Simulations Plus, Inc. — FY2023 Form 10-K
Business context and reporting period. This is the annual report for the fiscal year ended August 31, 2023, not a standalone fourth-quarter filing. Simulations Plus develops drug discovery and development modeling and simulation software and provides scientific consulting. Software generated 61% of revenue and services 39%. The company acquired Immunetrics on June 16, 2023; its results are included only from the acquisition date.
Key financial results
| Metric | FY2023 | FY2022 | Change |
|---|---|---|---|
| Revenue | $59.6 million | $53.9 million | Up 11% |
| Gross profit / margin | $47.9 million / 80% | $43.1 million / 80% | Gross profit up 11% |
| Operating income | $8.7 million | $14.9 million | Down 41% |
| Net income | $10.0 million | $12.5 million | Down 20% |
| Diluted EPS | $0.49 | $0.60 | Down 18% |
| Operating cash flow | $21.9 million | $17.9 million | Up $4.0 million |
Approximate operating and net margins were 14.6% and 16.7%, respectively, versus 27.7% and 23.2% in FY2022. The net margin benefited from higher other income, including interest income; operating profitability declined as expenses grew faster than revenue.
- Revenue by business: Software revenue was $36.5 million, up 12%; services revenue was $23.1 million, up 8%. Software gross margin was 90% and services gross margin 65%.
- Expense drivers: Operating expenses rose 39% to $39.2 million. SG&A increased 39% to $34.7 million, including higher personnel costs and $3.0 million of acquisition-related costs. The company also recorded a $0.5 million impairment of the Cognigen trade name.
- Other income and taxes: Other income was $3.0 million, including $4.1 million of interest income, partly offset by foreign-exchange losses and a $0.7 million increase in contingent consideration. The effective tax rate was approximately 15%, compared with 17% in FY2022.
- Liquidity and obligations: At year-end, cash and cash equivalents were $57.5 million, short-term investments $57.9 million, and working capital $118.4 million. The balance sheet reports no conventional borrowings; it includes $6.6 million of Immunetrics-related contracts payable and $1.2 million of operating lease liabilities. The company believes available capital and expected operating cash flow will fund foreseeable needs.
- Cash deployment: Investing activities provided $7.4 million, reflecting investment maturities net of purchases and the Immunetrics acquisition. Financing activities used $23.3 million, including $20.0 million of share repurchases and $4.8 million of dividends.
Material changes and unusual items
Revenue growth reflected software license timing and foreign-exchange effects, as well as added Immunetrics services revenue. Operating income fell despite higher revenue and gross profit, primarily because of increased hiring and compensation, acquisition costs, and the Cognigen trade-name impairment. The $3.0 million of other income was substantially higher than FY2022, chiefly due to increased interest income. FY2023 services revenue included $1.5 million of government assistance for research and development costs.
Immunetrics consideration included approximately $13.7 million paid at closing, a $1.8 million holdback, and earnouts of up to $8.0 million tied to revenue milestones for calendar years 2023 and 2024. The company recorded $4.8 million of contingent consideration at year-end. An unaudited pro forma presentation, assuming the acquisition occurred September 1, 2021, reported FY2023 revenue of $63.1 million and net income of $11.4 million; these are not reported actual results.
Outlook, management commentary, and risks
Management provided no specific numerical revenue or earnings guidance in the supplied filing text. Its stated priorities include continued investment in research and development, customer collaborations, marketing and sales expansion, recruiting scientific staff, and strategic acquisitions. Management views adoption of modeling and simulation in drug development and regulatory processes as a growth driver, but cautions that new products may not achieve market acceptance.
- Key risks include competition, customer R&D budget reductions or industry consolidation, slow sales cycles, contract delays or cancellations, and reliance on acceptance of model-informed drug development.
- Other material exposures include recruiting and retaining specialized staff; software defects; cybersecurity, privacy, and reliance on internal hosting and AWS; foreign-currency movements; and potential acquisition integration costs, earnouts, or undisclosed liabilities.
- Revenue is seasonal, with the first fiscal quarter generally the weakest. International markets accounted for 31% of FY2023 revenue; the three largest customers contributed 6%, 4%, and 3%, respectively.
- The company paid quarterly dividends of $0.06 per share in FY2023, but future dividends remain at the board’s discretion. The $50 million repurchase authorization had $30 million remaining after the $20 million accelerated repurchase.
- No pending legal proceedings were reported. Management and the auditor concluded internal control over financial reporting was effective; the auditor issued unqualified opinions on the financial statements and controls.
Investor verification priorities
- Review whether recurring software renewals and services demand can sustain revenue growth, and distinguish acquired Immunetrics revenue from organic growth.
- Assess the drivers and sustainability of the sharp rise in SG&A and the decline in operating income and margins.
- Track Immunetrics performance against earnout milestones, the remaining holdback, integration costs, and any purchase-accounting updates.
- Examine the composition and maturities of short-term investments, including interest-rate exposure, and monitor cash use for dividends, repurchases, and acquisitions.
- Check consulting contract cost-to-complete estimates, customer and international revenue trends, and the treatment of government grant revenue.