Simulations Plus(SLP) - 2022 Q4 - Annual Report

PART I ITEM 1 – BUSINESS The company develops AI-driven simulation software and provides consulting services for drug development - Simulations Plus, Inc. specializes in AI and machine-learning-based modeling and simulation software for drug discovery and development, alongside consulting services for the pharmaceutical, biotech, and related industries[21][22] Revenue Contribution by Segment (FY2020-FY2022) | Segment | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Software | 61 % | 60 % | 52 % | | Services | 39 % | 40 % | 48 % | | Total | 100 % | 100 % | 100 % | Overview The company develops AI-based modeling software and offers consulting services for global drug development - The Company, incorporated in 1996, is a leading developer of AI and machine-learning software for drug discovery and development, and provides consulting services globally[21][22] Segment Information The business operates through two reportable segments: software and services - The Company's business is organized into two reportable segments: software and services[23] Software The software segment offers thirteen products for pharmaceutical R&D, led by its flagship product GastroPlus® - The software business accounted for 61% of total revenue in FY2022, offering thirteen products for pharmaceutical R&D, including simulation, AI/machine-learning prediction, mechanistic models, and population analysis tools[24][26] - GastroPlus® is the Company's flagship product and largest software revenue source, with version 9.8.3 released in October 2022, adding new mechanisms, updated documentation, and capabilities for population simulations, dosage routes, and virtual bioequivalence[26][27] - Recent collaborations for GastroPlus® include animal health models, long-acting injectable (LAI) formulation models with the FDA, and dermal absorption (TCAT™) model expansion, while ADMET Predictor® version 10.4 (APX.4) added 3D conformer generation, new mouse HTPK models, and AIDD Module transform rules[30][34][35] Services The services segment provides expert consulting for drug development, supporting model-informed strategies - The services business generated 39% of total revenue in FY2022, offering consulting expertise in drug absorption, pharmacokinetics, pharmacodynamics, and drug-drug interactions[37] - Key service offerings include PKPD modeling, QSP/QST modeling for various conditions (NAFLD, NASH, IPF, heart disease, liver/kidney safety, radiation syndrome), and PBPK modeling, supporting Model-Informed Drug Discovery and Development (MIDD)[37][38][39] Sales and Marketing The company markets its products globally through scientific engagement and digital channels - Global sales and marketing are conducted through scientific meetings, trade shows, seminars, website, and digital advertising, supported by internal staff and international distributors[41][42] - The annual Model-Informed Drug Development (MIDD+) scientific conference, featuring speakers from regulatory agencies and pharmaceutical companies, is a key marketing event[43] Competition The company faces intense competition from various entities in the technology and pharmaceutical sectors - The Company faces intense competition from other software providers, larger technology companies, in-house development teams, academic/government institutions, and open-source initiatives[44][45][46][93] - Key competitive factors include continuous R&D investment, proprietary databases, attracting and retaining skilled scientific and engineering teams, aggressive global promotion, and maintaining relationships with industry, academia, and government agencies[47] Training and Technical Support The company provides extensive customer training and technical support to enhance product adoption - The Company provides extensive customer training and technical support through in-house seminars, web meetings, and direct assistance[49][50] - Support for GastroPlus User Groups in Japan, Europe, and North America facilitates information exchange and provides valuable feedback for product development[51] Research and Development R&D focuses on expanding the product portfolio and enhancing core technologies through internal and external means - R&D efforts are directed at expanding the product portfolio, enhancing core technologies, and integrating existing and new products, with a commitment to regular updates[52][53] R&D Expenditures (FY2020-FY2022) | Fiscal Year | Total R&D Expenditures (Millions) | Capitalized (Millions) | | :--- | :--- | :--- | | 2022 | $6.4 | $3.2 | | 2021 | $6.9 | $2.9 | | 2020 | $5.3 | $2.3 | Customers The company serves a fragmented customer base across various industries with seasonal revenue fluctuations - The Company serves a fragmented customer base across various industries, including