Simulations Plus(SLP) - 2024 Q4 - Annual Report

PART I This section details Simulations Plus's core business, including its biopharma software and consulting services, organizational structure, market position, and human capital initiatives ITEM 1 – BUSINESS Simulations Plus, Inc. is a global leader in biopharma software and consulting services, enhancing drug discovery and development. In fiscal year 2024, the company reorganized into six business units and acquired Pro-ficiency, expanding its offerings across the drug development value chain. The company focuses on model-informed drug development (MIDD) and adaptive learning solutions to optimize efficiency, reduce costs, and accelerate time-to-market for clients - Simulations Plus, Inc. was incorporated in California on July 17, 1996, and is a global leader in the biopharma sector, providing advanced software and consulting services for drug discovery, development, research, clinical trials, regulatory submissions, and commercialization[11] - The June 2024 acquisition of Pro-ficiency Holdings, Inc. extended the company's reach across the drug development value chain, creating a platform to serve clients from protocol stage through clinical research and commercialization[11] - The company reorganized its internal structure at the beginning of fiscal year 2024, moving from separate divisions to an integrated operating platform based on key product and service offerings. This resulted in six business units: Cheminformatics (CHEM), Physiologically Based Pharmacokinetics (PBPK), Clinical Pharmacology and Pharmacometrics (CPP), Quantitative Systems Pharmacology (QSP), Adaptive Learning & Insights (ALI), and Medical Communications (MC)[15] Company Overview & Mission Simulations Plus, Inc. is a global leader in biopharma, providing software and consulting services to accelerate drug development, reduce costs, ensure regulatory compliance, and improve patient lives. The company's mission is to create value for customers through innovative science-based solutions - The company's mission is to create value for customers by accelerating and reducing R&D costs through innovative science-based software and consulting solutions that optimize treatment options and improve patient lives[14] - Clients face challenges including the time-consuming and expensive nature of drug development (average 10-15 years, $6.16 billion per drug), and the need to prioritize efficacy, drug-drug interactions, diverse populations, regulatory approvals, reduced animal testing, clinical trial safety, and commercial success[12] - The company's model-informed drug development (MIDD) software and services, along with adaptive learning and medical communications solutions, help clients accelerate timelines, reduce R&D costs, comply with regulations, and increase confidence in drug safety and efficacy[13] Business Units & Reorganization In fiscal year 2024, Simulations Plus reorganized its internal structure to integrate operations around key product and service offerings, rather than prior acquisition-based divisions. This restructuring, including the Pro-ficiency acquisition, established six core business units: Cheminformatics (CHEM), Physiologically Based Pharmacokinetics (PBPK), Clinical Pharmacology and Pharmacometrics (CPP), Quantitative Systems Pharmacology (QSP), Adaptive Learning & Insights (ALI), and Medical Communications (MC) - At the beginning of fiscal year 2024, the Company reorganized its internal structure to create a more integrated and cohesive operating platform based on key product and services offerings rather than separate divisions based on its prior acquisitions[15] - The Pro-ficiency acquisition resulted in two new business units, Adaptive Learning & Insights (ALI) and Medical Communications (MC), bringing the total to six business units: Cheminformatics (CHEM), Physiologically Based Pharmacokinetics (PBPK), Clinical Pharmacology and Pharmacometrics (CPP), Quantitative Systems Pharmacology (QSP), Adaptive Learning & Insights (ALI), and Medical Communications (MC)[15] Solutions Simulations Plus offers a comprehensive suite of software and consulting services across the drug development continuum. Software products, which generated 59% of total revenue in FY2024, include simulation tools like GastroPlus®, prediction tools like ADMET Predictor®, and specialized platforms like MonolixSuite™ and Pro-ficiency Performance Management. Consulting services, accounting for 41% of revenue, cover areas such as PKPD, QSP, PBPK, Early Drug Discovery, Adaptive Learning & Insights, and Medical Communications, leveraging deep scientific expertise to support clients - The company provides end-to-end offerings across the drug development continuum, from early drug discovery to commercial market launches, utilizing AI and machine-learning technologies in its modeling and simulation software[17] Segment Revenue Contribution | Segment | 2024 | 2023 | 2022 | | :------ | :--- | :--- | :--- | | Software | 59 % | 61 % | 61 % | | Services | 41 % | 39 % | 39 % | | Total | 100 % | 100 % | 100 % | Software Products Simulations Plus offers a diverse portfolio of software products for pharmaceutical research, development, and commercialization, categorized into simulation products (e.g., GastroPlus®), static property prediction tools (e.g., ADMET Predictor®), mechanistic mathematical models (e.g., DILIsym®), population analysis tools (MonolixSuite™), education/training (Pro-ficiency Performance Management), and KOL research (Panorama KOL Insights) - The company offers three simulation products (GastroPlus®, DDDPlus™, MembranePlus™) that provide time-dependent results based on solving mechanistic differential equations[18] - Two products (ADMET Predictor®, MedChem Designer™) predict and analyze static properties of chemicals using AI and machine-learning technologies[18] - Seven products (DILIsym®, NAFLDsym®, ILDsym™, IPFsym®, RENAsym®, MITOsym®, OBESITYsym™) are based on mechanistic, mathematical models and differential equations[19] - MonolixSuite™ is designed for modeling and simulation, allowing for population analyses, rapid clinical trial data analyses, and regulatory submissions[19] - Pro-ficiency Performance Management provides education and compliance training, while Panorama KOL Insights is for key opinion leader (KOL) research[19] Key Software Products GastroPlus®, the flagship product, is the largest single source of software revenue, simulating drug absorption and interactions. MonolixSuite™ offers advanced algorithms for population analysis and clinical trial simulation. ADMET Predictor® uses AI/machine-learning for chemistry-based property predictions, with recent enhancements including new models, HTPK options, AIDD integration, and a DILI module. Pro-ficiency Performance Management and Panorama KOL Insights are newer additions from the Pro-ficiency acquisition, focusing on adaptive learning for clinical trials and KOL research, respectively - GastroPlus®, the flagship product, is the largest single source of software revenue, mechanistically simulating drug absorption and