Simulations Plus Inc.
07/15/2025 | Press release | Distributed by Public on 07/15/2025 06:02
Quarterly Report for Quarter Ending May 31, 2025 (Form 10-Q)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Executive Overview
Our clients face many challenges. Developing new therapies is time-consuming and expensive, requiring an average of 10-15 years and an average cost of approximately $1.3-$2.8 billion to develop a single drug. Drug sponsors must prioritize not only efficacy and safety of the drug, but also issues like drug-drug interactions, inclusion of patients representative of the indicated population, regulatory approvals, minimization of animal testing, safety and compliance during clinical trials, and commercial success.
Our model-informed drug development ("MIDD") software and services allow clients to use modeling and simulation to accelerate drug development, reduce the costs of R&D, comply with regulatory guidance and best practices, and increase confidence in the safety and efficacy of their drugs and biologics. Our adaptive learning solutions support the success of clinical trials by accelerating recruitment of an appropriate patient population, increasing retention of participants, and by driving competency and compliance with trial protocols, while our medical communications solutions provide support in obtaining regulatory approval and commercialization of drugs.
The Company was previously headquartered in Southern California; however, in support of the Company's remote work culture and plan to reduce excess office space to achieve its carbon footprint reduction targets, the Company fully exited four office locations in Lancaster, California; Raleigh, North Carolina; Buffalo, New York; and Pittsburgh, Pennsylvania. As a result, the company moved its headquarters from Lancaster, California, to Research Triangle Park, North Carolina, and also maintains a European office in Paris, France.
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, 2024, filed with the Securities and Exchange Commission ("SEC") on October 30, 2024, 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.
Our historical results are not necessarily indicative of the results that may be expected for any period in the future.
Results of Operations
Comparison of Three Months Ended May 31, 2025, and May 31, 2024
| (in thousands) | Three Months Ended | % of Revenue | ||||||||||||||||||||||||||||||||||||
| May 31, 2025 | May 31, 2024 | May 31, 2025 | May 31, 2024 | $ Change | % Change | |||||||||||||||||||||||||||||||||
| Revenue | $ | 20,363 | $ | 18,544 | 100 | % | 100 | % | $ | 1,819 | 10 | % | ||||||||||||||||||||||||||
| Cost of revenue | 7,331 | 5,287 | 36 | % | 29 | % | 2,044 | 39 | % | |||||||||||||||||||||||||||||
| Gross profit | 13,032 | 13,257 | 64 | % | 71 | % | (225) | -2 | % | |||||||||||||||||||||||||||||
| Research and development | 1,216 | 1,300 | 6 | % | 7 | % | (84) | -6 | % | |||||||||||||||||||||||||||||
| Sales and marketing | 2,680 | 2,399 | 13 | % | 13 | % | 281 | 12 | % | |||||||||||||||||||||||||||||
| General and administrative | 6,141 | 7,678 | 30 | % | 41 | % | (1,537) | -20 | % | |||||||||||||||||||||||||||||
| Impairments | 77,221 | - | 379 | % | NM | 77,221 | NM | |||||||||||||||||||||||||||||||
| Total operating expenses | 87,258 | 11,377 | 429 | % | 61 | % | 75,881 | 667 | % | |||||||||||||||||||||||||||||
| (Loss) Income from operations | (74,226) | 1,880 | -365 | % | 10 | % | (76,106) | -4,048 | % | |||||||||||||||||||||||||||||
| Other income, net | 182 | 2,010 | 1 | % | 11 | % | (1,828) | -91 | % | |||||||||||||||||||||||||||||
| (Loss) income before income taxes | (74,044) | 3,890 | -364 | % | 21 | % | (77,934) | -2,003 | % | |||||||||||||||||||||||||||||
| Income tax benefit (expense) | 6,727 | (753) | 33 | % | -4 | % | 7,480 | 993 | % | |||||||||||||||||||||||||||||
| Net (loss) income | $ | (67,317) | $ | 3,137 | -331 | % | 17 | % | $ | (70,454) | -2,246 | % | ||||||||||||||||||||||||||
Revenues
Revenues increased by $1.8 million, or 10%, to $20.4 million for the three months ended May 31, 2025, compared to $18.5 million for the three months ended May 31, 2024. This increase is primarily due to a $0.7 million, or 6%, in software-related revenue and a $1.1 million, or 17%, increase in service-related revenue when compared to the three months ended May 31, 2024. The software-related revenue increase of $0.7 million, or 6%, compared to the three months ended May 31, 2024, was primarily due to additional revenue from the Pro-ficiency acquisition of $0.4 million. The service-related revenue increase of $1.1 million or 17%, compared to the three months ended May 31, 2024, was primarily due to additional revenue from the Pro-ficiency acquisition of $2.0 million; however this was partially offset by a lower number of insufficient actionable projects and lower utilization from scientific staff.