pharmaceuticals, biotechnology, and government research, focusing on drug development stages[56] - In FY2022, the top three customers accounted for 5%, 3%, and 3% of total revenues, respectively[56] - Revenues show seasonal fluctuations, with the first (Sept-Nov) and fourth (June-Aug) fiscal quarters generally having the lowest revenues due to industry buying patterns and vacations[57] Environmental Regulatory Matters The company is in material compliance with environmental laws and expects no significant financial impact - The Company is in material compliance with environmental laws and expects no material impact on its financial or competitive position from environmental regulations[58] Human Capital Resources The company prioritizes attracting and developing its highly specialized and diverse workforce - As of August 31, 2022, the Company employed 163 people (157 full-time), with 113 in scientific, technical, and R&D roles; 75 employees hold PhDs and 40 hold Master's degrees[60] - The Company is committed to diversity, equity, and inclusion, with women comprising 49% of its workforce[62] - Employee development includes refining career paths, compliance and soft-skills training, and cross-specialty technical and leadership development sessions[63][64][65] Intellectual Property and Other Proprietary Rights Intellectual property is protected primarily through copyrights, trade secrets, and employee expertise - Intellectual property is primarily protected through copyrights and trade secrets, focusing on software source code and data files[69] - The expertise of its highly skilled scientific and engineering team is a considerable asset[69] Effect of Government Regulations The company's software products are research tools not subject to FDA approval - The Company's operations are substantially compliant with all applicable laws and regulations, and its software products are research tools, not subject to FDA approval[70] - No significant environmental pollution or material compliance costs are expected from environmental regulations[71] Company Website The corporate website provides free public access to the company's SEC filings - The Company's website (www.simulations-plus.com) provides free access to SEC filings, including annual, quarterly, and current reports[72][73] Environmental, Social, Governance The company is committed to ESG factors to create long-term shareholder value - The Company is committed to ESG factors, aligning with SASB and UN Sustainable Development Goals, to create long-term value[74][75] - Key ESG initiatives include a proactive COVID-19 response, recycling programs, energy efficiency upgrades, and the use of renewable energy at its Lancaster facility[76][77][81] - Social impact efforts include funding STEM scholarships for young women (Tech Trek), providing free/discounted software to academic institutions, sponsoring scientific conferences, and encouraging employee volunteering[81] - The Company prioritizes customer privacy and data security, with policies compliant with U.S. and State Data Privacy Laws, GDPR, PIPL, and ongoing employee training on cyber threats[82] - A strong corporate culture of honesty and integrity is maintained through a Corporate Code of Business Conduct and Ethics, and the Company supports UN International Bill of Human Rights principles[83][85] - Strong corporate governance practices are overseen by the Board of Directors, covering strategic, business, financial reporting, compensation, and ESG risks[86] ITEM 1A – RISK FACTORS The company faces risks from market dynamics, operations, and stock ownership - Risks include adverse effects from epidemic diseases (e.g., COVID-19) on operations, financial condition, and results[88] - Marketplace risks involve dependence on successful market entry and customer base expansion, potential customer loss due to pharmaceutical/biotechnology industry consolidation, increasing competition, and impacts from healthcare reform and pricing pressures[89][90][91][92][93][94] - Operational risks include software defects, delays in new product releases, challenges of global business (e.g., currency fluctuations, regulatory compliance), competition in contract research services, tax law changes, liability from contract research, difficulties in integrating acquisitions, and fluctuations in quarterly/annual operating results[104][105][107][109][110][113][120][122] - Risks related to common stock ownership include potential suspension of quarterly dividends, significant fluctuations in stock price due to various factors, and dilution from future issuances of common stock or convertible debt[148][150][153][158] ITEM 1B – UNRESOLVED STAFF COMMENTS There are no unresolved staff comments to report - No unresolved staff comments were reported[159] ITEM 2 – PROPERTIES The company leases office and data center spaces