The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
Simulations Plus, Inc.
Notes to Condensed Consolidated Financial Statements
NOTE 1: 1 – GENERAL
This Quarterly Report on Form 10-Q for the quarter ended February 28,
20222023, should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended August 31,
2021,2022, filed with the Securities and Exchange Commission (“SEC”) on October
27, 2021.28, 2022. As contemplated by the SEC under Article 8 of Regulation S-X, the accompanying consolidated financial statements and footnotes have been condensed and therefore do not contain all disclosures required by generally accepted accounting principles. The interim financial data are unaudited; however, in the opinion of Simulations Plus, Inc., the interim data include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the interim periods. Results for interim periods are not necessarily indicative of those to be expected for the full year.
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”("Cognigen") and Cognigen became a wholly owned subsidiary of Simulations Plus, Inc. In June 2017, Simulations Plus acquired DILIsym Services, Inc.
(“DILIsym”("DILIsym") as a wholly owned subsidiary. In April 2020, Simulations Plus
Inc. acquired Lixoft, a French société par actions simplifiée
(“Lixoft”("Lixoft")
, as a wholly owned subsidiary pursuant to a stock purchase and contribution
agreementagreement. (Simulations Plus together with its subsidiaries, collectively, the
“Company,"Company,”
“we,"we,”
“us,"us,”
“our”"our").
Effective September 1, 2021, the Company merged
both Cognigen and DILIsym with and into Simulations Plus, Inc. through
short formshort-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.
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 artificial intelligence (“AI”)both artificial-intelligence-based and machine learning based technology.machine-learning-based technologies. We also provide consulting services ranging from early drug discovery through preclinical and clinical trial datadevelopment analysis and for submissions to regulatory agencies. Our software and consulting services are provided to major pharmaceutical, biotechnology, agrochemical, cosmetics, and food industry companies. They are also provided tocompanies and academic and regulatory agencies worldwide for use in the conduct of industry-based research and to regulatory agencies for product approval.research.
NOTE
2: 2 – SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The
accompanying consolidated financial statements include the accounts of Simulations Plus and its wholly owned
subsidiary.subsidiary, Lixoft. All significant intercompany accounts and transactions
have beenare eliminated
uponin consolidation.
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.
Significant accounting policies for us include revenue recognition, accounting for capitalized computer software development costs, valuation of stock options, and accounting for income taxes.Reclassifications
Certain numbers in the prior year have been reclassified to conform to the current year's presentation.
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
Accounting Standards Codification TopicASC 606,
(ASC Topic 606), “Revenue from Contracts with Customers”, 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.
| | | | | | | | |
i.Revenue Components | | IdentificationTypical 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, or contracts,credit history and history with a customerthe client and deliverables within the contract. |
| | |
ii.Consortium Member Based Services: | | |
IdentificationThe 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 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,period, generally on a net-30 or as, we satisfy a performance obligation-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 February 28,
2022,2023, remaining performance obligations were
approximately $7.3$10.4 million.
Approximately 90%Ninety-six 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
RevenueRevenues
The components of disaggregation of revenue for the three and six months ended February 28,
20222023 and
20212022 were as follows:
| Schedule of disaggregation of revenue | | | | | | | | | | | | | | | | |
| (in thousands) | | Three Months Ended
February 28, | | | Six Months Ended
February 28, | |
| | | 2022 | | | 2021 | | | 2022 | | | 2021 | |
| Software licenses: | | | | | | | | | | | | | | | | |
| Point in time | | $ | 9,493 | | | $ | 7,536 | | | $ | 16,600 | | | $ | 13,472 | |
| Over time | | | 265 | | | | 291 | | | | 520 | | | | 503 | |
| | | | | | | | | | | | | | | | | |
| Consulting services: | | | | | | | | | | | | | | | | |
| Over time | | | 5,038 | | | | 5,320 | | | | 10,093 | | | | 9,873 | |
| Total revenue | | $ | 14,796 | | | $ | 13,147 | | | $ | 27,213 | | | $ | 23,848 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended February 28, | | Six Months Ended February 28, |
| (in thousands) | | 2023 | | 2022 | | 2023 | | 2022 |
| Software licenses | | | | | | | | |
| Point in time | | $ | 10,191 | | | $ | 9,493 | | | $ | 15,993 | | | $ | 16,600 | |
| Over time | | 296 | | | 265 | | | 568 | | | 520 | |
| Services | | | | | | | | |
| Over time | | 5,263 | | | 5,038 | | | 11,153 | | | 10,093 | |
| Total revenue | | $ | 15,750 | | | $ | 14,796 | | | $ | 27,714 | | | $ | 27,213 | |
In addition, the Company allocates revenues to geographic areas based on the locations of its customers. Geographical revenues for the three and six months ended February 28, 2023, and 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Three Months Ended February 28, |
| | 2023 | | 2022 | | |
| | $ | | % of total | | $ | | % of total | | | | |
| Americas | | $ | 10,589 | | | 67 | % | | $ | 9,696 | | | 66 | % | | | | |
| EMEA | | 3,618 | | | 23 | % | | 3,706 | | | 25 | % | | | | |
| Asia Pacific | | 1,543 | | | 10 | % | | 1,394 | | | 9 | % | | | | |
| Total | | $ | 15,750 | | | 100 | % | | $ | 14,796 | | | 100 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Six Months Ended February 28, | | | | |
| | 2023 | | 2022 | | | | |
| | $ | | % of total | | $ | | % of total | | | | |
| Americas | | $ | 19,089 | | | 69 | % | | $ | 18,155 | | | 67 | % | | | | |
| EMEA | | 5,748 | | | 21 | % | | 6,731 | | | 25 | % | | | | |
| Asia Pacific | | 2,877 | | | 10 | % | | 2,327 | | | 8 | % | | | | |
| Total | | $ | 27,714 | | | 100 | % | | $ | 27,213 | | | 100 | % | | | | |
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 February 28,
20222023, and August 31,
20212022, were
$2.1$2.9 million and
$3.2$1.7 million, respectively.
During the three and six months ended February 28,
2022, we2023, the Company recognized
$187 thousand$0.4 million and
$540 thousand,$2.3 million, respectively, of revenue that was included in contract liabilities as of August 31,
20212022, and during the three and six months ended February 28,
2021, we2022, the Company recognized
$104 thousand$0.2 million and
$400 thousand,$0.5 million, respectively, of revenue that was included in contract liabilities as of August 31,
2020.
2021.
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, general, and administrative 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
AllowancesAllowance for Credit Losses
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 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
Financial Accounting Standards Board (“FASB”) 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.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 reassess the appropriateness of that classification at each reporting date. During the quarter ended February 28,
2022,2023, all of our investments were classified as held-to-maturity.
Capitalized Computer Software Development Costs
Software development costs are capitalized in accordance with
FASB ASC
985-20, Costs of Software to Be Sold, Leased, or Marketed.985-20. 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 software development costs require considerable judgment by management with respect to certain external factors including, but not limited to, technological feasibility, anticipated future gross revenue, 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 our software products.
Amortization of capitalized 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
$328 thousand$0.4 million and
$365 thousand$0.3 million for the three months ended February 28,
20222023, and
2021,2022, respectively, and
$624 thousand$0.8 million and
$690 thousand$0.6 million for the six months ended February 28,
20222023, and
2021,2022, respectively. We expect future amortization expense to vary due to increases in capitalized computer software development costs.
We test capitalized computer software development costs for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
Property and equipment are recorded at cost, or fair market value for property and equipment acquired in business combinations, less accumulated depreciation and amortization. Depreciation and amortization are calculated using the straight-line method over the estimated useful lives as follows:
Property and Equipment estimated useful lives | | | | | |
| Equipment | 5 years |
| Computer equipment | 3 to 7 years |
| Furniture and fixtures | 5 to 7 years |
| Leasehold improvements | Shorter of life of asset or lease |
Maintenance and minor replacements are charged to expense as incurred. Gains and losses on disposals are included in the results of operations.
We
have a service contract related to the implementation of internally used software. In accordance with ASC 350-40 “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract”, we have capitalized certain internal-use software
costs in accordance with ASC 350-40, which are included in
long-termintangible assets.
The amortization of such costs is classified as selling, general, and administrative expenses on the condensed consolidated statementstatements of operations, and maintenanceoperations. Maintenance of and minor upgrades to internal-use software are also charged toclassified as selling, general, and administrative expenseexpenses as incurred.
Leases
We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets and operating lease liabilities (current and long-term) in our condensed consolidated balance sheets.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we generally use our incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at the commencement date. The operating lease ROU asset also includes any lease payments made at or before the commencement date and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense is recognized on a straight-line basis over the lease term.
Supplemental
balance sheet information related to operating leases was as follows as of February 28,
2022: | Balance sheet information related to operating leases | | | | |
| (in thousands) | | | |
| Right-of-use assets | | $ | 1,653 | |
| Lease liabilities, current | | $ | 336 | |
| Lease liabilities, long-term | | $ | 1,314 | |
| Operating lease costs | | $ | 256 | |
| Weighted average remaining lease term | | | 3.55 years | |
| Weighted average discount rate | | | 3.41% | |
| 10 | | | | | | | |
| (in thousands) | | |
| Right of use assets | | $ | 1,190 | |
| Lease liabilities, current | | $ | 432 | |
| Lease liabilities, long-term | | $ | 747 | |
| Operating lease costs | | $ | 252 | |
| Weighted-average remaining lease term | | 2.55 years |
| Weighted-average discount rate | | 3.41 | % |
Intangible Assets and Goodwill
We perform valuations of assets acquired and liabilities assumed on each acquisition accounted for as a business combination and recognize the assets acquired and liabilities assumed at their acquisition-date fair value. Acquired intangible assets include customer relationships, software, trade names, and noncompete agreements. We determine the appropriate useful life by performing an analysis of expected cash flows based on historical experience of the acquired businesses.
IntangibleFinite-lived 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.
Finite-lived 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.
Goodwill represents the excess of the cost of an acquired entity over the fair value of the acquired net assets. Goodwill
is not amortized, instead it isand indefinite-lived intangible assets are tested for impairment annually or when events or circumstances change that would indicate that
goodwillthey might be impaired. Events or circumstances that could trigger an impairment review include, but are not limited to, a significant adverse change in legal factors or in the business climate, an adverse action or assessment by a regulator, unanticipated competition, a loss of key personnel, significant changes in the manner of our use of the acquired assets or the strategy for our overall business, significant negative industry or economic trends, or significant underperformance relative to expected historical or projected future results of operations.
Goodwill
isand intangible assets are tested for impairment at the reporting unit level, which is one level below or the same as an operating segment.
As of February 28, 2022, we determined that we have four reporting units: Simulations Plus, Cognigen, DILIsym, and Lixoft. When testing goodwill for impairment, we first perform a qualitative assessment to determine whether it is necessary to perform step one of a two-step annual goodwill impairment test for each reporting unit. We are required to perform step one only if it concludes that it is more likely than not that a reporting unit's fair value is less than its carrying value. Should this be the case, the first step of the two-step process is to identify whether a potential impairment exists by comparing the estimated fair values of our reporting units with their respective book values, including goodwill. If the estimated fair value of the reporting unit exceeds book value, goodwill is considered not to be impaired, and no additional steps are necessary. If, however, the fair value of the reporting unit is less than book value, then the second step is performed to determine if goodwill is impaired and to measure the amount of impairment loss, if any. The amount of the impairment loss is the excess of the carrying amount of the goodwill over its implied fair value. The estimate of implied fair value of goodwill is primarily based on an estimate of the discounted cash flows expected to result from that reporting unit but may require valuations of certain internally generated and unrecognized intangible assets such as our software, technology, patents, and trademarks. If the carrying amount of goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess.As of February 28, 2022, the entire balance of goodwill was attributed to three of our reporting units: Cognigen, DILIsym, and Lixoft. 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. We did 0t recognize any impairment charges duringDuring the three and six months ended February 28, 2023 and 2022, there were no changes to our reporting units, and 2021.
Reconciliation of Goodwillwe did not recognize any impairment charges or additions to goodwill.
The following table summarizes other intangible assets as of February 28,
2022: | Schedule of reconciliation of goodwill | | | | | | | | | | | | |
| (in thousands) | | Cognigen | | | DILIsym | | | Lixoft | | | Total | |
| Balance, August 31, 2021 | | $ | 4,789 | | | $ | 5,598 | | | $ | 2,534 | | | $ | 12,921 | |
| Addition | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
| Impairments | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
| Balance, February 28, 2022 | | $ | 4,789 | | | $ | 5,598 | | | $ | 2,534 | | | $ | 12,921 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Amortization
Period | | Acquisition Value | | Accumulated Amortization | | Net Book
Value |
| Trade names | | None | | $ | 2,910 | | | $ | — | | | $ | 2,910 | |
| Covenants not to compete | | Straight line 3 years | | 60 | | | 58 | | | 2 | |
| Other internal use software | | Straight line 3 to 5 years | | 77 | | | 2 | | | 75 | |
| Customer relationships | | Straight line 8 to 14 years | | 4,450 | | | 1,614 | | | 2,836 | |
| ERP | | Straight line 15 years | | 1,702 | | | 138 | | | 1,564 | |
| | | | $ | 9,199 | | | $ | 1,812 | | | $ | 7,387 | |
The following table summarizes other intangible assets as of August 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Amortization
Period | | Acquisition
Value | | Accumulated
Amortization | | Net Book
Value |
| Trade names | | None | | $ | 2,910 | | | $ | — | | | $ | 2,910 | |
| Covenants not to compete | | Straight line 3 years | | 60 | | | 48 | | | 12 | |
| | | | | | | | |
| Customer relationships | | Straight line 8 to 14 years | | 5,550 | | | 2,534 | | | 3,016 | |
| ERP | | Straight line 15 years | | 1,702 | | | 80 | | | 1,622 | |
| | | | $ | 10,222 | | | $ | 2,662 | | | $ | 7,560 | |
Total amortization expense for the three months ended February 28, 2023, and 2022 was $0.1 million and $0.2 million, respectively, and amortization expense for the six months ended February 28, 2023, and 2022 was $0.3 million and $0.3 million, respectively.
Future amortization of finite-lived intangible assets for the next five years is as follows:
| | | | | | | | |
| (in thousands) | | |
| Year Ending August 31, | | Amount |
| Remainder of 2023 | | $ | 251 | |
| 2024 | | $ | 489 | |
| 2025 | | $ | 489 | |
| 2026 | | $ | 489 | |
| 2027 | | $ | 442 | |
Fair Value of Financial Instruments
Assets and liabilities recorded at fair value in the
Condensed Consolidated Balance Sheetscondensed consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. The categories
as defined by the standard are as follows:
| | | | | | | | |
| Level Input: | | Input Definition: |
| Level I | | Inputs that are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date. |
| Level II | | Inputs, other than quoted prices included in Level I, that are observable for the asset or liability through corroboration with market data at the measurement date. |
| Level III | | Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. |
For certain of our financial instruments, including accounts receivable, accounts payable,
and accrued
payrollcompensation and other
accrued expenses,
and the
carrying amounts
approximateare representative of their fair value due to their short maturities.