interactions in humans and animals. Version 10 (GPX™) was released in May 2024, featuring a redesigned platform with advanced science, models, algorithms, and integrated machine learning[20][21] - MonolixSuite™ supports nonparametric analyses, population analyses and modeling, and clinical trial simulation, with Monolix 2024R1 released in March 2024[24] - ADMET Predictor® uses AI/machine-learning to predict molecular properties from structures, enabling chemists to assess molecules without synthesis. Version 12, released in July 2024, added enhanced models, High-Throughput Pharmacokinetics (HTPK), AI-Driven Drug Design (AIDD) integration, and a new DILI Module[25][26][27] - Pro-ficiency Performance Management is an adaptive learning platform using simulations and data tracking to improve clinical trial recruitment, retention, and protocol compliance[31] - Panorama KOL Insights is a platform for Key Opinion Leader (KOL) research in life sciences, providing information on influential industry leaders[32] Services Offerings Simulations Plus's services business accounted for 41% of total revenue in FY2024, driven by increasing demand for its consulting expertise. Key offerings include PKPD modeling for regulatory submissions, QSP modeling for various diseases, PBPK modeling to support MIDD and regulatory guidance, Early Drug Discovery (EDD) services for in silico drug design, Adaptive Learning & Insights for training materials and learner data analysis, and Medical Communications for market intelligence and commercial support - The services business represented 41% of total revenue during the fiscal year ended August 31, 2024, with demand steadily increasing and consulting teams expanding to meet the workload[33][34] - PKPD services include population pharmacokinetic and pharmacodynamic modeling, exposure-response analyses, clinical trial simulations, and technical writing for regulatory submissions[34] - QSP services provide consulting for quantitative systems pharmacology modeling focused on NAFLD, NASH, IPF, heart disease, and liver/kidney safety[35] - PBPK services support Model-Informed Drug Development (MIDD) throughout the product lifecycle, driven by increasing regulatory emphasis from agencies like the FDA and EMA[36] - Early Drug Discovery (EDD) services offer end-to-end in silico drug design and optimization, including AIDD, HTS library design, and QSAR/QSPR modeling[37] - Adaptive Learning & Insights delivers engaging, adaptive learning solutions and insights from learner data for life sciences, while Medical Communications provides strategy, positioning, messaging, and tactical support for market intelligence and commercial endeavors[38][39] Sales and Marketing Simulations Plus employs a global sales and marketing strategy, utilizing scientific meetings, trade shows, seminars, online presentations, and its website. Internal sales and marketing staff, supported by scientific and senior management teams, drive these efforts. The company also uses independent distributors in key international markets and invested in marketing automation and CRM tools in FY2024 to enhance customer insights and engagement - The company markets its software and services globally through scientific meetings, trade shows, seminars, online presentations, its website, and communication channels to prospects and customers[40] - Sales and marketing efforts are primarily internal, supported by scientific and senior management staff, with independent distributors in Japan, China, India, South Korea, and Brazil[41][42] - In fiscal year 2024, the company invested in marketing automation tools to increase customer insights and engagement, and enhanced its customer relationship management software[41] Competition Simulations Plus competes with established companies offering screening, testing, and research services, as well as other software providers, larger technology firms, in-house development teams, and CROs. Key competitors include Optibrium, Certara, ICON, Metrum Research Group, Veeva, and WCG. The company believes its technical knowledge and expertise in modeling and simulation provide a strategic advantage, addressing client needs for specialized expertise, capacity, efficiency, and software utilization - The company competes with established companies providing screening, testing, and research services, other software companies, and in-house development efforts by major pharmaceutical companies[43][44] - Competitors include Optibrium, Certara, ICON, Metrum Research Group, Veeva, and WCG, some of whom have larger financial, personnel, research, and marketing resources[44] - The company believes its technical knowledge and expertise position it to offer competitive modeling and simulation consulting services, meeting client needs for specialized expertise, capacity, efficiency, and software utilization in areas like MIDD, PKPD, PBPK, and QSP[45] - Key competitive factors include continued investment in R&D, development of industry-leading software, maintenance of a proprietary database, attracting and retaining skilled scientific/engineering teams, aggressive global promotion, and fostering relationships with pharmaceutical companies, universities, and government agencies[46] Training and Technical Support Simulations Plus emphasizes strong customer training and technical support, offering in-house seminars and various online/offline assistance channels. The acquisition of Pro-ficiency expanded these capabilities to include professional development and medical communications within clinical trials and commercial spaces, utilizing adaptive learning and simulation-based training - The acquisition of Pro-ficiency expanded the software and services portfolio to include customer-facing professional development and medical communications capabilities within the clinical trial and commercial space[48] - The company provides in-house seminars at customer sites and universities, along with web meetings, telephone, fax, and e-mail assistance for technical support, aiming to be an industry leader in this area[49] Research and Development Simulations Plus's R&D efforts focus on expanding its product portfolio, enhancing core technologies, and integrating existing and new products into its software architecture. The company plans regular updates and seeks opportunities to expand its offerings, developing products internally and through licensing or acquisitions, with no royalties paid in FY2024 - R&D focuses on expanding the product portfolio, enhancing core technologies, and integrating products into the principal software architecture and platform technologies[51] - The company intends to continue offering regular product updates and expanding its suite of products and services, developing products internally, and licensing or acquiring technology from third parties when strategically beneficial[51][52] - No royalties were paid to third parties during the fiscal year ended August 31, 2024, for licensed or acquired products[52] Intellectual Property and Other Proprietary Rights Simulations Plus protects its intellectual property