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OFFON

SIMULATIONS PLUS, INC.

(SLP)
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SIMULATIONS PLUS : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

07/14/2021 | 04:08pm EDT

Forward-Looking Statements

This document and the documents incorporated in this document by reference contain forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact contained in this document and the materials accompanying this document are forward-looking statements.

The forward-looking statements are based on the beliefs of our management, as well as assumptions made by and information currently available to our management. Frequently, but not always, forward-looking statements are identified by the use of the future tense and by words such as "believes," expects," "anticipates," "intends," "will," "may," "could," "would," "projects," "continues," "estimates" or similar expressions. Forward-looking statements are not guarantees of future performance and actual results could differ materially from those indicated by the forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause our or our industry's actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by the forward-looking statements.

The forward-looking statements contained or incorporated by reference in this document are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended ("Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act") and are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. These statements include declarations regarding our plans, intentions, beliefs, or current expectations.

Among the important factors that could cause actual results to differ materially from those indicated by forward-looking statements are the risks and uncertainties described under "Risk Factors" in our Annual Report on Form 10-K for the year ended August 31, 2020 filed with the Securities and Exchange Commission ("SEC") on November 16, 2020 and elsewhere in this document and in our other filings with the SEC.

Forward-looking statements are expressly qualified in their entirety by this cautionary statement. The forward-looking statements included in this document are made as of the date of this document and we do not undertake any obligation to update forward-looking statements to reflect new information, subsequent events, or otherwise.



General



BUSINESS



OVERVIEW


Simulations Plus, Inc., incorporated in 1996, is a premier developer of modeling and simulation software for drug discovery and development, including the prediction of properties of molecules utilizing artificial-intelligence- and machine-learning-based technology. We also provide consulting services ranging from early drug discovery through preclinical and clinical trial development to regulatory submissions in support of product approval. Our software and consulting services are provided to major pharmaceutical, biotechnology, agrochemical, cosmetics, and food industry companies and to academic and regulatory agencies worldwide for use in the conduct of industry-based research. SLP is headquartered in Southern California, with offices in Buffalo, NY, Research Triangle Park, NC, and Paris, France. Our common stock trades on the Nasdaq Global Select Market under the symbol "SLP".

We are a global leader focused on improving the ways scientists use knowledge and data to predict the properties and outcomes of pharmaceutical and biotechnology agents by providing a wide range of early discovery, preclinical, and clinical consulting services and software. Our innovations in integrating new and existing science in medicinal and computational chemistry, pharmaceutical science, biology, physiology, and machine learning into our software have enabled us to be a leading software provider for physiologically based pharmacokinetics "(PBPK") modeling and simulation, pharmacometric modeling and simulation, prediction of molecular properties from structure, and prediction of the propensity of drugs to induce liver injury or to treat nonalcoholic fatty liver disease. Our scientific consulting staff draw upon extensive experience across multiple therapeutic areas and a full range of modeling and simulation techniques to assist our clients across the full spectrum of drug development.







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We generate revenue by delivering relevant, cost-effective software and creative and insightful consulting services. Pharmaceutical and biotechnology companies use our software programs and scientific consulting services to guide early drug discovery (molecule design screening and lead optimization), preclinical, and clinical development programs, including using our software products and services to enhance their understanding of the properties of potential new medicines and to use emerging data to improve formulations, select and justify dosing regimens, support the generics industry, optimize clinical trial designs, and simulate outcomes in special populations, such as in elderly and pediatric patients.

Simulations Plus acquired Cognigen Corporation (Cognigen) as a wholly owned subsidiary in September 2014. Cognigen was originally incorporated in 1992. Through the integration of Cognigen into Simulations Plus, Simulations Plus became a leading provider of population modeling and simulation contract research services for the pharmaceutical and biotechnology industries. Our clinical-pharmacology-based consulting services include pharmacokinetic and pharmacodynamic modeling, clinical trial simulations, data programming, and technical writing services in support of regulatory submissions. We have also developed software for harnessing cloud-based computing in support of modeling and simulation activities and secure data archiving, and we provide consulting services to improve interdisciplinary collaborations and research and development productivity.

Simulation Plus acquired DILIsym Services, Inc. (DILIsym) as a wholly owned subsidiary in June 2017. The acquisition of DILIsym positioned us as the leading provider of Drug Induced Liver Injury (DILI) modeling and simulation software and related scientific consulting services. In addition to the DILIsym® software for analysis of potential drug-induced liver injury, DILIsym also has developed a simulation program for analyzing nonalcoholic fatty liver disease (NAFLD) called NAFLDsym™. Both the DILIsym and NAFLDsym software programs require outputs from PBPK software as inputs. Outputs generated by the GastroPlus™ PBPK software that are required by DILIsym software can be automatically mapped to DILIsym applications; thus, the integration of these technologies streamlines the analysis of the potential for drug-induced liver injury for new drug compounds and for investigating the potential for new therapeutic agents to treat NAFLD. Since the acquisition, DILIsym has applied its mechanistic modeling resources in other disease areas including idiopathic pulmonary fibrosis (IPF).

Simulations Plus acquired Lixoft as a wholly owned subsidiary in April 2020. Lixoft brings to Simulations Plus its powerful software products, Monolix, Simulx, and PKanalix, which can take modeling projects from data exploration to clinical trial simulations. In addition, Lixoft provides training and focused consulting services which can accelerate pharmacometric studies. Lixoft's technologies were developed as a result of a research program led by the French national research institute for digital science and technology (Inria) on nonlinear mixed effect models for advanced population analysis, pharmacometrics, pre-clinical, and clinical trial modeling and simulation. Lixoft continues to work with Inria.