The following table summarizes fair value measurements
We invest a portion of our excess cash balances in short-term debt securities. Investments at February 28,
20222023, consisted of corporate bonds and
August 31, 2021 for assets and liabilities measured atterm deposits with maturities remaining of less than 12 months. Under the fair value
on a recurring basis: | Schedule of fair value measurements | | | | | | | | | | | | | | | | |
| February 28, 2022: | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| (in thousands) | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Cash and cash equivalents | | $ | 60,373 | | | $ | 0 | | | $ | 0 | | | $ | 60,373 | |
| Short-term investments | | $ | 63,922 | | | $ | 0 | | | $ | 0 | | | $ | 63,922 | |
| Acquisition-related contingent consideration obligations | | $ | 0 | | | $ | 0 | | | $ | 3,460 | | | $ | 3,460 | |
August 31, 2021:
| (in thousands) | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Cash and cash equivalents | | $ | 36,984 | | | $ | 0 | | | $ | 0 | | | $ | 36,984 | |
| Short-term investments | | $ | 86,484 | | | $ | 0 | | | $ | 0 | | | $ | 86,484 | |
| Acquisition-related contingent consideration obligations | | $ | 0 | | | $ | 0 | | | $ | 3,217 | | | $ | 3,217 | |
hierarchy, the fair market values of the Company's cash equivalents and investments are Level 1. We may also invest excess cash balances in certificates of deposit, money market accounts, government-sponsored enterprise securities, and/or commercial paper. We account for our investments in accordance with ASC 320, Investments – Debt and Equity Securities. As of February 28, 20222023, all investments were classified as held-to-maturity securities, as we have the positive intent and ability to hold these securities until maturity. We believe unrealized losses on investments were primarily caused by rising interest rates rather than changes in credit quality, and, accordingly, we have not recorded an allowance for credit losses on our debt securities as of February 28, 2023, and August 31, 2021, we had a liability for contingent consideration related to2022.
The following tables summarize our
acquisition of Lixoft. The fair value measurement of the contingent consideration obligations is determined using Level 3 inputs. The fair value of contingent consideration obligations is based on a discounted cash flow model using a probability-weighted income approach. These fair value measurements represent Level 3 measurements as they are based on significant inputs not observable in the market. Significant judgment is employed in determining the appropriateness of these assumptionsshort-term investments as of
the acquisition dateFebruary 28, 2023, and
for each subsequent period. Accordingly, changes in assumptions could have a material impact on the amount of contingent consideration expense we record in any given period. The liability is recorded as contracts payable on the condensed consolidated balance sheet, and changes in the value of the contingent consideration obligations are recorded other income (expense), net in our Condensed Consolidated Statement of Operations and Comprehensive Income.The following is a reconciliation of contingent consideration value:
| Reconciliation of contingent consideration | | | | |
| (in thousands) | | | |
| Value at August 31, 2021 | | $ | 3,217 | |
| Contingent consideration payments | | | 0 | |
| Change in value of contingent consideration | | | 243 | |
| Value at February 28, 2022 | | $ | 3,460 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | February 28, 2023 |
| (in thousands) | | Amortized Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Fair Value |
| Commercial notes (due within one year) | | $ | 71,552 | | | $ | — | | | $ | (175) | | | $ | 71,377 | |
| Term deposits (due within one year) | | 4,500 | | | | | | | 4,500 | |
| Total | | $ | 76,052 | | | $ | — | | | $ | (175) | | | $ | 75,877 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | August 31, 2022 |
| (in thousands) | | Amortized Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Fair Value |
| Commercial notes (due within one year) | | $ | 72,168 | | | $ | — | | | $ | (839) | | | $ | 71,329 | |
| Term deposits (due within one year) | | 4,500 | | | | | | | 4,500 | |
| Total | | $ | 76,668 | | | $ | — | | | $ | (839) | | | $ | 75,829 | |
Research and Development Costs
Research and development costs are charged to expense as incurred until technological feasibility has been established. These costs include salaries, laboratory experiments, and purchased software that was developed by other companies and incorporated into, or used in the development of, our final products.
We account for income taxes in accordance with ASC
740-10, “Income Taxes”740, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns.
Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The provision for income taxes represents the tax payable for the period and the change during the period in deferred tax assets and liabilities.
The following table summarizes intellectual property as of February 28,
2022: | Schedule of intellectual property | | | | | | | | | | | | | | |
| (in thousands) | | Amortization
Period | | Acquisition
Value | | | Accumulated
Amortization | | | Net Book
Value | |
| Royalty Agreement buy out-Enslein Research | | Straight line 10 years | | $ | 75 | | | $ | 75 | | | $ | 0 | |
| Termination/nonassertion agreement-TSRL Inc. | | Straight line 10 years | | | 6,000 | | | | 4,675 | | | | 1,325 | |
| Developed technologies–DILIsym acquisition | | Straight line 9 years | | | 2,850 | | | | 1,504 | | | | 1,346 | |
| Intellectual rights of Entelos Holding Corp. | | Straight line 10 years | | | 50 | | | | 18 | | | | 32 | |
| Developed technologies–Lixoft acquisition | | Straight line 16 years | | | 8,010 | | | | 959 | | | | 7,051 | |
| | | | | $ | 16,985 | | | $ | 7,231 | | | $ | 9,754 | |
2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Amortization
Period | | Acquisition
Value | | Accumulated
Amortization | | Net Book
Value |
| | | | | | | | |
| Termination/nonassertion agreement-TSRL Inc. | | Straight line 10 years | | 6,000 | | | 5,275 | | | 725 | |
| Developed technologies–DILIsym acquisition | | Straight line 9 years | | 2,850 | | | 1,821 | | | 1,029 | |
| Intellectual rights of Entelos Holding Company | | Straight line 10 years | | 50 | | | 23 | | | 27 | |
| Developed technologies–Lixoft acquisition | | Straight line 16 years | | 8,010 | | | 1,433 | | | 6,577 | |
| | | | $ | 16,910 | | | $ | 8,552 | | | $ | 8,358 | |
The following table summarizes intellectual property as of August 31,
2021:| (in thousands) | | Amortization
Period | | Acquisition
Value | | | Accumulated
Amortization | | | Net Book
Value | |
| Royalty Agreement buy out-Enslein Research | | Straight line 10 years | | $ | 75 | | | $ | 71 | | | $ | 4 | |
| Termination/nonassertion agreement-TSRL Inc. | | Straight line 10 years | | | 6,000 | | | | 4,375 | | | | 1,625 | |
| Developed technologies–DILIsym acquisition | | Straight line 9 years | | | 2,850 | | | | 1,346 | | | | 1,504 | |
| Intellectual rights of Entelos Holding Corp. | | Straight line 10 years | | | 50 | | | | 15 | | | | 35 | |
| Developed technologies–Lixoft acquisition | | Straight line 16 years | | | 8,010 | | | | 709 | | | | 7,301 | |
| | | | | $ | 16,985 | | | $ | 6,516 | | | $ | 10,469 | |
Amortization2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Amortization
Period | | Acquisition
Value | | Accumulated
Amortization | | Net Book
Value |
| Royalty Agreement buy out-Enslein Research | | Straight line 10 years | | $ | 75 | | | $ | 75 | | | $ | — | |
| Termination/nonassertion agreement-TSRL Inc. | | Straight line 10 years | | 6,000 | | | 4,975 | | | 1,025 | |
| Developed technologies–DILIsym acquisition | | Straight line 9 years | | 2,850 | | | 1,662 | | | 1,188 | |
| Intellectual rights of Entelos Holding Company | | Straight line 10 years | | 50 | | | 20 | | | 30 | |
| Developed technologies–Lixoft acquisition | | Straight line 16 years | | 8,010 | | | 1,196 | | | 6,814 | |
| | | | $ | 16,985 | | | $ | 7,928 | | | $ | 9,057 | |
Total amortization expense for intellectual property agreements for the three months ended February 28,
2023 and 2022
was $0.4 million and
2021 was $358 thousand and $357 thousand,$0.4 million, respectively, and amortization expense for intellectual property agreements for the six months ended February 28,
2023 and 2022
was $0.7 million and
2021 was $715 thousand and $714 thousand,$0.7 million, respectively.
Other intangible assets
The following table summarizes our other intangible assets asFuture amortization of February 28, 2022:
| Schedule of other intangible assets | | | | | | | | | | | | | | |
| (in thousands) | | Amortization
Period | | Acquisition
Value | | | Accumulated
Amortization | | | Net Book
Value | |
| Simulations Plus | | | | | | | | | | | | | | |
| ERP | | Straight line 15 years | | $ | 1,702 | | | $ | 24 | | | $ | 1,678 | |
| Cognigen | | | | | | | | | | | | | | |
| Customer relationships | | Straight line 8 years | | | 1,100 | | | | 1,031 | | | | 69 | |
| Trade name | | None | | | 500 | | | | 0 | | | | 500 | |
| Covenants not to compete | | Straight line 5 years | | | 50 | | | | 50 | | | | 0 | |
| DILIsym | | | | | | | | | | | | | | |
| Customer relationships | | Straight line 10 years | | | 1,900 | | | | 903 | | | | 997 | |
| Trade name | | None | | | 860 | | | | 0 | | | | 860 | |
| Covenants not to compete | | Straight line 4 years | | | 80 | | | | 80 | | | | 0 | |
| Lixoft | | | | | | | | | | | | | | |
| Customer relationships | | Straight line 14 years | | | 2,550 | | | | 349 | | | | 2,201 | |
| Trade name | | None | | | 1,550 | | | | 0 | | | | 1,550 | |
| Covenants not to compete | | Straight line 3 years | | | 60 | | | | 38 | | | | 22 | |
| | | | | $ | 10,352 | | | $ | 2,475 | | | $ | 7,877 | |
The following table summarizes our other intangible assets as of August 31, 2021:
| (in thousands) | | Amortization
Period | | Acquisition
Value | | | Accumulated
Amortization | | | Net Book
Value | |
| Cognigen | | | | | | | | | | | | | | |
| Customer relationships | | Straight line 8 years | | $ | 1,100 | | | $ | 963 | | | $ | 137 | |
| Trade name | | None | | | 500 | | | | 0 | | | | 500 | |
| Covenants not to compete | | Straight line 5 years | | | 50 | | | | 50 | | | | 0 | |
| DILIsym | | | | | | | | | | | | | | |
| Customer relationships | | Straight line 10 years | | | 1,900 | | | | 807 | | | | 1,093 | |
| Trade name | | None | | | 860 | | | | 0 | | | | 860 | |
| Covenants not to compete | | Straight line 4 years | | | 80 | | | | 80 | | | | 0 | |
| Lixoft | | | | | | | | | | | | | | |
| Customer relationships | | Straight line 14 years | | | 2,550 | | | | 258 | | | | 2,292 | |
| Trade name | | None | | | 1,550 | | | | 0 | | | | 1,550 | |
| Covenants not to compete | | Straight line 3 years | | | 60 | | | | 28 | | | | 32 | |
| | | | | $ | 8,650 | | | $ | 2,186 | | | $ | 6,464 | |
Amortization expense for other intangible assetsintellectual property for the three months ended February 28, 2022 and 2021 was $156 thousand and $138 thousand, respectively and amortization expense for other intangible assets for the six months ended February 28, 2022 and 2021 was $289 thousand and $275 thousand, respectively. In addition to normal amortization, these assets are tested for impairmentnext five years is as needed.
| | | | | | | | |
| (in thousands) | | |
| Year Ending August 31, | | Amount |
| Remainder of 2023 | | $ | 694 | |
| 2024 | | $ | 1,218 | |
| 2025 | | $ | 793 | |
| 2026 | | $ | 717 | |
| 2027 | | $ | 477 | |
We report earnings per share in accordance with
FASB ASC
260-10.260. Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding. Diluted earnings per share is computed similarly to basic earnings per share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. The components of basic and diluted earnings per share for the three
and six months ended February 28,
20222023, and
20212022 were as follows:
| | | | | | | | | | | | | |
| (in thousands) | | Three Months Ended
February 28, | | | Six Months Ended
February 28, | |
| | | 2022 | | | 2021 | | | 2021 | | | 2020 | |
| Numerator: | | | | | | | | | | | | |
| Net income attributable to common shareholders | | $ | 4,409 | | | $ | 3,211 | | | $ | 7,435 | | | $ | 5,690 | |
| | | | | | | | | | | | | | | | | |
| Denominator: | | | | | | | | | | | | | | | | |
| Weighted-average number of common shares outstanding during the period | | | 20,177 | | | | 20,006 | | | | 20,164 | | | | 19,968 | |
| Dilutive effect of stock options | | | 568 | | | | 836 | | | | 574 | | | | 818 | |
| Common stock and common stock equivalents used for diluted earnings per share | | | 20,745 | | | | 20,842 | | | | 20,738 | | | | 20,786 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended February 28, | | Six Months Ended February 28, |
| | | | |
| (in thousands) | | 2023 | | 2022 | | 2023 | | 2022 |
| Numerator | | | | | | | | |
| Net income attributable to common shareholders | | $ | 4,174 | | | $ | 4,409 | | | $ | 5,419 | | | $ | 7,435 | |
| | | | | | | | |
| Denominator | | | | | | | | |
| Weighted-average number of common shares outstanding during the year | | 20,112 | | | 20,177 | | | 20,200 | | | 20,164 | |
| Dilutive effect of stock options | | 417 | | | 568 | | | 457 | | | 574 | |
| Common stock and common stock equivalents used for diluted earnings per share | | 20,529 | | | 20,745 | | | 20,657 | | | 20,738 | |
Compensation costs related to stock options are determined in accordance with FASB ASC 718-10, “Compensation-Stock Compensation”.718. Compensation cost is calculated based on the grant-date fair value estimated in accordance with FASB ASC 718-10,using the Black-Scholes pricing model and then amortized on a straight-line basis over the options’ vestingrequisite service period. Stock-based compensation expense related to stock options, not including shares issued to directors for services, was $703 thousand$1.2 million and $717 thousand$0.7 million for the three months ended February 28, 20222023, and 2021,2022, respectively, and $1.3$2.0 million and $1.2$1.3 million for the six months ended February 28, 2023, and 2022, and 2021, respectively. This expense is included in the condensed consolidated statements
Impairment of Long-lived Assets
We account for the impairment and disposition of long-lived assets in accordance with ASC
350, “Intangibles – Goodwill and Other” and ASC 360, “Property and Equipment”.360. Long-lived assets to be held and used are reviewed for events or changes in circumstances that indicate that their carrying value may not be recoverable. We measure recoverability by comparing the carrying amount of an asset to the expected future undiscounted net cash flows generated by the asset. If we determine that the asset may not be recoverable, or if the carrying amount of an asset exceeds its estimated future undiscounted cash flows, we recognize an impairment charge to the extent of the difference between the fair value and the asset's carrying amount. No impairment losses were recorded during the
three and six months ended February 28,
20222023, and
2021.2022.