in the US and France - The Company leases office spaces in Lancaster, CA (9,255 sq ft, $17k/month, lease to Jan 2026), Buffalo, NY (4,317 sq ft, $7k/month, lease to Nov 2026, plus data center colocation), Durham, NC (3,386 sq ft, $8k/month, lease to Sept 2023), and Paris, France (2,300 sq ft, $5k/month, lease to Nov 2024)[161][162][163][164] - Existing facilities and equipment are considered to be in good operating condition and suitable for business operations[164] ITEM 3 – LEGAL PROCEEDINGS The company is not currently involved in any legal proceedings - The Company is not a party to any legal proceedings and is unaware of any pending legal proceedings[165] ITEM 4 – MINE SAFETY DISCLOSURES This item is not applicable to the company's operations - Mine safety disclosures are not applicable[166] PART II ITEM 5 – MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES The company's common stock trades on Nasdaq, and it maintained quarterly dividends in FY2022 - The Company's common stock (SLP) trades on the Nasdaq Global Select Market, with 51 shareholders of record as of October 19, 2022[169][170] - In FY2022, the Company issued 20,326 and 23,825 unregistered shares of common stock to former Lixoft shareholders as partial payments for holdback and earnout obligations, respectively[180][181] FY2022 Quarterly Dividends Declared | Record Date | Distribution Date | of Shares Outstanding (thousands) | Dividend per Share | Total Amount (thousands) | | :--- | :--- | :--- | :--- | :--- | | 7/25/2022 | 8/01/2022 | 20,239 | $0.06 | $1,214 | Equity Compensation Plan Information (as of Aug 31, 2022) | Plan Category | Number of Securities to be Issued upon Exercise of Outstanding Options (thousands) | Weighted-Average Exercise Price of Outstanding Options | Number of Securities Remaining Available for Future Issuance (thousands) | | :--- | :--- | :--- | :--- | | Approved by Security Holders | 1,245 | $28.61 | 1,034 | | Total | 1,245 | $28.61 | 1,034 | 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 The company achieved record financial performance in FY2022 with strong revenue and net income growth - The Company's strategy includes pursuing customer collaborations, aggressive marketing, expanding sales and scientific staff, and seeking strategic acquisitions[188] - As of August 31, 2022, the Company had $51.6 million in cash and cash equivalents, $76.7 million in short-term investments, and working capital of $139.1 million, with continuous positive operating cash flow for the last thirteen fiscal years[223] FY2022 Financial Highlights | Metric | FY2022 ($M) | FY2021 ($M) | Change ($M) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Consolidated Revenues | 53.9 | 46.5 | 7.4 | 16 % | | Consolidated Gross Profit | 43.1 | 35.9 | 7.2 | 20 % | | Income from Operations | 14.9 | 11.3 | 3.7 | 33 % | | Net Income | 12.5 | 9.8 | 2.7 | 28 % | | Diluted EPS | $0.60 | $0.47 | $0.13 | 28 % | Management Overview FY2022 was a record year driven by increased adoption of simulation software and strategic expansion - The Company's strategy includes pursuing customer collaborations, aggressive marketing, expanding sales and scientific staff, and seeking strategic acquisitions[188] FY2022 Financial Highlights | Metric | FY2022 ($M) | FY2021 ($M) | Change ($M) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Consolidated Revenues | 53.9 | 46.5 | 7.4 | 16 % | | Consolidated Gross Profit | 43.1 | 35.9 | 7.2 | 20 % | | Income from Operations | 14.9 | 11.3 | 3.7 | 33 % | | Net Income | 12.5 | 9.8 | 2.7 | 28 % | | Diluted EPS | $0.60 | $0.47 | $0.13 | 28 % | Results of Operations FY2022 revenue grew 16% to $53.9 million, with net income increasing 28% to $12.5 million - Overall gross margin percentage was 80% in FY2022, up from 77% in FY2021, and 74% in FY2020[194][207] Consolidated Results of Operations (FY2022 vs FY2021) | (in thousands) | 2022 | 2021 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Revenue | $53,906 | $46,466 | $7,440 | 16 % | | Cost of revenue | 10,822 | 10,600 | 222 | 2 % | | Gross profit | 43,084 | 35,866 | 7,218 | 20 % | | Research and development | 3,208 | 4,047 | (839) | (21)% | | Selling, general, and administrative | 24,965 | 20,566 | 4,399 | 21 % | | Total operating expenses | 28,173 | 24,613 | 3,560 | 14 % | | Income from operations | 14,911 | 11,253 | 3,658 | 33 % | | Other income (expense), net | 204 | (168) | 372 | (221)% | | Income before income taxes | 15,115 | 11,085 | 4,030 | 36 % | | Provision for income taxes | (2,632) | (1,303) | (1,329) | 102 % | | Net income | $12,483 | $9,782 | $2,701 | 28 % | Consolidated Results of Operations (FY2021 vs FY2020) | (in thousands) | 2021 | 2020 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Revenue | $46,466 | $41,589 | $4,877 | 12 % | | Cost of revenue | 10,600 | 10,649 | (49) | — % | | Gross profit | 35,866 | 