Cost of revenues
Cost of revenues increased by $2.0 million, or 39%, for the three months ended May 31, 2025, compared to the three months ended May 31, 2024. This increase is primarily due to a $1.1 million or 81%, increase in software-related cost and a $0.9 million or 23%, increase in service-related costs. The software-related costs increase of $1.1 million or 81%, compared to the three months ended May 31, 2024, was primarily due to additional amortization of $0.8 million as a result of the acquisition of Pro-ficiency and $0.3 million of higher amortization of capitalized software cost driven by the release of GastroPlus in May 2024. The service-related costs increase of $0.9 million or 23%, compared to the three months ended May 31, 2024, was primarily due to additional costs from the Pro-ficiency acquisition of $1.6 million, and a $1.0 million shift from G&A expense to cost of revenues, due to the FY24 reorganization, partially offset by $1.3 million of lower accrued bonuses due to Company performance, lower stock compensation expense of $0.2 million, and lower cost of revenues of $0.2 million due to lower revenues.
Gross profit
Gross profit decreased marginally to $13.0 million from $13.3 million, or 1.7% for the three months ended May 31, 2025, and May 31, 2024. The gross profit decreased modestly in our software business by $0.4 million, or 4%, and increased moderately for our services business by $0.2 million, or 8%, for the three months ended May 31, 2025, compared to the three months ended May 31, 2024.
Overall gross margin percentage was 64% and 71% for the three months ended May 31, 2025 and 2024, respectively, due to the factors described above.
Research and development
We incurred $2.1 million of research and development costs during the three months ended May 31, 2025. Of this amount, $0.9 million was capitalized as part of capitalized software development costs, and $1.2 million was expensed. We incurred $2.1 million of research and development costs during the three months ended May 31, 2024. Of this amount, $0.8 million was capitalized, and $1.3 million was expensed. Research and development spend decreased by $0.1 million, or 2%, for the three months ended May 31, 2025, compared to the three months ended May 31, 2024.
Sales and marketing expenses
Sales and marketing expenses increased by $0.3 million, or 12%, to $2.7 million for the three months ended May 31, 2025, compared to $2.4 million for the three months ended May 31, 2024. The increase for the three months ended May 31, 2025, was primarily due to a $0.5 million increase in expenses related to the acquisition of Pro-ficiency, partially offset by lower stock compensation of $0.1 million and lower sales commissions of $0.1 million.
General, and administrative expenses
General, and administrative ("G&A") expenses decreased by $1.5 million, or 20%, to $6.1 million for the three months ended May 31, 2025, compared to $7.7 million for the three months ended May 31, 2024. The decrease is primarily driven by a $1.0 million shift from G&A expense to cost of revenues, due to the FY24 reorganization, reduction in bonus expense of $0.9 million, lower travel and entertainment expenses of $0.1 million, partially offset by $0.6 million expense related to a company wide employee summit.