Recently Issued Accounting
PronouncementsIn March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). The amendments in ASU 2020-04 provide temporary optional expedients and exceptions for applying GAAP to contract modifications, hedging relationships, and other transactions to ease the potential accounting and financial reporting burden associated with transitioning away from reference rates that are expected to be discontinued, including the London Interbank Offered Rate (“LIBOR”). This ASU is effective as of March 12, 2020, through December 31, 2022. The adoption of the new standard has not had and is not expected to have, a material impact on our consolidated financial statements or related disclosures.
In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU 2021-08”). The amendment requires contract assets and contract liabilities acquired in a business combination to be recognized and measured in accordance with ASC 606, Revenue from Contracts with Customers, as if the acquirer had originated the contract. The amendment is intended to improve the accounting for acquired revenue contracts with customers in a business combination, related to the recognition of an acquired contract liability, and to payment terms and their effect on subsequent revenue recognized by the acquirer. The amendment also provides certain practical expedients when applying the guidance. ASU 2021-08 is effective for interim and annual periods beginning after December 15, 2022, on a prospective basis, with early adoption permitted. The Company expects to adopt ASU 2021-08 in the first quarter of fiscal year 2024. The Company is currently evaluating the potential impact of ASU 2021-08 to its consolidated financial statements.
In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832), which requires business entities to disclose information about transactions with a government that are accounted for by applying a grant or contribution model by analogy (for example, IFRS guidance in IAS 20 or guidance on contributions for not-for-profit entities in ASC 958-605). For transactions within scope, the new standard requires the disclosure of information about the nature of the transaction, including significant terms and conditions, as well as the amounts and specific financial statement line items affected by the transaction. The new guidance is effective for annual reporting periods beginning after December 15, 2021. The Company does not expect that the adoption of this standard will have a material impact on its condensed consolidated financial statements; however, the Company expects to increase its disclosures with respect to government assistance beginning in the first quarter of fiscal year 2023.
NOTE
3: 3 – OTHER INCOME (EXPENSE), NET
The components of other income (expense), net for the three and six months ended February 28,
20222023, and
20212022, were as follows:
| Schedule of other income and expense | | | | | | | | | | | | | | | | |
| (in thousands) | | Three Months Ended
February 28, | | | Six Months Ended
February 28, | |
| | | 2022 | | | 2021 | | | 2022 | | | 2021 | |
| Interest income | | $ | 75 | | | $ | 58 | | | $ | 139 | | | $ | 119 | |
| Interest expense | | | 0 | | | | (22 | ) | | | 0 | | | | (22 | ) |
| Change in valuation of contingent consideration | | | (122 | ) | | | (122 | ) | | | (243 | ) | | | (243 | ) |
| Gain on sale of assets | | | | | | | 0 | | | | 1 | | | | 0 | |
| Gain (loss) on currency exchange | | | 100 | | | | 23 | | | | 221 | | | | 28 | |
| Total other income (expense), net | | $ | 53 | | | $ | (63 | ) | | $ | 118 | | | $ | (118 | ) |
NOTE 4: INVESTMENTS
We invest a portion of our excess cash balances in short-term debt securities within the parameters of our Investment Policy and Guidelines. Investments as of February 28, 2022, consisted of corporate bonds with maturities remaining of less than twelve months. We may also invest excess cash balances in certificates of deposit, money market accounts, government-sponsored enterprise securities, corporate bonds, and/or commercial paper. We account for investments in accordance with FASB ASC 320, Investments – Debt and Equity Securities. As of February 28, 2022, all investments were classified as held-to-maturity securities.
l
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended February 28, | | Six Months Ended February 28, |
| | | | |
| (in thousands) | | 2023 | | 2022 | | 2023 | | 2022 |
| Interest income | | $ | 985 | | | $ | 75 | | | $ | 1,756 | | | $ | 139 | |
| | | | | | | | |
| Change in valuation of contingent consideration | | — | | | (122) | | | — | | | (243) | |
| Gain on sale of assets | | — | | | — | | | — | | | 1 | |
| Gain (loss) on currency exchange | | 49 | | | 100 | | | 18 | | | 221 | |
| Total other income, net | | $ | 1,034 | | | $ | 53 | | | $ | 1,774 | | | $ | 118 | |
The following tables summarize our short-term investments as of February 28, 2022 and August 31, 2021:
February 28, 2022
| Schedule of short term investments | | | | | | | | | | | | |
| (in thousands) | | Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Fair Value | |
| | | | | | | | | | | | | |
| Commercial notes (due within one year) | | $ | 64,192 | | | $ | 0 | | | $ | (270 | ) | | $ | 63,922 | |
| Total | | $ | 64,192 | | | $ | 0 | | | $ | (270 | ) | | $ | 63,922 | |
August 31, 2021
| (in thousands) | | Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Fair Value | |
| | | | | | | | | | | | | |
| Commercial notes (due within one year) | | $ | 86,620 | | | $ | 0 | | | $ | (136 | ) | | $ | 86,484 | |
| Total | | $ | 86,620 | | | $ | 0 | | | $ | (136 | ) | | $ | 86,484 | |
NOTE 5: CONTRACTS PAYABLE
Lixoft Acquisition Liabilities:
On April 1, 2020, we acquired Lixoft. The agreement provided for a 24-month, $2.0 million holdback provision against certain representations and warrantees, comprised of $1.3 million of cash and shares of common stock valued at $667 thousand issued at the date of the agreement. In addition, based on a revenue-growth formula for the two years subsequent to April 1, 2020, the agreement calls for earnout payments of up to $5.5 million (two-thirds cash and one-third newly issued, unregistered shares of our common stock). The former shareholders of Lixoft can earn up to $2.0 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.
As of February 28, 2022 and August 31, 2021, the following liabilities have been recorded:
| Schedule of liabilities | | | | | | |
| (in thousands) | | February 28,
2022 | | | August 31,
2021 | |
| Holdback liability | | $ | 1,333 | | | $ | 1,333 | |
| Earnout liability | | | 3,460 | | | | 3,217 | |
| Sub total | | $ | 4,793 | | | $ | 4,550 | |
| Less: current portion | | | 4,793 | | | | 4,550 | |
| Long-term portion | | $ | 0 | | | $ | 0 | |
NOTE
6: 4 – COMMITMENTS AND CONTINGENCIES
Leases
LeasesWeOn February 17, 2023, we entered into an amendment, effective May 1, 2023, to the lease approximately 9,255 square feet ofagreement for our office space in Lancaster, California, where our corporate headquarters are located. The amendment extends the lease term extendsthrough April 30, 2028, reduces the leased square footage from 9,255 to January 31, 2026,approximately 4,200, and reduces the monthly base rent is approximately $17from $18 thousand per month.month to $8 thousand per month with an annual increase of 3%. The amended lease agreement gives the Company the right, upon 180 days’ prior notice, to opt out of all or part of the last fourthree years of the lease term with no penalty.
We lease approximately 4,317 square feet of office space in Buffalo, New York. The lease term extends to November 30, 2026, and the base rent is approximately $7 thousand per month with an annual 2% increase. The lease agreement provides the Company with two five-yearfive-year renewal options and the right to terminate the lease with one year’syear's prior written notice with certain penalties.
We
previously leased approximately 12,623 square feet of officehave a data center colocation space
at a different location in Buffalo, New
York. ThatYork, with a lease term
extended tothrough November
202130, 2026, and
the base rent
was approximately $16of $4 thousand per
month.month with an annual 3% increase.
We lease
approximately 3,386 square feet of office space in Durham, North Carolina. The lease term extends to September 30, 2023, and the base rent is
approximately $8 thousand per month with an annual 3% increase.
We lease
approximately 2,300 square feet of office space in Paris, France. The lease term extends to November
30, 2024, and the rent is
approximately $5 thousand per month,
and adjustedwhich amount is subject to adjustment each December based on a consumer price index.
Rent expense, including common area maintenance fees for the three months ended February 28,
2023, and 2022
was $0.1 million and
2021 was $120 thousand and $147 thousand,$0.1 million, respectively, and
$276 thousandwas $0.3 million and
$332 thousand$0.3 million for the six months ended February 28,
2023, and 2022,
and 2021, respectively.
The following table presents maturities
Lease liability maturities as of February 28,
2022:| Future minimum lease payments | | | | |
(in thousands)
Years Ending February 28, | | | |
| 2023 | | $ | 509 | |
| 2024 | | | 465 | |
| 2025 | | | 379 | |
| 2026 | | | 319 | |
| 2027 | | | 101 | |
| Total undiscounted liabilities | | | 1,773 | |
| Less: imputed interest | | | (123 | ) |
| Total operating lease liabilities (including current portion) | | $ | 1,650 | |
Line of Credit
On March 31, 2020, we entered into a Credit Agreement with Wells Fargo Bank, N.A. The Credit Agreement provides us with a credit facility of $3.5 million through April 15, 2022 (the “Termination Date”). As of February 28, 2022, there2023, were 0 amounts drawn against the line of credit. We do not currently intend to extend the term of the Credit Agreement beyond the Termination Date or to replace the credit facility with a new one in the near term.
as follows:
| | | | | | | | | | | |
| (in thousands) | Year Ending August 31, | | Amount |
| Remainder of 2023 | | $ | 255 | |
| 2024 | | 411 | |
| 2025 | | 346 | |
| 2026 | | 219 | |
| 2027 | | 8 | |
| Total undiscounted liabilities | | 1,239 | |
| Less: imputed interest | | (60) | |
| Total operating lease liabilities (including current portion) | | $ | 1,179 | |
Employment Agreements
In the normal course of business,
we havethe Company has entered into employment agreements with certain of
our key management personnelits executive officers that may require compensation payments upon termination.
Income Taxes
We follow guidance issued by the FASB with regard to our accounting for uncertainty in income taxes recognized in the financial statements. Such guidance prescribes a recognition threshold of more likely than not and a measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In making this assessment, a company must determine whether it is more likely than not that a tax position will be sustained upon examination, based solely on the technical merits of the position, and must assume that the tax position will be examined by taxing authorities. Our policy is to include interest and penalties related to income tax expense. We file income tax returns with the IRS and various state jurisdictions as well as with the countries of India and France. Our federal income tax returns for fiscal years 20182019 through 20202021 are open for audit, and our state tax returns for fiscal years 20172018 through 20202021 remain open for audit.
Our review of prior year tax positions using the criteria and provisions presented in guidance issued by FASB did not result in a material impact on our financial position or results of operations.
We are not a party to any legal proceedings and are not aware of any pending
threatened, or
unassertedthreatened legal proceedings of any kind.
NOTE
7: SHAREHOLDERS’5 – SHAREHOLDERS' EQUITY
Shares Outstanding
Shares of
Company common stock outstanding for the three and six months ended February 28,
20222023 and
20212022 were as follows:
| Schedule of common stock outstanding | | | | | | | | | | | | | | | | |
| | | Three Months Ended February 28, | | | Six Months Ended February 28, | |
| | | 2022 | | | 2021 | | | 2022 | | | 2021 | |
| Common stock outstanding, beginning of the period | | | 20,168,796 | | | | 19,958,760 | | | | 20,141,521 | | | | 19,923,277 | |
| Common stock issued during the period | | | 12,988 | | | | 100,768 | | | | 40,263 | | | | 136,251 | |
| Common stock outstanding, end of the period | | | 20,181,784 | | | | 20,059,528 | | | | 20,181,784 | | | | 20,059,528 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended February 28, | | Six Months Ended February 28, |
| | 2023 | | 2022 | | 2023 | | 2022 |
| Common stock outstanding, beginning of period | | 20,313,755 | | | 20,168,796 | | | 20,260,070 | | | 20,141,521 | |
| Common stock repurchased during the period * | | (408,685) | | | — | | | (408,685) | | | — | |
| Common stock issued during the period | | 25,553 | | | 12,988 | | | 79,238 | | | 40,263 | |
| Common stock outstanding, end of period | | 19,930,623 | | | 20,181,784 | | | 19,930,623 | | | 20,181,784 | |
*Common stock repurchased per the ASR Agreement, as discussed in further detail in this footnote, below.
Dividends
The Company’s Board of Directors declared cash dividends during the fiscal years 2022 2023and 2021.2022. The details of the dividends paid are in the following tables:| Schedule of dividends declared and paid | | | | | | | | | | | | | | |
| (in thousands, except dividend per share) | | Fiscal Year 2022 | | | | | | | |
| Record Date | | Distribution Date | | Number of Shares
Outstanding on
Record Date | | | Dividend per
Share | | | Total Amount | |
| 10/25/2021 | | 11/01/2021 | | | 20,148 | | | $ | 0.06 | | | | 1,209 | |
| 1/31/2022 | | 2/07/2022 | | | 20,178 | | | $ | 0.06 | | | | 1,211 | |
| Total | | | | | | | | | | | | $ | 2,420 | |
| (in thousands, except dividend per share) | | Fiscal Year 2021 | | | | | | | |
| Record Date | | Distribution Date | | Number of Shares
Outstanding on
Record Date | | | Dividend per
Share | | | Total Amount | |
| 10/26/2020 | | 11/02/2020 | | | 19,924 | | | $ | 0.06 | | | $ | 1,195 | |
| 1/25/2021 | | 2/01/2021 | | | 20,010 | | | $ | 0.06 | | | | 1,201 | |
| 4/26/2021 | | 5/03/2021 | | | 20,115 | | | $ | 0.06 | | | | 1,207 | |
| 7/26/2021 | | 8/02/2021 | | | 20,139 | | | $ | 0.06 | | | | 1,208 | |
| Total | | | | | | | | | | | | $ | 4,811 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands, except dividend per share) | | Fiscal Year 2023 |
| | | | | | |
| Record Date | | Distribution Date | | Number of Shares
Outstanding on
Record Date | | Dividend per
Share | | Total Amount |
| 10/31/2022 | | 11/07/2022 | | 20,299 | | | $ | 0.06 | | | $ | 1,218 | |
| 1/30/2023 | | 2/06/2023 | | 19,924 | | | $ | 0.06 | | | 1,195 | |
| | | | | | | | |
| | | | | | | | |
| Total | | | | | | | | $ | 2,413 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands, except dividend per share) | | Fiscal Year 2022 | | | | | | |
| | | | | | | | |
| Record Date | | Distribution Date | | Number of Shares
Outstanding on
Record Date | | Dividend per
Share | | Total Amount |
| 10/25/2021 | | 11/01/2021 | | 20,148 | | | $ | 0.06 | | | $ | 1,209 | |
| 1/31/2022 | | 2/07/2022 | | 20,178 | | | $ | 0.06 | | | 1,211 | |
| 4/25/2022 | | 5/02/2022 | | 20,207 | | | $ | 0.06 | | | 1,212 | |
| 7/25/2022 | | 8/01/2022 | | 20,239 | | | $ | 0.06 | | | 1,214 | |
| Total | | | | | | | | $ | 4,846 | |
On
FebruaryDecember 23,
2007,2016, the
Company’sCompany's Board of Directors adopted, and
on February 23, 2017, its shareholders approved, the
2007 Stock OptionCompany's 2017 Equity Incentive Plan (the
“2007 Plan”"2017 Plan"), under which a total of 1.0 million shares of common stock were reserved for issuance.