30,940 | 4,926 | 16 % | | Research and development | 4,047 | 2,975 | 1,072 | 36 % | | Selling, general, and administrative | 20,566 | 16,360 | 4,206 | 26 % | | Total operating expenses | 24,613 | 19,335 | 5,278 | 27 % | | Income from operations | 11,253 | 11,605 | (352) | (3)% | | Other income (expense), net | (168) | (218) | 50 | (23)% | | Income before income taxes | 11,085 | 11,387 | (302) | (3)% | | Provision for income taxes | (1,303) | (2,055) | 752 | (37)% | | Net income | $9,782 | $9,332 | $450 | 5 % | Results of Operations by Business Unit In FY2022, both software and services segments experienced strong revenue and gross profit growth - Software revenue increase in FY2022 was primarily due to higher revenues from GastroPlus ($2.4 million) and MonolixSuite Software ($1.6 million); Services revenue increase was primarily due to higher revenues from PBPK ($1.4 million) and QSP/QST ($0.5 million)[216][217] Revenue by Business Unit (FY2022 vs FY2021) | (in thousands) | 2022 | 2021 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Software | $32,642 | $27,670 | $4,972 | 18 % | | Services | 21,264 | 18,796 | 2,468 | 13 % | | Total | $53,906 | $46,466 | $7,440 | 16 % | Gross Profit by Business Unit (FY2022 vs FY2021) | (in thousands) | 2022 | 2021 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Software | $29,582 | $24,435 | $5,147 | 21 % | | Services | 13,502 | 11,431 | 2,071 | 18 % | | Total | $43,084 | $35,866 | $7,218 | 20 % | Revenue by Business Unit (FY2021 vs FY2020) | (in thousands) | 2021 | 2020 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Software | $27,670 | $21,587 | $6,083 | 28 % | | Services | 18,796 | 20,002 | (1,206) | (6)% | | Total | $46,466 | $41,589 | $4,877 | 12 % | Liquidity and Capital Resources The company maintains strong liquidity with significant cash, investments, and positive operating cash flow - As of August 31, 2022, the Company had $51.6 million in cash and cash equivalents, $76.7 million in short-term investments, and $139.1 million in working capital[223] - The Company's $3.5 million credit facility with Wells Fargo Bank terminated in April 2022 and was not renewed, as no immediate need for it is foreseen[224] - In FY2022, the Company completed the remaining $2.0 million holdback and $3.5 million second earnout payments for the Lixoft acquisition, paid in a combination of cash and unregistered common stock[225] Cash Flows Operating activities provided strong cash flow, while investing activities shifted to a net provider of cash - Net cash provided by operating activities was $17.9 million in FY2022, primarily from $12.5 million net income, offset by changes in operating assets and liabilities[229] - Net cash provided by investing activities was $4.3 million in FY2022, mainly from $109.1 million in short-term investment sales, partially offset by $100.8 million in purchases and $3.2 million in software development costs[231] - Net cash used in financing activities was $7.6 million in FY2022, primarily due to $4.8 million in dividend payments and a $3.7 million earnout payment for Lixoft, partially offset by $0.9 million from stock option exercises[233] Cash Flow Summary (FY2020-FY2022) | (in thousands) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $17,900 | $19,203 | $10,912 | | Net cash provided by (used in) investing activities | 4,305 | (26,742)| (75,505) | | Net cash (used in) provided by financing activities | (7,622) | (4,684) | 102,366 | | Net increase (decrease) in cash and cash equivalents | 14,583 | (12,223)| 37,773 | | Cash and cash equivalents, end of period | $51,567 | $36,984 | $49,207 | DIVIDENDS The company maintained a quarterly cash dividend of $0.06 per share throughout FY2022 and FY2021 - All future dividends are subject to declaration by the Board of Directors, with no assurances of continued distributions[171] Cash Dividends Declared (FY2022 & FY2021) | Fiscal Year | Total Dividends Declared (thousands) | Cash Dividends Declared per Common Share | | :--- | :--- | :--- | | 2022 | $4,846 | $0.24 | | 2021 | $4,811 | $0.24 | Known Trends or Uncertainties The company faces uncertainties from industry consolidation but anticipates growth from simulation tool adoption - Consolidation, delays, holds, or cancellations in the pharmaceutical industry could adversely impact revenues and earnings[236] - The Company expects increasing adoption of simulation and modeling tools and anticipates growth from new product developments, though without guarantees[237] - Strategic acquisitions could significantly change revenues and earnings, and growth potential in new markets (e.g., healthcare) is uncertain[238] Recently Issued or Newly Adopted Accounting Standards The company is evaluating new accounting standards for business combinations and government assistance - The Company is evaluating ASU No. 2021-08 (Business