Impairments
During the third quarter of 2025, the Company identified the underperformance of revenue at ALI and MC relative to forecasts utilized in the purchase price allocation and the significant stock price decline in relative terms and in comparison to peers as a triggering event as of May 31, 2025, indicating goodwill, other intangibles and long-lived assets may be impaired. As a result of the impairment test performed, the Company determined goodwill, other intangibles and certain long-lived assets were impaired for its PBPK Services, QSP Software, QSP Services, ALI/MC Software and MC Services reporting units and recorded impairment charges of $0.3 million, $2.7 million, $2.2 million, $33.6 million and $38.4 million, respectively. No impairment was recognized as of May 31, 2024.
Other income
Total other income was $0.2 million for the three months ended May 31, 2025, compared to total other income of $2.0 million for the three months ended May 31, 2024. Interest income decreased by $1.4 million due to the use of cash from investment in debt securities to acquire Pro-ficiency and other income decreased by $0.6 million due to changes in the fair value of the earnout liability related to the Immunetrics acquisition. The fair value of the earnout liability decreased, as no earnout payment was earned in the second earnout measurement period.
Provision for income taxes
The benefit for income taxes was $6.7 million for the three months ended May 31, 2025, compared to an expense of $0.8 million for the three months ended May 31, 2024. The Company tax rate decreased to 9.1% for the three months ended May 31, 2025, when compared to 19.4% for the three months ended May 31, 2024. The decrease in the tax rate is primarily due to discrete expenses recognized during the three months ended May 31, 2025.
Results of Operations
Comparison of Nine Months Ended May 31, 2025 and May 31, 2024
| (in thousands) | Nine Months Ended | % of Revenue | |||||||||||||||||||||||||||
| May 31, 2025 | May 31, 2024 | May 31, 2025 | May 31, 2024 | $ Change | % Change | ||||||||||||||||||||||||
| Revenue | $ | 61,719 | $ | 51,349 | 100 | % | 100 | % | $ | 10,370 | 20 | % | |||||||||||||||||
| Cost of revenue | 25,342 | 15,023 | 41 | % | 29 | % | 10,319 | 69 | % | ||||||||||||||||||||
| Gross profit | 36,377 | 36,326 | 59 | % | 71 | % | 51 | 0 | % | ||||||||||||||||||||
| Research and development | 5,207 | 3,829 | 8 | % | 7 | % | 1,378 | 36 | % | ||||||||||||||||||||
| Sales and marketing | 9,248 | 6,337 | 15 | % | 12 | % | 2,911 | 46 | % | ||||||||||||||||||||
| General and administrative | 16,089 | 18,878 | 26 | % | 37 | % | (2,789) | -15 | % | ||||||||||||||||||||
| Impairments | 77,221 | - | 125 | % | NM | 77,221 | NM | ||||||||||||||||||||||
| Total operating expenses | 107,765 | 29,044 | 175 | % | 57 | % | 78,721 | 271 | % | ||||||||||||||||||||
| (Loss) income from operations | (71,388) | 7,282 | -116 | % | 14 | % | (78,670) | -1,080 | % | ||||||||||||||||||||
| Other income, net | 1,122 | 4,266 | 2 | % | 8 | % | (3,144) | -74 | % | ||||||||||||||||||||
| (Loss) income before income taxes | (70,266) | 11,548 | -114 | % | 22 | % | (81,814) | -708 | % | ||||||||||||||||||||
| Income tax benefit | 6,229 | (2,437) | 10 | % | -5 | % | 8,666 | -356 | % | ||||||||||||||||||||
| Net (loss) income | $ | (64,037) | $ | 9,111 | -104 | % | 18 | % | $ | (73,148) | -803 | % | |||||||||||||||||
Revenues
Revenues increased by $10.4 million, or 20%, to $61.7 million for the nine months ended May 31, 2025, compared to $51.3 million for the nine months ended May 31, 2024. This increase is primarily due to a $5.7 million, or 18%, increase in software-related revenue and a $4.7 million, or 23%, increase in service-related revenue when compared to the nine months ended May 31, 2024. The software-related revenue increase of $5.7 million, or 18%, compared to the nine months ended May 31, 2024, was primarily due to additional revenue from the Pro-ficiency acquisition of $3.0 million, higher revenues from CPP of $1.0 million and higher revenues from QSP of $0.9 million as perpetual licenses sales increased. The service-related revenue increase of $4.7 million, or 23%, compared to the nine months ended May 31, 2024, was primarily due to additional revenue from the Pro-ficiency acquisition of $6.2 million offset by lower revenue from PBPK of $0.8 million and lower revenue from QSP of $0.8 million due to soft market conditions.
