simu-20231130

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q


x			Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended November 30, 2023

OR

o			Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ______ to ______

Commission file number: 001-32046

Simulations Plus, Inc.

(Name of registrant as specified in its charter)


California			95-4595609
(State or other jurisdiction of Incorporation or Organization)			(I.R.S. Employer identification No.)

42505 10th Street West

Lancaster, CA 93534-7059

(Address of principal executive offices including zip code)

(661) 723-7723

(Registrant’s telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:


Title of Each Class Common Stock, par value $0.001 per share			Trading Symbol SLP			Name of Each Exchange on Which Registered NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act (Check one):


x	Large accelerated Filer	o	Accelerated Filer
o	Non-accelerated Filer	o	Smaller reporting company
o	Emerging Growth Company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The number of shares outstanding of the registrant’s common stock, par value $0.001 per share, as of December 27, 2023, was 19,967,077.

Simulations Plus, Inc.

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FORM 10-Q

For the Quarterly Period Ended November 30, 2023

Table of Contents


	PART I. FINANCIAL INFORMATION
		Page
Item 1.	Condensed Consolidated Financial Statements

	Condensed Consolidated Balance Sheets at November 30, 2023 and August 31, 2023	3

	Condensed Consolidated Statements of Operations and Comprehensive Income for the three months ended November 30, 2023 and 2022	4

	Condensed Consolidated Statements of Shareholders’ Equity for the three months ended November 30, 2023 and 2022	5

	Condensed Consolidated Statements of Cash Flows for the three months ended November 30, 2023 and 2022	6

	Notes to Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	35

Item 4.	Controls and Procedures	36

	PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	36

Item 1A.	Risk Factors	36

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37

Item 3.	Defaults upon Senior Securities	37

Item 4.	Mine Safety Disclosures	37

Item 5.	Other Information	37

Item 6.	Exhibits	38

	Signatures	39

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

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SIMULATIONS PLUS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS


	(Unaudited)		(Audited)
(in thousands, except share and per share amounts)	November 30, 2023		August 31, 2023
ASSETS
Current assets
Cash and cash equivalents	$	39,789	$	57,523
Accounts receivable, net of allowance for doubtful accounts of $37 and $46	10,346		10,201
Prepaid income taxes	37		804
Prepaid expenses and other current assets	5,414		3,904
Short-term investments	74,101		57,940
Total current assets	129,687		130,372
Long-term assets
Capitalized computer software development costs, net of accumulated amortization of $17,580 and $17,199	11,896		11,335
Property and equipment, net	487		671
Operating lease right-of-use assets	1,118		1,247
Intellectual property, net of accumulated amortization of $9,709 and $9,301	8,281		8,689
Other intangible assets, net of accumulated amortization of $2,351 and $2,107	12,954		12,825
Goodwill	19,099		19,099
Deferred tax assets	1,826		1,438
Other assets	430		425
Total assets	$	185,778	$	186,101

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable	$	317	$	144
Accrued compensation	2,170		4,392
Accrued expenses	731		659

Contracts payable	2,290		3,250
Operating lease liability - current portion	420		442
Deferred revenue	2,660		3,100
Total current liabilities	8,588		11,987
Long-term liabilities

Operating lease liability	669		755
Contracts payable – net of current portion	4,180		3,330
Total liabilities	13,437		16,072
Commitments and contingencies	—		—
Shareholders' equity
Preferred stock, $0.001 par value — 10,000,000 shares authorized; no shares issued and outstanding	$	—	$	—
Common stock, $0.001 par value and additional paid-in capital —50,000,000 shares authorized; 19,965,678 and 19,937,961 shares issued and outstanding	146,591		144,974
Retained earnings	25,945		25,196
Accumulated other comprehensive loss	(195)		(141)
Total shareholders' equity	172,341		170,029
Total liabilities and shareholders' equity	$	185,778	$	186,101

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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SIMULATIONS PLUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Unaudited)


	Three Months Ended November 30,

(in thousands, except per common share amounts)	2023		2022
Revenues
Software	$	7,589	$	6,074
Services	6,911		5,890
Total revenues	14,500		11,964
Cost of revenues
Software	991		885
Services	3,661		1,786
Total cost of revenues	4,652		2,671
Gross profit	9,848		9,293
Operating expenses
Research and development	1,217		1,166
Selling and marketing	1,989		1,485
General and administrative	5,682		5,764
Total operating expenses	8,888		8,415