Combinations), effective FY2024, which requires contract assets and liabilities acquired in business combinations to be recognized under ASC 606[239][385] - ASU 2021-10 (Government Assistance), effective FY2023, will increase disclosures for government transactions, but is not expected to materially impact consolidated financial statements[240][386] Critical Accounting Policies and Estimates Critical accounting policies involve significant estimates for revenue, software costs, and intangible assets - Significant accounting policies include revenue recognition (ASC 606), accounting for capitalized software development costs (ASC 985-20), valuation of stock options (ASC 718-10), and accounting for income taxes (ASC 740-10)[241][242][244][254][256] - Capitalization of software development costs begins upon technological feasibility and ends when the product is available for sale, amortized over an estimated economic life not exceeding five years[244][246] - Goodwill and indefinite-lived intangible assets are tested for impairment annually or when circumstances change, with no impairment charges recognized in FY2020-FY2022[249][251] ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The company is exposed to market risk from interest rate changes and foreign currency fluctuations - The Company's short-term investments are exposed to interest rate risk, but it does not hold trading or available-for-sale securities[257] - International sales (30% of FY2022 revenue) expose the Company to foreign currency exchange rate risk, particularly for Yen and RMB, though most software licenses are USD-denominated[258][420] - Foreign currency risk is mitigated by periodic price adjustments in foreign markets; the Company does not use derivative instruments for hedging[258] ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements are incorporated by reference from page F-1 of this report - Financial statements and supplementary data are included starting on page F-1[259] ITEM 9 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There are no changes in or disagreements with accountants to report - No changes in or disagreements with accountants on accounting and financial disclosure were reported[260] ITEM 9A – CONTROLS AND PROCEDURES Management concluded that disclosure controls and internal financial reporting controls were effective - The CEO and CFO concluded that disclosure controls and procedures were effective as of August 31, 2022[261] - Management assessed and concluded that internal control over financial reporting was effective as of August 31, 2022, based on the COSO framework[262][263] - No material changes in internal control over financial reporting occurred during the most recent fiscal quarter[265] ITEM 9B – OTHER INFORMATION There is no other information to report under this item - No other information was reported[266] ITEM 9C – DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS This item is not applicable to the company - Disclosure regarding foreign jurisdictions that prevent inspections is not applicable[267] PART III ITEM 10 – DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE Information on directors and governance is incorporated by reference from the 2023 Proxy Statement - Information on directors, executive officers, and corporate governance is incorporated by reference from the 2023 Proxy Statement[270] - The Corporate Code of Business Conduct and Ethics is publicly available on the Company's website[271] ITEM 11 – EXECUTIVE COMPENSATION Executive compensation details are incorporated by reference from the 2023 Proxy Statement - Executive compensation information is incorporated by reference from the 2023 Proxy Statement[272] ITEM 12 – SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Security ownership information is incorporated by reference from this report and the 2023 Proxy Statement - Security ownership information is incorporated by reference from Part II, Item 5 of this Report and the 2023 Proxy Statement[273][274] ITEM 13 – CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Information on related transactions and director independence is incorporated by reference - Information on certain relationships, related transactions, and director independence is incorporated by reference from the 2023 Proxy Statement[275] ITEM 14 – PRINCIPAL ACCOUNTING FEES AND SERVICES Information on accounting fees is incorporated by reference from the 2023 Proxy Statement - Principal accounting fees and services information is incorporated by reference from the 2023 Proxy Statement[276] - Rose, Snyder & Jacobs LLP is the independent registered public accounting firm[276] PART IV ITEM 15 – EXHIBITS, FINANCIAL STATEMENT SCHEDULES This section lists the consolidated financial statements and exhibits filed with the report - Consolidated financial statements