Cost of revenues
Cost of revenues increased by $10.3 million, or 69%, for the nine months ended May 31, 2025, compared to the nine months ended May 31, 2024. This increase is primarily due to a $4.0 million or 108%, increase in software-related cost and a $6.3 million or 56%, increase in service-related costs. The software-related costs increase of $4.0 million or 108%, compared to the nine months ended May 31, 2024, was primarily due to additional cost of revenues of $3.0 million as a result of the Pro-ficiency acquisition out of which $2.5 million is from amortization of developed technology from the acquisition of Pro-ficiency, and $1.0 million of higher amortization of capitalized software cost driven by the release of GastroPlus in May 2024, offset by a decrease of $0.4 million of fully amortized TSRL in the third quarter of fiscal year 2024. The service-related costs increase of $6.3 million or 56%, compared to the nine months ended May 31, 2024, was primarily due to additional costs from the Pro-ficiency acquisition of $4.7 million, and $2.6 million shift from G&A expense to cost of revenues, due to the FY24 reorganization. The $2.6 million increase in cost of revenues corresponds to the $2.6 million decrease in general and administrative expenses discussed below, partially offset by $1.2 million of lower accrued bonuses due to Company performance.
Gross profit
Gross profit remained relatively flat at $36.4 million for the nine months ended May 31, 2025, compared to $36.3 million for the nine months ended May 31, 2024. Gross profit increased in our software business by $1.7 million, or 6%, and decreased for our services business by $1.6 million, or 18%, for the nine months ended May 31, 2025, compared to the nine months ended May 31, 2024.
Overall gross margin percentage was 59% and 71% for the nine months ended May 31, 2025 and 2024, respectively. Gross margin decline is largely attributable to the underperformance of Pro-ficiency revenues.
Research and development
We incurred $7.6 million of research and development costs during the nine months ended May 31, 2025. Of this amount, $2.4 million was capitalized as a part of capitalized software development costs and $5.2 million was expensed. We incurred $6.4 million of research and development costs during the nine months ended May 31, 2024. Of this amount, $2.6 million was capitalized and $3.8 million was expensed. Research and development spend increased by $1.2 million, or 18%, for the nine months ended May 31, 2025, compared to the nine months ended May 31, 2024, primarily due to an increase of $1.2 million from the acquisition of Pro-ficiency.
Sales and marketing expenses
Sales and marketing expenses increased by $2.9 million, or 46%, to $9.2 million for the nine months ended May 31, 2025, compared to $6.3 million for the nine months ended May 31, 2024. The increase was primarily due to an increase of $1.3 million from the acquisition of Pro-ficiency, $0.4 million in higher event-related spending to enhance brand awareness and customer engagement, increased headcount costs of $0.7 million, $0.3 million incurred to support our business development efforts, and increased sales commission to employees of $0.1 million.
General, and administrative expenses
General, and administrative ("G&A") expenses decreased by $2.8 million, or 15%, to $16.1 million for the nine months ended May 31, 2025, compared to $18.9 million for the nine months ended May 31, 2024. The decrease is primarily driven by a $2.6 million shift from G&A expense to cost of revenues, as referenced above, due to the FY24 reorganization and a decrease in bonus expense of $1.2 million, partially offset by an increase of $0.9 million from the acquisition of Pro-ficiency.