primarily through trademarks, copyrights, trade secrets, and contractual measures, focusing on source code, online platforms, and data files. The expertise of its highly qualified scientific and engineering staff is also considered a significant asset - Intellectual property is primarily protected through trademarks, copyrights, trade secrets, and contractual measures, consisting mainly of source code for computer programs, online platforms, and data files[54] - The expertise of its staff is a considerable asset, and attracting and retaining highly qualified scientists and engineers is essential to the business[54] Customers Simulations Plus serves a fragmented customer base across pharmaceuticals, biotechnology, agrotechnology, cosmetics, universities, hospitals, and government research organizations. The company focuses on drug discovery, development, clinical trials, post-patent generic formulation, and post-approval commercialization, with no single client accounting for a material portion of revenues in FY2024 - Customers include companies in pharmaceuticals, biotechnology, agrotechnology, and cosmetics, as well as universities, hospitals, and government research organizations[55] - The company focuses on serving customer needs in drug discovery, development, clinical trials, post-patent generic formulation development, and post-approval drug commercialization[55] - The current customer base is highly fragmented, and no single client derived a material portion of revenues for the fiscal year ended August 31, 2024[55] Seasonality The company's revenues exhibit seasonal fluctuations, with the first fiscal quarter (September-November) generally having the lowest revenues for biosimulation software and services. The last fiscal quarter (June-August) tends to be slow due to pharmaceutical industry buying patterns, consulting service slowdowns from summer vacations, and lower conference attendance - Revenues exhibit seasonal fluctuations, with the first fiscal quarter (September-November) generally having the lowest revenues for biosimulation software and services[56] - The last fiscal quarter (June-August) tends to be slow due to pharmaceutical industry buying patterns, consulting service slowdowns from summer vacations, and lower customer and employee conference attendance[56] Environmental Regulatory Matters Simulations Plus believes it is in material compliance with all applicable environmental laws and does not anticipate that maintaining this compliance will materially affect capital expenditures, earnings, or competitive position - The company believes it is in compliance in all material respects with all applicable environmental laws[57] - No material effect on capital expenditures, earnings, or competitive position is anticipated from efforts to maintain environmental compliance[57] Human Capital Simulations Plus prioritizes its employees, with over 98% full-time and 68% in life sciences software or consulting. The majority of technical and scientific staff hold advanced degrees (over 65% doctorates). As of August 31, 2024, the company employed 247 people. It focuses on attracting and retaining talent through a comprehensive total rewards program, including competitive compensation, health benefits, training, and a remote-first culture. The company also emphasizes Diversity, Equity, and Inclusion (DEI), with women comprising 48% of the workforce and 47% of scientific staff - As of August 31, 2024, the company employed 247 persons (243 full-time, 4 part-time)[59] - Over 98% of global employees are full-time, and more than 68% work within life sciences software or consulting business units[58] - Over 65% of technical and scientific staff hold doctoral degrees in mathematics, chemistry, biomedical engineering, and/or pharmaceutical sciences[58] - The company focuses on attracting and retaining qualified personnel through a total rewards program, including compensation, health/wellness benefits, training, time off, and recognition[60] - The voluntary turnover rate was less than 4% during fiscal year 2024[60] Diversity, Equity, and Inclusion Simulations Plus embraces diversity for innovation and fosters inclusion, aiming to expand its focus on Diversity, Equity, and Inclusion (DEI). Women currently make up 48% of the workforce and 47% of scientific staff. The company tracks metrics via ADP Workforce Now and offers parental leave, flexible time off, and a remote-first culture to support inclusivity - The company embraces diversity for greater innovation and fosters inclusion, with a goal to continuously expand its focus on diversity, equity, and inclusion[61] - Women comprise 48% of the workforce and 47% of the scientific staff, with metrics tracked via ADP Workforce Now to align recruitment efforts and refine inclusive policies[61] - The company provides paid parental leave, flexible time off, and a remote-first work culture to support employees globally[61] Compensation, Training, and Awareness Programs Simulations Plus refines career paths for employee development and uses a new performance platform within ADP Workforce Now for better performance management, goal tracking, and succession planning. In the past year, a company-paid training program was implemented for all employees, with a future focus on leadership development. Cross-specialty training sessions are held monthly to foster collaboration, knowledge sharing, and identify synergies across business units - Career paths are refined for employee development and growth, and a new performance platform within ADP Workforce Now is used for performance management, goal tracking, and succession planning[63] - A company-paid training program for technical, leadership, or skills training was implemented, with a future focus on leadership development[64] - Ongoing cross-specialty training sessions by expert modelers from each business unit aim to familiarize all units with applications and techniques, fostering synergies and knowledge expansion[64] Health & Safety Simulations Plus prioritizes employee well-being, maintaining a clean, safe, and healthy environment, and adhering to its Human Rights Policy and Code of Conduct. The company provides competitive health and wellness benefits, hosts wellness challenges, and encourages interaction through regular 'coffee breaks.' Open communication is maintained via quarterly company-wide virtual meetings to keep employees informed and engaged - The company places a high value on maintaining a clean, safe, and healthy environment for employees, confirming commitment to human rights and ethical principles through its Human Rights Policy and Code of Conduct[65] - Competitive health and wellness benefits are provided, along with wellness challenges and regular 'coffee breaks' to encourage employee interaction[66] - Quarterly company-wide virtual meetings ensure open and transparent communication, keeping employees engaged and informed about company activities and financial results[67] Government Regulation Simulations Plus believes its operations comply with all applicable laws and regulations and holds necessary