PRODUCTS



General


We currently offer eleven software products for pharmaceutical research and development: five simulation programs that provide time-dependent results based on solving large sets of differential equations: GastroPlus; DDDPlus™; MembranePlus™; DILIsym; and NAFLDsym®; three programs that are based on predicting and analyzing static (not time-dependent) properties of chemicals: ADMET Predictor; MedChem Designer™; and MedChem Studio™ (the combination of ADMET Predictor, MedChem Designer, and MedChem Studio is called our ADMET Design Suite); a program which is designed for rapid clinical trial data analysis and regulatory submissions called PKPlus™; a cloud-based communication and collaboration platform for exploratory data analysis, population PK/PD modeling and reporting called KIWITM; and in April 2020 with the acquisition of Lixoft, we added the Monolix Suite of products - a modeling and simulation solution that allows population analyses, especially for pharmacokinetic-pharmacodynamic ('PKPD") analyses.




Software business



Our software business represented 61% of our total revenue during the first nine months of fiscal year 2021, and was primarily generated by the following products:




GastroPlus®

Our flagship product, originally introduced in 1998, and currently our largest single source of software revenue, is GastroPlus. GastroPlus mechanistically simulates the absorption, pharmacokinetics, pharmacodynamics, and drug-drug interactions (DDI) of compounds administered to humans and animals and is currently one of the most widely used commercial software of its type by industry, the U.S. Food and Drug Administration (FDA), the U.S. National Institutes of Health (NIH), and other government agencies in the U.S. and around the world. In February 2021, GastroPlus version 9.8.1, which included new mechanisms and updated documentation for key DDI standards models, was released.







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ADMET Predictor®

ADMET Predictor is a top-ranked, chemistry-based computer program that takes molecular structures (i.e., drawings of molecules represented in various formats) as inputs and uses our unique artificial intelligence/machine learning technologies to predict approximately 175 different properties for them at an average rate of over 200,000 compounds per hour on a modern laptop computer. This capability allows chemists to generate estimates for a large number of important molecular properties without the need to synthesize and test the molecules, as well as to generate estimates of unknown properties for molecules that have been synthesized, but for which only a limited number of experimental properties have been measured. In April 2021, ADMET Predictor® Version 10.2 (APX.2), which includes new capabilities in the High Throughput Pharmacokinetic (HTPK) Simulation Module and integrates machine learning and physiologically based pharmacokinetic (PBPK) technologies to guide lead selection, was released.

DILIsym®

The DILIsym software is a quantitative systems pharmacology ("QSP") program that was introduced in 2011. QSP software models are based on the fundamental understanding of complex biological pathways, disease processes, and drug mechanisms of action, integrating information from experiments and forming hypotheses for the next experimental model. DILIsym deals with the propensity for some drug molecules to induce temporary or permanent changes in biological functions within liver cells (hepatocytes) that can result in damage to the liver (i.e., drug-induced liver injury or DILI).

Monolix Suite ™

The Monolix Suite is a unique solution for modeling and simulation for pharmaceutical companies, biotechs, and hospitals. It supports population PKPD analyses and modeling, and clinical trial simulation. The extended MonolixSuite contains three main products: Monolix, Simulx, and PKanalix. These products are interconnected and interoperable, i.e., allowing users to go from one application to another one without changing anything in terms of data set or of biological models. Monolix 2020R1 was released in November 2020, which combines the most advanced algorithms with unique ease of use.



Consulting Services


Our consulting business represented 39% of our total revenue during the first nine months of fiscal year 2021, and was primarily generated by the following services:




PKPD

Our clinical-pharmacology-based consulting services include population pharmacokinetic and pharmacodynamic modeling, exposure-response analyses, clinical trial simulations, data programming, and technical writing services in support of regulatory submissions. In addition to modeling and simulation consulting services, we provide expertise and assistance with development-related decision making and support for regulatory interactions related to dose selection, clinical trial design, and understanding of the determinants of safety and efficacy for new medicines.

QSP/QST

We provide creative and insightful consulting services to support our quantitative systems pharmacology/quantitative systems toxicology ("QSP/QST") modeling focused on heart failure, liver safety, and radiation syndrome, as well as other areas.




PBPK

Beginning in 2014, the FDA and other regulatory agencies began to emphasize the need to encourage mechanistic PBPK modeling and simulation in clinical pharmacology, with final guidance documents completed in 2018. New draft guidance documents were released in October 2020 focused on additional applications for biopharmaceuticals. This has resulted in an increased need for us to provide consulting-related services to support this sophisticated technique. We support Model-Informed Drug Discovery and Development throughout the entire product lifecycle: from discovery through translation research and clinical development when an organization does not have the time or resources to use our software directly. More specifically, our clients seek out our consulting services to acquire scientific, therapeutic-area-related modeling and simulation expertise that they do not have in-house.







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ENVIRONMENTAL, SOCIAL, GOVERNANCE

We are committed to providing consistent and excellent return to our shareholders, all while maintaining a strong sense of good corporate citizenship that places a high value on the welfare of our employees, the communities in which we operate, and the world as a whole. We believe that effectively prioritizing and managing our Environmental, Social, and Governance ("ESG") topics will help create long-term value for our investors. We also believe that transparently disclosing the goals and relevant metrics related to our ESG programs will allow our stakeholders to be informed about our progress.

