gross profit

Consolidated gross profit increased by $2.1 million or 20% to $12.4 million for
the three months ended May 31, 2022, compared to $10.3 million for the three
months ended May 31, 2021. The higher gross profit is primarily due to an
increase in gross profit for our software business of $1.4 million or 19% and a
$675 thousand or 24% increase in gross profit for our services business.

Overall gross margin percentage was 83% and 81% for the three months ended
May 31, 2022 and 2021, respectively.

Research and development costs

Total research and development costs decreased by $56 thousand for the three
months ended May 31, 2022, compared to the three months ended May 31, 2021.
During the three months ended May 31, 2022, we incurred $1.4 million of research
and development costs; of this amount, $759 thousand was capitalized and $655
thousand was expensed. During the three months ended May 31, 2021, we incurred
$1.5 million of research and development costs; of this amount $800 thousand was
capitalized and $670 thousand was expensed.

Selling, general and administrative expenses

Selling, general, and administrative expenses increased by $1.7 million or 33%
to $6.8 million for the three months ended May 31, 2022, up from $5.1 million
for the three months ended May 31, 2021. The increase was primarily due to an
increase in personnel costs of $537 thousand, driven largely by inflationary
wage pressure and a tight labor market, an increase in travel costs of $193
thousand, and an increase in insurance expense of $154 thousand.

As a percentage of sales, consolidated selling, general and administrative expenses increased by 40% to 45% for the same comparative periods.

Other income (expenses), net

Total other expense was $112 thousand for the three months ended May 31, 2022,
compared to total other expense of $51 thousand for the three months ended
May 31, 2021. The variance of $61 thousand was primarily due to
currency-exchange loss of $244 thousand, partially offset by an increase in
interest income of $102 thousand and a decrease in loss due to change in value
of contingent consideration of $81 thousand.

Provision for income taxes

Provision for income taxes was $747 thousand for the three months ended May 31,
2022, compared to $704 thousand for the same period in the previous year. Our
effective tax rate decreased by less than 1% to 15% for the three months ended
May 31, 2022, from 16% during the same period of the previous year.
                                       28

————————————————– ——————————

Contents

Comparison of the nine months ended May 31, 2022 and 2021:

(in thousands)                                          Nine Months Ended May 31,
                                             2022           2021        $ Change      % Change
Revenue                                   $  42,172      $ 36,625      $  5,547           15  %
Cost of revenue                               8,145         7,815           330            4  %
Gross profit                                 34,027        28,810         5,217           18  %
Research and development                      2,439         2,771          (332)         (12) %
Selling, general and administrative          17,371        14,960         2,411           16  %
Total operating expenses                     19,810        17,731         2,079           12  %
Income from operations                       14,217        11,079         3,138           28  %
Other income (expense), net                       6          (169)          175         (104) %
Income before income taxes                   14,223        10,910         3,313           30  %
Provision for income taxes                   (2,701)       (1,433)       (1,268)          88  %
Net income                                $  11,522      $  9,477      $  2,045           22  %


Revenue

Consolidated revenue increased by $5.5 million or 15% to $42.2 million for the
nine months ended May 31, 2022, compared to consolidated revenue of $36.6
million for the nine months ended May 31, 2021. This increase is primarily due
to a $4.4 million or 20% increase in software-related revenue, as well as a $1.1
million or 8% increase in service-related revenue when comparing the nine months
ended May 31, 2022 and 2021.

Cost of Revenue

Consolidated cost of revenue increased by $330 thousand or 4% to $8.1 million
for the nine months ended May 31, 2022, compared to $7.8 million for the nine
months ended May 31, 2021. The increase is primarily due to a $533 thousand or
10% increase in service-related cost of revenue, partially offset by a decrease
of $203 thousand in software-related cost of revenue when compared to the nine
months ended May 31, 2022 and 2021.

Gross profit

Consolidated gross profit increased by $5.2 million or 18% to $34.0 million for
the nine months ended May 31, 2022, compared to $28.8 million for the nine
months ended May 31, 2021. The higher gross profit is due to an increase in
gross profit for our software business of $4.6 million or 23% and an increase in
gross profit for our services business of $584 thousand or 7%.