Impairments
During the third quarter of 2025, the Company identified the underperformance of revenue at ALI and MC relative to forecasts utilized in the purchase price allocation and the significant stock price decline in relative terms and in comparison to peers as a triggering event as of May 31, 2025, indicating goodwill, other intangibles and long-lived assets may be impaired. As a result of the impairment test performed, the Company determined goodwill, other intangibles and certain long-lived assets were impaired for its PBPK Services, QSP Software, QSP Services, ALI/MC Software and MC Services reporting units and recorded impairment charges of $0.3 million, $2.7 million, $2.2 million, $33.6 million and $38.4 million, respectively. No impairment was recognized in May 31, 2024.
Other income
Total other income was $1.1 million for the nine months ended May 31, 2025, compared to total other income of $4.3 million for the nine months ended May 31, 2024. $3.7 million of the decrease in interest income is attributable to the use of cash from investment in debt securities to acquire Pro-ficiency, partially offset by a $0.4 million increase due to the decrease in the fair value of the Immunetrics earnout liability, as no earnout payment is anticipated related to the second earnout measurement period.
Provision for income taxes
The benefit for income taxes was $6.2 million for the nine months ended May 31, 2025, compared to an expense of $2.4 million for the nine months ended May 31, 2024. The Company tax rate decreased to 8.9% mainly due to both the lower proportion of US taxable income vs France where the effective tax rate is significantly lower and tax benefits from discrete items, when compared to 21.1% for the nine months ended May 31, 2024.
Liquidity and Capital Resources
Our principal sources of capital have been cash flows from our operations. We expect existing cash, cash equivalents, short-term investments, cash generated by ongoing operations, and working capital will be sufficient to fund our operating activities and cash commitments for investing and financing activities and material capital expenditures for the next 12 months and beyond.
We continue to seek opportunities for strategic acquisitions, investments, and partnerships. If one or more strategic opportunities are identified, a substantial portion of our cash reserves may be required to complete the transaction. If we identify an attractive strategic opportunity that would require more cash to complete than we are willing or able to use from our cash reserves, we may consider financing options to complete the transaction, including obtaining loans or selling our securities. Additionally, our quest for strategic opportunities could result in a significant change to our liquidity position and/or our results of operations if any such transactions are completed.
Except as discussed elsewhere in this Quarterly Report, 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.
Cash, Cash Equivalents, and Investments
At May 31, 2025, the Company had $27.0 million in cash and cash equivalents, $1.5 million in short-term investments, and net working capital of $41.6 million. Short-term investments consist of highly liquid investment-grade fixed-income securities, diversified among industries and issuers. The investments are U.S.-dollar-denominated securities. Our fixed-income investments are exposed to interest rate risk and credit risk. The settlement risk related to these investments is insignificant, given that the short-term investments held are primarily highly liquid investment-grade fixed-income securities and can readily be converted to cash when needed.
Cash Flows
Operating Activities
Net cash provided by operating activities was $12.5 million for the nine months ended May 31, 2025. Our operating cash flows resulted in part from our net loss of $64.0 million, offset by cash payments we made to third parties for their services, employee compensation, and non-cash impairment charges. The changes in balances of assets of $4.1 million was primarily due to change in accounts receivables driven by higher revenues and invoicing that occurred closer to the end of the current quarter and higher prepaid income taxes of $1.2 million driven by timing of cash tax payments. The changes in liabilities balances of $0.8 million were primarily due to higher deferred revenues of $2.3 million driven by higher invoicing that occurred closer to the end of the current quarter and timing of revenue recognition, and higher accounts payable of $1.1 million driven by timing of payments, offset by lower bonus accrual of $2.4 million driven by lower business performance.