On February 25, 2014, the shareholders approved an additional 1.0 million shares, increasing the total number of shares available to be granted under the 2007 Plan to 2.0 million. This plan terminated in February 2017 by its terms.On December 23, 2016, the Company’s Board of Directors adopted, and on February 23, 2017, its shareholders approved, the Company’s 2017 Equity Incentive Plan (the “2017 Plan”), under which a total of 1.0 million shares of common stock were reserved for issuance. The 2017 Plan will terminateplan would have terminated in December 2026. The 2017 Plan was replaced by the Company’s 2021 Plan (as defined below), and as a result, no further issuances of shares may be made under the 2017 Plan.
On April 9, 2021, the Company’sCompany's Board of Directors adopted, and on June 23, 2021, its shareholders approved, the Company’sCompany's 2021 Equity Incentive Plan (the “2021 Plan,” and together with the 2007 Plan and 2017 Plan, the “Plans”"Plans"), under which a total of 1.3 million shares of common stock were initially reserved for issuance. On October 20, 2022, the Company’s Board of Directors approved, and on February 9, 2023, its shareholders approved, an amendment to the 2021 Plan to increase the number of shares of common stock authorized for issuance thereunder from 1.3 million shares to 1.55 million shares of common stock of the Company. The 2021 Plan became effective as of April 9, 2021, and the Company may issue equity awards to permitted recipients thereunder. The maximum contractual life of the plan is ten years.
will terminate in 2031.
As of February 28,
2022,2023, employees and directors
holdheld Qualified Incentive Stock Options
(“ISOs”("ISOs") and Non-Qualified Stock Options
(“NQSOs”("NQSOs") to purchase
approximately 1.3an aggregate of 1.6 million shares of common stock at exercise prices ranging from $6.85 to
$66.14.$66.14 per share.
The following
table summarizestables summarize information about stock options:
| Schedule of stock option activity | | | | | | | | | | | | |
(in thousands, except per share and weighted-average amounts)
Transactions during the six months ended February 28, 2022 | | Number of
Options | | | Weighted-
Average
Exercise
Price
Per Share | | | Weighted-
Average
Remaining
Contractual
Life (Years) | |
| Outstanding, August 31, 2021 | | | 1,184 | | | $ | 25.63 | | | | 6.47 | |
| Granted | | | 189 | | | $ | 39.22 | | | | | |
| Exercised | | | (44 | ) | | $ | 17.48 | | | | | |
| Cancelled/Forfeited | | | (41 | ) | | $ | 39.72 | | | | | |
| Outstanding, February 28, 2022 | | | 1,288 | | | $ | 27.45 | | | | 6.47 | |
| Exercisable, February 28, 2022 | | | 751 | | | $ | 16.81 | | | | 4.93 | |
| | | | | | | | | | | | | | | | | | | | |
| (in thousands, except per share and weighted-average amounts) | | | | | | |
| Transactions During The Six Months Ended February 28, 2023 | | Number of
Options | | Weighted-Average
Exercise Price
Per Share | | Weighted-Average
Remaining
Contractual Life |
| Outstanding, August 31, 2022 | | 1,245 | | | $ | 28.61 | | | 6.14 years |
| Granted | | 434 | | | 43.82 | | | |
| Exercised | | (77) | | | 14.94 | | | |
| Canceled/Forfeited | | (26) | | | 40.48 | | | |
| Outstanding, February 28, 2023 | | 1,576 | | | $ | 33.27 | | | 6.85 years |
| Vested and Exercisable, February 28, 2023 | | 766 | | | $ | 21.76 | | | 4.69 years |
| Vested and Expected to Vest, February 28, 2023 | | 1,569 | | | $ | 33.23 | | | 6.84 years |
The total
grant-date fair value of nonvested stock options as of February 28,
20222023, was
$7.6 $16.2 million and is amortizable over a
weighted averageweighted-average period of
3.36 3.66 years.
The fair value of these options was estimated at the date of grant using the Black-Scholes option-pricing model. The Black-Scholes option-valuation model was developed for use in estimating the fair value of traded options, which do not have vesting restrictions and are fully transferable. In addition,
option valuationoption-valuation models require the input of highly subjective assumptions, including the expected stock price volatility.
The following table summarizes the fair value of the options, including both ISOs and NQSOs, granted during the
six months ended February 28, 2022current fiscal year 2023 and fiscal year
2021: | Schedule of fair value of options | | | | | | | | |
| (in thousands except pricing) | | Six Months Ended February 28, 2022 | | | Fiscal Year 2021 | |
| Estimated fair value of awards granted | | $ | 3,042 | | | $ | 5,092 | |
| Unvested forfeiture rate | | | 0% | | | | 0% | |
| Weighted average grant price | | $ | 39.22 | | | $ | 57.60 | |
| Weighted average market price | | $ | 39.22 | | | $ | 57.60 | |
| Weighted average volatility | | | 41.91% | | | | 40.49% | |
| Weighted average risk-free rate | | | 1.44% | | | | 0.64% | |
| Weighted average dividend yield | | | 0.61% | | | | 0.42% | |
| Weighted average expected life | | | 6.60 years | | | | 6.63 years | |
| | | | | | | | | | | | | | |
| (in thousands, except prices) | | Six Months Ended February 28, 2023 | | Fiscal Year 2022 |
| Estimated fair value of awards granted | | $ | 9,457 | | | $ | 4,597 | |
| Unvested Forfeiture Rate | | 0.00 | % | | 1.04 | % |
| Weighted-average grant price | | $ | 43.82 | | | $ | 42.13 | |
| Weighted-average market price | | $ | 43.82 | | | $ | 42.13 | |
| Weighted-average volatility | | 46.26 | % | | 42.80 | % |
| Weighted-average risk-free rate | | 4.32 | % | | 1.74 | % |
| Weighted-average dividend yield | | 0.55 | % | | 0.58 | % |
| Weighted-average expected life | | 6.59 years | | 6.59 years |
The exercise prices for the options outstanding at February 28,
20222023, ranged from $6.85 to $66.14, and the information relating to these options is as follows:
| Schedule of options by exercise price range | | | | | | | | | | | | | | | | | | | |
| (in thousands except prices) | | | | | | | | | | | | | | | | | | | |
| Exercise Price | | | Awards Outstanding | | | Awards Exercisable | |
| Low | | | High | | | Quantity | | | Weighted
Average
Remaining
Contractual
Life | | | Weighted
Average
Exercise
Price | | | Quantity | | | Weighted
Average
Remaining
Contractual
Life | | | Weighted
Average
Exercise
Price | |
| $ | 6.85 | | | $ | 9.77 | | | | 304 | | | | 3.29 years | | | $ | 8.37 | | | | 304 | | | | 3.29 years | | | $ | 8.37 | |
| $ | 9.78 | | | $ | 18.76 | | | | 224 | | | | 4.85 years | | | $ | 10.35 | | | | 223 | | | | 4.84 years | | | $ | 10.33 | |
| $ | 18.77 | | | $ | 33.40 | | | | 268 | | | | 6.91 years | | | $ | 25.12 | | | | 135 | | | | 6.54 years | | | $ | 24.16 | |
| $ | 33.41 | | | $ | 47.63 | | | | 246 | | | | 9.13 years | | | $ | 38.35 | | | | 31 | | | | 7.53 years | | | $ | 35.56 | |
| $ | 47.64 | | | $ | 66.14 | | | | 246 | | | | 8.73 years | | | $ | 58.23 | | | | 58 | | | | 8.64 years | | | $ | 58.88 | |
| | | | | | | | | | 1,288 | | | | 6.47 years | | | $ | 27.45 | | | | 751 | | | | 4.93 years | | | $ | 16.81 | |
(in thousands except prices)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Exercise Price | | Awards Outstanding | | Awards Exercisable |
| Low | | High | | Quantity | | Weighted -Average
Remaining
Contractual
Life | | Weighted-Average
Exercise
Price | | Quantity | | Weighted-Average
Remaining
Contractual
Life | | Weighted-Average
Exercise
Price |
| $ | 6.85 | | | $ | 9.77 | | | 259 | | | 2.27 years | | $ | 8.33 | | | 259 | | | 2.27 years | | $ | 8.33 | |
| $ | 9.78 | | | $ | 18.76 | | | 174 | | | 3.99 years | | $ | 10.10 | | | 174 | | | 3.99 years | | $ | 10.10 | |
| $ | 18.77 | | | $ | 33.40 | | | 214 | | | 6.15 years | | $ | 25.37 | | | 147 | | | 6.06 years | | $ | 24.62 | |
| $ | 33.41 | | | $ | 47.63 | | | 646 | | | 9.15 years | | $ | 42.06 | | | 84 | | | 7.58 years | | $ | 37.92 | |
| $ | 47.64 | | | $ | 66.14 | | | 283 | | | 8.07 years | | $ | 56.27 | | | 102 | | | 7.68 years | | $ | 58.55 | |
| | | | | 1,576 | | | 6.85 years | | $ | 33.27 | | | 766 | | | 4.69 years | | $ | 21.76 | |
During the three and six months ended February 28,
2022 the Company2023, we issued
1,7163,645 and
3,4517,160 shares of stock valued at
$88 thousand$0.1 million and
$176 thousand,$0.3 million, respectively, to our
non-managementnonmanagement directors as compensation for board-related duties.
The balancebalances of par valueour par-value common stock and additional paid-in capital as of February 28, 2022, was $102023, were $11 thousand and $135.5 $137.8 million, respectively.
Share Repurchases
On January 11, 2023, the Company entered into an accelerated share repurchase agreement (the “ASR Agreement”) with Morgan Stanley & Co. LLC (“Morgan Stanley”) to repurchase an aggregate of $20 million of the Company’s outstanding common shares. The ASR Agreement was executed as part of the Company’s existing $50 million share repurchase program.
Pursuant to the terms of the ASR Agreement, the Company made an initial payment, using available cash balances, of $20 million to Morgan Stanley and received an initial delivery of 408,685 shares of Company common stock. These 408,685 shares were retired and are treated as authorized, unissued shares. The final number of shares to be repurchased will be based on the volume-weighted average price of the Company’s common stock during the term of the ASR Agreement, less a discount and subject to adjustments. At final settlement, under certain circumstances, Morgan Stanley may be required to deliver to the Company additional shares of the Company’s common stock, or the Company may be required to deliver to Morgan Stanley additional shares of the Company’s common stock (or, at the Company’s election, to make a cash payment to Morgan Stanley). The final settlement is expected to be completed during the third quarter of fiscal 2023. The Company estimates that the final additional share delivery from Morgan Stanley to the Company pursuant to the ASR Agreement will be approximately 91,000 shares.
The ASR Agreement contains the principal terms and provisions governing the transaction, including, but not limited to, the mechanism used to determine the number of shares that will be delivered, the required timing of delivery of the shares, the circumstances under which Morgan Stanley is permitted to make adjustments to valuation and calculation periods and various acknowledgments, representations and warranties made by the Company and Morgan Stanley to one another.
NOTE
8: 6 – CONCENTRATIONS AND UNCERTAINTIESFinancial instruments that potentially subject
usthe Company to concentration of credit risk consist principally of cash, cash equivalents, trade accounts receivable, and short-term investments.
The Company holds cash and cash equivalents with balances that exceed FDIC insured limits. Cash maintained in excess of these limits is on deposit with a large, national bank. Accordingly, the Company does not have depository exposure to regional banks. In addition,
we holdthe Company holds cash at a bank in France that is not FDIC-insured. Historically,
we havethe Company has not experienced any losses in such
accounts. However, weaccounts, and management believes that the financial institutions at which its cash is held are
investigating alternative ways to minimize our exposure to such risks.stable; however, no assurances can be provided. While
wethe Company may be exposed to credit losses due to the nonperformance of
ourits counterparties,
we dothe Company does not expect the settlement of these transactions to have a material effect on
ourits results of operations, cash flows, or financial condition.
We maintain cash and cash equivalents at financial institutions that may, at times, exceed federally insured limits.Revenue concentration shows that international sales accounted for
33%31% and
34%33% of
net salesrevenue for the six months ended February 28,
2023, and 2022,
and 2021, respectively.
FourOur four largest customers
in terms of revenue accounted for
11%6%,
5%5%,
4%3%, and
4%3% of
net sales duringrevenue for the six months ended February 28,
2022. Two2023. Our four largest customers
in terms of revenue accounted for
13%11%, 5%, 4%, and
5%4% of
net sales duringrevenue for the six months ended February 28,
2021.2022.
Accounts receivable
concentration showsconcentrations show that
threeour six largest customers
in terms of accounts receivable each comprised between
19%5% and
4%13% of accounts receivable as of February 28,
2022 compared to four2023; our three largest customers
each comprisingin terms of accounts receivable comprised between
15%4% and
5%19% of accounts receivable as of February 28,
2021.2022.
We operate in the
computer software industry,biosimulation market, which is highly competitive and changes rapidly. Our operating results could be significantly affected by our ability to develop new products and find new distribution channels for new and existing products.
NOTE 7 – SEGMENT REPORTING
The majority of our customers areCompany applies ASC 280, Segment Reporting, in determining reportable segments. The Company has two reportable segments: Software and Services. Segment information is presented in the pharmaceutical industry. During economic downturns, we have seen consolidations insame manner that the pharmaceutical industry.chief operating decision maker ("CODM") reviews certain financial information based on these reportable segments. The extent to which the COVID-19 pandemic continues to impact our business going forward will depend on numerous factors we cannot reliably predict, including the durationCODM reviews revenue and scopegross profit for both of the pandemic; businesses and individuals' actions in responsereportable segments. Gross profit is defined as revenue less cost of revenue incurred by the segment.