permits. Its pharmaceutical software products are research tools and are not FDA-approved. The company anticipates no material effect on capital expenditures, earnings, or competitive position from environmental controls - The company believes its operations are substantially in compliance with all applicable laws and regulations and holds all necessary permits[68] - Pharmaceutical software products are tools for research and development and are neither approved nor approvable by the FDA or other government agencies[68] - No significant pollution or hazardous emissions result from operations, and compliance with environmental, health, and safety requirements has not been material, nor is it expected to have a material effect on capital expenditures, earnings, or competitive position[69] Environmental, Social, Governance (ESG) Simulations Plus is committed to strong corporate citizenship and believes that effectively managing ESG factors creates long-term shareholder value. The company's ESG initiatives include recycling programs, using IT hardware vendors that embrace environmental sustainability, and promoting remote work to reduce emissions. Socially, it focuses on employee well-being, customer privacy, data security, and business ethics. Governance is overseen by a diverse Board of Directors and an ESG steering committee, with a commitment to human rights - The company is committed to providing consistent returns to shareholders while maintaining strong corporate citizenship, prioritizing employee welfare, community impact, and global well-being[70] - Transparent disclosure of ESG goals and metrics is provided on its website and in ESG updates, aligning with frameworks like SASB and UN SDGs[71] Environmental Matters Simulations Plus participates in recycling programs, uses environmentally sustainable IT hardware vendors, and promotes remote work to reduce commuting emissions. Server consolidation in U.S. offices reduced energy usage by 75% compared to the prior year. The company reports no Scope 1 or Scope 3 Greenhouse Gas (GHG) emissions, with Scope 2 emissions identified from electricity use - The company participates in recycling programs, uses IT hardware vendors that embrace environmental sustainability, and promotes remote work to reduce commuting emissions[72] - Server consolidation in U.S. offices reduced energy usage by 75% compared to the prior year, contributing to a reduced carbon footprint[72] - Scope 1 and Scope 3 GHG emissions are not applicable, as the company does not own or control direct emission sources and believes it does not produce Scope 3 emissions; Scope 2 emissions are identified from electricity use[73][74][75] Social Impact and Supporting our Communities Simulations Plus is committed to its employees, conducting annual engagement surveys, offering paid parental leave, and a recognition system. The company provides supplemental health benefits and focuses on physical and mental wellness through online challenges. Efforts are made to build a culture of trust and transparency, including a compensation benchmarking study to ensure competitive and equitable pay - The company is committed to supporting and valuing its employees, conducting annual engagement surveys, offering paid parental leave, and a recognition system[76][77] - Supplemental health benefits are provided, with an increased focus on physical and mental wellness through an online wellness challenge[78] - A compensation benchmarking study with an external consultant was conducted, leading to efforts to align compensation practices with market salary ranges[79] Customer Privacy & Data Security Simulations Plus prioritizes customer privacy and data security, collecting data only as needed and detailing practices in its Privacy Notice. The leadership team thoroughly examines data security elements, aiming to ensure security, confidentiality, and privacy of systems and information assets, compliant with laws like HIPAA, EU GDPR, UK GDPR, and China's PIPL. A corporate IT department centralizes data processing, storage, and backup, with a Data Protection Officer (DPO) ensuring compliance with data privacy laws - Customer privacy is valued, with data collected only as needed and detailed in a comprehensive Privacy Notice on the website[80] - The leadership team conducts thorough examinations of data security, aiming to ensure security, confidentiality, and privacy of systems and information assets, compliant with applicable laws and regulations (e.g., HIPAA, EU GDPR, UK GDPR, PIPL)[81] - A corporate-level IT department centralizes data processing, storage, and backup, and a third-party Data Protection Officer (DPO), VeraSafe, ensures compliance with data privacy laws[81][82] Business Ethics Simulations Plus emphasizes honesty and integrity, fostering a corporate culture of trust and ethical behavior. Policies define core values, legal requirements, and provide guidance for employees. The Code of Conduct, applicable to all management and employees, incorporates principles of the Pharmaceutical Supply Chain Initiative, governing conduct with stakeholders - The company places a strong emphasis on conducting business with honesty and integrity, striving to create a corporate culture of honesty, integrity, and trust[83] - Policies define core values, legal requirements, and ethical behavior, offering guidance and clear procedures for employees to obtain information, ask questions, and report suspected violations[83] - All management and employees must comply with the Code of Conduct, which incorporates principles of the Pharmaceutical Supply Chain Initiative due to the company's customer base in the pharmaceutical and biotech industries[84] Human Rights Simulations Plus is committed to human rights, upholding principles in its Code of Conduct and supporting the UN International Bill of Human Rights and ILO Declaration. A written Human Rights Policy guides these commitments, with future guidance from UN Guiding Principles on Business and Human Rights - The company is committed to human rights, upholding its principles in day-to-day business practices, relationships, and employment matters, as delineated in its Code of Conduct[86] - It supports the principles of the United Nations International Bill of Human Rights and the ILO Declaration on Fundamental Principles and Rights at Work, with a written Human Rights Policy and future guidance from the UN Guiding Principles on Business and Human Rights[86] Governance Simulations Plus maintains strong corporate governance for financial integrity and shareholder confidence. The Board of Directors oversees company risks, including financial reporting, compensation, cybersecurity, ESG, and product development, supported by three committees. The Board is diverse and has a lead independent director, with an ESG steering committee overseeing related matters. All employees, contractors, and vendors adhere to the Code of Conduct - The company is committed to strong corporate governance practices, with the Board of Directors responsible for oversight of risks including financial