Overall gross margin percentage was 81% and 79% for the nine months ended May 31, 2022 and 2021, respectively.

Research and development costs

Total research and development costs decreased by $366 thousand for the nine
months ended May 31, 2022, compared to the nine months ended May 31, 2021.
During the nine months ended May 31, 2022, we incurred $4.7 million of research
and development costs; of this amount, $2.3 million was capitalized and $2.4
million was expensed. During the nine months ended May 31, 2021, we incurred
$5.1 million of research and development costs; of this amount $2.3 million was
capitalized and $2.8 million was expensed.

Selling, general and administrative expenses

Selling, general, and administrative expenses increased by $2.4 million or 16%
to $17.4 million for the nine months ended May 31, 2022, from $15.0 million for
the nine months ended May 31, 2021. The increase was primarily due to an
increase in personnel costs of $1.7 million, an increase in insurance costs of
$442 thousand related to cyber and D&O premiums, and an increase in travel costs
of $255 thousand.
                                       29

————————————————– ——————————

Contents

As a percentage of sales, consolidated selling, general and administrative expenses remained stable at 41% for the same comparative periods.

Other income (expenses), net

Total other income was $6 thousand for the nine months ended May 31, 2022
compared to total other expense of $169 thousand for the nine months ended May
31, 2021. The variance of $175 thousand was primarily due to an increase in net
interest income of $144 thousand.

Provision for income taxes

Provision for income taxes was $2.7 million for the nine months ended May 31,
2022, compared to $1.4 million for the same period in the previous year. Our
effective tax rate increased 6% to 19% for the nine months ended May 31, 2022
compared to 13% for the same period of the previous year.

Segment operating results by business unit

Comparison of the three months ended May 31, 2022 and 2021:

Revenue

(in thousands)                       Three Months Ended May 31,
                         2022           2021        Change ($)       Change (%)
Software             $    9,647      $  8,298      $     1,349             16  %
Services                  5,312         4,479              833             19  %
Total                $   14,959      $ 12,777      $     2,182             17  %


Cost of Revenue

(in thousands)                         Three Months Ended May 31,
                            2022             2021        Change ($)      Change (%)
Software             $      730            $   800      $      (70)            (9) %
Services                  1,829              1,671             158              9  %
Total                $    2,559            $ 2,471      $       88              4  %


Gross Profit

(in thousands)                       Three Months Ended May 31,
                         2022           2021        Change ($)       Change (%)
Software             $    8,917      $  7,498      $     1,419             19  %
Services                  3,483         2,808              675             24  %
Total                $   12,400      $ 10,306      $     2,094             20  %


Software Business

For the three months ended May 31, 2022, the revenue increase of $1.3 million or
16%, compared to the three months ended May 31, 2021, was primarily due to
higher sales from GastroPlus of $1.0 million. Cost of revenue decreased $70
thousand or 9% during the same periods primarily due to a decrease in
amortization of capitalized software. Gross profit increased $1.4 million or 19%
during the same periods, primarily due to the increase in revenue.
                                       30

————————————————– ——————————

Contents

service company

For the three months ended May 31, 2022, the revenue increase of $833 thousand
or 19%, compared to the three months ended May 31, 2021, was primarily due to an
increase in revenue from PBPK of $612 thousand and an increase in revenue from
PKPD of $557 thousand, partially offset by decreases in other services revenue.
Cost of revenue increased $158 thousand or 9%, primarily due to an increase in
CRO services of $105 thousand. Gross profit increased $675 thousand or 24%.