No operating segments have been aggregated to
form the
pandemic; andreportable segments. The Company does not allocate assets at the
impact on economic activity, including the possibility of recession or financial market instability. These factors may adversely impact consumer, business, and government spendingreportable segment level as
well as customers ability to pay for our products and servicesthese are managed on an
ongoing basis. Asentity-wide group basis and, accordingly, the Company does not report asset information by segment. The Company does not allocate operating expenses that are managed on an entity-wide group basis and, accordingly, the Company does not allocate and report operating expenses at a
result, our growth rate could be affected by consolidation and downsizing insegment level. There are no internal revenue transactions between the
pharmaceutical industry.NOTE 9: SEGMENT AND GEOGRAPHIC REPORTING
We account for segments and geographic revenue in accordance with guidance issued by
The following tables summarize the
FASB. Our reportable segments are strategic business units that offer different products and services.Resultsresults for each business unit segment and consolidated results for the three and six months ended February 28, 20222023, and 2021 were as follows:
| Schedule of revenue by business unit | | | | | | | | | | | | |
| (in thousands) | | Three Months Ended February 28, 2022 | |
| | | Software | | | Services | | | Total | |
| Revenue | | $ | 9,758 | | | $ | 5,038 | | | $ | 14,796 | |
| Cost of revenue | | | 780 | | | | 2,050 | | | | 2,830 | |
| Gross profit | | $ | 8,978 | | | $ | 2,988 | | | $ | 11,966 | |
| Gross margin | | | 92% | | | | 59% | �� | | | 81% | |
2022:
| | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Three Months Ended February 28, 2023 |
| | Software | | Services | | Total |
| Revenues | | $ | 10,487 | | | $ | 5,263 | | | $ | 15,750 | |
| Cost of revenues | | 843 | | | 1,777 | | | 2,620 | |
| Gross profit | | $ | 9,644 | | | $ | 3,486 | | | $ | 13,130 | |
| Gross margin | | 92 | % | | 66 | % | | 83 | % |
Our software business and services business represented 67% and 33% of total revenue, respectively, for the three months ended February 28, 2023.
| | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Three Months Ended February 28, 2022 |
| | Software | | Services | | Total |
| Revenues | | $ | 9,758 | | | $ | 5,038 | | | $ | 14,796 | |
| Cost of revenues | | 780 | | | 2,050 | | | 2,830 | |
| Gross profit | | $ | 8,978 | | | $ | 2,988 | | | $ | 11,966 | |
| Gross margin | | 92 | % | | 59 | % | | 81 | % |
Our software business and services business represented 66% and 34% of total revenue, respectively, for the three months ended February 28, 2022.
| (in thousands) | | Three Months Ended February 28, 2021 | |
| | | Software | | | Services | | | Total | |
| Revenue | | $ | 7,827 | | | $ | 5,320 | | | $ | 13,147 | |
| Cost of revenue | | | 836 | | | | 2,075 | | | | 2,911 | |
| Gross profit | | $ | 6,991 | | | $ | 3,245 | | | $ | 10,236 | |
| Gross margin | | | 89% | | | | 61% | | | | 78% | |
The following tables summarize the results for each segment for the six months ended February 28, 2023, and 2022:
| | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Six Months Ended February 28, 2023 |
| | Software | | Services | | Total |
| Revenues | | $ | 16,561 | | | $ | 11,153 | | | $ | 27,714 | |
| Cost of revenues | | 1,728 | | | 3,563 | | | 5,291 | |
| Gross profit | | $ | 14,833 | | | $ | 7,590 | | | $ | 22,423 | |
| Gross margin | | 90 | % | | 68 | % | | 81 | % |
Our software business and services business represented 60% and 40% of total revenue, respectively, for the
threesix months ended February 28,
2021.| (in thousands) | | Six Months Ended February 28, 2022 | |
| | | Software | | | Services | | | Total | |
| Revenue | | $ | 17,120 | | | $ | 10,093 | | | $ | 27,213 | |
| Cost of revenue | | | 1,515 | | | | 4,071 | | | | 5,586 | |
| Gross profit | | $ | 15,605 | | | $ | 6,022 | | | $ | 21,627 | |
| Gross margin | | | 91% | | | | 60% | | | | 79% | |
2023.
| | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Six Months Ended February 28, 2022 |
| | Software | | Services | | Total |
| Revenues | | $ | 17,120 | | | $ | 10,093 | | | $ | 27,213 | |
| Cost of revenues | | 1,515 | | | 4,071 | | | 5,586 | |
| Gross profit | | $ | 15,605 | | | $ | 6,022 | | | $ | 21,627 | |
| Gross margin | | 91 | % | | 60 | % | | 79 | % |
Our software business and services business represented 63% and 37% of total revenue, respectively, for the six months ended February 28, 2022.
| (in thousands) | | Six Months Ended February 28, 2021 | |
| | | Software | | | Services | | | Total | |
| Revenue | | $ | 13,975 | | | $ | 9,873 | | | $ | 23,848 | |
| Cost of revenue | | | 1,647 | | | | 3,697 | | | | 5,344 | |
| Gross profit | | $ | 12,328 | | | $ | 6,176 | | | $ | 18,504 | |
| Gross margin | | | 88% | | | | 63% | | | | 78% | |
Our software business and services business represented 59% and 41% of total revenue, respectively, for the six months ended February 28, 2021.
Revenue by product and consolidated revenue for the three and six months ended February 28, 2022 and 2021 were as follows:
| Schedule of revenue by product | | | | | | |
| (in thousands) | | Three Months Ended February 28, | |
| | | 2022 | | | 2021 | |
| Software revenue | | | | | | | | | | | | | | | | |
| GastroPlus | | $ | 5,450 | | | | 56% | | | $ | 4,483 | | | | 57% | |
| MonolixSuite | | | 2,222 | | | | 23 | | | | 1,551 | | | | 20 | |
| ADMET Predictor | | | 1,367 | | | | 14 | | | | 1,212 | | | | 15 | |
| Other | | | 719 | | | | 7 | | | | 581 | | | | 8 | |
| Total software revenue | | $ | 9,758 | | | | 100% | | | $ | 7,827 | | | | 100% | |
| | | | | | | | | | | | | | | | | |
| Services revenue | | | | | | | | | | | | | | | | |
| PKPD | | $ | 2,222 | | | | 44% | | | $ | 2,585 | | | | 49% | |
| QSP/QST | | | 1,527 | | | | 30 | | | | 1,745 | | | | 33 | |
| PBPK | | | 948 | | | | 19 | | | | 945 | | | | 17 | |
| Other | | | 341 | | | | 7 | | | | 45 | | | | 1 | |
| Total services revenue | | $ | 5,038 | | | | 100% | | | $ | 5,320 | | | | 100% | |
| Total consolidated revenue | | $ | 14,796 | | | | | | | $ | 13,147 | | | | | |
| (in thousands) | | Six Months Ended February 28, | |
| | | 2022 | | | 2021 | |
| Software revenue | | | | | | | | | | | | | | | | |
| GastroPlus | | $ | 9,435 | | | | 55% | | | $ | 7,819 | | | | 56% | |
| MonolixSuite | | | 3,792 | | | | 22 | | | | 2,716 | | | | 19 | |
| ADMET Predictor | | | 2,826 | | | | 17 | | | | 2,384 | | | | 17 | |
| Other | | | 1,067 | | | | 6 | | | | 1,056 | | | | 8 | |
| Total software revenue | | $ | 17,120 | | | | 100% | | | $ | 13,975 | | | | 100% | |
| | | | | | | | | | | | | | | | | |
| Services revenue | | | | | | | | | | | | | | | | |
| PKPD | | $ | 4,548 | | | | 45% | | | $ | 4,830 | | | | 49% | |
| QSP/QST | | | 2,993 | | | | 30 | | | | 2,867 | | | | 29 | |
| PBPK | | | 1,807 | | | | 18 | | | | 1,573 | | | | 16 | |
| Other | | | 745 | | | | 7 | | | | 603 | | | | 6 | |
| Total services revenue | | $ | 10,093 | | | | 100% | | | $ | 9,873 | | | | 100% | |
| Total consolidated revenue | | $ | 27,213 | | | | | | | $ | 23,848 | | | | | |
Revenue by division and consolidated revenue for the three and six months ended February 28, 2022 and 2021 were as follows:
Schedule of revenue by division
| (in thousands) | | Three Months Ended February 28, | |
| | | 2022 | | | 2021 | |
| Simulations Plus | | $ | 7,989 | | | | 54% | | | $ | 6,646 | | | | 51% | |
| Cognigen | | | 2,437 | | | | 17 | | | | 2,783 | | | | 21 | |
| DILIsym | | | 2,102 | | | | 14 | | | | 2,114 | | | | 16 | |
| Lixoft | | | 2,268 | | | | 15 | | | | 1,604 | | | | 12 | |
| Total | | $ | 14,796 | | | | 100% | | | $ | 13,147 | | | | 100% | |
| (in thousands) | | Six Months Ended February 28, | |
| | | 2022 | | | 2021 | |
| Simulations Plus | | $ | 14,504 | | | | 53% | | | $ | 12,078 | | | | 51% | |
| Cognigen | | | 4,940 | | | | 18 | | | | 5,451 | | | | 23 | |
| DILIsym | | | 3,819 | | | | 14 | | | | 3,486 | | | | 15 | |
| Lixoft | | | 3,950 | | | | 15 | | | | 2,833 | | | | 11 | |
| Total | | $ | 27,213 | | | | 100% | | | $ | 23,848 | | | | 100% | |
In addition, we allocate revenue to geographic areas based on the locations of our customers. Revenue for each geographical area and consolidated revenue for the three and six months ended February 28, 2022 and 2021 were as follows:
Schedule of revenue by geographic areas
| (in thousands) | | Three Months Ended February 28, | |
| | | 2022 | | | 2021 | |
| Americas | | $ | 9,696 | | | | 66% | | | $ | 8,662 | | | | 66% | |
| EMEA | | | 3,706 | | | | 25 | | | | 3,071 | | | | 23 | |
| Asia Pacific | | | 1,394 | | | | 9 | | | | 1,414 | | | | 11 | |
| Total | | $ | 14,796 | | | | 100% | | | $ | 13,147 | | | | 100% | |
| (in thousands) | | Six Months Ended February 28, | |
| | | 2022 | | | 2021 | |
| Americas | | $ | 18,155 | | | | 67% | | | $ | 15,785 | | | | 66% | |
| EMEA | | | 6,731 | | | | 24 | | | | 5,560 | | | | 23 | |
| Asia Pacific | | | 2,327 | | | | 9 | | | | 2,503 | | | | 11 | |
| Total | | $ | 27,213 | | | | 100% | | | $ | 23,848 | | | | 100% | |
NOTE 10: 8 – EMPLOYEE BENEFIT PLAN
We maintain a 401(k) Plan for
all eligible
employees, and weemployees. We make matching contributions equal to 100% of the employee’s elective deferral, not to exceed 4% of
total employee compensation.the employee's gross salary. We
can also elect to make a profit-sharing contribution. Our contributions to this 401(K) Plan amounted to $194 thousandcontributed $0.2 million and
$131 thousand$0.2 million for the three months ended February 28,
20222023 and
2021,2022, respectively, and
$308 thousand$0.3 million and
$252 thousand$0.3 million for the six months ended February 28,
2023, and 2022,
and 2021, respectively.
NOTE 11: 9 - SUBSEQUENT EVENTS
Dividend Declared
On
Thursday,Wednesday, April
6, 2022,5, 2023, our Board of Directors declared a quarterly cash dividend of $0.06 per share to our shareholders. The dividend
in the amount of approximately $1.2 million will be distributed on Monday, May
2, 2022,1, 2023, for shareholders of record as of Monday, April
25, 2022.On April 1, 2022, upon expiration of the 24-month holdback period set forth in the Share Purchase and Contribution Agreement entered into by and among the Company and the former shareholders of Lixoft on March 31, 2020, the Company released and distributed the $2.0 million holdback consideration, consisting of approximately $1.3 million in cash and $0.7 million in restricted shares of Company common stock (amounting to an aggregate of 20,326 shares of common stock), to the former shareholders of Lixoft.
Item 2.
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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,
2021,2022, filed with the Securities and Exchange Commission (“SEC”) on October
27, 2021,28, 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.
Simulations Plus, Inc., incorporated in 1996, is a premier developer of
modeling and simulation software for drug discovery and development
includingsoftware for modeling and simulation, and for the prediction of
molecular properties
of molecules utilizing
artificial-intelligenceboth artificial intelligence and machine-learning-based
technologies.technology. We also provide consulting services ranging from early drug discovery through preclinical and clinical
trial development
analysis and for submissions to regulatory
submissions in support of product approval.agencies. Our software and consulting services are provided to major pharmaceutical, biotechnology, agrochemical, cosmetics, and food industry
companies. They are also provided tocompanies and academic
and regulatory agencies
worldwide for use in the conduct of industry-based
research and to regulatory agencies for product approval.research. The Company is headquartered in Southern California, with
additional offices in Buffalo, NY;
Durham,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
generate revenue byare 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
medicinestherapies 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.
Impacts
Table of the COVID-19 Pandemic on our BusinessContentsFor 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
Short-Form 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
Comparison of Three Months Ended February 28,
20222023 and
2021:| (in thousands) | | Three Months Ended February 28, | |
| | | 2022 | | | 2021 | | | $ Change | | | % Change | |
| Revenue | | $ | 14,796 | | | $ | 13,147 | | | $ | 1,649 | | | | 13% | |
| Cost of revenue | | | 2,830 | | | | 2,911 | | | | (81 | ) | | | (3)% | |
| Gross profit | | | 11,966 | | | | 10,236 | | | | 1,730 | | | | 17% | |
| Research and development | | | 902 | | | | 1,292 | | | | (390 | ) | | | (30)% | |
| Selling, general and administrative | | | 5,584 | | | | 5,458 | | | | 126 | | | | 2% | |
| Total operating expenses | | | 6,486 | | | | 6,750 | | | | (264 | ) | | | (4)% | |
| Income from operations | | | 5,480 | | | | 3,486 | | | | 1,994 | | | | 57% | |
| Other income (expense), net | | | 53 | | | | (63 | ) | | | 116 | | | | (184)% | |
| Income before income taxes | | | 5,533 | | | | 3,423 | | | | 2,110 | | | | 62% | |
| Provision for income taxes | | | (1,124 | ) | | | (212 | ) | | | (912 | ) | | | 430% | |
| Net income | | $ | 4,409 | | | $ | 3,211 | | | $ | 1,198 | | | | 37% | |
Revenue
Consolidated revenue2022
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Three Months Ended February 28, | | | | |
| | 2023 | | 2022 | | $ Change | | % Change |
| Revenue | | $ | 15,750 | | | $ | 14,796 | | | $ | 954 | | | 6 | % |
| Cost of revenue | | 2,620 | | | 2,830 | | | (210) | | | (7) | % |
| Gross profit | | 13,130 | | | 11,966 | | | 1,164 | | | 10 | % |
| Research and development | | 1,317 | | | 902 | | | 415 | | | 46 | % |
| Selling, general, and administrative | | 7,779 | | | 5,584 | | | 2,195 | | | 39 | % |
| Total operating expenses | | 9,096 | | | 6,486 | | | 2,610 | | | 40 | % |
| Income from operations | | 4,034 | | | 5,480 | | | (1,446) | | | (26) | % |
| Other income, net | | 1,034 | | | 53 | | | 981 | | | 1,851 | % |
| Income before income taxes | | 5,068 | | | 5,533 | | | (465) | | | (8) | % |
| Provision for income taxes | | (894) | | | (1,124) | | | 230 | | | (20) | % |
| Net income | | $ | 4,174 | | | $ | 4,409 | | | $ | (235) | | | (5) | % |
Revenues
Revenues increased by
approximately $1.6$1.0 million, or
13%6%, to $15.8 million for the three months ended February 28, 2023, compared to $14.8 million for the three months ended February 28,
2022, compared to consolidated revenue of approximately $13.1 million for the three months ended February 28, 2021.2022. This increase is primarily due to a
$1.9$0.7 million, or
25%7%, increase in software-related revenue
partially offset by a $282 thousandand $0.2 million, or
5% decrease4%, increase in service-related revenue when compared to the three months ended February 28,
2022 and 2021.2022.