Net cash provided by operating activities was $11.7 million for the nine months ended May 31, 2024. Our operating cash flows resulted primarily from our net income of $9.1 million. In addition, $3.0 million related to changes in balances of operating assets and liabilities was added to net income and $5.6 million related to noncash charges was added to net income to reconcile to cash flow from operations.
Net cash provided by operating activities decreased by $0.9 million during the nine months ended May 31, 2025, compared to the nine months ended May 31, 2024. This decrease was driven by drivers as explained above for both comparative periods.
Investing Activities
Net cash provided by investing activities during the nine months ended May 31, 2025, was $5.4 million, primarily due from maturities of short-term investments of $14.0 million and sale of short-term investments of $1.0 million, partially offset by the purchase of short-term investments of $6.5 million and computer software development costs of $2.1 million,
Net cash provided by investing activities during the nine months ended May 31, 2024, was $45.5 million, primarily due to the sale of investments for $45.1 million and maturities of short-term investments for $71.1 million. This was partially offset by purchase of short-term investments of $67.2 million and computer software development costs of $2.5 million.
Financing Activities
Net cash used in financing activities during the nine months ended May 31, 2025, was $1.3 million, primarily due to cash settlement of $1.6 million from the holdback obligation related to the Immunetrics acquisition, offset by proceeds from the exercise of stock options totaling $0.3 million.
Net cash used in financing activities during nine months ended May 31, 2024, was $5.6 million, primarily due to dividend payments totaling $3.6 million and the first cash earnout payments in the aggregate amount of $2.5 million to the former equity holders and employees of Immunetrics, partially offset by proceeds from the exercise of stock options totaling $0.5 million.
Pro-ficiency Acquisition
On June 11, 2024, the Company entered into a Stock Purchase Agreement, by and among the Company, Pro-ficiency, each of the stockholders of Pro-ficiency (collectively, the "Sellers") and WRYP Stockholders Services, LLC, solely in its capacity as the Sellers' Representative (the "Purchase Agreement"). Pursuant to the Purchase Agreement, at closing on June 11, 2024, (the "Closing"), the Company purchased 100% of the issued and outstanding capital stock of Pro-ficiency (the "Acquisition") from the Sellers for an aggregate purchase price of $100 million in cash, subject to post-closing adjustments for net working capital, closing cash, indebtedness, and transaction expenses (collectively, the "Purchase Price"). An aggregate of $1 million of the Purchase Price was placed in escrow to fund payment obligations of the Sellers with respect to post-closing Purchase Price adjustments and post-Closing indemnification obligations of the Sellers, and another portion of the Purchase Price was deposited into an account to reimburse the Seller Representative for any fees and expenses incurred by the Seller Representative in performing its duties under the Purchase Agreement as the representative of the Sellers. As a result of the Acquisition, at Closing, Pro-ficiency became a wholly-owned subsidiary of the Company.
The Purchase Agreement contains standard representations, warranties and covenants, and other terms customary in similar transactions. Subject to the provisions of the Purchase Agreement, the Sellers have agreed to indemnify the Company and its affiliates for losses resulting from breaches of representations, warranties, and covenants of the Sellers and Pro-ficiency in the Purchase Agreement and for certain other specified matters. The Sellers' indemnification obligations are subject to various limitations, including, among other things, a deductible, caps, and time limitations.
In connection with the Acquisition, the Company obtained a customary buyer's representation and warranty insurance policy (the "R&W Insurance Policy") providing for up to $10 million in coverage in the case of breaches of representations and warranties of the Sellers and Pro-ficiency contained in the Purchase Agreement, subject to certain exclusions and an initial $0.5 million retention. The Company, on the one hand, and the Sellers, on the other hand, each bore one-half of the cost of obtaining the R&W Insurance Policy.
Immunetrics Acquisition
During the quarter ended February 28, 2025, the Company completed the final payment of $1.6 million related to the holdback liability from the Immunetrics acquisition. Additionally, based on Immunetrics' performance during the second earnout measurement period, the Company reassessed the fair value of the related contingent consideration and determined it to be zero as of February 28, 2025. In the quarter ending May 31, 2025, the Company reached a final settlement with the sellers, confirming that no earnout payment was due, consistent with the previously recorded assessment.
