SIMULATIONS PLUS, INC. 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
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
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.
Simulation Plus acquired
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
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
27 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
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
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
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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
Our ESG highlights as of the fiscal year ended
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
We will continue to monitor mandates, guidelines and recommendations issued by
the
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, ourBuffalo 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.
Energy (LCE) is the locally run power program created by the
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. 29
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
an estimated one-half of our employees originate from countries outside the
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 theAmerican 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
o
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.
30 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 theUnited 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
(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
Cost of Revenues
Cost of revenues decreased by approximately
Gross Margin
Gross margin increased by
Overall gross margin percentage increased by approximately 3% to 81% for the
three months ended
Selling, General and Administrative Expenses
Selling, general, and administrative expenses increased by approximately
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
Other Income/Expense
Total other expense was
Provision for Income Taxes
Provision for income taxes was
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Comparison of Nine Months Ended
(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
Cost of Revenues
Cost of revenues decreased by approximately
Gross Margin
Gross margin increased
Overall gross margin percentage increased by 4% to 79% for the nine months ended
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Selling, General and Administrative Expenses
Selling, general, and administrative expenses increased by approximately
The increase in Selling, general, and administrative expense was primarily due to the following:
· Salaries and wages increased by
salaries, bonuses, stock-related compensation, and severance costs, as well
as an increase in headcount;
· Payroll tax expense increased
wages;
· These were offset by a decrease in consulting fees of
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
Other Income/Expense
Total other expense was
Provision for Income Taxes
The provision for income taxes was
Segment Results of Operations
Comparison of Three Months Ended
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
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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
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
For the three months ended
Cognigen
For the three months ended
DILIsym
For the three months ended
Lixoft
For the three months ended
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Comparison of Nine Months Ended
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
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
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
36Simulations Plus
For the nine months ended
Cognigen
For the nine months ended
DILIsym
For the nine months ended
Lixoft
For the nine months ended
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
On
As of
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
Net cash provided by operating activities was
Investing Activities
Cash provided by investing activities during the nine months ended
Financing Activities
For the nine months ended
38Cash and Working Capital
Cash and cash equivalents were
At
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
(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.
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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
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.
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