Comparison of the nine months ended May 31, 2022 and 2021:

Revenue

(in thousands)                       Nine Months Ended May 31,
                        2022           2021        Change ($)       Change (%)
Software             $  26,767      $ 22,337      $     4,430             20  %
Services                15,405        14,288            1,117              8  %
Total                $  42,172      $ 36,625      $     5,547             15  %


Cost of Revenue

(in thousands)                         Nine Months Ended May 31,
                           2022            2021        Change ($)       Change (%)
Software             $    2,245          $ 2,448      $      (203)            (8) %
Services                  5,900            5,367              533             10  %
Total                $    8,145          $ 7,815      $       330              4  %


Gross Profit

(in thousands)                       Nine Months Ended May 31,
                        2022           2021        Change ($)       Change (%)
Software             $  24,522      $ 19,889      $     4,633             23  %
Services                 9,505         8,921              584              7  %
Total                $  34,027      $ 28,810      $     5,217             18  %


Software Business

For the nine months ended May 31, 2022, the revenue increase of $4.4 million or
20%, compared to the nine months ended May 31, 2021, was primarily due to higher
sales from GastroPlus, MonolixSuite, and ADMET Predictor of $2.6 million, $1.2
million, and $547 thousand, respectively. Cost of revenue decreased $203
thousand or 8% during the same periods primarily due to a decrease in
amortization of capitalized software. Gross profit increased $4.6 million or 23%
during the same periods, primarily due to the increase in revenue.

service company

For the nine months ended May 31, 2022, the revenue increase of $1.1 million or
8%, compared to the nine months ended May 31, 2021, was primarily due to an
increase in revenue from PBPK of $846 thousand, an increase from PKPD of $275
thousand, and an increase in QSP/QST consulting services of $143 thousand. Cost
of revenue increased by $533 thousand or 10%, primarily due to an increase in
personnel costs of $235 thousand and an increase in CRO services of $224
thousand. Gross profit increased $584 thousand or 7% during the same periods,
primarily due to the increase in revenue.
                                       31

————————————————– ——————————

Contents

Cash and capital resources

As of May 31, 2022, the Company had $42.4 million in cash and cash equivalents,
$80.1 million in short-term investments, and $138.9 million in working capital.
Our principal sources of capital have been cash flows from our operations and a
public offering in 2020. We have achieved continuous positive operating cash
flow over the last twelve fiscal years.

On March 31, 2020, we entered into a Credit Agreement with Wells Fargo Bank,
N.A. The Credit Agreement provided us with a credit facility of $3.5 million
through April 15, 2022 (the "Termination Date"), on which date the Credit
Agreement terminated in accordance with its terms. As a result, we can no longer
draw down against the line of credit. We chose not to renew or pursue an
alternative credit facility as we do not foresee a need to utilize such credit
facility within the next twelve months. As of the Termination Date, there were
no amounts drawn against the line of credit.

On March 31, 2020, we entered into a Share Purchase and Contribution Agreement
(the "Agreement") with Lixoft. Under the terms of the Agreement, we agreed to
pay the former shareholders of Lixoft total consideration of up to $16.5
million, consisting of two-thirds cash and one-third newly issued, unregistered
shares of our common stock. At closing, we paid the former shareholders of
Lixoft a total of $10.8 million, comprised of cash in the amount of $9.5 million
and the issuance of 111,682 shares of our common stock valued at $3.7 million,
net of adjustments and a $2.0 million holdback for representations and
warranties. In addition, we paid $3.5 million of excess working capital based on
the March 31, 2020 financial statements of Lixoft. In addition, the Agreement
called for earnout payments up to an additional $5.5 million, payable in
two-thirds cash and one-third newly issued, unregistered shares of our common
stock, based on a revenue growth formula each year for the two years subsequent
to April 1, 2020. The former shareholders could earn up to $2 million the first
year and $3.5 million in year two. In June 2021, $2.0 million was paid out under
the first earnout payment, which was comprised of $1.3 million of cash and $0.7
million worth of common stock. In April 2022, we released and distributed the
$2.0 million holdback consideration, consisting of $1.3 million in cash and
shares of common stock valued at $0.7 million (amounting to an aggregate of
20,326 unregistered shares of common stock), to the former shareholders of
Lixoft. In May 2022, we released and distributed $3.5 million in earnout
consideration, consisting of $2.3 million in cash and shares of common stock
valued at $1.2 million (amounting to an aggregate of 23,825 unregistered shares
of common stock), to the former shareholders of Lixoft in accordance with the
Agreement.