The topics covered in this section are provided by relevant topics identified through third-party ESG reporting frameworks, standards and metrics, such as the Sustainability Accounting Standards Board ("SASB"), and United Nations Sustainable Development Goals. More information on our key ESG programs, goals and commitments, and key metrics can be found on our website in our 2020 ESG Report.

Our ESG highlights as of the fiscal year ended August 31, 2020 include the following:

COVID-19 Response. With employee health and safety always a top priority, SLP proactively implemented a COVID-19 Contingency Plan in late February of 2020, prior to the state-issued stay-at-home orders. The comprehensive plan included information on prevention measures, travel restrictions, when and how to quarantine, the Families First Coronavirus Response Act, sick leave arrangements, including caring for family members affected by COVID-19, and workplace safety measures. At the time, as part of our ongoing flexible work initiative to give employees the option of telecommuting or working remotely, over 40 percent of our workforce was already working from home, however in response to the COVID-19 pandemic, we took quick action to ensure the safety of the rest of our workforce by supporting them in setting up home offices.

Since that initial plan was disseminated, additional updates from SLP management have included the most up-to-date information from the U.S. Department of State, CDC and WHO, and we have, at all times, encouraged employees to keep management informed of the need for any additional support. Our COVID-19 Contingency Plan communication and our SLP Policy for Returning to Work During the Coronavirus Pandemic specifies several CDC-recommended measures to mitigate the spread of COVID-19 in the workplace, including that masks be worn in the office, the importance of social and physical distancing and frequent hand-washing, and that employees are to remain home if feeling unwell and self-quarantine following any possible exposure to the virus. In addition to these measures, the company has increased sanitation procedures to ensure the safety of those employees who have resumed working in the office.

We will continue to monitor mandates, guidelines and recommendations issued by the CDC, WHO and local governments as they are released, and revise our COVID-19 Contingency Plan communication and our SLP Policy for Returning to Work During the Coronavirus Pandemic accordingly.

Our Commitment to the Environment

· We participate in a recycling program through our local waste management

   facility to divert all recyclable materials - bottles, cans, plastics, paper,
   and cardboard - from landfills. Across the company, our facilities provide for
   recycling, and our electronic waste is sent to local approved e-waste recycling
   centers.

· Our operations are built on continual improvements in efficiency and clean

   energy. From 2012 to 2019, our Buffalo division redesigned its data center to
   be more energy efficient as part of our ongoing and increasing commitment to
   reduce our environmental footprint and energy usage. An example of an upgrade
   is the installation of an uninterruptible power supply with hot and cold dial
   separation, and regulating the temperature and airflow through in-row cooling
   units with high efficiency fans based on cooling needs.

· We are also attentive to our energy use in our office operations. For instance,

our Lancaster division recently switched to renewable energy. Lancaster Choice

Energy (LCE) is the locally run power program created by the City of Lancaster,

and we now proudly participate in LCE's Smart Choice 100% renewable energy

program. Our decision to opt in to the program not only contributes to the

city's goal of becoming one of the world's first net-zero cities, but also

reflects SLP's dedication to creating positive impacts on the environment and

   local communities.






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Social Impact and Supporting our Communities

  · Our support for the academic community is broad and deep. We provide certain
    distinguished professors at academic institutions with free reference site
    licenses for nonprofit research and teaching, including providing free access
    to our software in university instruction. In addition to reference site
    licenses, academic and research institutions are entitled to a 95% discount
    off commercial license fees, and we offer students and professors either free
    or substantially reduced fees to attend our training courses and workshops. In
    recent years, SLP has sponsored several students with awards given by the
    Society of Toxicology.
  · We provide sponsorships to numerous conferences, symposia, and associations
    such as the American Conference on Pharmacometrics (ACoP), American
    Association of Pharmaceutical Scientists (AAPS), American Chemical Society
    (ACS), Controlled Release Society (CRS), Groupe de Métabolisme et
    Pharmacocinétique (GMP), and the Gordon Research Conferences.
  · At the local level, SLP promotes a culture of voluntarism, and we offer our
    employees the flexibility they need to participate, from sponsoring and
    participating in charity golf tournaments to volunteering to serve hot meals
    to the disadvantaged. In recent years, we have joined the global GivingTuesday
    movement and donated food, clothing, and financial support to several
    organizations that serve those in need in our communities.




Our People

· In 2020, we added an HR resource who is currently implementing unified and

    consistent policies, procedures, and employee training across all of our
    business units. In our recruitment and hiring, SLP embraces diversity with the
    knowledge that it can lead to greater innovation, and in our workplace, we
    foster inclusion so all employees feel part of the SLP team with equal access
    to all opportunities. One of our goals is to expand our focus on Diversity,
    Equity and Inclusion.

· Ethnic minority groups comprise more than one-third of our U.S. workforce and

an estimated one-half of our employees originate from countries outside the

United States. In terms of gender equity, women comprise approximately 47% of

our workforce and men comprise approximately 53%.

· Our commitment to community, to education, and to gender equity can best be

   summarized by how our Lancaster division has, for more than a decade, funded a
   summer scholarship to Tech Trek, a one-week residential science, technology,
   engineering and math (STEM) camp founded and operated by the American
   Association of University Women (AAUW) that is designed to inspire young women
   to attend college, to major in STEM fields, and to pursue STEM careers. Our own
   female scientists, who are excellent role models for these young women, have
   volunteered their time to personally present our Tech Trek scholarship each
   year.