are included in the Annual Report, and financial statement schedules are omitted as not applicable or already included[279] - A list of exhibits, including merger agreements, equity incentive plans, employment agreements, and certifications, is provided[280][281] SIGNATURES SIGNATURES The report was duly signed by executives and directors in compliance with the Securities Exchange Act - The report was signed on October 28, 2022, by key executives and directors, affirming compliance with SEC requirements[286][287][288] FINANCIAL STATEMENTS REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The independent auditor issued an unqualified opinion on the financial statements and internal controls - Rose, Snyder & Jacobs LLP issued an unqualified opinion on the consolidated financial statements for the three-year period ended August 31, 2022[293] - An unqualified opinion was also issued on the effectiveness of internal control over financial reporting as of August 31, 2022[294][306] - A critical audit matter involved the complexity and judgment in auditing revenue recognition, particularly contract cost estimates for consulting services, due to variability and uncertainty in assessing progress to completion[298][299] Consolidated Balance Sheets Total assets increased to $188.4 million, while total liabilities decreased to $10.1 million in FY2022 Consolidated Balance Sheet Highlights (as of August 31) | (in thousands) | 2022 | 2021 | | :--- | :--- | :--- | | ASSETS | | | | Cash and cash equivalents | $51,567 | $36,984 | | Short-term investments | 76,668 | 86,620 | | Total current assets | 146,790 | 139,313 | | Capitalized software development costs, net | 9,563 | 7,646 | | Intellectual property, net | 9,057 | 10,469 | | Goodwill | 12,921 | 12,921 | | Total assets | $188,382 | $179,978 | | LIABILITIES | | | | Total current liabilities | $7,735 | $11,574 | | Total liabilities | 10,134 | 14,196 | | SHAREHOLDERS' EQUITY | | | | Total shareholders' equity | $178,248 | $165,782 | Consolidated Statements of Operations and Comprehensive Income FY2022 revenues grew 16% to $53.9 million, with net income increasing 28% to $12.5 million Consolidated Statements of Operations Highlights (Years Ended August 31) | (in thousands, except per common share amounts) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Total revenues | $53,906 | $46,466 | $41,589 | | Total cost of revenues | 10,822 | 10,600 | 10,649 | | Gross profit | 43,084 | 35,866 | 30,940 | | Total operating expenses | 28,173 | 24,613 | 19,335 | | Income from operations | 14,911 | 11,253 | 11,605 | | Net Income | $12,483 | $9,782 | $9,332 | | Diluted Earnings per share | $0.60 | $0.47 | $0.50 | Consolidated Statements of Shareholders' Equity Shareholders' equity increased to $178.2 million, driven by net income and stock-based compensation - Net income of $12.5 million and stock-based compensation of $2.7 million contributed to the increase in shareholders' equity in FY2022[321] - Shares issued for the Lixoft acquisition totaled $1.2 million in FY2022, contributing to common stock and additional paid-in capital[321] Consolidated Statements of Shareholders' Equity Highlights (Years Ended August 31) | (in thousands) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Common stock and additional paid in capital | $138,512 | $133,418 | $128,541 | | Retained earnings | 40,044 | 32,407 | 27,436 | | Accumulated other comprehensive (loss) income | (308) | (43) | 58 | | Total shareholders' equity | $178,248 | $165,782 | $156,035 | | Cash dividends declared per common share | $0.24 | $0.24 | $0.24 | Consolidated Statements of Cash Flows Cash and cash equivalents increased by $14.6 million, driven by operating activities and investment sales - Investing activities shifted from a net use of $26.7 million in FY2021 to a net provision of $4.3 million in FY2022, driven by short-term investment sales[323] - Financing activities used $7.6 million in FY2022, primarily due to $4.8 million in dividend payments and $3.7 million in earnout payments for the Lixoft acquisition[233][323] Consolidated Statements of Cash Flows Highlights (Years Ended August 31) | (in thousands) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $17,900 | $19,203 | $10,912 | | Net cash provided by (used in) investing activities | 4,305 | (26,742)| (75,505) | | Net cash (used in) provided by financing activities | (7,622) | (4,684) | 102,366 | | Net increase (decrease) in cash and cash equivalents | 14,583 | (12,223)| 37,773 | | Cash and cash equivalents, end of period | $51,567 | $36,984 | $49,207 | Notes to Consolidated Financial Statements The notes detail significant accounting policies, including revenue recognition and intangible asset valuation - The Company's accounting policies adhere to GAAP, with significant estimates for revenue recognition, capitalized