Income from operations	960		878

Other income	1,446		740

Income before income taxes	2,406		1,618
Provision for income taxes	(461)		(373)
Net income	$	1,945	$	1,245

Earnings per share
Basic	$	0.10	$	0.06
Diluted	$	0.10	$	0.06

Weighted-average common shares outstanding
Basic	19,947		20,286
Diluted	20,279		20,825

Other comprehensive income, net of tax
Foreign currency translation adjustments	(54)		53
Comprehensive income	$	1,891	$	1,298

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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SIMULATIONS PLUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(Unaudited)


	Three Months Ended November 30,

(in thousands, except per common share amounts)		2023		2022
Common stock and additional paid in capital
Balance, beginning of period		$	144,974	$	138,512
Exercise of stock options		164		758
Stock-based compensation		1,303		886
Shares issued to Directors for services		150		150




Balance, end of period		146,591		140,306

Retained earnings
Balance, beginning of period		25,196		40,044
Declaration of dividends		(1,196)		(1,218)

Net income		1,945		1,245
Balance, end of period		25,945		40,071

Accumulated other comprehensive loss
Balance, beginning of period		(141)		(308)
Other comprehensive (loss) income		(54)		53
Balance, end of period		(195)		(255)
Total shareholders’ equity		$	172,341	$	180,122
Cash dividends declared per common share		$	0.06	$	0.06

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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SIMULATIONS PLUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	Three Months Ended November 30,

(in thousands)	2023		2022
Cash flows from operating activities
Net income	$	1,945	$	1,245
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization	1,091		923
Change in fair value of contingent consideration	(110)		—
Amortization of investment (discounts) premiums	(395)		(90)
Stock-based compensation	1,362		1,036
Deferred income taxes	(388)		—



Currency translation adjustments	(54)		52
(Increase) decrease in
Accounts receivable	(145)		2,088
Prepaid income taxes	767		399
Prepaid expenses and other assets	(1,515)		(1,266)
Increase (decrease) in
Accounts payable	173		13
Other liabilities	(2,129)		107

Deferred revenue	(440)		200
Net cash provided by operating activities	162		4,707

Cash flows from investing activities
Purchases of property and equipment	—		(109)
Purchase of short-term investments	(30,544)		(29,518)
Proceeds from maturities of short-term investments	14,778		24,138
Purchased intangibles	(247)		(39)

Capitalized computer software development costs	(851)		(894)
Net cash used in investing activities	(16,864)		(6,422)

Cash flows from financing activities
Payment of dividends	(1,196)		(1,218)
Payments on contracts payable	—		758
Proceeds from the exercise of stock options	164		—

Net cash used in financing activities	(1,032)		(460)

Net decrease in cash and cash equivalents	(17,734)		(2,175)
Cash and cash equivalents, beginning of year	$	57,523	$	51,567
Cash and cash equivalents, end of period	$	39,789	$	49,392

Supplemental disclosures of cash flow information
Income taxes paid	$	96	$	—

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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Simulations Plus, Inc.

Notes to Condensed Consolidated Financial Statements

For the three months ended November 30, 2023

NOTE 1 – ORGANIZATION AND LINES OF BUSINESS

Organization

Simulations Plus, Inc. (“Simulations Plus”) was incorporated on July 17, 1996. In September 2014, Simulations Plus acquired all of the outstanding equity interests of Cognigen Corporation (“Cognigen”) and Cognigen became a wholly owned subsidiary of Simulations Plus. In June 2017, Simulations Plus acquired DILIsym Services, Inc. (“DILIsym”) as a wholly owned subsidiary. In April 2020, Simulations Plus acquired Lixoft, a French société par actions simplifiée (“Lixoft” or “SLP France”), as a wholly owned subsidiary pursuant to a stock purchase and contribution agreement. In June 2023, Simulations Plus acquired Immunetrics, Inc. (“Immunetrics”) as a wholly owned subsidiary through a reverse triangular merger. (Simulations Plus together with its subsidiaries, collectively, the “Company,” “we,” “us,” “our”).

Effective September 1, 2021, the Company merged both Cognigen and DILIsym with and into Simulations Plus 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 (Simulation Plus’ 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.

On December 20, 2022, Simulations Plus International, Inc. (“SLPI”), a Delaware corporation, was created as a wholly owned subsidiary of Simulations Plus in order to facilitate future international acquisitions, if any, and global integrations. In furtherance of this objective, the Company added the trade name “SLP France” to Lixoft, and on April 25, 2023, Simulations Plus transferred its ownership of SLP France to SLPI pursuant to a contribution and acceptance agreement, resulting in SLP France becoming a wholly owned subsidiary of SLPI. The transfer did not impact the rights of the Company’s stockholders.