Cost of
RevenueConsolidated costrevenues
Cost of
revenue decreased by approximately $81 thousandrevenues remained relatively consistent with a slight decrease of $0.2 million, or
3% to $2.8 million7%, for the three months ended February 28,
20222023, compared to
approximately $2.9 million for the three months ended February 28,
2021.2022. The decrease is primarily due to a
$56 thousand$0.3 million, or
7%13%, decrease in
software-relatedservice-related cost of revenue,
sold and a $25 thousandoffset by an increase of $0.1 million, or
1% decrease8%, in
service-relatedsoftware-related cost of revenue when compared to the three months ended February 28,
2022 and 2021.Gross Profit
Consolidated grossprofit
Gross profit increased by
approximately $1.7$1.2 million, or
17%10%, to $13.1 million for the three months ended February 28, 2023, compared to $12.0 million for the three months ended February 28,
2022, compared to approximately $10.2 million for the three months ended February 28, 2021.2022. The
higherincrease in gross profit is
primarily due to an increase in gross profit for our software business of
approximately $2.0$0.7 million, or
28%7%,
partially offset by a decreaseand an increase in gross profit for our services business of
approximately $257 thousand$0.5 million, or
8%17%.
Overall gross margin percentage was
81%83% and
78%81% for the three months ended February 28,
2023, and 2022,
and 2021, respectively.
Research and
Development CostsTotaldevelopment
We incurred $2.1 million of research and development costs decreasedduring the three months ended February 28, 2023. Of this amount, $0.8 million was capitalized as a part of capitalized software development costs and $1.3 million was expensed. We incurred $1.6 million of research and development costs during the three months ended February 28, 2022. Of this amount, $0.7 million was capitalized and $0.9 million was expensed. The overall increase in research and development costs is primarily due to the development of the newest version of our MonolixSuite product, version 2023R1, which was released on February 28, 2023, as well as an increase in personnel costs from market compensation adjustments following the Company's engagement during fiscal year 2022 of an external consulting firm, Arthur J. Gallagher & Co., to complete a full market study on the compensation payable to our employees compared to those of our peers. The Company rebuilt its career grading system based on the results of the compensation study to ensure competitive and equitable pay for all our employees across the organization in base salary, cash bonus, and stock option grants. We believe that the market study and resulting compensation adjustments were necessary in light of the highly competitive employment market to attract and retain superior talent.
Selling, general, and administrative expenses
Selling, general, and administrative ("SG&A") expenses increased by
$421 thousand$2.2 million, or 39%, to $7.8 million for the three months ended February 28,
20222023, compared to
the three months ended February 28, 2021. During the three months ended February 28, 2022, we incurred approximately $1.6 million of research and development costs; of this amount, $669 thousand was capitalized and approximately $902 thousand was expensed. During the three months ended February 28, 2021, we incurred approximately $2.0 million of research and development costs; of this amount approximately $700 thousand was capitalized and $1.3 million was expensed.Selling, General, and Administrative Expenses
Selling, general, and administrative expenses increased by approximately $126 thousand or 2% to approximately $5.6 million for the three months ended February 28, 2022. This increase was primarily due to a $1.7 million increase in employee and labor-related expenses from a 14% headcount increase to meet the robust and growing demand for our services as well as market compensation adjustments following the Company's engagement during fiscal year 2022 up from $5.5of an external consulting firm, Arthur J. Gallagher & Co., to complete a full market study on the compensation payable to our employees compared to those of our peers. The Company rebuilt its career grading system based on the results of the compensation study to ensure competitive and equitable pay for all our employees across the organization in base salary, cash bonus, and stock option grants. We believe that the market study and resulting compensation adjustments were necessary in light of the highly competitive employment market to attract and retain superior talent. The $1.9 million increase in personnel costs includes an increase in stock compensation expense of $0.5 million, an increase in accrued bonuses of $0.6 million, and an increase in base salaries of $0.3 million.
As a percent of revenues, SG&A expense was 49% for the three months ended February 28, 2023, compared to 38% for the three months ended February 28, 2022.
Other income
Total other income was $1.0 million for the three months ended February 28,
2021. The increase was primarily due2023, compared to
higher selling and marketing expense of $330 thousand, an increase in office expense driven by software license and maintenance costs of $275 thousand, and an increase in liability insurance costs of $145 thousand. This was offset by a decrease in salary, bonus and other compensation costs of $496 thousand and a decrease in state taxes of $144 thousand.As a percent of revenue, consolidated selling, general, and administrative expenses decreased from 42% to 38% for the same comparative periods.
Other Income (Expense), net
Totaltotal other income was $53 thousandof $0.1 million for the three months ended February 28, 2022 compared2022. The increase is primarily due to total other expensean increase in interest income of $63 thousand$0.9 million driven by an increase in interest rates.
Provision for income taxes
The provision for income taxes was $0.9 million for the three months ended February 28,
2021. The variance of $116 thousand was primarily due2023, compared to
an increase in currency-exchange gains of $77 thousand and a decrease in interest expense of $22 thousand.Provision for Income Taxes
Provision for income taxes was $1.1 million for the three months ended February 28, 2022 compared to $212 thousand for the same period in the previous year.2022. Our effective tax rate increased 14.1%decreased to 20.3%18% for the three months ended February 28, 20222023, from 6.2% during20% for the same periodthree months ended February 28, 2022.
Comparison of Six Months Ended February 28,
20222023 and
2021:| (in thousands) | | Six Months Ended February 28, | |
| | | 2022 | | | 2021 | | | $ Change | | | % Change | |
| Revenue | | $ | 27,213 | | | $ | 23,848 | | | $ | 3,365 | | | | 14% | |
| Cost of revenue | | | 5,586 | | | | 5,344 | | | | 242 | | | | 5% | |
| Gross profit | | | 21,627 | | | | 18,504 | | | | 3,123 | | | | 17% | |
| Research and development | | | 1,784 | | | | 2,101 | | | | (317 | ) | | | (15)% | |
| Selling, general and administrative | | | 10,572 | | | | 9,866 | | | | 706 | | | | 7% | |
| Total operating expenses | | | 12,356 | | | | 11,967 | | | | 389 | | | | 3% | |
| Income from operations | | | 9,271 | | | | 6,537 | | | | 2,734 | | | | 42% | |
| Other income (expense), net | | | 118 | | | | (118 | ) | | | 236 | | | | (200)% | |
| Income before income taxes | | | 9,389 | | | | 6,419 | | | | 2,970 | | | | 46% | |
| Provision for income taxes | | | (1,954 | ) | | | (729 | ) | | | (1,225 | ) | | | 168% | |
| Net income | | $ | 7,435 | | | $ | 5,690 | | | $ | 1,745 | | | | 31% | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Six Months Ended February 28, | | | | |
| | 2023 | | 2022 | | $ Change | | % Change |
| Revenue | | $ | 27,714 | | | $ | 27,213 | | | $ | 501 | | | 2 | % |
| Cost of revenue | | 5,291 | | | 5,586 | | | (295) | | | (5) | % |
| Gross profit | | 22,423 | | | 21,627 | | | 796 | | | 4 | % |
| Research and development | | 2,483 | | | 1,784 | | | 699 | | | 39 | % |
| Selling, general, and administrative | | 15,028 | | | 10,572 | | | 4,456 | | | 42 | % |
| Total operating expenses | | 17,511 | | | 12,356 | | | 5,155 | | | 42 | % |
| Income from operations | | 4,912 | | | 9,271 | | | (4,359) | | | (47) | % |
| Other income, net | | 1,774 | | | 118 | | | 1,656 | | | 1,403 | % |
| Income before income taxes | | 6,686 | | | 9,389 | | | (2,703) | | | (29) | % |
| Provision for income taxes | | (1,267) | | | (1,954) | | | 687 | | | (35) | % |
| Net income | | $ | 5,419 | | | $ | 7,435 | | | $ | (2,016) | | | (27) | % |
Revenue
Consolidated revenue
Revenues
Revenues increased by
approximately $3.4$0.5 million, or
14%2%, to $27.7 million for the six months ended February 28, 2023, compared to $27.2 million for the six months ended February 28,
2022, compared to consolidated revenue of approximately $23.8 million for the six months ended February 28, 2021.2022. This increase is primarily due to
a $3.2an increase of $1.1 million, or
23% increase11%, in service-related revenue, partially offset by a $0.6 million, or 3%, decrease in software-related revenue,
as well as a $220 thousand or 2% increase in service-related revenuedriven by timing of the software license renewals and foreign currency exchange rate fluctuations when comparing the six months ended February 28,
20222023, and
2021.2022.
Cost of
RevenueConsolidated costrevenues
Cost of
revenue increased by approximately $242 thousandrevenues remained relatively consistent with a slight decrease of $0.3 million, or 5%
to $5.6 million, for the six months ended February 28,
2022,2023, compared to
approximately $5.3 million for the six months ended February 28,
2021.2022. The
increasedecrease is primarily due to a
$374 thousand$0.5 million, or
10% increase12%, decrease in service-related cost of revenue,
and a $132 thousandoffset by an increase of $0.2 million, or
8% decrease14%, in software-related cost of revenue when compared to the six months ended February 28,
2022 and 2021.2022.
Gross
ProfitConsolidated grossprofit
Gross profit increased by
approximately $3.1$0.8 million, or
17%4%, to $22.4 million for the six months ended February 28, 2023, compared to $21.6 million, for the six months ended February 28,
2022, compared to approximately $18.5 million for the six months ended February 28, 2021.2022. The
higherincrease in gross profit is
primarily due to an increase in gross profit for our
softwareservices business of
approximately $3.3$1.6 million, or
27%26%, partially offset by a decrease in gross profit for our
servicessoftware business of
approximately $154 thousand$0.8 million, or
2%5%.
Overall gross margin percentage was
79%81% and
78%79% for the six months ended February 28,
2023, and 2022,
and 2021, respectively.
Research and
Development CostsTotaldevelopment
We incurred $4.2 million of research and development costs decreased by $284 thousand forduring the six months ended February 28, 2022, compared to2023. Of this amount, $1.7 million was capitalized as a part of capitalized software development costs and $2.5 million was expensed. We incurred $3.3 million of research and development costs during the six months ended February 28, 2021. During the six months ended February 28, 2022, we incurred approximately $3.3 million of research and development costs; of2022. Of this amount, $1.5 million was capitalized and $1.8 million was expensed. DuringThe overall increase in research and development costs is primarily due to the development of the newest version of our MonolixSuite product, version 2023R1, which was released on February 28, 2023 as well as an increase in personnel costs from market compensation adjustments following the Company's engagement during fiscal year 2022 of an external consulting firm, Arthur J. Gallagher & Co., to complete a full market study on the compensation payable to our employees compared to those of our peers. The Company rebuilt its career grading system based on the results of the compensation study to ensure competitive and equitable pay for all our employees across the organization in base salary, cash bonus, and stock option grants. We believe that the market study and resulting compensation adjustments were necessary in light of the highly competitive employment market to attract and retain superior talent.
Selling, general, and administrative expenses
Selling, general, and administrative (“SG&A”) expenses increased by $4.5 million, or 42%, to $15.0 million for the six months ended February 28,
2021, we incurred approximately $3.5 million of research and development costs; of this amount approximately $1.4 million was capitalized and $2.1 million was expensed.Selling, General, and Administrative Expenses
Selling, general, and administrative expenses increased by approximately $706 thousand or 7%2023, compared to approximately $10.6 million for the six months ended February 28, 2022. This increase was primarily due to a $3.2 million increase in employee and labor related expenses from a 14% headcount increase to meet the robust and growing demand for our services as well as market compensation adjustments following the Company's engagement during fiscal year 2022 from $9.9of an external consulting firm, Arthur J. Gallagher & Co., to complete a full market study on the compensation payable to our employees compared to those of our peers. The Company rebuilt its career grading system based on the results of the compensation study to ensure competitive and equitable pay for all our employees across the organization in base salary, cash bonus, and stock option grants. We believe that the market study and resulting compensation adjustments were necessary in light of the highly competitive employment market to attract and retain superior talent. The $3.2 million increase in personnel costs includes an increase in accrued bonuses of $1.0 million, an increase in stock compensation of $0.9 million, and an increase in base salaries of $1.0 million.
Additionally, the overall increase in SG&A is due to an increase in merger and acquisition costs of $0.4 million, an increase in commissions to distributors of $0.1 million, and an increase in travel costs of $0.2 million.
As a percent of revenues, SG&A expense was 54% for the six months ended February 28, 2023, compared to 39% for the six months ended February 28, 2022.
Other income
Total other income was $1.8 million for the six months ended February 28,
2021. The increase was primarily due2023, compared to
higher selling and marketing costs of $419 thousand, an increase in office expense of $349 thousand and an increase in insurance costs of $288 thousand related to liability premiums. These were offset by a decrease in salaries and wages of $194 thousand and lower state and local taxes of $135 thousand.As a percent of revenue, consolidated selling, general, and administrative expenses decreased from 41% to 39% for the same comparative periods.
Other Income (Expense), net
Totaltotal other income was $118 thousandof $0.1 million for the six months ended February 28, 2022 compared2022. The increase is primarily due to total other expensean increase in interest income of $118 thousand$1.6 million driven by an increase in interest rates.
Provision for income taxes
The provision for income taxes was $1.3 million for the six months ended February 28,
2021. The variance of $236 thousand was primarily due2023, compared to
an increase in currency-exchange gains of $193 thousand and a decrease in interest expense of $22 thousand.Provision for Income Taxes
Provision for income taxes was approximately $2.0 million for the six months ended February 28, 2022, compared to $729 thousand for the same period in the previous year.2022. Our effective tax rate increased 9.4%decreased to 20.8%19% for the six months ended February 28, 2022 compared to 11.4%2023, from 21% for the same period of the previous year.
Segment six months ended February 28, 2022.