software, stock options, and income taxes[241][329] - Revenue is primarily from software licenses (recognized at a point in time or over time) and consulting services (recognized over time based on labor costs)[331][333][335] - Goodwill and intangible assets are tested for impairment annually, with no impairment charges recognized in FY2020-FY2022[361][362] NOTE 1 – ORGANIZATION AND LINES OF BUSINESS The company develops drug discovery software and provides consulting services to the pharmaceutical industry - Simulations Plus, Inc. was incorporated in 1996 and acquired Cognigen (2014), DILIsym (2017), and Lixoft (2020); Cognigen and DILIsym merged into Simulations Plus, Inc. in September 2021[325][326] - The Company develops modeling and simulation software for drug discovery and development, utilizing AI and machine learning, and offers consulting services to various industries and regulatory agencies worldwide[327] NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note details key accounting policies, including revenue recognition, software capitalization, and goodwill - Revenue is recognized from software licenses (point-in-time or over time) and consulting services (over time based on labor costs), with remaining performance obligations of $13.5 million as of August 31, 2022[331][333][335][337] - Capitalized computer software development costs are amortized over an estimated economic life not exceeding five years, totaling $1.2 million in FY2022[351][353] - Goodwill and intangible assets are tested for impairment annually, with no impairment charges recognized in FY2020-FY2022[361][362] Disaggregation of Revenues (Years Ended August 31) | (in thousands) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Software licenses | | | | | Point in time | $31,587 | $26,725 | $20,668 | | Over time | 1,055 | 945 | 919 | | Services | | | | | Over time | 21,264 | 18,796 | 20,002 | | Total revenue | $53,906 | $46,466 | $41,589 | Geographical Revenues (Years Ended August 31) | (in thousands) | 2022 ($) | % of total | 2021 ($) | % of total | 2020 ($) | % of total | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Americas | $37,681 | 70 % | $32,549 | 70 % | $29,674 | 71 % | | EMEA | 10,388 | 19 % | 7,906 | 17 % | 5,827 | 14 % | | Asia Pacific | 5,837 | 11 % | 6,011 | 13 % | 6,088 | 15 % | | Total | $53,906 | 100 % | $46,466 | 100 % | $41,589 | 100 % | Intellectual Property (as of August 31, 2022) | (in thousands) | Amortization Period | Acquisition Value | Accumulated Amortization | Net Book Value | | :--- | :--- | :--- | :--- | :--- | | 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 | | Developed technologies–Lixoft acquisition | Straight line 16 years | 8,010 | 1,196 | 6,814 | | Total | | $16,985 | $7,928 | $9,057 | NOTE 3 – OTHER INCOME (EXPENSE), NET Other income was $0.2 million in FY2022, driven by higher interest income Other Income (Expense), Net (Years Ended August 31) | (in thousands) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Interest income | $717 | $201 | $30 | | Change in valuation of contingent consideration | (283) | (486) | (203) | | (Loss) gain on currency exchange | (231) | 139 | (45) | | Total other income (expense), net | $204 | $(168)| $(218)| NOTE 4 – PROPERTY AND EQUIPMENT Net property and equipment decreased to $0.6 million in FY2022 - Depreciation expense was $0.3 million in FY2022, $0.2 million in FY2021, and $0.2 million in FY2020[388] Property and Equipment (as of August 31, in thousands) | (in thousands) | 2022 | 2021 | | :--- | :--- | :--- | | Equipment | $346 | $293 | | Computer equipment | 860 | 606 | | Construction in progress| — | 1,302 | | Subtotal | 1,280 | 2,250 | | Less accumulated depreciation | (648) | (412) | | Total | $632 | $1,838 | NOTE 5 – INVESTMENTS Short-term investments, classified as held-to-maturity, totaled $76.7 million - All investments are classified as held-to-maturity, with unrealized losses primarily due to rising interest rates[350][389] Short-Term Investments (as of August 31, 2022, in thousands) | (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 | NOTE 6 – CONTRACTS PAYABLE All acquisition-related holdback and earnout liabilities were settled by May 2022 - All DILIsym acquisition earnout liabilities were settled by August 2020[391] - Lixoft acquisition holdback ($1.3 million cash, $0.7 million stock) and second earnout ($2.3 million cash, $1.2 million stock) liabilities were fully settled by May 2022[392] Contracts Payable (as of August 31, in thousands) | (in thousands) | 2022 | 2021 | | :--- | :--- | :--- | | Holdback liability| $— | $1,333 | | Earnout liability | — | 3,217 | | Subtotal | $— | $4,550 | NOTE 7 – COMMITMENTS AND CONTINGENCIES The company has operating lease commitments totaling $1.5 million and no outstanding credit facility - The Company's $3.5 million credit facility terminated in