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. 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.

We continue to seek opportunities for strategic acquisitions. If one or more
such acquisitions is identified, a substantial portion of our cash reserves may
be required to complete it; however, we intend to maintain sufficient cash
reserves after any acquisition to provide reasonable assurance that outside
financing will not be necessary to continue operations. If we identify an
attractive acquisition 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 acquisition, including obtaining loans and issuing
additional securities.

Except as discussed elsewhere in 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 increasing cash deposits from our operating cash flows, and we
expect that trend to continue for the foreseeable future.
                                       32

————————————————– ——————————

  Table of Contents

Cash Flows

Operating Activities

Net cash provided by operating activities was $10.0 million for the nine months
ended May 31, 2022. Our operating cash flows resulted primarily from our net
income of $11.5 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, net cash outflow from changes in
balances of operating assets and liabilities was $8.0 million, offset by
non-cash charges of $6.5 million. The change in operating assets and liabilities
was primarily a result of an increase in accounts receivable.

Net cash provided by operating activities was $10.9 million for the nine months
ended May 31, 2021. Our operating cash flows resulted primarily from our net
income of $9.5 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, net cash outflow from changes in balances of
operating assets and liabilities was $5.4 million, offset by non-cash charges of
$6.8 million. The change in operating assets and liabilities was primarily a
result of an increase in accounts receivable.

Investing activities

Net cash provided by investing activities during the nine months ended May 31,
2022, of $2.0 million was primarily due to the proceeds from the sale of
short-term investments of $75.9 million, partially offset by the purchase of
short-term investments of $70.9 million and the purchase of computer software
development costs of $2.3 million.

Cash provided by investing activities during the nine months ended May 31, 2021,
of $865 thousand was primarily due to the proceeds from the sale of short-term
investments of $68.1 million, partially offset by the purchase of short-term
investments of $64.0 million, the costs associated with the development of
computer software of $2.3 million and the purchase of equipment of $1.0 million.

Fundraising activities

For the nine months ended May 31, 2022, net cash used in financing activities of
$6.6 million was primarily due to payments on contracts payable of $3.7 million
comprised of $2.3 million for the final earnout payment and $1.3 million to
settle the holdback liability related to the Lixoft acquisition, and dividend
payments totaling $3.6 million, partially offset by proceeds from the exercise
of stock options totaling $693 thousand.

For the nine months ended May 31, 2021net cash used by financing activities of
$2.2 million was mainly driven by the payment of dividends totaling $3.6 millionpartially offset by proceeds from the exercise of stock options totaling $1.4 million.

Working capital

At May 31, 2022, we had working capital of $138.9 million, a ratio of current
assets to current liabilities of 24.5 and a ratio of debt to equity of less than
0.1. At August 31, 2021, we had working capital of $127.7 million, a ratio of
current assets to current liabilities of 12.0 and a ratio of debt to equity of
0.1.

Contractual Obligations

The following table provides general information regarding our contractual obligations at May 31, 2022:

(in thousands)                                              Payments due by 

period

Contractual obligations:           Total       1 year      2-3 years       

4-5 years More than 5 years

Operating lease obligations      $ 1,629      $  509      $      801      $      319      $                -

Total                            $ 1,629      $  509      $      801      $      319      $                -


                                       33

————————————————– ——————————

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 revenue from that industry. Should consolidations and downsizing in the
industry continue to occur, those events could adversely impact our revenue 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 the pharmaceutical business segments could
result in increased revenue and earnings if they are accepted by our markets;
however, there can be no assurances that new products will result in significant
improvements to revenue or earnings. For competitive reasons, we do not disclose
all of our new product development activities.

Our continued pursuit of acquisitions could result in a material change in revenues and earnings if one or more of these 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
sales 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 in the 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, including the COVID-19 pandemic, 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 ended August 31,
2021 (the "Annual Report"), filed with the SEC on October 27, 2021.

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 Previews


Source link

Share.

Comments are closed.