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Item 7. Management’s Discussion and Analysis

2022-10-28 compared with 2021-10-27 · 230 added, 526 removed, 54 unchanged (93% of the section changed)

ITEM 7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and

Analysis is intended to assist the reader in understanding our results of operations and financial condition.

Management’s Discussion

and Analysis is provided as a supplement to, and should be read in conjunction with, our audited consolidated financial statements beginning

on page F-1 of this Annual Report on Form 10-K.

This Annual Report on Form 10-K includes certain statements that may be deemed to be “forward-looking

statements” within the meaning of Section 27A of the Securities Act of 1933, as amended.

All statements, other than statements of

historical fact, included in this Annual Report on Form 10-K that address activities, events or developments that we expect, project,

believe, or anticipate will or may occur in the future, including matters having to do with expected and future revenue, our ability to

fund our operations and repay debt, business strategies, expansion and growth of operations and other such matters, are forward-looking

These statements are based on certain assumptions and analyses made by our management in light of its experience and its perception

of historical trends, current conditions, expected future developments, and other factors it believes are appropriate in the circumstances.

These statements are subject to a number of assumptions, risks and uncertainties, including general economic and business conditions,

the business opportunities (or lack thereof) that may be presented to and pursued by us, our performance on our current contracts and

our success in obtaining new contracts, our ability to attract and retain qualified employees, and other factors, many of which are beyond

You are cautioned that these forward-looking statements are not guarantees of future performance and those actual results

or developments may differ materially from those projected in such statements.

ITEM 7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis is intended to assist the reader in understanding our results of operations and financial condition.

Management’s Discussion and Analysis is provided as a supplement to, and should be read in conjunction with, our audited consolidated financial statements beginning on page F-1 of this Report.

This Report includes certain statements that may be deemed to be “forward-looking statements” within the meaning of Section 27A of the Securities Act.

All statements, other than statements of historical fact, included in this Report that address activities, events or developments that we expect, project, believe, or anticipate will or may occur in the future, including matters having to do with expected and future revenue, our ability to fund our operations and repay debt, business strategies, expansion and growth of operations and other such matters, are forward-looking statements.

These statements are based on certain assumptions and analyses made by our management in light of its experience and its perception of historical trends, current conditions, expected future developments, and other factors it believes are appropriate in the circumstances.

These statements are subject to a number of assumptions, risks and uncertainties, including general economic and business conditions, the business opportunities (or lack thereof) that may be presented to and pursued by us, our performance on our current contracts and our success in obtaining new contracts, our ability to attract and retain qualified employees, and other factors, many of which are beyond our control.

You are cautioned that these forward-looking statements are not guarantees of future performance and those actual results or developments may differ materially from those projected in such statements.

Management Overview

1 unchanged sentence

• Consolidated revenues increased by $7.4 million, or 16%, to $53.9 million for the year ended August 31, 2022, compared to $46.5 million for the year ended August 31, 2021

Consolidated gross profit increased by approximately $5.0 million or 15.9%, to $35.9 million for the year ended August 31, 2021, compared to $30.9 million for the year ended August 31, 2020.

Income from operations decreased by $352

thousand, or 3.0%, to approximately $11.3 million for the year ended August 31, 2021, from $11.6 million for the year ended August

Fiscal year 2020 includes a one-time acquisition cost of $1.4 million related to Lixoft.

Net income increased by $450 thousand or 4.8% to $9.8 million for the year ended August 31, 2021, compared to $9.3 million for the year ended August 31, 2020.

Diluted earnings per share decreased by $0.03 or 6.0% to $0.47 for the year ended August 31, 2021, compared to $0.50 for the year ended August 31, 2020.

• Consolidated gross profit increased by $7.2 million, or 20%, to $43.1 million for the year ended August 31, 2022, compared to $35.9 million for the year ended August 31, 2021

• Income from operations increased by $3.7 million, or 33%, to $14.9 million for the year ended August 31, 2022, from $11.3 million for the year ended August 31, 2021

• Net income increased by $2.7 million, or 28% to $12.5 million for the year ended August 31, 2022, compared to $9.8 million for the year ended August 31, 2021

• Diluted earnings per share increased by $0.13, or 28% to $0.60 for the year ended August 31, 2022, compared to $0.47 for the year ended August 31, 2021

Strategy Going Forward:

Continue to pursue funded and unfunded collaborations in support of improving our products and services

Continue our aggressive marketing and sales campaign

Continue to expand our use of social media and advertising

Continue to expand our sales staff, both in-house and in the field

Continue to recruit scientific and other resources to support our product and scientific consulting services

Seek accretive acquisitions that complement our existing offerings and expand our markets

• Continue to pursue customer collaborations to support expansion of our products and services portfolio

• Continue our aggressive marketing campaigns and expand our use of social media and digital advertising

• Continue to expand our sales staff and distributor channels

• Continue to recruit scientific staff to support our product and services innovation

• Continue to seek strategic acquisitions that complement our existing solutions portfolio and expand our markets

Fiscal year 2022 was yet another record year for the Company.

good growth in the midst of the fiscal year that had to bear the brunt of the COVID-19 global pandemic.