reporting, compensation, cybersecurity, ESG, and product developments[87] - The Board has three committees (Audit, Compensation, Nominating & Corporate Governance), is gender and racially diverse, and has appointed a lead independent director[87] - An ESG steering committee oversees and executes matters related to ESG, and all employees, contractors, and vendors are required to follow the Code of Conduct[87] Company Website Simulations Plus maintains a corporate website (www.simulations-plus.com) where it makes SEC filings (10-K, 10-Q, 8-K, proxy statements, Section 16 filings) available free of charge. The website content is not incorporated into the Form 10-K report - The company maintains a corporate website at www.simulations-plus.com, where SEC reports (10-K, 10-Q, 8-K, proxy statements, Section 16 filings) are available free of charge[88][89] - The contents of the website are not incorporated in or otherwise to be regarded as part of this Report[89] ITEM 1A – RISK FACTORS This section outlines significant risks that could materially harm Simulations Plus's business, financial condition, operating results, and growth prospects. These risks include market-related factors such as dependence on new markets and existing customer expansion, resistance to model-informed drug development, increasing competition and costs in the pharmaceutical industry, and healthcare reform. Operational risks encompass delays in product releases, global business operations, tax law changes, liability from contract research services, intellectual property litigation, dependence on key personnel, acquisition integration challenges, and fluctuations in operating results. Risks related to common stock ownership include dividend discontinuation, stock price volatility, and potential dilution from capital raises - The company's ability to sustain or increase revenues depends on success in entering new markets, increasing customer base, and deriving additional revenues from existing customers[92][93] - A decrease in or resistance to the acceptance of model-informed biopharmaceutical discovery and development by regulatory authorities or academic institutions could damage reputation or reduce demand for products and services[94][95] - Increasing competition and costs within the pharmaceutical and biotechnology industries, drug development, and life science market for modeling and simulation software may affect demand for products and services[96][98] - Delays in the release of new or enhanced products or services or undetected errors could result in increased costs, delayed market acceptance, and lost revenue[116][117] - Operating a global business exposes the company to risks such as local economic conditions, currency-exchange-rate fluctuations, political and economic changes, trade restrictions, and compliance with foreign laws[118] - The company depends on key personnel, and the inability to retain these employees or recruit additional qualified personnel could harm the business[127][128] - The Pro-ficiency acquisition may not perform as expected, leading to risks such as integration difficulties, increased operational size, uncertain synergies, and potential adverse effects on relationships with third parties and customers[173] - The Board of Directors has discontinued quarterly dividends and does not expect to pay cash dividends in the foreseeable future, requiring investors to rely on stock price appreciation for returns[176][177] Certain Risks Related to Our Marketplace and Environment Risks in the marketplace and environment include the challenge of sustaining revenue growth by expanding into new markets and increasing existing customer usage. There's a risk of decreased demand if regulatory or academic institutions resist model-informed biopharmaceutical development. Increased competition and rising costs in the pharmaceutical and biotechnology industries, along with healthcare reform, could reduce R&D expenditures, impacting the company's revenues. The market is intensely competitive, with pressure on pricing, and the company's insurance coverage may not be sufficient for all liabilities - Sustaining or increasing revenues depends on successfully entering new markets, expanding the customer base, and increasing revenue from existing customers[92][93] - A decrease in or resistance to the acceptance of model-informed biopharmaceutical discovery and development by regulatory authorities or academic institutions could negatively impact reputation and demand[94][95] - Increasing competition and costs within the pharmaceutical and biotechnology industries, along with healthcare reform, may reduce R&D expenditures, thereby affecting demand for the company's products and services[96][98][99][100] - The market for modeling and simulation software is intensely competitive, facing other software providers, larger technology companies, in-house development, and open-source initiatives, which could lead to price concessions[101][102] - Insurance coverage may not be sufficient to cover all claims or liabilities, and future coverage may not be obtainable[103][105] Certain Risks Related to Our Operations Operational risks include potential delays or errors in new product releases, which could increase costs and delay market acceptance. Global operations expose the company to foreign currency fluctuations, economic instability, and diverse regulatory environments. Contract research services carry liability risks from errors or omissions. The company faces intellectual property litigation and challenges in developing and marketing new services. Dependence on key personnel and difficulties in integrating acquisitions (like Pro-ficiency) pose significant risks. Quarterly and annual operating results are subject to fluctuations, and a downturn in the clinical trial market could decrease revenues. Cybersecurity breaches and non-compliance with data privacy laws could harm reputation and operations. Reliance on a single internal hosting facility and AWS for solutions also presents a risk of service disruption. Cash expenditures from recent acquisitions, particularly Immunetrics and Pro-ficiency, create liquidity and cash flow risks - Delays in releasing new or enhanced products/services or undetected errors could increase costs, delay market acceptance, and result in delayed or lost revenue[116][117] - Global business operations expose the company to local economic conditions, currency-exchange-rate fluctuations, political changes, trade restrictions, and compliance difficulties with foreign laws[118] - Contract research services create liability risks from errors or omissions in preclinical studies, potentially leading to inaccurate reports or undermining study usefulness[122] - The drug discovery and development industry has a history of patent and intellectual property litigation, which can be costly and divert management's attention[124][125] - Inability to successfully develop and market new services and products, or to attract and retain key personnel, could adversely affect the business[126][127][128] - Difficulties in selecting and