Effective September 1, 2023, the Company merged Immunetrics with and into Simulations Plus through a short-form merger (the “Merger”). To effectuate the Merger, the Company filed Certificates of Ownership with the Secretaries of State of the states of Delaware (Immunetrics’ state of incorporation) and California (Simulation Plus’ state of incorporation). Consummation of the Merger was not subject to approval of the Company’s stockholders and did not impact the rights of the Company’s stockholders.

At the beginning of fiscal year 2024, in order to create a more integrated and cohesive company, the Company reorganized its internal structuring to move away from divisions based on its prior acquisitions and to instead divide the internal structure into business units organized around key product and service offerings that the Company provides, which include:

•Clinical Pharmacology and Pharmacometrics (“CPP”);

•Quantitative Systems Pharmacology (“QSP”);

•Physiologically based pharmacokinetics (“PBPK”);

•Cheminformatics; and

•Regulatory Strategies.

Lines of Business

We are a premier developer of drug discovery and development software for modeling and simulation, and for the prediction of molecular properties utilizing both artificial-intelligence-based and machine-learning-based technologies. 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.

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

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The condensed consolidated financial statements include the accounts of Simulations Plus and its wholly owned operating subsidiaries, SLPI and SLP France. All significant intercompany accounts and transactions are eliminated in consolidation.

Use of Estimates

Our financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management’s application of accounting policies. Actual results could differ from those estimates.

Reclassifications

Certain numbers in the prior year have been reclassified to conform to the current year’s presentation.

Revenue Recognition

We generate revenue primarily from the sale of software licenses and by providing consulting services to the pharmaceutical industry for drug development.

In accordance with ASC 606, we determine revenue recognition through the following steps:

i.Identification of the contract, or contracts, with a customer

ii.Identification of the performance obligations in the contract

iii.Determination of the transaction price

iv.Allocation of the transaction price to the performance obligations in the contract

v.Recognition of revenue when, or as, we satisfy a performance obligation

Components of Revenue

The following is a description of principal activities from which the Company generates revenue. As part of the accounting for these arrangements, the Company must develop assumptions that require judgment to determine the standalone selling price for each performance obligation identified in the contract. Standalone selling prices are determined based on the prices at which the Company separately sells its services or goods.

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Revenue Components						Typical Payment Terms

Software Revenues:
Software revenues are generated primarily from sales of software licenses at the time the software is unlocked, and the term commences. The license period typically is one year or less. Along with the license, a di minimis amount of customer support is provided to assist the customer with the software. Should the customer need more than a di minimis amount of support, they can choose to enter into a separate contract for additional training. Most software is installed on our customers’ servers and the Company has no control of the software once the sale is made.						Payments are generally due upon invoicing on a net 30 basis, unless other payment terms are negotiated with the customer based on customer history. Typical industry standards apply.

For certain software arrangements the Company hosts the licenses on servers maintained by the Company. Revenue for those arrangements is accounted as Software as a Service over the life of the contract. These arrangements account for a small portion of software revenues of the Company.

Consulting Contracts:
Consulting services provided to our customers are generally recognized over time as the contracts are performed and the services are rendered. The Company measures its consulting revenue based on time expended compared to total estimated hours to complete a project. The Company believes the method chosen for its contract revenue best depicts the transfer of benefits to the customer under the contracts.						Payment terms vary, depending on the size of the contract, credit history and history with the client, and deliverables within the contract.

Consortium-Member Based Services:
The performance obligation is recognized on a time-elapsed basis, by month for which the services are provided, as the Company transfers control evenly over the contractual period.						Payment is due at the beginning of the period, generally on a net-30 or -60 basis.

Remaining Performance Obligations

Transaction price allocated to remaining performance obligations represents contracted revenue that has not yet been recognized, which includes deferred revenue and unbilled amounts that will be recognized as revenue in future periods. As of November 30, 2023, remaining performance obligations were $10.3 million. Ninety-five percent of the remaining performance obligations are expected to be recognized over the next 12 months, with the remainder expected to be recognized thereafter. Remaining performance obligations estimates are subject to change and are affected by several factors, including contract terminations and changes in the scope of contracts.