Results of Operations by Business Unit
Comparison of Three Months Ended February 28,
20222023 and
2021:
Revenue
| (in thousands) | | Three Months Ended February 28, | |
| | | 2022 | | | 2021 | | | Change ($) | | | Change (%) | |
| Software | | $ | 9,758 | | | $ | 7,827 | | | $ | 1,931 | | | | 25% | |
| Services | | | 5,038 | | | | 5,320 | | | | (282 | ) | | | (5)% | |
| Total | | $ | 14,796 | | | $ | 13,147 | | | $ | 1,649 | | | | 13% | |
2022
Revenues
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Three Months Ended February 28, |
| | 2023 | | 2022 | | Change ($) | | Change (%) |
| Software | | $ | 10,487 | | | $ | 9,758 | | | $ | 729 | | | 7 | % |
| Services | | 5,263 | | | 5,038 | | | 225 | | | 4 | % |
| Total | | $ | 15,750 | | | $ | 14,796 | | | $ | 954 | | | 6 | % |
Cost of RevenueRevenues
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Three Months Ended February 28, |
| | 2023 | | 2022 | | Change ($) | | Change (%) |
| Software | | $ | 843 | | | $ | 780 | | | $ | 63 | | | 8 | % |
| Services | | 1,777 | | | 2,050 | | | (273) | | | (13) | % |
| Total | | $ | 2,620 | | | $ | 2,830 | | | $ | (210) | | | (7) | % |
| (in thousands) | | Three Months Ended February 28, | |
| | | 2022 | | | 2021 | | | Change ($) | | | Change (%) | |
| Software | | $ | 780 | | | $ | 836 | | | $ | (56 | ) | | | (7)% | |
| Services | | | 2,050 | | | | 2,075 | | | | (25 | ) | | | (1)% | |
| Total | | $ | 2,830 | | | $ | 2,911 | | | $ | (81 | ) | | | (3)% | |
Gross Profit
| (in thousands) | | Three Months Ended February 28, | |
| | | 2022 | | | 2021 | | | Change ($) | | | Change (%) | |
| Software | | $ | 8,978 | | | $ | 6,991 | | | $ | 1,987 | | | | 28% | |
| Services | | | 2,988 | | | | 3,245 | | | | (257 | ) | | | (8)% | |
| Total | | $ | 11,966 | | | $ | 10,236 | | | $ | 1,730 | | | | 17% | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Three Months Ended February 28, |
| | 2023 | | 2022 | | Change ($) | | Change (%) |
| Software | | $ | 9,644 | | | $ | 8,978 | | | $ | 666 | | | 7 | % |
| Services | | 3,486 | | | 2,988 | | | 498 | | | 17 | % |
| Total | | $ | 13,130 | | | $ | 11,966 | | | $ | 1,164 | | | 10 | % |
For the three months ended February 28,
2022,2023, the revenue increase of
$1.9$0.7 million, or
25%7%, compared to the three months ended February 28,
2021,2022, was primarily due to higher
salesrevenues from GastroPlus® of $0.9 million, partially offset by lower revenues from MonolixSuite
and GastroPlus of
$1.0 million and $967 thousand, respectively.$0.2 million. Cost of
revenue decreased $56 thousandrevenues remained relatively consistent, with a slight increase of $0.1 million, or
7%8%, during the same periods,
primarily due to a decrease in salaries of $231 thousand and
an increase in international salaries of $191 thousand. Grossgross profit increased
$1.9by $0.7 million, or
28% during the same periods,7%, primarily due to the increase in
revenue.revenues.
For the three months ended February 28,
2022,2023, the revenue
decreaseincrease of
$282 thousand$0.2 million, or
5%4%, compared to the three months ended February 28,
2021,2022, was primarily due to
higher revenues from pharmacokinetic and pharmacodynamic (“PKPD”) services of $0.4 million and higher revenues from physiologically based pharmacokinetics (“PBPK”) services of $0.3 million, partially offset by a decrease in
revenuerevenues from
PKPDquantitative systems pharmacology/quantitative systems toxicology (“QSP/QST”) services of
$438 thousand, partially offset by increases in other services revenue.$0.5 million. Cost of
revenuerevenues decreased
$25 thousandby $0.3 million, or
1%, primarily due to a decrease in salaries and benefits of $104 thousand and lower stock compensation expense of $92 thousand, partially offset by an increase in CRO services and other expense of $136 thousand, and higher contractor costs of $36 thousand.13%. Gross profit
decreased $257 thousandincreased by $0.5 million, or
8%.17%, for the same periods. Comparison of Six Months Ended February 28, 20222023 and 2021:
Revenue
| (in thousands) | | Six Months Ended February 28, | |
| | | 2022 | | | 2021 | | | Change ($) | | | Change (%) | |
| Software | | $ | 17,120 | | | $ | 13,975 | | | $ | 3,145 | | | | 23% | |
| Services | | | 10,093 | | | | 9,873 | | | | 220 | | | | 2% | |
| Total | | $ | 27,213 | | | $ | 23,848 | | | $ | 3,365 | | | | 14% | |
2022
Revenues
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Six Months Ended February 28, |
| | 2023 | | 2022 | | Change ($) | | Change (%) |
| Software | | $ | 16,561 | | | $ | 17,120 | | | $ | (559) | | | (3) | % |
| Services | | 11,153 | | | 10,093 | | | 1,060 | | | 11 | % |
| Total | | $ | 27,714 | | | $ | 27,213 | | | $ | 501 | | | 2 | % |
Cost of
Revenue| (in thousands) | | Six Months Ended February 28, | |
| | | 2022 | | | 2021 | | | Change ($) | | | Change (%) | |
| Software | | $ | 1,515 | | | $ | 1,647 | | | $ | (132 | ) | | | (8)% | |
| Services | | | 4,071 | | | | 3,697 | | | | 374 | | | | 10% | |
| Total | | $ | 5,586 | | | $ | 5,344 | | | $ | 242 | | | | 5% | |
Revenues
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Six Months Ended February 28, |
| | 2023 | | 2022 | | Change ($) | | Change (%) |
| Software | | $ | 1,728 | | | $ | 1,515 | | | $ | 213 | | | 14 | % |
| Services | | 3,563 | | | 4,071 | | | (508) | | | (12) | % |
| Total | | $ | 5,291 | | | $ | 5,586 | | | $ | (295) | | | (5) | % |
Gross Profit
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Six Months Ended February 28, |
| | 2023 | | 2022 | | Change ($) | | Change (%) |
| Software | | $ | 14,833 | | | $ | 15,605 | | | $ | (772) | | | (5) | % |
| Services | | 7,590 | | | 6,022 | | | 1,568 | | | 26 | % |
| Total | | $ | 22,423 | | | $ | 21,627 | | | $ | 796 | | | 4 | % |
| (in thousands) | | Six Months Ended February 28, | |
| | | 2022 | | | 2021 | | | Change ($) | | | Change (%) | |
| Software | | $ | 15,605 | | | $ | 12,328 | | | $ | 3,277 | | | | 27% | |
| Services | | | 6,022 | | | | 6,176 | | | | (154 | ) | | | (2)% | |
| Total | | $ | 21,627 | | | $ | 18,504 | | | $ | 3,123 | | | | 17% | |
For the six months ended February 28,
2022,2023, the revenue
increasedecrease of
$3.1$0.6 million, or
23%3%, compared to the six months ended February 28,
2021,2022, was primarily due to
higher saleslower revenues from
GastroPlusAbsorption, Distribution, Metabolism, Excretion, and
Toxicity Predictor (“ADMET Predictor®”) of $0.4 million and from MonolixSuite of
$1.6 million and $1.4 million, respectively.$0.2 million. Cost of
revenue decreased $132 thousandrevenues increased by $0.2 million, or
8%14%, during the same periods,
primarily due to an decrease in salaries of $231 thousand and
lower tech support costs of $99 thousand, partially offsetgross profit decreased by
an increase in international salaries of $191 thousand. Gross profit increased $3.3$0.8 million, or
27% during the same periods,5%, primarily due to the
increasedecrease in
revenue.revenues.
For the six months ended February 28, 2022,2023, the revenue increase of $220 thousand$1.1 million, or 2%11%, compared to the six months ended February 28, 2021,2022, was primarily due to higher revenues from PKPD services of $1.0 million and an increase in revenuerevenues from PBPK services of $0.9 million, partially offset by a decrease in revenues from QSP/QST consulting services of $130 thousand.$0.9 million. Cost of revenuerevenues decreased by $0.5 million, or 12%. Gross profit increased by $374 thousand$1.6 million, or 10%26%, primarily due to an increase in payroll taxes of $281 thousand and higher CRO services costs of $119 thousand. Gross profit decreased $154 thousand or 2% duringfor the same periods, primarily due to the increase in costperiods.
Liquidity and Capital Resources
As of February 28,
2022,2023, the Company had
$60.4$39.3 million in cash and cash equivalents,
$64.2$76.1 million in short-term investments, and
$134.6 million in working
capital.capital of $125.5 million. Our principal sources of capital have been
a follow-on public offering in August 2020 for $107.7 million and cash flows from our
operations and a public offering in 2020.operations. We have achieved continuous positive operating cash flow over the last
twelvethirteen fiscal years.
On March 31, 2020, we entered intoDecember 29, 2022, our Board of Directors authorized and approved a Credit Agreement with Wells Fargo Bank, N.A. The Credit Agreement provides us with a credit facility of $3.5share repurchase program for up to $50 million through April 15, 2022 (the “Termination Date”). As of February 28, 2022, there were no amounts drawn against the line of credit. We do not currently intend to extend the term of the Credit Agreement beyond the Termination Date or to replace the credit facility with a new one in the near term.
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 111,682outstanding shares of our common stock, valued at $3.7 million, netincluding the repurchase of adjustments and a $2.0 million holdback for representations and warranties. In addition, we paid $3.5up to $20 million of excess working capitalour 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 March 31, 2020 financial statementscapital needs of Lixoft. In addition,our business, the Agreement calls for earnout payments up to an additional $5.5 million, payable in two-thirds cash and one-third newly issued, unregisteredmarket price of shares of our common stock, based on a revenue growth formula each yearand general market conditions. Repurchases may be made under certain SEC 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 two years subsequentcompletion of our share repurchase program, and the program may be suspended or discontinued at any time. Except as required by the ASR Agreement (as defined below), we are not obligated to April 1, 2020. The former shareholders can earn up to $2 million the first year and $3.5 million in year two. In June 2021, $2.0 million was paid outrepurchase any shares under the first earnout payment, which was comprisedrepurchase program. We funded share repurchases, if any, through cash on hand and cash generated from operations.
On January 11, 2023, the Company entered into an accelerated share repurchase agreement (the “ASR Agreement”) with Morgan Stanley & Co. LLC (“Morgan Stanley”) to repurchase an aggregate of $1.3$20 million of cash and $0.7 million worth ofthe Company’s outstanding common stock. Under theshares. The ASR Agreement we have up to 90 days after April 1, 2022 to calculate the amountwas executed as part of the earnout payment, if any, payable for year two under the Agreement. We have not yet determined the final amount, if any, we will be required to pay under the second earnout; however, we intend to do so within the period provided under the Agreement. SubsequentCompany’s existing $50 million share repurchase program.
Pursuant to the endterms of the quarter ended February 28, 2022, on April 01, 2022, we releasedASR Agreement, the Company made an initial payment, using available cash balances, of $20 million to Morgan Stanley and distributed the $2.0 million holdback consideration, consistingreceived an initial delivery of approximately $1.3 million in cash and $0.7 million in restricted408,685 shares of Company common stock. These 408,685 shares were retired and are treated as authorized, unissued shares. The final number of shares to be repurchased will be based on the volume-weighted average price of the Company’s common stock (amountingduring the term of the ASR Agreement, less a discount and subject to an aggregate of 20,326adjustments. At final settlement, under certain circumstances, Morgan Stanley may be required to deliver to the Company additional shares of the Company’s common stock),stock, or the Company may be required to deliver to Morgan Stanley additional shares of the Company’s common stock (or, at the Company’s election, to make a cash payment to Morgan Stanley). The final settlement is expected to be completed during the third quarter of fiscal 2023. The Company estimates that the final additional share delivery from Morgan Stanley to the former shareholdersCompany pursuant to the ASR Agreement will be approximately 91,000 shares.
The ASR Agreement contains the principal terms and provisions governing the transaction, including, but not limited to, the mechanism used to determine the number of
Lixoft.shares that will be delivered, the required timing of delivery of the shares, the circumstances under which Morgan Stanley is permitted to make adjustments to valuation and calculation periods, and various acknowledgments, representations, and warranties made by the Company and Morgan Stanley to one another.
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.future, including to complete our 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.securities. In the event
suchthat additional 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.acquisitions, investments, and partnerships. If one or more such
acquisitions isstrategic opportunities are 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
acquisitionstrategic 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
acquisition,transaction, including obtaining loans and issuing additional securities.
Except as discussed elsewhere in this
report,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.
Net cash provided by operating activities was $10.2 million for the six months ended February 28, 2023. Our operating cash flows resulted in part from our net income of $5.4 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, $0.6 million related to changes in balances of operating assets and liabilities was added to net income and $4.2 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 $6.2 million for the six months ended February 28, 2022. Our operating cash flows resulted primarily from our net income of $7.4 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$6.1 million related to changes in balances of operating assets and liabilities was
$6.1subtracted from net income and $4.9 million
offset byrelated to non-cash charges
of $4.9 million. The change in operating assets and liabilities was
primarily a result of an increase in accounts receivable.added to net income to reconcile to cash flow from operations.
Investing Activities
Net cash
provided by operatingused in investing activities
was $6.6 million forduring the six months ended February 28,
2021. Our operating cash flows resulted2023, was $1.1 million, primarily
from our net incomedue to the purchase of
$5.7short-term investments of $47.2 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, net cash outflow from changes in balancescomputer software development costs of
operating assets and liabilities was $3.7$1.7 million, offset by
non-cash chargesproceeds from maturities of
$4.6short-term investments of $48.2 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 six months ended February 28, 2022, of approximatelywas $19.1 million, was primarily due to the proceeds from the salematurities of short-term investments of $46.8 million, partially offset by the purchase of short-term investments of $25.5 million and the purchase of computer software development costs of $1.5 million.
Cash
Financing Activities
Net cash used
for investingin financing activities during the six months ended February 28,
2021 of $11.92023, was $21.5 million,
was primarily due to
the purchaseshare repurchases of
short-term investments of $40.8 million, the costs associated with the development of computer software of $1.5$20.0 million and
the purchase of equipment of $0.6dividend payments totaling $2.4 million,
partially offset by
the proceeds from the
saleexercise of
short-term investments of $31.0stock options totaling $1.0 million.
Financing Activities
For
Net cash used in financing activities during the six months ended February 28, 2022,
net cash used in financing activities ofwas $1.9 million,
was primarily due to dividend payments totaling $2.4 million, partially offset by proceeds from the exercise of stock options totaling
$541 thousand.For the six months ended February 28, 2021, net cash used by financing activities of $1.6 million was primarily driven by the payment of dividends totaling $2.4 million, partially offset by proceeds from the exercise of stock options totaling $0.8$0.5 million.
At February 28,
2022,2023, we had working capital of
$134.6$125.5 million, a ratio of current assets to current liabilities of
16.021.9 and a ratio of debt to equity of 0.1. At August 31,
2021,2022, we had working capital of
$127.7$139.1 million, a ratio of current assets to current liabilities of
12.019.0 and a ratio of debt to equity of 0.1.
Contractual Obligations
The following table provides aggregate information regarding our contractual obligations as
Known Trends
ofor Uncertainties
Although we have not seen any significant reduction in total revenue to date, we did see a reduction in PKPD services during the year ended August 31, 2021, primarily resulting from project disruptions due to customer delays, holds, and drug development program cancellations.