integrating acquired businesses and technologies, or managing divestitures, could harm the business, including challenges with operations, staffing, and undiscovered liabilities[129][130] - Quarterly and annual operating results fluctuate due to various factors, and failure to meet expectations could lead to a decline in stock price[131][132] - Breaches in security could disrupt business, harm operating results, and deter customers, especially given reliance on secure electronic transmission and storage of sensitive information[140] - Changes in or failure to comply with data privacy laws (e.g., HIPAA, EU GDPR, UK GDPR, CCPA, PIPL) could materially adversely affect reputation, market position, business, and financial performance[141][142][145] - Reliance on a single internal hosting facility and Amazon Web Services (AWS) for solutions means any disruption or interference could harm business and results of operations[148][150] - Cash expenditures associated with the Immunetrics and Pro-ficiency acquisitions, including earnout payments and integration costs, may create liquidity and cash flow risks[170][171] Certain Risks Related to Ownership of Our Common Stock Risks related to common stock ownership include the discontinuation of quarterly dividends, meaning investors must rely on stock price appreciation for returns. Failure to meet public guidance or analyst expectations could cause the stock price to decline. The stock price is volatile due to various factors, and broad market fluctuations could lead to securities class action litigation. Adverse opinions from analysts or removal from indices like the S&P 600 could also negatively impact stock price and trading volume. Future capital raises through equity or convertible debt could dilute existing stockholders - The Board of Directors has discontinued quarterly dividends and does not expect to pay cash dividends in the foreseeable future; investors must rely on sales of shares after price appreciation for returns[176][177] - If operating and financial performance does not meet public guidance or analyst expectations, the market price of common stock may decline[178][179] - The price of common stock may be volatile due to factors like operating results, new product announcements, loss of key personnel, regulatory actions, industry consolidation, and general economic conditions[180][181] - Adverse or misleading opinions from securities analysts or discontinuation of inclusion in indices like the S&P 600 could cause stock price and trading volume to decline[183][184] - Future capital raises through the issuance of common stock, convertible debt, or equity-linked securities could result in dilution to stockholders or negatively impact the stock price[185][186] ITEM 1B – UNRESOLVED STAFF COMMENTS There are no unresolved staff comments to report ITEM 1C - CYBERSECURITY Simulations Plus is committed to safeguarding stakeholder information through a comprehensive cybersecurity program, risk management, and governance. The program integrates industry best practices (NIST 800-53, ISO 27001, CIS Top 20, OWASP Top 10) for continuous monitoring, threat detection, and incident response. The Board of Directors oversees the program, supported by a VP of IT and a Data Protection Officer (VeraSafe), with regular employee training and reporting on program effectiveness - The company is committed to safeguarding sensitive stakeholder information through its cybersecurity program, risk management, and governance[191] - The cybersecurity program is based on industry best practices (NIST 800-53, ISO 27001, CIS Top 20, OWASP Top 10) and involves continuous monitoring, vulnerability scanning, penetration testing, and annual employee awareness training[192][194] - As of the report date, no cybersecurity incidents have had or are reasonably likely to have a material impact on the company's results of operations or financial condition[195] Risk Management and Strategy Simulations Plus implements a comprehensive cybersecurity program, embedding security into all operations with a proactive approach. It uses continuous monitoring, vulnerability scanning, penetration testing, and threat intelligence to identify and assess risks, ensuring compliance with legal and contractual obligations. Robust incident response procedures are in place, including escalation to management and the Board, mitigation, remediation, and materiality assessment - The company has implemented a comprehensive cybersecurity program, embedding security considerations into every aspect of operations with a proactive approach[192] - Risk management processes, guided by industry best practices (NIST 800-53, ISO 27001, CIS Top 20, OWASP Top 10), involve identifying and assessing risks across technical assets through vulnerability scanning, penetration testing, and threat intelligence[192] - Robust cybersecurity incident response procedures include escalating incidents to appropriate management and the Board, mitigation, remediation, and assessing materiality[193] Governance The Board of Directors is ultimately responsible for overseeing the cybersecurity program, focusing on risk, incident response, and business continuity. A third-party Data Protection Officer (VeraSafe) ensures compliance with data privacy laws. The VP of Information Technology, supported by legal and finance leadership, oversees the security program, with defined roles and responsibilities for managing cybersecurity risks and regular reporting to the Board - The Board of Directors is ultimately responsible for the oversight of the company's security program, focusing on cybersecurity risk, incident response planning, and business continuity[196] - VeraSafe, a third-party consulting firm, serves as the Data Protection Officer (DPO), responsible for ensuring compliance with data privacy laws like EU GDPR, UK GDPR, and China's PIPL[197] - The VP of Information Technology, supported by corporate legal and finance leadership, oversees the security program and is accountable for its design, implementation, and monitoring, with regular reporting to executive leadership and the Board[198][199] ITEM 2 – PROPERTIES Simulations Plus's corporate headquarters are in Lancaster, California, with additional offices in the U.S. and Paris, France. Most employees work remotely to minimize carbon footprint and costs, and to support talent retention. The company does not consider any leased physical properties material to its business - Corporate headquarters are in Lancaster, California, with additional offices in the United States and Paris, France[201] - Employees predominantly work remotely to minimize carbon footprint and cost structure, while supporting talent retention and recruitment[201] - The company does not believe any leased physical properties are material to its business[201] ITEM 3 – LEGAL PROCEEDINGS Simulations Plus is not currently a party to any legal proceedings, nor is it aware of any pending or threatened litigation that would have a material adverse effect on its business, results of operations, financial condition, or cash flows - The company