Simulations Plus(US:SLP)2021-10-27 20:15PART I ITEM 1 – BUSINESS Simulations Plus develops AI-driven drug discovery software and consulting services, with software comprising 60% of FY2021 revenue - Simulations Plus, Inc. is a premier developer of modeling and simulation software for drug discovery and development, leveraging AI and machine learning, and offers consulting services from early discovery to regulatory submissions25 Revenue Contribution by Segment (FY2019-FY2021) | Segment | 2021 | 2020 | 2019 | | :----------------- | :---- | :---- | :---- | | Simulations Plus, Inc. | 54% | 53% | 58% | | Cognigen | 23% | 26% | 27% | | DILIsym | 13% | 17% | 15% | | Lixoft | 10% | 4% | —% | | Total | 100%| 100%| 100%| - The software business generated 60% of total revenue in FY2021, while consulting services accounted for 40%3646 OVERVIEW Provides a general introduction to the company's business and operations SEGMENT INFORMATION Details the company's business segments and their financial contributions PRODUCTS Describes the company's software and consulting service offerings Software Business Focuses on the company's core software products and their applications Consulting Services Business Outlines the range of consulting services provided by the company SALES AND MARKETING Describes the company's strategies for sales and marketing its products and services COMPETITION Analyzes the competitive landscape within the life science software and consulting market TRAINING AND TECHNICAL SUPPORT Details the training and technical support services offered to customers RESEARCH AND DEVELOPMENT Outlines the company's investments and activities in research and development CUSTOMERS Describes the company's customer base and target markets SEASONALITY Discusses any seasonal trends affecting the company's business operations ENVIRONMENTAL MATTERS Addresses the company's approach to environmental considerations HUMAN CAPITAL RESOURCES Details the company's human capital management, including diversity and training Diversity, Equity and Inclusion Details the company's initiatives and policies regarding diversity, equity, and inclusion Training and Awareness Programs Describes the company's programs for employee training and awareness Health & Safety Outlines the company's policies and measures for employee health and safety INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS Describes the company's intellectual property and proprietary rights protection EFFECT OF GOVERNMENT REGULATIONS Discusses the impact of government regulations on the company's operations COMPANY WEBSITE Provides information regarding the company's official website ENVIRONMENTAL, SOCIAL, GOVERNANCE Outlines the company's commitments and initiatives in environmental, social, and governance areas COVID-19 Response Details the company's actions and strategies in response to the COVID-19 pandemic Environmental Matters Discusses the company's specific environmental initiatives and impacts Social Impact and Supporting our Communities Describes the company's social responsibility efforts and community engagement Customer Privacy & Data Security Outlines the company's policies and measures for protecting customer privacy and data security Business Ethics Details the company's commitment to ethical business practices Human Rights States the company's stance and policies regarding human rights Governance Describes the company's corporate governance structure and practices ITEM 1A – RISK FACTORS The company faces risks from epidemics, market competition, operational issues, financial vulnerabilities, and stock volatility - The COVID-19 pandemic has not materially adversely affected business operations as of the report date, but future impacts are uncertain and could disrupt supply chains and global economic conditions103 - The company's ability to sustain or increase revenues depends on successfully entering new markets, expanding its customer base, and increasing revenue from existing customers104 - The company faces strong competition in the life science market for modeling and simulation software from other software providers, larger technology companies, in-house development, academic institutions, and open-source initiatives108 - Three customers accounted for a significant portion of revenue in fiscal year 2021 (11%, 4%, and 3%), making the company vulnerable to the loss of major customers140 Risk Factor Summary Provides an overview of the key risks facing the company Certain Risks Related to Our Business Details specific risks inherent to the company's business model and operations Certain Risks Related to Our Marketplace and