Customer Privacy & Data Security

· SLP values customer privacy and the data we collect are only as needed to

   deliver company information, software products, and/or simulation and modeling
   consulting services. Our website includes our comprehensive Privacy Policy
   which details what and how data are collected, how data are used and stored,
   and the options for controlling personal data, including opting-out, accessing,
   updating, or deleting it.

· In recognition of the critical importance of Data Security to our operations -

i.e., Cybersecurity, Data Protection and Customer Privacy, in whole or in part

- the SLP executive leadership team conducts a thorough examination of all

elements of Data Security. Our obligation, across all divisions, is to ensure

the security, confidentiality, and privacy of our systems and information

assets, and to follow and be compliant with all relevant laws, regulations, and

guidelines, including, but not limited to:

o U.S. and State Data Privacy Laws

o The EU's General Data Protection Regulation (GDPR)

o Pharmaceutical Good Practice Quality Guidelines, including FDA 21 CFR Part 11

o Sarbanes-Oxley Act

· In 2020, we enacted several organizational changes to strengthen our Data

   Security, beginning with the creation of a corporate level Information
   Technology department, operating under Corporate Human Resources, to bring
   greater consistency, efficiency, and functional IT support across all
   divisions. The Director of Information Technology is responsible for
   centralizing divisional data processing, storage, and backup capabilities with
   the support of IT teams in place at each of our geographical locations. The
   Director of Information Technology is also responsible for ensuring that
   corporate IT policies are aligned and compliant with all applicable regulatory
   provisions and current best practices.

· Another addition to our corporate Data Security team is the Corporate Personal

   Data Protection Officer (PDPO). The PDPO is responsible for establishing and
   maintaining a Personal Data Privacy program at SLP that is compliant with
   applicable data privacy laws and legislation at the state and federal levels,
   as well as the EU's GDPR. The PDPO is leading our efforts to further build and
   implement a company-wide Personal Data Protection and Customer Privacy
   framework, protocols, and training.

· We also have an ongoing program of employee training in security awareness to

keep our staff fully informed about potential cyber threats - such as phishing

and malware - with periodic random phishing tests.






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Business Ethics

· From its inception, SLP has placed the highest emphasis on conducting its

   business with honesty and integrity. The highest ethical standards are expected
   of management and employees alike, and we continuously strive to create a
   corporate culture of honesty, integrity, and trust. Throughout our operations
   and in our dealings with SLP stakeholders, we endeavor to engender the
   confidence that the company's conduct is beyond reproach.

· The policies we have developed are intended to:

o Define and disseminate our core values and the legal requirements applicable to

good business conduct and ethical behavior.

o Offer guidance in understanding company policies, interpreting laws, and

handling company-related issues and situations.

o Foster clear, ethical behaviors and conduct to create an atmosphere of respect,

trust, cooperation, and collaboration throughout the company and its

activities.

o Provide clear and well-defined procedures by which employees can easily obtain

information, ask questions, and, if necessary, report any suspected violations

of any of our Business Ethics policies.

· In addition to abiding by all applicable laws, all management and employees are

   required to comply fully with our Corporate Code of Business Conduct and Ethics
   (CCBCE) which sets forth the company's values, business culture, and practices.




Human Rights

· SLP was founded on the belief that our software technologies could lead to

   important advances in healthcare, thereby improving patient outcomes, advancing
   and improving global health, and bettering the lives of humankind. This
   objective cannot be accomplished without a commitment to Human Rights, and SLP
   is committed to ensuring that, in our day-to-day business practices, in our
   business relationships, and in matters of employment, we will uphold our own
   principles as delineated in our Corporate Code of Business Conduct and Ethics.
   Furthermore, we support the principles set forth in the United Nations
   International Bill of Human Rights, specifically the Universal Declaration of
   Human Rights, and the ILO Declaration on Fundamental Principles and Rights at
   Work. As we evolve this policy, we will look to the UN Guiding Principles on
   Business and Human Rights (UNGPs) for guidance.




Summary Results of Operations



Comparison of Three Months Ended May 31, 2021 and 2020:



(in thousands)                                    Three Months Ended May 31,
                                      2021           2020         $ Change        % Change
Revenues                           $   12,777     $   12,298     $       479             4 %
Cost of revenues                        2,471          2,666            (195 )          (7)%
Gross margin                           10,306          9,632             674             7 %
Selling, general and
administrative                          5,094          5,023              71             1 %
Research and development                  670            752             (82 )         (11)%
Total operating expenses                5,764          5,775             (11 )             -
Income from operations                  4,542          3,857             685            18 %
Other income (expense), net               (51 )          (77 )            26           (34)%
Income before provision for
income taxes                            4,491          3,780             711            19 %
Provision for income taxes               (704 )         (844 )           140           (17)%
Net income                         $    3,787     $    2,936     $       851            29 %








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Revenues

Revenues increased by approximately $479 thousand or 4% to $12.8 million for the three months ended May 31, 2021, compared to consolidated revenue of approximately $12.3 million for the three months ended May 31, 2020. This increase is primarily due to a $1.4 million or 21% increase in consolidated software-related revenue, offset by a $1.0 million or 18% decrease in consolidated consulting and analytical study revenues when comparing the three months ended May 31, 2021 and 2020.