We believe the continued growth

of our pharmaceutical software and services business is the result of steadily increasing adoption and awareness of the value of simulation

and modeling software tools across the pharmaceutical industry, the continuing push by regulatory agencies for increased use of modeling

and simulation, and the expertise we offer as consultants to assist companies involved in the research and development of new medicines.

We continue to be a leader in the fast- growing $2 billion bio-simulation industry.

We believe the continued growth of our pharmaceutical software and services business is the result of steadily increasing adoption and awareness of the value of simulation and modeling software tools across the pharmaceutical industry, the continuing push by regulatory agencies for increased use of modeling and simulation, and the expertise we offer as consultants to assist companies involved in the research and development of new medicines.

We continue to be a leader in the fast-growing global biosimulation market.

Results of Operations

A discussion regarding our financial condition

and results of operations for fiscal 2019 compared to fiscal 2018 can be found under Item 7 in our Annual Report on Form 10-K for the

fiscal year ended August 31, 2019, filed with the SEC on November 13, 2019, which is available free of charge on the SEC’s website

at www.sec.gov and our corporate website at https://www.simulations-plus.com/investorscorporate-profile/sec-filings/.

Comparison of fiscal year 2021 and fiscal

(in thousands)

Year Ended August 31,

Cost of revenues

Comparison of fiscal year 2022 and fiscal year 2021

(in thousands) Year ended August 31

2022 2021 $ Change % Change

Revenue $ 53,906 $ 46,466 $ 7,440 16 %

Cost of revenue 10,822 10,600 222 2 %

Gross profit 43,084 35,866 7,218 20 %

Research and development 3,208 4,047 (839) (21) %

5 unchanged sentences

Provision for income taxes (2,632) (1,303) (1,329) 102 %

Revenues increased by approximately $4.9 million

or 12% to $46.5 million for the year ended August 31, 2021, compared to approximately $41.6 million for the year ended August 31, 2020.

This increase is primarily due to a $6.1 million or 28% increase in software-related revenue, offset by a $1.2 million or 6% decrease

in consulting services and analytical study revenue when comparing the years ended August 31, 2021, and 2020.

Net income $ 12,483 $ 9,782 $ 2,701 28 %

Revenues increased by $7.4 million or 16%, to $53.9 million for the year ended August 31, 2022, compared to $46.5 million for the year ended August 31, 2021.

This increase is primarily due to a $5.0 million, or 18%, increase in software-related revenue and $2.5 million, or 13%, increase in service-related revenue when comparing the years ended August 31, 2022, and 2021.

Cost of revenues

Cost of revenues remained relatively consistent

with a slight decrease of $49 thousand or approximately 1% for the year ended August 31, 2021, compared to the year ended August 31, 2020.

The decrease is primarily due to lower contract research organization fees of $204 thousand, lower tech-support costs of $135 thousand,

lower labor-related costs of $100 thousand, and lower training and travel costs of $97 thousand, partially offset by higher amortization

of software development costs of $455 thousand related to the purchase of Lixoft.

A significant portion of cost of revenues for

pharmaceutical software products is the systematic amortization of capitalized software development costs, which is a fixed cost rather

than a variable cost related to revenues.

The amortization cost of $2.8 million for the year ended August 31, 2021, increased by approximately

$455 thousand compared to fiscal year 2020.

Cost of revenues as a percentage of revenue was

22.8% for the year ended August 31, 2021, compared to 25.6% for the year ended August 31, 2020, resulting in a decrease of 2.8%.

Gross profit increased by approximately $5.0 million

or 16% to $35.9 million for the year ended August 31, 2021, compared to approximately $30.9 million for the year ended August 31, 2020.

The increase is due to an increase in gross profit for the software business of $5.7 million or 31%, partially offset by a decrease in

gross profit for the consulting services business of $0.7 million or 7% over the same periods.

Overall gross margin percentage increased by 2.8%

to 77.2% for the year ended August 31, 2021, from 74.4% for the year ended August 31, 2020.

Cost of revenues remained relatively consistent with a slight increase of $0.2 million, or 2%, for the year ended August 31, 2022, compared to the year ended August 31, 2021.

The increase is primarily due to a $0.4 million, or 5%, increase in service-related cost of revenue, partially offset by a decrease of $0.2 million, or 5%, in software-related cost of revenue when compared to the year ended August 31, 2021.

Gross profit increased by $7.2 million, or 20%, to $43.1 million for the year ended August 31, 2022, compared to $35.9 million, for the year ended August 31, 2021.

The higher gross profit is due to an increase in gross profit for our software business of $5.1 million, or 21%, and an increase in gross profit for our services business of $2.1 million, or 18%.

Overall gross margin percentage was 80% and 77% for the years ended August 31, 2022, and 2021, respectively.

Research and development

We incurred approximately $6.9 million of research

and development costs during the year ended August 31, 2021.

We incurred $6.4 million of research and development costs during the year ended August 31, 2022.

Of this amount, $3.2 million was capitalized as a part of capitalized software development costs and $3.2 million was expensed.