Environment Addresses risks arising from the market and external operating environment Certain Risks Related to Our Operations Covers operational risks, including software defects and global business complexities Certain Risks Related to Ownership of Our Common Stock Discusses risks associated with owning the company's common stock ITEM 1B – UNRESOLVED STAFF COMMENTS The company has no unresolved staff comments from the SEC - There are no unresolved staff comments175 ITEM 2 – PROPERTIES The company leases offices in multiple locations, with FY2021 rent expense of $655 thousand and a new Buffalo lease in 2021 - The company leases office spaces in Lancaster, CA (headquarters), Buffalo, NY, Research Triangle Park, NC, and Paris, France176177178179 Rent Expense (FY2019-FY2021) | Fiscal Year | Rent Expense (in thousands) | | :---------- | :-------------------------- | | 2021 | $655 | | 2020 | $644 | | 2019 | $584 | - A new five-year lease agreement for a different property in Buffalo, NY, was signed in August 2021, with an expected move-in by November 2021177 ITEM 3 – LEGAL PROCEEDINGS The company is not currently a party to any legal proceedings and is unaware of any pending legal actions - The company is not a party to any legal proceedings and is not aware of any pending legal proceedings182 ITEM 4 – MINE SAFETY DISCLOSURES This item is not applicable to the company - Mine Safety Disclosures are not applicable to the registrant183 PART II ITEM 5 – MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES SLP common stock trades on Nasdaq, with 20.1 million shares outstanding and $0.06 quarterly dividends declared in FY2021 - The company's common stock (SLP) has traded on the Nasdaq Global Select Market since May 13, 2021186 Common Stock Outstanding and Dividends Declared (FY2021) | Metric | Value | | :----------------------------------- | :------------- | | Shares Outstanding (Oct 25, 2021) | 20,147,714 | | Shareholders of Record (Oct 25, 2021)| 43 | | Quarterly Dividend per Share (FY2021)| $0.06 | | Total Dividends Declared (FY2021) | $4,811 thousand| - In June 2021, 11,540 unregistered shares, valued at $666 thousand, were issued as an earnout payment related to the Lixoft acquisition191 Market Information Provides details on the trading market for the company's common equity Holders Reports on the number of shareholders of record Dividends Details the company's dividend policy and payments Shareholder Return Performance Graph Presents a graphical comparison of shareholder returns Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities Discloses recent issuances of unregistered securities Repurchases Provides information on any share repurchase programs 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 FY2021 revenue grew 11.7% to $46.5 million, with 4.8% net income growth and strong liquidity Fiscal Year 2021 Financial Highlights | Metric | FY2021 (in millions) | FY2020 (in millions) | Change ($) | Change (%) | | :-------------------------- | :------------------- | :------------------- | :--------- | :--------- | | Consolidated Revenues | $46.5 | $41.6 | $4.9 | 11.7% | | Consolidated Gross Profit | $35.9 | $30.9 | $5.0 | 15.9% | | Income from Operations | $11.3 | $11.6 | ($0.352) | (3.0%) | | Net Income | $9.8 | $9.3 | $0.450 | 4.8% | | Diluted EPS | $0.47 | $0.50 | ($0.03) | (6.0%) | - Software-related revenue increased by $6.1 million (28%) in FY2021, while consulting services revenue decreased by $1.2 million (6%)201 - The company's strategy includes pursuing collaborations, expanding marketing and sales, recruiting scientific talent, and seeking accretive acquisitions197 Management Overview Presents management's perspective on the company's financial performance and strategic direction Results of Operations Analyzes the company's financial performance over specified fiscal periods Comparison of fiscal year 2021 and fiscal year 2020 Compares the financial results between fiscal years 2021 and 2020 Comparison of fiscal year 2020 and fiscal year 2019 Compares the financial results between fiscal years 2020 and 2019 Segment Results of Operations Provides a detailed breakdown of financial results by business segment Comparison of fiscal year 2021 and fiscal year 2020 Compares the financial results between fiscal years 2021 and 2020 Comparison of fiscal year 2020 and fiscal year 2019 Compares the financial results between fiscal years 2020 and 2019 LIQUIDITY AND CAPITAL RESOURCES Discusses the company's financial liquidity, cash position, and capital management Cash Flows Analyzes the company's cash inflows and outflows from operating, investing, and financing activities Operating