Cost of Revenues

Cost of revenues decreased by approximately $195 thousand, or 7%, to $2.5 million for the three months ended May 31, 2021, compared to approximately $2.7 million for the three months ended May 31, 2020. The decrease is primarily due to lower contract research organization fees for the DILIsym division.

Gross Margin

Gross margin increased by $674 thousand or 7% to $10.3 million for the three months ended May 31, 2021, compared to approximately $9.6 million for the three months ended May 31, 2020. The higher gross margin is primarily due to Simulations Plus division's gross margin increase of $1.1 million or 17%, as well as the addition of the Lixoft division, which contributed $284 thousand to the increase. The gross margins for the Cognigen and DILIsym Divisions decreased by $332 thousand and $345 thousand, respectively, for the quarter.

Overall gross margin percentage increased by approximately 3% to 81% for the three months ended May 31, 2021, from 78% for the three months period ended May 31, 2020.

Selling, General and Administrative Expenses

Selling, general, and administrative expenses increased by approximately $71 thousand, or 1% to approximately $5.1 million for the three months ended May 31, 2021 from $5.0 million for the three months ended May 31, 2020. The increase was primarily due to a $552 thousand increase in corporate salaries and bonuses and a $90 thousand increase in insurance costs related to higher liability-related insurance, offset by a decrease in professional and legal fees of approximately $535 thousand.

As a percent of revenues, consolidated selling, general, and administrative expenses decreased from 41% to 40% for the same comparative periods.

Research and Development Costs

Total research and development costs increased by $110 thousand for the three months ended May 31, 2021 compared to the three months ended May 31, 2020. During the third quarter of fiscal year 2021, we incurred approximately $1.5 million of research and development costs; of this amount, $800 thousand was capitalized and $670 thousand was expensed. For the three months ended May 31, 2020, we incurred approximately $1.4 million of research and development costs; of this amount, $606 thousand was capitalized and $752 thousand was expensed.

Other Income/Expense

Total other expense was $51 thousand for the three months ended May 31, 2021 compared to total other expense of $77 thousand for the three months ended May 31, 2020. The variance of $26 thousand is primarily due to increases in interest income from short-term investments and currency exchange gains, partially offset by an increase in the change in the valuation of contingent consideration.

Provision for Income Taxes

Provision for income taxes was $704 thousand for the three months ended May 31, 2021 compared to $844 thousand for the same period in the previous year. Our effective tax rate decreased 6.6% to 15.7% for the three months ended May 31, 2021 from 22.3% during the same period of the previous year primarily due to the disqualified disposition of options exercised.







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Comparison of Nine Months Ended May 31, 2021 and 2020:



(in thousands)                                      Nine Months Ended May 31,
                                      2021           2020         Change ($)       Change (%)
Revenues                           $   36,625     $   32,049     $      4,576             14 %
Cost of revenues                        7,815          7,975             (160 )           (2)%
Gross margin                           28,810         24,074            4,736             20 %
Selling, general and
administrative                         14,960         12,646            2,314             18 %
Research and development                2,771          2,026              745             37 %
Total operating expenses               17,731         14,672            3,059             21 %
Income from operations                 11,079          9,402            1,677             18 %
Other income (expense), net              (169 )          (53 )           (116 )          219 %
Income before provision for
income taxes                           10,910          9,349            1,561             17 %
Provision for income taxes             (1,433 )       (2,205 )            772            (35)%
Net income                         $    9,477     $    7,144     $      2,333             33 %




Revenues

Revenues increased by approximately $4.6 million or 14% to $36.6 million for the nine months ended May 31, 2021 compared to approximately $32.0 million for the nine months ended May 31, 2020. This increase is primarily due to a $5.4 million or 32% increase in consolidated software-related revenue, offset by a $846 thousand or 6% decrease in consolidated consulting and analytical study revenues when comparing the nine months ended May 31, 2021 and 2020.

Cost of Revenues

Cost of revenues decreased by approximately $160 thousand or 2% for the nine months ended May 31, 2021 compared to the nine months ended May 31, 2020. The decrease is primarily due to a decrease in labor-related costs and contract research organization fees totaling $446 thousand, partially offset by higher amortization of software development costs related to the purchase of Lixoft of $291 thousand.




Gross Margin

Gross margin increased $4.7 million or 20% to $28.8 million for the nine months ended May 31, 2021 compared to $24.1 million for the nine months ended May 31, 2020. The higher gross margin is primarily due to the addition of the Lixoft division, which contributed $2.7 million to the increase, as well as the Simulations Plus division's gross margin increase of $2.4 million or 16%. The Cognigen Division gross margin increased by $223 thousand or 5%. This was offset by a decrease in DILIsym Divisions' gross margin of $645 thousand or 16% for the year to date.

Overall gross margin percentage increased by 4% to 79% for the nine months ended May 31, 2021 from 75% for the nine months ended May 31, 2020.







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Selling, General and Administrative Expenses

Selling, general, and administrative expenses increased by approximately $2.3 million, or 18% to $15.0 million for the nine months ended May 31, 2021 from approximately $12.7 million for the nine months ended May 31, 2020.

The increase in Selling, general, and administrative expense was primarily due to the following:

· Salaries and wages increased by $2.4 million due to higher corporate

salaries, bonuses, stock-related compensation, and severance costs, as well

as an increase in headcount;

· Payroll tax expense increased $578 thousand due to higher headcount and

wages;

· These were offset by a decrease in consulting fees of $586 thousand

primarily related to the acquisition of Lixoft.