may become subject to litigation, claims, investigations, and audits in the ordinary course of business[202] - Management believes there is no pending or threatened litigation that would have a material adverse effect on the business, results of operations, financial condition, and/or cash flows[202] ITEM 4 – MINE SAFETY DISCLOSURES This item is not applicable to Simulations Plus, Inc. PART II This section covers Simulations Plus's common stock market, shareholder matters, management's financial discussion, market risks, and internal controls ITEM 5 – MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Simulations Plus common stock trades on the Nasdaq Global Select Market under 'SLP'. As of October 18, 2024, there were 37 shareholders of record. The Board of Directors discontinued quarterly cash dividends after August 5, 2024, to reallocate funds to growth initiatives. The company has an equity compensation plan with 1.9 million outstanding options. A $50 million share repurchase program was authorized in December 2022, with $20 million completed in May 2023, leaving $30 million available, though no repurchases occurred in FY2024 - The Company's common stock has traded on the Nasdaq Global Select Market under the symbol 'SLP' since May 13, 2021[205] - As of October 18, 2024, there were 37 shareholders of record, with a substantially greater number of beneficial holders[206] - The Board of Directors declared a quarterly cash dividend of $0.06 per share on July 2, 2024, distributed on August 5, 2024, totaling approximately $1.2 million[207] - The Board has determined to discontinue quarterly cash dividends after August 5, 2024, to reallocate funds to growth initiatives, and does not anticipate paying cash dividends in the foreseeable future[208] Equity Compensation Plan Information (as of August 31, 2024) | Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options (a) | Weighted-Average Exercise Price of Outstanding Options (b) | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (excluding securities reflected in column (a)) (c) | | :-------------------------------- | :----------------------------------------------------------------------- | :--------------------------------------------------------- | :------------------------------------------------------------------------------------------------------------------------------------------------------ | | Equity Compensation Plans Approved by Security Holders | 1,906 | 37.64 | 1,234 | | Equity compensation plans not approved by security holders | — | — | — | | Total | 1,906 | 37.64 | 1,234 | - A share repurchase program for up to $50 million was authorized on December 29, 2022. An accelerated share repurchase agreement for $20 million was settled in May 2023, repurchasing 492,041 shares. As of August 31, 2024, $30 million remains available, but no repurchases were made in fiscal year 2024[213][214][215][216] ITEM 6 – [RESERVED] This item is reserved and contains no information ITEM 7 – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides management's perspective on Simulations Plus's financial condition and results of operations for fiscal years 2024, 2023, and 2022. Key highlights for FY2024 include an 18% revenue increase to $70.0 million, but a 10% decrease in gross profit and a 30% decrease in income from operations, while net income and diluted EPS remained unchanged. The company's strategy focuses on R&D investment, customer collaborations, market expansion, and strategic acquisitions. Recent acquisitions of Immunetrics and Pro-ficiency significantly impacted financial results and operational structure. The section also details liquidity, capital resources, cash flows, and critical accounting estimates - Fiscal year 2024 was successful due to enhanced leadership in modeling and simulation, expanded collaborations, strategic acquisitions, and growth in scientific staff[220] - The continued growth of software and services is attributed to increasing adoption of simulation and modeling tools, regulatory push for their use, and the company's consulting expertise[220] Fiscal Year 2024 Financial Highlights | Metric | FY2024 ($ millions) | FY2023 ($ millions) | Change ($ millions) | Change (%) | | :------------------------- | :------------------ | :------------------ | :------------------ | :--------- | | Consolidated Revenues | 70.0 | 59.6 | 10.4 | 18% | | Consolidated Gross Profit | 43.2 | 47.9 | (4.8) | (10)% | | Income from Operations | 6.1 | 8.7 | (2.6) | (30)% | | Net Income | 10.0 | 10.0 | 0.0 | 0% | | Diluted Earnings Per Share | 0.49 | 0.49 | 0.0 | 0% | - Strategy going forward includes continued investment in R&D, pursuing customer collaborations, aggressive marketing campaigns, expanding sales and marketing staff, recruiting and retaining scientific staff, and seeking strategic acquisitions[220] Management Overview Fiscal year 2024 was marked by significant achievements, including enhanced leadership in modeling and simulation with new technology releases, expanded collaborations with industry and regulatory leaders, and strategic acquisitions. The company successfully grew its scientific staff through strong retention and recruitment. This growth is attributed to increasing adoption of simulation and modeling software in the pharmaceutical industry, regulatory encouragement, and the company's consulting expertise, solidifying its position as a leader in the biosimulation market - Fiscal year 2024 was successful due to enhanced leadership in modeling and simulation with new technology, expanded collaborations with industry and regulatory leaders, and strategic acquisitions[220] - The company grew its scientific staff through excellent retention and recruiting efforts[220] - Continued growth in software and services is driven by increasing adoption of simulation and modeling tools in the pharmaceutical industry, regulatory push for their use, and the company's consulting expertise[220] Acquisitions Simulations Plus completed two significant acquisitions: Immunetrics on June 16, 2023, for an estimated $15.3 million, and Pro-ficiency on June 11, 2024, for an estimated $100.2 million. The Immunetrics acquisition aimed to expand support for quantitative systems pharmacology (QSP) in oncology, with a remaining earnout obligation of up to $5.5 million and a $1.8 million holdback liability. The Pro-ficiency acquisition was strategic, combining complementary expertise and advanced technologies like AI for actionable data analytics - On June 16, 2023, the Company acquired Immunetrics for an estimated $15.3 million, with a remaining earnout obligation of up to $5.5 million and a $1.8 million holdback liability expected in early calendar year 2025[221] - The Immunetrics acquisition aimed to capitalize on growth opportunities by supporting quantitative systems pharmacology (QSP) in a greater range of therapeutic areas, including oncology[455] - On June 11, 2024, the Company acquired Pro-ficiency for an estimated $100.2 million, with $1.0 million of the purchase price placed in escrow for post-closing adjustments and indemnification[223] - The