Activities Details cash flows generated from the company's primary business operations Investing Activities Describes cash flows related to the purchase and sale of long-term assets and investments Financing Activities Outlines cash flows from debt, equity, and dividend transactions DIVIDENDS Details the company's dividend declarations and payments KNOWN TRENDS OR UNCERTAINTIES Identifies significant trends or uncertainties that may impact future financial results OFF-BALANCE SHEET ARRANGEMENTS Discloses any material off-balance sheet arrangements CONTRACTUAL OBLIGATIONS Outlines the company's material contractual obligations RECENTLY ISSUED OR NEWLY ADOPTED ACCOUNTING STANDARDS Discusses the impact of new accounting standards on the financial statements CRITICAL ACCOUNTING POLICIES AND ESTIMATES Explains the significant accounting policies and estimates requiring management judgment Estimates Discusses the use of estimates in financial reporting and their impact Revenue Recognition Explains the specific accounting policies for recognizing revenue Capitalized Computer Software Development Costs Details the accounting treatment for capitalized software development costs Intangible Assets and Goodwill Describes the accounting for intangible assets and goodwill, including impairment testing Business Acquisitions Outlines the accounting policies for business combinations Research and Development Costs Explains the accounting treatment for research and development expenses Income Taxes Details the accounting policies related to income taxes Stock-Based Compensation Describes the accounting for stock-based compensation plans ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk stems from interest rates and foreign currency, mitigated by price adjustments, not derivatives - The company's market risk is primarily related to changes in interest rates affecting short-term investments and foreign currency exchange rate fluctuations from international operations283284 International Revenue (FY2019-FY2021) | Fiscal Year | International Revenue (in millions) | | :---------- | :-------------------------------- | | 2021 | $4.8 | | 2020 | $5.0 | | 2019 | $4.1 | - The company mitigates foreign currency risk by periodically adjusting prices in foreign markets and does not use derivative contracts for hedging284 ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA This section refers to the consolidated financial statements and supplementary data, incorporated by reference from page F-1 - The consolidated financial statements are included starting on page F-1 of this Annual Report on Form 10-K285 ITEM 9 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no changes in or disagreements with accountants on accounting and financial disclosure - There are no changes in or disagreements with accountants on accounting and financial disclosure286 ITEM 9A – CONTROLS AND PROCEDURES Disclosure controls and internal control over financial reporting were effective as of August 31, 2021, with no material changes - The CEO and CFO concluded that disclosure controls and procedures were effective as of August 31, 2021287 - Management assessed and concluded that internal control over financial reporting was effective as of August 31, 2021, based on the COSO (2013) framework288289 - No material changes in internal controls over financial reporting occurred during the most recent fiscal quarter291 Evaluation of Disclosure Controls and Procedures Reports on the effectiveness of the company's disclosure controls and procedures Management Report on Internal Control over Financial Reporting Presents management's assessment of the effectiveness of internal control over financial reporting Inherent Limitations on Effectiveness of Controls Acknowledges the inherent limitations of any control system Changes in Internal Control over Financial Reporting Discloses any material changes in internal control over financial reporting ITEM 9B – OTHER INFORMATION There is no other information to report under this item - There is no other information to report under this item292 PART III ITEM 10 – DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE Information on directors, executive officers, and corporate governance is incorporated by reference from the 2022 proxy statement - Information for this item is incorporated by reference from the definitive proxy statement for the 2022 Annual Meeting of Shareholders294 ITEM 11 – EXECUTIVE COMPENSATION Executive compensation information is incorporated by reference from the 2022 proxy statement - Information for this item is incorporated by reference from the definitive proxy statement