As a percent of revenues, Selling, general, and administrative expense increased from 39% to 41% for the same comparative periods.

Research and Development Costs

Total research and development costs increased by $1.4 million for the nine months ended May 31, 2021 compared to the nine months ended May 31, 2020. During the first three quarters of fiscal year 2021, we incurred approximately $5.1 million of research and development costs; of this amount, $2.3 million was capitalized and $2.8 million was expensed. For the nine months ended May 31, 2020 we incurred approximately $3.7 million of research and development costs; of this amount, $1.7 million was capitalized and $2.0 million was expensed.

Other Income/Expense

Total other expense was $169 thousand for the nine months ended May 31, 2021 compared to total other expense of $53 thousand for the nine months ended May 31, 2020. The variance of $116 thousand is primarily due to a change in the valuation of contingent consideration, partially offset by an increase in interest income and a currency exchange gain.

Provision for Income Taxes

The provision for income taxes was $1.4 million for the nine months ended May 31, 2021 compared to $2.2 million for the same period in the previous year. Our effective tax rate decreased 10.5% to 13.1% for the nine months ended May 31, 2021 from 23.6% during the same period of the previous year primarily due to the disqualified disposition of options exercised.



Segment Results of Operations


Comparison of Three Months Ended May 31, 2021 and 2020:



Revenues



(in thousands)                   Three Months Ended May 31,
                     2021         2020        Change ($)       Change (%)
Simulations Plus   $  7,916     $  6,728     $      1,188             18 %
Cognigen              2,536        3,039             (503 )          (17)%
DILIsym               1,331        1,909             (578 )          (30)%
Lixoft*                 994          622              372             60 %
Total              $ 12,777     $ 12,298     $        479              4 %



*Lixoft was acquired on April 1, 2020.







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Cost of Revenues



(in thousands)                 Three Months Ended  May 31,
                    2021        2020       Change ($)       Change (%)
Simulations Plus   $   715     $   594     $       121             20 %
Cognigen             1,161       1,332            (171 )          (13)%
DILIsym                414         647            (233 )          (36)%
Lixoft*                181          93              88             95 %
Total              $ 2,471     $ 2,666     $      (195 )           (7)%



*Lixoft was acquired on April 1, 2020.



Gross Margin



(in thousands)                   Three Months Ended May 31,
                     2021        2020        Change ($)       Change (%)
Simulations Plus   $  7,201     $ 6,134     $      1,067             17 %
Cognigen              1,375       1,707             (332 )          (19)%
DILIsym                 917       1,262             (345 )          (27)%
Lixoft*                 813         529              284             54 %
Total              $ 10,306     $ 9,632     $        674              7 %



*Lixoft was acquired on April 1, 2020.

Simulations Plus

For the three months ended May 31, 2021, the revenue increase of $1.2 million or 18%, compared to the three months ended May 31, 2020 was primarily due to higher sales from GastroPlus ($817 thousand) and ADMET Software ($277 thousand). Cost of revenue increased $121 thousand during the same periods and gross margin increased $1.1 million or 17%, primarily due to the increase in revenue.

Cognigen

For the three months ended May 31, 2021, the revenue decrease of $503 thousand or 17%, compared to the three months ended May 31, 2020 was primarily due to a decrease in grant revenue. Cost of revenues decreased $171 thousand or 13%, primarily due to a reduction in salaries, offset by an increase in subcontractor costs and bonus expense. Gross margin decreased $332 thousand or 19%.

DILIsym

For the three months ended May 31, 2021, the revenue decrease of $578 thousand or 30% compared to the three months ended May 31, 2020 was primarily due to lower revenue from consulting services of $445 thousand and lower grant revenue of $119 thousand. Cost of revenue decreased $233 thousand or 36%, primarily due to lower contract research organization fees. Gross margin decreased $345 thousand or 27%.




Lixoft

For the three months ended May 31, 2021, the revenue increase of $372 thousand or 60% compared to the three months ended May 31, 2020 was primarily due to the purchase of Lixoft on April 1, 2020. Software sales of the Monolix Suite generated 95% of total revenue and 5% was generated from consulting services. Cost of revenue and gross margin increases of $88 thousand or 95% and $284 thousand or 54%, respectively, were both primarily due to the purchase of Lixoft on April 1, 2020.







  35





Comparison of Nine Months Ended May 31, 2021 and 2020:



Revenues



(in thousands)                    Nine Months Ended May 31,
                     2021         2020        Change ($)       Change (%)
Simulations Plus   $ 19,994     $ 17,559     $      2,435              14%
Cognigen              7,987        8,176             (189 )           (2)%
DILIsym               4,817        5,692             (875 )          (15)%
Lixoft*               3,827          622            3,205             515%
Total              $ 36,625     $ 32,049     $      4,576              14%



*Lixoft was acquired on April 1, 2020.



Cost of Revenues



(in thousands)                  Nine Months Ended  May 31,
                    2021        2020       Change ($)       Change (%)
Simulations Plus   $ 2,199     $ 2,185     $        14               1%
Cognigen             3,531       3,943            (412 )          (10)%
DILIsym              1,524       1,754            (230 )          (13)%
Lixoft*                561          93             468             503%
Total              $ 7,815     $ 7,975     $      (160 )           (2)%



*Lixoft was acquired on April 1, 2020.