Disaggregation of Revenues

The components of disaggregation of revenue for the three months ended November 30, 2023 and 2022 were as follows:

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	Three Months Ended November 30,
(in thousands)		2023		2022
Software licenses
Point in time		$	7,321	$	5,802
Over time		268		272
Services
Over time		6,911		5,890
Total revenue		$	14,500	$	11,964

In addition, the Company allocates revenues to geographic areas based on the locations of its customers. Geographical revenues for the three months ended November 30, 2023 and 2022 were as follows:



	Three Months Ended November 30,
(in thousands)	2023				2022
	$		% of total		$		% of total
Americas	$	10,891	75	%	$	8,500	71	%
EMEA	2,302		16	%	2,130		18	%
Asia Pacific	1,307		9	%	1,334		11	%
Total	$	14,500	100	%	$	11,964	100	%

Contract Balances

We receive payments from customers based upon contractual billing schedules, while we recognize revenue when, or as, we satisfy our performance obligations. This timing difference results in accounts receivable, contract assets, and contract liabilities. We record accounts receivable when the right to consideration becomes unconditional. We record a contract asset if the right to consideration is conditioned on something other than the passage of time, such as our future performance. Contract assets are included in prepaid expenses and other current assets on our condensed consolidated balance sheets. We record a contract liability when we have an obligation to transfer goods or services to a customer for which we have either received consideration or a payment is due from a customer. We refer to contract liabilities as deferred revenue on our condensed consolidated balance sheets.

Contract asset balances as of November 30, 2023, and August 31, 2023, were $2.9 million and $2.7 million, respectively.

During the three months ended November 30, 2023, the Company recognized $2.2 million of revenue that was included in contract liabilities as of August 31, 2023, and during the three months ended November 30, 2022, the Company recognized $1.9 million of revenue that was included in contract liabilities as of August 31, 2022.

Deferred Commissions

Sales commissions earned by our sales force and our commissioned sales representatives are considered incremental and recoverable costs of obtaining a contract with a customer. We apply the practical expedient as described in ASC 340-40-25-4 to expense costs as incurred for sales commissions, since the amortization period of the asset that we otherwise would have recognized is one year or less. This expense is included in the condensed consolidated statements of operations and comprehensive income as selling and marketing expense.

Cash and Cash Equivalents

For purposes of the statements of cash flows, we consider all highly liquid investments purchased with original maturities of three months or less to be cash equivalents.

Accounts Receivable and Allowance for Credit Losses

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The Company extends credit to its customers in the normal course of business. The Company evaluates its allowance for credit losses based on its estimate of the collectability of its trade accounts receivable. As part of this assessment, the Company considers various factors including the financial condition of the individual companies with which it does business, the aging of receivable balances, historical experience, changes in customer payment terms, current market conditions, and reasonable and supportable forecasts of future economic conditions. In times of economic turmoil, the Company’s estimates and judgments with respect to the collectability of its receivables is subject to greater uncertainty than in more stable periods. Accounts receivable balances will be charged off against the allowance for credit losses after all means of collection have been exhausted and the potential for recovery is considered remote.

The activity in the allowance for credit losses related to our trade receivables is summarized as follows:



	Three Months Ended November 30,
(in thousands)		2023		2022
Balance, beginning of period		$	46	$	12
Provision for expected credit losses		(9)		—

Balance, end of period		$	37	$	12

Investments

The Company may invest excess cash balances in short-term and long-term marketable debt securities. Investments may consist of certificates of deposit, money market accounts, government-sponsored enterprise securities, corporate bonds, and/or commercial paper within the parameters of our Investment Policy and Guidelines. The Company accounts for its investments in marketable securities in accordance with ASC 320, Investments – Debt and Equity Securities. This statement requires debt securities to be classified into three categories:

Held-to-maturity—Debt securities that the entity has the positive intent and ability to hold to maturity are measured at amortized cost and are presented at the net amount expected to be collected. Any change in the allowance for credit losses during the period is reflected in earnings. Discounts and premiums to par value of the debt securities are amortized to interest income/expense over the term of the security.

Trading Securities—Debt securities that are bought and held primarily for the purpose of selling in the near term are reported at fair value, with unrealized gains and losses included in earnings.

Available-for-Sale—Debt securities not classified as either securities held-to-maturity or trading securities are reported at fair value. For available-for-sale debt securities in an unrealized-loss position, we evaluate as of the balance sheet date whether the unrealized losses are attributable to a credit loss or other factors. The portion of unrealized losses related to a credit loss is recognized in earnings, and the portion of unrealized loss not related to a credit loss is recognized in other comprehensive income (loss).

We classify our investments in marketable debt securities based on the facts and circumstances present at the time of purchase of the securities. We subsequently reasses