Share Repurchases
For the three and nine months ended May 31, 2025, and May 31, 2024, respectively, we did not repurchase any shares of Company stock. As of May 31, 2025, $30 million remains available for additional repurchases under our authorized repurchase program. However, we are not obligated to repurchase any additional shares, and the timing, manner, price, and actual amount of further share repurchases will depend on a variety of factors, including stock price, market conditions, other capital management needs and opportunities, and corporate and regulatory considerations. The share repurchase program has no expiration date but may be terminated at any time at our Board of Directors' discretion.
Critical Accounting Estimates
Estimates
Our financial statements and accompanying notes are prepared in accordance with GAAP. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management's application of accounting policies. Actual results could differ from those estimates. Critical Accounting Estimates for us include revenue recognition, accounting for capitalized software development costs, accounting for intangible assets and goodwill, valuation of stock options, business acquisitions and accounting for income taxes.
Revenue Recognition
We generate revenue primarily from the sale of software licenses, providing consulting services, and customizing a software platform tailored to the pharmaceutical industry for drug development.
The Company determines revenue recognition through the following steps:
i.Identification of the contract, or contracts, with a customer
ii.Identification of the performance obligations in the contract
iii.Determination of the transaction price
iv.Allocation of the transaction price to the performance obligations in the contract
v.Recognition of revenue when, or as, the Company satisfies a performance obligation
The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance, and collectability of consideration is probable. Contracts generally have fixed pricing terms and are not subject to variable pricing. The Company considers the nature and significance of each specific performance obligation under a contract when allocating the proceeds under each contract. Accounting for contracts includes significant judgement in the estimation of hours/cost to be incurred on consulting contracts, and the de minimisnature of the post-sales costs associated with software sales.
Capitalized Computer Software Development Costs
Software development costs are capitalized in accordance with ASC 985-20, "Costs of Software to Be Sold, Leased, or Marketed." Capitalization of software development costs begins upon the establishment of technological feasibility and is discontinued when the product is available for sale. The establishment of technological feasibility and the ongoing assessment for recoverability of capitalized computer software development costs require considerable judgment by management with respect to certain external factors including, but not limited to, technological feasibility, anticipated future gross revenues, estimated economic life, and changes in software and hardware technologies. Capitalized software development costs are comprised primarily of salaries and direct payroll-related costs and the purchase of existing software to be used in the Company's software products. Total capitalized computer software development costs were $0.9 million and $0.8 million for the three months ended May 31, 2025, and May 31, 2024, respectively, and $2.4 million and $2.6 million for the nine months ended May 31, 2025, and May 31, 2024, respectively.
Amortization of capitalized computer software development costs is calculated on a product-by-product basis on the straight-line method over the estimated economic life of the products, not to exceed five years. Amortization of software development costs amounted to $0.8 million and $0.5 million, respectively, for the three months ended May 31, 2025, and May 31, 2024, respectively, and $2.4 million and $1.3 million for the nine months ended May 31, 2025, and May 31, 2024, respectively. We expect future amortization expense to vary due to variations in capitalized computer software development costs.
We test capitalized computer software development costs for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
Intangible Assets and Goodwill
The Company performs valuations of assets acquired and liabilities assumed on each acquisition accounted for as a business combination and recognizes the assets acquired and liabilities assumed at their acquisition-date fair value. Acquired intangible assets include customer relationships, software, trade names, and noncompete agreements. The Company determines the appropriate useful life by performing an analysis of expected cash flows based on historical experience of the acquired businesses. Intangible assets are amortized over their estimated useful lives using the straight-line method, which approximates the pattern in which the majority of the economic benefits are expected to be consumed.