Gross Margin



(in thousands)                    Nine Months Ended May 31,
                     2021         2020        Change ($)       Change (%)
Simulations Plus   $ 17,795     $ 15,374     $      2,421              16%
Cognigen              4,456        4,233              223               5%
DILIsym               3,293        3,938             (645 )          (16)%
Lixoft*               3,266          529            2,737             517%
Total              $ 28,810     $ 24,074     $      4,736              20%



*Lixoft was acquired on April 1, 2020.







  36






Simulations Plus

For the nine months ended May 31, 2021, the revenue increase of $2.4 million or 14% compared to the nine months ended May 31, 2020 was primarily due to higher sales from GastroPlus ($1.7 million) and ADMET Software ($587 thousand). Cost of revenue increased slightly during the same periods, and gross margin increased $2.4 million or 16%, primarily due to the increase in revenue.

Cognigen

For the nine months ended May 31, 2021, the revenue decrease of $189 thousand or 2% compared to the nine months ended May 31, 2020 was primarily due to a decrease in grant revenue. Cost of revenue decreased $412 thousand or 10%, primarily due to a reduction in headcount, partially offset by an increase in bonus accrual and stock-based compensation during the same periods. Gross margin increased by approximately $223 thousand or 5%.

DILIsym

For the nine months ended May 31, 2021, the revenue decrease of $875 thousand or 15% compared to the nine months ended May 31, 2020, was primarily due to lower revenue from consulting services. Cost of revenue decreased $230 thousand or 13% during the same periods, primarily due to lower contract research organization fees. Gross margin decreased $645 thousand or 16%, primarily due to the decrease in revenue.




Lixoft

For the nine months ended May 31, 2021, the revenue increase of $3.2 million compared to the nine months ended May 31, 2020 was primarily due to the purchase of Lixoft on April 1, 2020. Software sales of the Monolix Suite generated 96% of total revenue and 4% was generated from consulting services. Cost of revenue increased $468 thousand, and gross margin increased $2.7 million primarily due to the purchase of Lixoft on April 1, 2020.

Liquidity and Capital Resources

Our principal sources of capital have been cash flows from our operations and a public offering. We have achieved continuous positive operating cash flow over the last eleven fiscal years.

In August 2020, we closed an underwritten public offering of 2,090,909 shares of our common stock to the public at $55.00 per share, which included the full exercise of the underwriters' option to purchase 272,727 additional shares of common stock. The aggregate gross proceeds to us from this offering were approximately $115 million, before deducting underwriting discounts and commissions; net proceeds were approximately $107.7 million. The offering was made pursuant to our automatic shelf registration statement on Form S-3 filed with the SEC on July 9, 2020.

On March 31, 2020, we entered into a Stock Purchase and Contribution Agreement (the "Agreement") with Lixoft. On April 1, 2020, we completed the acquisition of all outstanding equity interests of Lixoft pursuant to the terms of the Agreement, with Lixoft becoming our wholly owned subsidiary. We believe the combination of Simulations Plus and Lixoft provides substantial future potential based on the complementary strengths of each of the companies. Under the terms of the Agreement, we agreed to pay the former shareholders of Lixoft total consideration of up to $16.5 million, consisting of two-thirds cash and one-third newly issued, unregistered shares of our common stock. At closing, we paid the former shareholders of Lixoft a total of $10.8 million, comprised of cash in the amount of $9.5 million and the issuance of 111,682 shares of our common stock valued at $3.7 million, net of adjustments and a holdback for representations and warranties. In addition, we paid $3.5 million of excess working capital based on the March 31, 2020 financial statements of Lixoft. In addition, the Agreement calls for earnout payments up to an additional $5.5 million, two-thirds cash and one-third newly issued, unregistered shares of our common stock based on a revenue growth formula each year for the two years subsequent to April 1, 2020. The former shareholders can earn up to $2 million the first year and $3.5 million in year two. See Note 12, Acquisition, to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for a further description of the Agreement.

As of May 31, 2021, the Company had $58.8 million in cash and cash equivalents and $60.9 million in short-term investments.







  37





We believe that our existing capital and anticipated funds from operations will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for the foreseeable future. Thereafter, if cash generated from operations is insufficient to satisfy our capital requirements, we may draw from our revolving line of credit with the bank, or we may have to sell additional equity or debt securities or obtain expanded credit facilities. In the event such financing is needed in the future, there can be no assurance that such financing will be available to us, or, if available, that it will be in amounts and on terms acceptable to us. If cash flows from operations became insufficient to continue operations at the current level, and if no additional financing was obtained, then management would restructure the Company in a way to preserve its pharmaceutical business while maintaining expenses within operating cash flows.

We will continue to seek opportunities for strategic acquisitions. If one or more such acquisitions is identified, a substantial portion of our cash reserves may be required to complete it; however, we intend to maintain sufficient cash reserves after any acquisition to provide reasonable assurance that outside financing will not be necessary to continue operations. If we identify an attractive acquisition that would require more cash to complete than we are willing or able to use from our cash reserves, we will consider financing options to complete the acquisition, including obtaining loans and issuing additional securities.

We are not aware of any trends or demands, commitments, events or uncertainties that are reasonably likely to result in a decrease in liquidity of our assets. The trend over the last ten years has been increasing cash deposits from our operating cash flows, and we expect that trend to continue for the foreseeable future.