We have
also seen some consolidation in the pharmaceutical industry during economic downturns, although these consolidations have not had a negative effect on our total
revenuerevenues 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
revenuerevenues and earnings going forward.
The world has been affected by the COVID-19 pandemic. Although there has not been a substantial impact on our sales revenue to date, until the pandemic has passed, there remains uncertainty as to the effect on our business in both the short and long term.
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 theour pharmaceutical business segments could result in increased revenuerevenues and earnings if they are accepted by our markets; however, there can be no assurances that new products will result in significant improvements to revenuerevenues or earnings. For competitive reasons, we do not disclose all of our new product development activities.
The world has been affected by the ongoing conflict between Russia and Ukraine and economic uncertainty, amongst other things. Inflation has risen, Federal Reserve interest rates have increased recently, and the general consensus among economists suggests that we should expect a higher recession risk to continue over the next year. These factors, amongst other things, could result in further economic uncertainty and volatility in the capital markets in the near term, and could negatively affect our operations.
Additionally, in March 2023, Silicon Valley Bank and Signature Bank were closed and taken over by the FDIC, which created significant market disruption and uncertainty for those who bank with those institutions, and which raised significant concern regarding the stability of the banking system in the United States, and in particular with respect to regional banks. Although we do not hold our cash in regional banks, if the banks and financial institutions at which we hold our cash enter receivership or become insolvent in the future in response to financial conditions affecting the banking system and financial markets, our ability to access our cash and cash equivalents may be threatened and such events could have a material adverse effect on our business and financial condition.
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 our 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
revenuerevenues 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
salesrevenues in these new markets 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,
20212022 (the “Annual Report”), filed with the SEC on October
27, 2021.28, 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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk As of February 28, 2022,2023, there has been no material change in our exposure to market risk from that described in Item 7A of our Annual Report.
Item 4. Controls and Procedures Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of February 28,
2022.2023. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well-designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, management concluded as of February 28,
20222023 that our disclosure controls and procedures were effective.
Changes in Internal Controls over Financial Reporting
No change in our internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
For a description of our material pending legal proceedings, please see Note
6,5, Commitments and Contingencies, to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Item 1A. Risk Factors
Please carefully consider the information set forth in this Quarterly Report on Form 10-Q and the risk factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report
on Form 10-K for the year ended August 31, 2022, which could materially affect our business, financial condition, or future results. The risks described in our Annual Report, as well as other risks and uncertainties, could materially and adversely affect our business, results of operations, and financial condition, which in turn could materially and adversely affect the trading price of shares of our common stock. Except as set forth below, there have been no material updates or changes to the risk factors previously disclosed in our Annual Report; provided, however, additional risks not currently known or currently material to us may also harm our business.
We are currently operating in a periodcannot guarantee that our share repurchase program will be fully consummated or that it will enhance long-term stockholder value, and share repurchases could increase the volatility of economic uncertainty and capital markets disruption, which has been significantly impacted by geopolitical instability duethe price of our common stock.
Pursuant to the ongoing military conflict between Russianew share repurchase program authorized by our Board of Directors on December 29, 2022, we are authorized to repurchase up to $50 million of outstanding shares of our common stock from time to time through a combination of open market repurchases, privately negotiated transactions, 10b5-1 trading plans, accelerated stock repurchase transactions, and/or other transactions, in accordance with federal securities laws. Such program may be suspended or discontinued at any time. Except for the $20 million of shares we are obligated to repurchase pursuant to the ASR Agreement we entered into on January 11, 2023, we are not obligated to repurchase any shares, and Ukraine. Ourthe timing, manner, price, and actual amount of 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. As of February 28, 2023, we had repurchased an aggregate of 408,685 common shares pursuant to the ASR Agreement, and we currently expect that the final additional share delivery from Morgan Stanley to us pursuant to the ASR Agreement will be approximately 91,000 shares. The timing of additional repurchases pursuant to our share repurchase program could affect our stock price and increase its volatility. We cannot guarantee that we will repurchase any additional shares, and there can be no assurance that any share repurchases will enhance shareholder value because the stock price of our common stock may decline below the levels at which we effected repurchases.
Adverse developments affecting the financial services industry, such as actual events or concerns involving liquidity, defaults, or non-performance by financial institutions or transactional counterparties, could adversely affect our current and projected business operations and our financial condition and results of operations could be materially adversely affectedoperations.
Actual events involving reduced or limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions or other companies in the financial services industry or the financial services industry generally, or concerns or rumors about any events of these kinds, have in the past and may in the future lead to market-wide liquidity problems. For example, in March 2023, Silicon Valley Bank and Signature Bank were closed and taken over by
the Federal Deposit Insurance Corporation (“FDIC”) as receiver. Although we did not have any
negative impactcash or cash equivalent balances on
the global economy and capital markets resulting from the conflict in Ukrainedeposit with Silicon Valley Bank or Signature Bank, or any other
geopolitical tensions.regional banks, investor concerns regarding the U.S. or international financial systems could result in less favorable commercial financing terms, including higher interest rates or costs and global markets are experiencing volatilitytighter financial and disruption following the escalation of geopolitical tensions and the start of the military conflict between Russia and Ukraine. On February 24, 2022, a full-scale military invasion of Ukraine by Russian troops was reported. Although the length and impact of the ongoing military conflict is highly unpredictable, the conflict in Ukraine could leadoperating covenants, or systemic limitations on access to market disruptions, including significant volatility in commodity prices, credit and capital markets, as well as supply chain interruptions. We are continuing to monitor the situation in Ukraine and globally and assessing its potential impact on our business.
Additionally, the recent military conflict in Ukraine has led to sanctions and other penalties being levied by the United States, European Union and other countries against Russia. Additional potential sanctions and penalties have also been proposed and/or threatened. Russian military actions and the resulting sanctions could adversely affect the global economy and financial markets and lead to instability and lack of liquidity in capital markets, potentiallysources, thereby making it more difficult for us to obtain additional funds.
Althoughacquire financing on acceptable terms or at all. Any decline in available funding or access to our business has not been materially impacted by the ongoing military conflict between Russiancash and Ukraine to date, it is impossible to predict the extent to which our operations, or those of our suppliers and manufacturers, will be impacted in the short and long term, or the ways in which the conflict mayliquidity resources could, among other risks, adversely impact our business. The extent and durationability to meet our operating expenses, financial obligations or fulfill our other obligations. Any of these impacts, or any other impacts resulting from the military action, sanctions and resulting market disruptions are impossible to predict, butfactors described above or other related or similar factors not described above, could be substantial. Any such disruptions may also magnify the impact of other risks described in this Quarterly Reporthave material adverse impacts on Form 10-Qour liquidity and our Annual Report.
We may be adversely affected by the effects of inflation.
Inflation has the potential to adversely affect our liquidity,current and/or projected business operations and financial condition and results of operations by increasing our overall cost structure, particularly if we are unable to achieve commensurate increases in the prices we charge our customers. The existenceoperations.
Table of inflation in the economy has resulted in, and may continue to result in, higher interest rates and capital costs, shipping costs, supply shortages, increased costs of labor, weakening exchange rates and other similar effects. As a result of inflation, we have experienced and may continue to experience, cost increases. Although we may take measures to mitigate the impact of this inflation, if these measures are not effective, our business, financial condition, results of operations and liquidity could be materially adversely affected. Even if such measures are effective, there could be a difference between the timing of when these beneficial actions impact our results of operations and when the cost of inflation is incurred.Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
As discussed elsewhere in this report, on April 1, 2022,
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
During the
Company issued an aggregatequarter ended February 28, 2023, there were no unregistered sales of
20,326 restricted shares of the Company’s common stock to the former shareholders of Lixoft as partial payment of a $2.0 million holdback of the closing consideration payable pursuant to that Share Purchase and Contribution Agreement entered into by and among the Company and the former shareholders of Lixoft, dated March 31, 2020. The shares had an aggregate value of approximately $0.70 million.The shares issued as partial payment of the $2.0 million holdback were issued in a transaction not involving a public offering in reliance upon an exemption from registration provided by Section 4(a)(2) of the Securities Act and/or Regulation S promulgated thereunder.
The Company did not sell any other unregistered equityour securities during the period covered by this report that were not otherwise disclosedreported in a Current Report on Form 8-K.
Issuer Purchases of Equity Securities
As discussed elsewhere in this Quarterly Report on Form 10-Q, on December 29, 2022, our Board of Directors authorized and approved a share repurchase program for up to $50 million of the outstanding shares of our common stock, and on January 11, 2023, we entered into the ASR Agreement with Morgan Stanley to repurchase an aggregate of $20 million of our outstanding common shares as part of the share repurchase program. The program has no expiration date but may be terminated at any time at our Board of Directors’ discretion.
In January 2023, we received an initial delivery of an aggregate of 408,685 shares of our common stock from Morgan Stanley pursuant to the ASR Agreement, in exchange for which we made an initial payment of $20 million to Morgan Stanley. These 408,685 shares were retired and are treated as authorized, unissued shares. The final number of shares to be repurchased pursuant to the ASR Agreement will be based on the volume-weighted average price of the Company’s common stock during the term of the ASR Agreement, less a discount and subject to adjustments. At final settlement, under certain circumstances, Morgan Stanley may be required to deliver to us additional shares of our common stock, or we may be required to deliver to Morgan Stanley additional shares of our common stock (or, at our election, to make a cash payment to Morgan Stanley). The final settlement is expected to be completed during the third quarter of fiscal 2023. We currently estimate that the final additional share delivery from Morgan Stanley to us pursuant to the ASR Agreement will be approximately 91,000 shares.
After completion of the repurchases under the ASR Agreement, $30 million will remain available for additional repurchases under the authorized repurchase program.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Program | | Maximum
Approximate Dollar
Value of Shares that
May Yet Be Purchased
Under the Program
|
| 12/01/2022 - 12/31/2022 | | — | | | $— | | — | | | $ | — | |
| 01/01/2023 - 01/31/2023 | | 408,685 | | | (1) | | 408,685 | | | $ | 30,000,000 | |
| 02/01/2023 - 02/28/2023 | | — | | | $— | | — | | | $ | — | |
| Total | | 408,685 | | | (1) | | 408,685 | | | $ | 30,000,000 | |
(1) On January 11, 2023, we entered into the ASR Agreement with Morgan Stanley to repurchase an aggregate of $20 million of our outstanding common shares and received an initial delivery of an aggregate of 408,685 shares of our common stock. The final number of shares to be repurchased pursuant to the ASR Agreement will be based on the volume-weighted average price of the Company's common stock during the term of the ASR Agreement, less a discount and subject to adjustments. The final settlement is expected to be completed during the third quarter of fiscal 2023, and we currently estimate that the final additional share delivery from Morgan Stanley to us pursuant to the ASR Agreement will be approximately 91,000 shares. Assuming 91,000 shares are ultimately delivered at settlement, our average price paid per share would be approximately $40.03; this is just an estimate that remains subject to change, and the total number of shares to be delivered in the final delivery will be determined as of the date of the final settlement.
Item 3. | Defaults Upon Senior Securities |
Item 3. Defaults Upon Senior Securities
Item 4. | Mine Safety Disclosures |
Item 4. Mine Safety Disclosures
Item 5. Item 5. | Other Information |
None.
| | | | | | | | |
| EXHIBIT NUMBER | | DESCRIPTION |
| | |
2.1(3)^2.1^ | | |
2.2(5)^2.2^ | | |
3.1(2)2.3^ | | |
| 3.1 | | |
3.2(2)3.2 | | |
3.3(4)3.3 | | |
4.1(1)4.1 | | Form of Common Stock Certificate.Certificate, incorporated by reference to the Company’s Registration Statement on Form SB-2 (Registration No. 333-6680) filed on March 25, 1997. |
4.2(1)4.2 | | Share Exchange Agreement.Agreement, incorporated by reference to the Company’s Registration Statement on Form SB-2 (Registration No. 333-6680) filed on March 25, 1997. |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
4.3(6)10.1^ | | |
4.4(6) | | Credit Agreement, dated as of March 31, 2020, by and between the Company, as borrower, and Wells Fargo Bank, National Association, as lender. |
10.1(7)† | | First Amendment to Employment Agreement,January 11, 2023, by and between Simulations Plus, Inc. and Shawn O’Connor, dated November 19, 2021Morgan Stanley & Co. LLC, incorporated by reference to an exhibit to the Company’s Form 8-K, filed January 11, 2023.. |
31.1*10.2 | | |
| 10.3* | | |
| 31.1 * | | |
31.2*31.2 * | | |
32.1*32.1 ** | | |
| 101.INS*** | | Inline XBRL Instance Document.Document |
| 101.SCH*** | | Inline XBRL Taxonomy Extension Schema Document.Document |
| 101.CAL*** | | Inline XBRL Taxonomy Extension Calculation Linkbase Document.Document |
| 101.DEF*** | | Inline XBRL Taxonomy Extension Definition Linkbase Document.Document |
| 101.LAB*** | | Inline XBRL Taxonomy Extension Label Linkbase Document.Document |
| 101.PRE*** | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
104* | | Cover Page Interactive Data File – the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.Document |
________________________
_____________________________
| | | | | | | | |
| ^ | | | | Schedules and exhibits omitted pursuant to Item 601(b)(2) of Registration S-K. The registrant agrees to furnish supplementally a copy of any omitted schedule to the SEC upon request. |
| * | | | | Filed herewithherewith. |
†** | | | | Those exhibits marked with a (†) refer to management contracts or compensatory plans or arrangements.Furnished herewith. |
(1)*** | | | | IncorporatedThe XBRL related information in Exhibit 101 shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Company’s Registration Statement on Form SB-2 (Registration No. 333-6680) filed on March 25, 1997. |
(2) | | | | IncorporatedSecurities Act of 1933, as amended, except as shall be expressly set forth by specific reference to an exhibit to the Company’s Form 10-K for the fiscal year ended August 31, 2010.in such filing or document. |
(3) | | | | Incorporated by reference to an exhibit to the Company’s Form 8-K/A filed November 18, 2014. |
(4) | | | | Incorporated by reference to Appendix A to the Company’s Definitive Schedule 14A filed December 31, 2018. |
(5) | | | | Incorporated by reference to an exhibit to the Company’s Form 8-K filed April 2, 2020. |
(6) | | | | Incorporated by reference to an exhibit to the Company’s Form 8-K filed April 3, 2020. |
(7) | | | | Incorporated by reference to the Company’s Form 8-K filed with the SEC on November 19, 2021. |
In accordance with Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Lancaster, State of California, on April
8, 2022.7, 2023 | | | | | | | | | | | |
| | Simulations Plus, Inc.SIMULATIONS PLUS, INC. |
| | |
| | |
| Date: | April 8, 20227, 2023 | By: | /s/ Will Frederick |
| | Will Frederick |
| | | Will Fredrick
Chief Financial Officer (Principal financial officer) |