for the 2022 Annual Meeting of Shareholders295 ITEM 12 – SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Security ownership information is incorporated by reference from the 2022 proxy statement - Information for this item is incorporated by reference from the definitive proxy statement for the 2022 Annual Meeting of Shareholders296 ITEM 13 – CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Related party transactions and director independence information is incorporated by reference from the 2022 proxy statement - Information for this item is incorporated by reference from the definitive proxy statement for the 2022 Annual Meeting of Shareholders297 ITEM 14 – PRINCIPAL ACCOUNTING FEES AND SERVICES Principal accounting fees and services information is incorporated by reference from the 2022 proxy statement - Information for this item is incorporated by reference from the definitive proxy statement for the 2022 Annual Meeting of Shareholders298 PART IV ITEM 15 – EXHIBITS, FINANCIAL STATEMENT SCHEDULES This section lists financial statements and a comprehensive list of exhibits filed or furnished with the report - The consolidated financial statements are included in this Annual Report on Form 10-K beginning on page F-1301 - All financial statement schedules have been omitted as the information is either not applicable, not required, or included in the financial statements or notes301 - A list of exhibits required by Item 601 of Regulation S-K is provided, including merger agreements, stock option plans, employment agreements, and certifications302303 SIGNATURES This section contains the signatures of the company's authorized representatives, certifying the report as of October 27, 2021 - The report is signed by the Chief Financial Officer, Chief Executive Officer, Chairman of the Board, and other Directors, dated October 27, 2021309310 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Auditors issued an unqualified opinion on financials and internal controls, highlighting consulting revenue recognition as a critical audit matter - Rose, Snyder & Jacobs LLP issued an unqualified opinion on the consolidated financial statements for the three-year period ended August 31, 2021315 - An unqualified opinion was also expressed on the effectiveness of the company's internal control over financial reporting as of August 31, 2021316327 - A critical audit matter identified was the complexity and judgment involved in revenue recognition, specifically the variability and uncertainty in assessing the measure of progress for consulting service agreements320321 FINANCIAL STATEMENTS This section presents consolidated financial statements including Balance Sheets, Operations, Equity, Cash Flows, and detailed notes - The financial statements include Consolidated Balance Sheets, Statements of Operations and Comprehensive Income, Statements of Shareholders' Equity, and Statements of Cash Flows312 Consolidated Balance Sheet Highlights (in thousands) | Metric | August 31, 2021 | August 31, 2020 | | :-------------------------- | :-------------- | :-------------- | | Cash and cash equivalents | $36,984 | $49,207 | | Short-term investments | $86,620 | $66,804 | | Total assets | $179,978 | $168,422 | | Total liabilities | $14,196 | $12,387 | | Total shareholders' equity | $165,782 | $156,035 | Consolidated Statements of Operations Highlights (in thousands) | Metric | FY2021 | FY2020 | FY2019 | | :-------------------------- | :------- | :------- | :------- | | Revenues | $46,466 | $41,589 | $33,970 | | Gross profit | $35,866 | $30,940 | $24,944 | | Income from operations | $11,253 | $11,605 | $10,648 | | Net Income | $9,782 | $9,332 | $8,583 | | Diluted EPS | $0.47 | $0.50 | $0.48 | Consolidated Balance Sheets Presents a snapshot of the company's assets, liabilities, and equity at specific points in time Consolidated Statements of Operations and Comprehensive Income Reports the company's revenues, expenses, net income, and comprehensive income over periods Consolidated Statements of Shareholders' Equity Details changes in the company's equity accounts over periods Consolidated Statements of Cash Flows Summarizes the cash generated and used by the company from operating, investing, and financing activities Notes to Consolidated Financial Statements Provides detailed explanations and additional information for the financial statements NOTE 1 – ORGANIZATION AND LINES OF BUSINESS Describes the company's structure and primary business activities NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Outlines the key accounting principles and methods used in preparing financial statements Principles