Cash Flows



Operating Activities

Net cash provided by operating activities was $10.9 million for the nine months ended May 31, 2021. Our operating cash flows resulted primarily from our net income of $9.5 million, which was generated by cash received from our customers, offset by cash payments we made to third parties for their services and employee compensation. In addition, net cash outflow from changes in balances of operating assets and liabilities was $5.4 million, offset by non-cash charges of $6.8 million. The change in operating assets and liabilities was primarily a result of an increase in accounts receivable.

Net cash provided by operating activities was $6.1 million for the nine months ended May 31, 2020. Our operating cash flows resulted primarily from our net income of $7.1 million, which was generated by cash received from our customers, offset by cash payments we made to third parties for their services and employee compensation. In addition, net cash outflow from changes in balance of operating assets and liabilities was $4.4 million, offset by non-cash charges of $3.4 million. The change in operating assets and liabilities was primarily a result of an increase in accounts receivable and accounts payable, offset by a decrease in billings in excess of revenue and prepaid income tax.



Investing Activities


Cash provided by investing activities during the nine months ended May 31, 2021 of $865 thousand was primarily due to the proceeds from the sale of short-term investments of 68.1 million, partially offset by the purchase of short-term investments of $64.0 million, computer software development costs of $2.3 million and property and equipment costs of $1.0 million. Cash used for investing activities during the nine months ended May 31, 2020 of $7.5 million was primarily due to costs associated with the acquisition of a subsidiary and the development of computer software, partially offset by cash received from the acquisition of the subsidiary.



Financing Activities


For the nine months ended May 31, 2021, net cash used in financing activities of $2.2 million, was primarily due to dividend payments totaling $3.6 million, partially offset by proceeds from the exercise of stock options totaling $1.4 million. Net cash used by financing activities for the comparable period in fiscal year 2020 of $2.7 million, was primarily due to dividend payments totaling $3.2 million, partially offset by proceeds of $0.5 million from the exercise of stock options.







  38






Cash and Working Capital



Cash and cash equivalents were $58.8 million as of May 31, 2021 compared to $49.2 million as of August 31, 2020.

At May 31, 2021, we had working capital of $131.4 million, a ratio of current assets to current liabilities of 18.9 and a ratio of debt to equity of 0.1. At August 31, 2020, we had working capital of $123.6 million, a ratio of current assets to current liabilities of 23.4 and a ratio of debt to equity of 0.1.

Based upon our current operating plans, we believe that our existing cash and cash equivalents, together with anticipated funds from operations, will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for the foreseeable future. Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially. We have based this estimate on assumptions that may prove to be wrong, and we could deplete our capital resources sooner than we expect.




Contractual Obligations



The following table provides aggregate information regarding our contractual obligations as of May 31, 2021:



(in thousands)                                  Payments due by period
                                                        2-3        4-5        More than
Contractual obligations:       Total      1 year       years      years        5 years

Operating lease obligations   $ 1,499     $   465     $   673     $  361     $         -
Contracts payable               6,428       3,333       3,095          -               -

Total                         $ 7,927     $ 3,798     $ 3,768     $  361     $         -



Known Trends of Uncertainties

Although we have not seen any significant reduction in revenues to date, we have seen some consolidation in the pharmaceutical industry during economic downturns. These consolidations have not had a negative effect on our total sales to that industry; however, should consolidations and downsizing in the industry continue to occur, those events could adversely impact our revenues and earnings going forward.

The world has been affected due to the COVID-19 pandemic. Though there has not been a substantial impact on sales revenues, until the pandemic has passed, there remains uncertainty as to the effect on our business in both the short and long term.

We believe that the need for improved productivity in the research and development activities directed toward developing new medicines will continue to result in increasing adoption of simulation and modeling tools such as those we produce. New product developments in the pharmaceutical business segments could result in increased revenues and earnings if they are accepted by our markets; however, there can be no assurances that new products will result in significant improvements to revenues or earnings. For competitive reasons, we do not disclose all of our new product development activities.







  39





Our continued quest for acquisitions could result in a significant change to revenues and earnings if one or more such acquisitions are completed.

The potential for growth in new markets (e.g., healthcare) is uncertain. We will continue to explore these opportunities until such time as we either generate sales or determine that resources would be more efficiently used elsewhere.



Critical Accounting Estimates


Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of the condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements, and the reported amounts of expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including those related to recoverability and useful lives of long-lived assets, stock compensation, valuation of derivative instruments, allowances, contingent consideration, contingent value rights, fixed payment arrangements and going concern. Management bases its estimates and judgments on historical experience and on various other factors, including the COVID-19 pandemic, that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The methods, estimates, and judgments used by us in applying these critical accounting policies have a significant impact on the results we report in our condensed consolidated financial statements. Our significant accounting policies and estimates are included in our Annual Report on Form 10-K for the fiscal year ended August 31, 2020, filed with the SEC on November 16, 2020.

Information regarding our significant accounting policies and estimates can also be found in Note 2, Significant Accounting Policies, to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

© Edgar Online, source Glimpses

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Sales 2021 44,8 M - -
Net income 2021 10,5 M - -
Net Debt 2021 - - -
P/E ratio 2021 87,3x
Yield 2021 -
Capitalization 888 M 888 M -
Capi. / Sales 2021 19,8x
Capi. / Sales 2022 17,0x
Nbr of Employees 133
Free-Float 77,7%
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Shawn M. O'Connor Chief Executive Officer
William W. Frederick Chief Financial Officer & Secretary
Walter S. Woltosz Chairman
Viera Lukacova Chief Scientist
David L. Ralph Independent Director
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