April 2022 and was not renewed[398] - The Company is not a party to any legal proceedings[400] Lease Liability Maturities (as of August 31, 2022, in thousands) | Years Ending August 31, | Amount | | :--- | :--- | | 2023 | $511 | | 2024 | 411 | | 2025 | 346 | | 2026 | 219 | | 2027 | 34 | | Total undiscounted liabilities | 1,521 | | Total operating lease liabilities | $1,404 | NOTE 8 – SHAREHOLDERS' EQUITY The company maintained its quarterly dividend and reported stock-based compensation of $2.7 million - The Company declared quarterly cash dividends of $0.06 per share in FY2022 and FY2021[402] - Stock-based compensation expense was $2.7 million in FY2022, $2.4 million in FY2021, and $1.3 million in FY2020[383] Common Stock Outstanding (as of August 31, in thousands) | | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Beginning | 20,142 | 19,923 | 17,592 | | Issued | 119 | 218 | 2,331 | | End | 20,260 | 20,142 | 19,923 | Stock Options Outstanding (as of August 31, 2022, in thousands) | Transactions During Fiscal Year 2022 | Number of Options | Exercise Price Per Share | | :--- | :--- | :--- | | Outstanding, August 31, 2021 | 1,184 | $25.63 | | Granted | 255 | $42.13 | | Exercised | (104) | $16.15 | | Canceled/Forfeited | (90) | $42.30 | | Outstanding, August 31, 2022 | 1,245 | $28.61 | NOTE 9 – INCOME TAXES The effective tax rate was 17.4% in FY2022, influenced by R&D credits and foreign tax items - Federal income tax returns for fiscal years 2019-2021 and state tax returns for fiscal years 2018-2021 are open for audit[417] Income Tax Provision (Years Ended August 31, in thousands) | (in thousands) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Current | $2,901 | $1,931 | $2,615 | | Deferred | (269) | (628) | (560) | | Total | $2,632 | $1,303 | $2,055 | Effective Income Tax Rate Reconciliation (Years Ended August 31) | | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Federal statutory tax rate | 21.0 % | 21.0 % | 21.0 % | | State taxes, net of federal benefit | 3.2 | 2.0 | 4.1 | | Stock-based compensation | 0.6 | (6.8) | (1.2) | | R&D credit | (2.2) | (1.6) | (2.8) | | Foreign-tax-related differences | (3.2) | (2.6) | (1.4) | | Total | 17.4 % | 11.8 % | 18.0 % | NOTE 10 – CONCENTRATIONS AND UNCERTAINTIES The company faces credit risk, moderate customer concentration, and operates in a competitive market - The Company holds cash and cash equivalents at banks, with balances often exceeding FDIC insured limits, and is exposed to credit risk from trade accounts receivable[419] - International sales represented 30% of revenue in FY2022; The three largest customers accounted for 5%, 3%, and 3% of revenue in FY2022[420] - The biosimulation market is highly competitive and rapidly changing, impacting the Company's ability to develop new products and find distribution channels[422] NOTE 11 – SEGMENT REPORTING The company operates in two segments, Software and Services, with different revenue and margin profiles - The Company has two reportable segments: Software and Services, with performance reviewed based on revenue and gross profit[423][424] - Software and Services represented 61% and 39% of total revenue, respectively, in FY2022[426] Segment Results (Years Ended August 31, 2022, in thousands) | (in thousands) | Software | Services | Total | | :--- | :--- | :--- | :--- | | Revenues | $32,642 | $21,264 | $53,906 | | Cost of revenues | 3,060 | 7,762 | 10,822 | | Gross profit | $29,582 | $13,502 | $43,084 | | Gross margin | 91 % | 63 % | 80 % | NOTE 12 – EMPLOYEE BENEFIT PLAN The company offers a 401(k) plan with matching contributions for eligible employees - The Company contributes 100% of employee elective deferrals to its 401(k) Plan, up to 4% of total compensation[429] 401(k) Contributions (Fiscal Years, in millions) | Fiscal Year | Contribution | | :--- | :--- | | 2022 | $0.6 | | 2021 | $0.5 | | 2020 | $0.5 | NOTE 13 – ACQUISITION The company completed all payments related to the 2020 acquisition of Lixoft - The Company acquired Lixoft on April 1, 2020, for up to $16.5 million, consisting of cash and unregistered common stock[431] - All holdback and earnout payments related to the Lixoft acquisition were completed by May 2022[431] Lixoft Acquisition Purchase Price Allocation (in thousands) | (in thousands) | Amount | | :--- | :--- | | Assets acquired, including cash of $3,799 and accounts receivable of $629 | $5,007 | | Developed technologies acquired | 8,010 | | Estimated value of intangible assets acquired | 4,160 | | Estimated goodwill acquired | 2,534 | | Liabilities assumed | (1,118)| | Total consideration | $18,593| NOTE 14 - SUBSEQUENT EVENTS A quarterly cash dividend was declared subsequent to the fiscal year-end - A quarterly cash dividend of $0.06 per share ($1.2 million total) was declared on October 20, 2022, for distribution on November 7, 2022[433]