primary purpose of the Pro-ficiency acquisition was to combine complementary expertise and services grounded in science, focusing on applying advanced technologies like AI to enhance actionable data analytics[223] Results of Operations Simulations Plus experienced an 18% revenue increase to $70.0 million in FY2024, driven by both software (12% increase) and services (26% increase). However, gross profit decreased by 10% due to a 131% rise in cost of revenues, primarily from internal reorganization, acquisitions (Pro-ficiency, Immunetrics), and compensation increases. Operating expenses decreased by 6% due to a significant reclassification from G&A to cost of revenues, despite increases in R&D and sales/marketing. Net income remained flat at $10.0 million, while other income significantly increased due to a decrease in earnout liability and foreign currency gains. For FY2023, revenues grew 11% to $59.6 million, with gross profit up 11%, but income from operations decreased 41% due to substantial increases in R&D, sales & marketing, and G&A expenses, largely from headcount increases, market compensation adjustments, and acquisition-related costs Comparison of fiscal years 2024 and 2023 In fiscal year 2024, revenues increased by 18% to $70.0 million, with software revenue up 12% and service revenue up 26%. Cost of revenues surged by 131%, primarily due to internal reorganization reclassifying personnel costs, acquisitions (Pro-ficiency, Immunetrics), and compensation increases. This led to a 10% decrease in gross profit to $43.2 million and a drop in gross margin from 80% to 62%. Operating expenses decreased by 6% overall, mainly due to the G&A reclassification, despite R&D and sales/marketing increases. Net income remained unchanged at $10.0 million, while other income significantly increased by 111% due to a decrease in earnout liability and foreign currency gains Consolidated Financial Performance (FY2024 vs. FY2023) | Metric | FY2024 ($ thousands) | FY2023 ($ thousands) | Change ($ thousands) | % Change | | :------------------------- | :------------------- | :------------------- | :------------------- | :------- | | Revenue | 70,013 | 59,577 | 10,436 | 18% | | Cost of Revenue | 26,862 | 11,630 | 15,232 | 131% | | Gross Profit | 43,151 | 47,947 | (4,796) | (10)% | | Research and Development | 5,754 | 4,504 | 1,250 | 28% | | Sales and Marketing | 8,915 | 6,558 | 2,357 | 36% | | General and Administrative | 22,351 | 28,160 | (5,809) | (21)% | | Total Operating Expenses | 37,020 | 39,222 | (2,202) | (6)% | | Income from Operations | 6,131 | 8,725 | (2,594) | (30)% | | Other Income, Net | 6,280 | 2,970 | 3,310 | 111% | | Income Before Income Taxes | 12,411 | 11,695 | 716 | 6% | | Provision for Income Taxes | (2,457) | (1,734) | (723) | 42% | | Net Income | 9,954 | 9,961 | (7) | 0% | - Revenues increased by $10.4 million (18%) to $70.0 million, driven by a $4.5 million (12%) increase in software revenue (Monolix™, GastroPlus®, QSP, ADMET Predictor®, ALI) and a $5.9 million (26%) increase in service revenue (QSP, CPP, offset by PBPK)[224] - Cost of revenues increased by $15.2 million (131%), primarily due to a $6.8 million reclassification from G&A due to internal reorganization, $3.0 million from the Pro-ficiency acquisition, $1.6 million from Immunetrics, and $2.8 million in compensation-related increases[225] - Gross profit decreased by $4.8 million (10%) to $43.2 million, with overall gross margin decreasing from 80% to 62%. The decrease was mainly in services gross profit ($6.5 million, 43%), partially offset by a software gross profit increase ($1.7 million, 5%)[227] - R&D spend increased by $1.2 million (16%) to $9.0 million, with $5.8 million expensed, mainly due to Immunetrics ($0.5 million) and Pro-ficiency ($0.3 million) acquisitions. R&D as a percentage of revenue remained consistent at 13%[228] - Sales and marketing expenses increased by $2.4 million (36%) to $8.9 million, driven by $0.9 million in compensation-related increases (stock compensation, Chief Revenue Officer, commissions, salary adjustments) and $0.9 million from Pro-ficiency and Immunetrics acquisitions[229] - G&A expenses decreased by $5.8 million (21%) to $22.4 million, primarily due to a $6.8 million reclassification to cost of revenues and a $1.1 million decrease in M&A expense, partially offset by increases from acquisitions and compensation costs[230] - Other income increased by $3.3 million (111%) to $6.3 million, mainly due to a $2.3 million decrease in the fair value of the Immunetrics earnout liability, a $0.9 million swing from foreign currency exchange loss to gain, and a $0.2 million increase in interest income[231] - Provision for income taxes increased by $0.7 million (42%) to $2.5 million, with the effective tax rate rising from 15% to 20%, primarily due to a larger return-to-provision adjustment in FY2023[233] Comparison of fiscal years 2023 and 2022 In fiscal year 2023, revenues increased by 11% to $59.6 million, with software revenue up 12% and service revenue up 8% (partially from Immunetrics). Cost of revenues increased by 7%, maintaining a 20% ratio to revenue. Gross profit increased by 11% to $47.9 million, with gross margin remaining at 80%. However, total operating expenses surged by 39%, leading to a 41% decrease in income from operations. This was driven by significant increases in R&D (40%), sales and marketing (34%), and G&A (40%), largely due to headcount increases, market compensation adjustments, and one-time acquisition-related charges. Other income saw a substantial 1,356% increase, mainly from higher interest income Consolidated Financial Performance (FY2023 vs. FY2022) | Metric | FY2023 ($ thousands) | FY2022 ($ thousands) | Change ($ thousands) | % Change | | :------------------------- | :------------------- | :------------------- | :------------------- | :------- | | Revenue | 59,577 | 53,906 | 5,671 | 11% | | Cost of Revenue | 11,630 | 10,822 | 808 | 7% | | Gross Profit | 47,947 | 43,084 | 4,863 | 11% | | Research and Development | 4,504 | 3,208 | 1,296 | 40% | | Sales and Marketing | 6,558 | 4,879 | 1,679 | 34% | | General and Administrative | 28,160 | 20,086 | 8,074 | 40% | | Total Operating Expenses | 39,222 | 28,173 | 11,049 | 39% | | Income from Operations | 8,725 | 14,911 | (6,186) | (41)% | | Other Income, Net | 2,970 | 204 | 2,766 | 1,356% | | Income Before Income Taxes | 11,695 | 15,115 | (3,420) | (23)% | | Provision for Income Taxes | (1,734) | (2,632) | 898 | (34)% | | Net Income | 9,961 | 12,483 | (2,522) | (20)% | - Revenues increased by $5.7 million (11%) to $59.6 million, driven by a $3.9 million (12%) increase in software revenue and a $1.8 million (8%) increase in service revenue, including Immunetrics services[235] - Cost of revenues increased by $0.8 million (7%), primarily due to a $0.6 million increase in software-related costs and a $0.2 million increase in service-related costs from Immunetrics[236] - Gross profit increased by $4.9 million (11%) to $47.9 million, with gross margin remaining at 80%[237][238] - R&D costs increased by **$1.4 million (22%) to $7.8 millio