of Consolidation Explains the basis for consolidating financial statements Use of Estimates Discusses the role of management estimates in financial reporting Reclassifications Notes any reclassifications made in prior period financial statements Revenue Recognition Explains the specific accounting policies for recognizing revenue Deferred Commissions Explains the accounting for deferred commission expenses Practical Expedients and Exemptions Discusses the application of practical expedients and exemptions in accounting Cash and Cash Equivalents Defines cash and cash equivalents and their presentation Accounts Receivable Describes the accounting for accounts receivable and allowance for doubtful accounts Investments Details the accounting for the company's investment portfolio Capitalized Computer Software Development Costs Explains the accounting for capitalized software development costs Property and Equipment Details the accounting for property and equipment Internal-use Software Describes the accounting for software developed for internal use Leases Explains the accounting for lease agreements Intangible Assets and Goodwill Details the accounting for intangible assets and goodwill Other Intangible Assets Provides specific details on other intangible assets Business Acquisitions Explains the accounting for business acquisitions Fair Value of Financial Instruments Describes the methods used to determine the fair value of financial instruments Marketing Details the accounting for marketing expenses Research and Development Costs Explains the accounting for research and development costs Income Taxes Details the accounting for income taxes Intellectual property Describes the accounting for intellectual property Earnings per Share Explains the calculation of earnings per share Stock-Based Compensation Details the accounting for stock-based compensation Impairment of Long-lived Assets Describes the accounting for impairment of long-lived assets Recently Issued Accounting Standards Discusses recently issued accounting standards NOTE 3 – REVENUE RECOGNITION Details the company's policies and methods for recognizing revenue Components of Revenue Details the various components that make up the company's revenue Remaining performance obligations Explains the accounting for remaining performance obligations under revenue contracts Contract Liabilities Describes the accounting for contract liabilities Disaggregation of Revenues Provides a breakdown of revenues by various categories Contracts in Progress Details the accounting for contracts in progress NOTE 4 – PROPERTY AND EQUIPMENT Provides information on the company's property and equipment, including depreciation policies NOTE 5 – INVESTMENTS Details the company's investment portfolio and related accounting policies NOTE 6 – CONTRACTS PAYABLE Describes the company's contractual liabilities, including acquisition-related payments DILIsym Acquisition Liabilities Describes liabilities related to the DILIsym acquisition Lixoft Acquisition Liabilities Describes liabilities related to the Lixoft acquisition NOTE 7 – COMMITMENTS AND CONTINGENCIES Discloses the company's material commitments and potential contingent liabilities Leases Details the company's lease commitments Line of Credit Provides information on the company's line of credit Employment Agreements Describes key employment agreements License Agreement Details significant license agreements Litigation Discusses any ongoing or potential litigation NOTE 8 – SHAREHOLDERS' EQUITY Provides detailed information on the components of shareholders' equity, including stock options and dividends Shares Outstanding Provides information on the number of shares outstanding Dividends Details the company's dividend policy Stock Option Plans Describes the company's stock option plans NOTE 9 – INCOME TAXES Details the company's income tax provisions, deferred taxes, and effective tax rates NOTE 10 – CONCENTRATIONS AND UNCERTAINTIES Discusses significant concentrations of risk and other uncertainties affecting the company NOTE 11 – SEGMENT AND GEOGRAPHIC REPORTING Provides financial information disaggregated by business segment and geographic region NOTE 12 – RELATED PARTY TRANSACTIONS Discloses transactions between the company and its related parties NOTE 13 – EMPLOYEE BENEFIT PLAN Describes the company's employee benefit plans NOTE 14 – ACQUISITION Provides details on recent business acquisitions NOTE 15 – UNAUDITED QUARTERLY FINANCIAL DATA Presents unaudited financial data for recent fiscal quarters NOTE 16 - SUBSEQUENT EVENTS Discloses significant events that occurred after the balance sheet date