Goodwill represents the excess of the cost of an acquired entity over the fair value of the acquired net assets. Goodwill is not amortized; instead, it is tested for impairment annually or when events or circumstances change that would indicate that goodwill might be impaired. Events or circumstances that could trigger an impairment review include, but are not limited to, a significant adverse change in legal factors or in the business climate, an adverse action or assessment by a regulator, unanticipated competition, a loss of key personnel, significant changes in the manner of the Company's use of the acquired assets or the strategy for the Company's overall business, significant negative industry or economic trends, or significant underperformance relative to expected historical or projected future results of operations.
Goodwill is tested for impairment at the reporting unit level, which is one level below or the same as an operating segment. As of May 31, 2025, the Company determined that it had nine reporting units: CHEM Software, PBPK Software, QSP Software, CPP Software, ALI/MC Software, PBPK Services, CPP Services, QSP Services, and ALI/MC Services.
As of May 31, 2025, the entire balance of goodwill was attributed to six of the Company's reporting units, CPP Software, CPP Services, QSP Software, QSP Services, ALI/MC Software, and MC Services. Intangible assets subject to amortization are reviewed for impairment whenever events or circumstances indicate that the carrying amount of these assets may not be recoverable. As a result of the quantitative impairment test performed, the Company determined goodwill was impaired for its QSP Software, ALI/MC Software and MC Services reporting units and recorded a goodwill impairment charge of $1.8 million, $13.3 million and $36.7 million, respectively during the period ended May 31, 2025. Such charges are recorded in Impairments on the condensed consolidated statements of operations and comprehensive (loss) income.
The Company recorded impairment charges for its indefinite lived intangible assets for its QSP Software and ALI/MC Software reporting units of $0.9 million and $4.6 million, respectfully during the period ended May 31, 2025. Such charges are recorded in Impairments on the condensed consolidated statements of operations and comprehensive (loss) income.
The Company recorded impairment charges for its long-lived assets for its PBPK Services, QSP Services, ALI/MC Software, and MC Services reporting units of $0.3 million, $2.2 million, $15.7 million and $1.7 million, respectively during the period ended May 31, 2025. Such charges are recorded in Impairments on the condensed consolidated statements of operations and comprehensive (loss) income.
No impairment losses were recorded during the three and nine months ended May 31, 2024, respectively.
Business Acquisitions
The Company accounted for the acquisitions using the acquisition method of accounting where the assets acquired and liabilities assumed are recognized based on their respective estimated fair values. The excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Determining the fair value of certain acquired assets and liabilities is subjective in nature and often involves the use of significant estimates and assumptions, including, but not limited to, the selection of appropriate valuation methodology, projected revenue, expenses, and cash flows, weighted-average cost of capital, discount rates, and estimates of terminal values. Business acquisitions are included in the Company's consolidated financial statements as of the date of the acquisition.
Research and Development Costs
R&D costs are charged to expense as incurred until technological feasibility has been established, or when the costs are for maintenance and minor modification of existing software products that do not add significant new capabilities to the products. These costs include salaries and benefits, laboratory experiments, and purchased software that was developed by other companies and incorporated into, or used in the development of, our final products.
Income Taxes
The Company accounts for income taxes in accordance with ASC 740-10, "Income Taxes," which requires the recognition of deferred tax assets and liabilities for expected future tax consequences of events that have been included in the financial statements or tax returns.
Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The provision for income taxes represents the tax payable for the period and the change during the period in deferred tax assets and liabilities.
Stock-Based Compensation
The Company accounts for stock options in accordance with ASC 718-10, "Compensation-Stock Compensation." Under this method, compensation costs include the estimated grant-date fair value of awards amortized over the options' vesting period. Stock-based compensation costs, not including shares issued to directors for services, were $1.4 million and $1.7 million, for the three months ended May 31, 2025, and May 31, 2024, respectively, and $4.7 million and $4.6 million for the nine months ended May 31, 2025, and May 31, 2024, respectively.
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