We incurred $6.9 million of research and development costs during year ended August 31, 2021.

Of this amount, $2.9 million was capitalized and $4.0 million was expensed.

We incurred approximately $5.3 million of research and development costs during year ended August 31, 2020.

Of this amount, $2.3 million

was capitalized and $3.0 million was expensed.

The year-over-year increase of $1.6 million, or 30%, in research and development expenditures

was primarily due to increased costs in the Simulations Plus, DILIsym and Lixoft divisions.

Selling, general, and administrative expenses

Selling, general, and administrative (“SG&A”)

expenses increased by $4.2 million, or 26% to $20.6 million for the year ended August 31, 2021, compared to $16.4 million for the year

ended August 31, 2020, primarily due to the following:

An increase in salaries and wages of $3.3

million due to higher corporate salaries, bonuses, stock-based compensation, and 401K costs, as well as an increase in headcount.

An increase in payroll tax expense of $707 thousand, resulting from higher salary and wage related costs.

As a percent of revenues, SG&A expense was

44% for the year ended August 31, 2021, compared to 39% for the year ended August 31, 2020.

Selling, general, and administrative ("SG&A") expenses increased by $4.4 million, or 21%, to $25.0 million for the year ended August 31, 2022, compared to $20.6 million for the year ended August 31, 2021.

The increase was primarily due to an increase in personnel costs of $2.9 million, an increase in insurance costs of $0.6 million related to cyber and D&O premiums, and an increase in travel costs of $0.4 million.

As a percent of revenues, SG&A expense was 46% for the year ended August 31, 2022, compared to 44% for the year ended August 31, 2021.

Other income/expense

Total other expense was $168 thousand for the

year ended August 31, 2021, compared to total other expense of $218 thousand for the year ended August 31, 2020.

The variance of $50 thousand

is primarily due to an increase in currency exchange gain $184 thousand and an increase in interest income of $171 thousand, offset by

an increase in the change in the value of contingent consideration of $283 thousand.

Total other income was $0.2 million for the year ended August 31, 2022, compared to total other expense of $0.2 million for the year ended August 31, 2021.

The increase of $0.4 million is primarily due to an increase in net interest income of $0.5 million and a decrease in the value of contingent consideration of $0.2 million, partially offset by an increase in the loss on currency exchange of $0.4 million.

Provision for income taxes

The provision for income taxes was $1.3 million

for the year ended August 31, 2021, compared to $2.1 million for the year ended August 31, 2020.

Our effective tax rate decreased by 6.2%

to 11.8% for the year ended August 31, 2021, from 18.0% for the year ended August 31, 2020.

The effective rate differs from anticipated combined

statutory rates of approximately 24.5% due to R&D credits, foreign-tax related items (tax credits and foreign-deemed intangible income

deductions), and the tax effect of stock-compensation related items for stock compensation and disqualifying dispositions.

years ended August 31, 2021, and 2020, as a result of an increase in stock prices, a number of employees exercised and sold incentive

stock options granted to them under their corporate incentive plans, creating corporate tax deductions that lowered the effective tax

Comparison of fiscal year 2020 and fiscal

(in thousands)

Year Ended August 31,

Cost of revenues

The provision for income taxes was $2.6 million for the year ended August 31, 2022, compared to $1.3 million for the year ended August 31, 2021.

Our effective tax rate increased by 5% to 17% for the year ended August 31, 2022, from 12% for the year ended August 31, 2021.

The effective rate differs from anticipated combined statutory rates of 25% due to R&D credits, foreign-tax-related items (tax credits and foreign-deemed intangible income deductions), and the tax effect for stock compensation and disqualifying dispositions.

During the year ended August 31, 2021, as a result of an increase in the Company's stock price, a number of employees exercised and sold ISOs granted to them under their corporate incentive plans, creating corporate tax deductions that lowered the effective tax rate, whereas disqualifying dispositions were not as prevalent during the year ended August 31, 2022.

Comparison of fiscal year 2021 and fiscal year 2020

(in thousands) Year ended August 31

2021 2020 $ Change % Change

Revenue $ 46,466 $ 41,589 $ 4,877 12 %

Cost of revenue 10,600 10,649 (49) — %

Gross profit 35,866 30,940 4,926 16 %

Research and development 4,047 2,975 1,072 36 %

5 unchanged sentences

Provision for income taxes (1,303) (2,055) 752 (37) %

Revenues increased by approximately $7.6 million

or 22% to $41.6 million for the year ended August 31, 2020 compared to $34.0 million for the year ended August 31, 2019.

This increase

is primarily due to a $4.5 million or 29.1% increase in consulting services revenue.

Software-related revenue increased $3.1 million or

16.8% when comparing the fiscal years ended August 31, 2020 and 2019.

Net income $ 9,782 $ 9,332 $ 450 5 %

Revenues increased by $4.9 million, or 12%, to $46.5 million for the year ended August 31, 2021, compared to $41.6 million for the year ended August 31, 2020.

This increase is primarily due to a $6.1 million, or 28%, increase in software-related revenue, offset by a $1.2 million, or 6%, decrease in service-related revenue when comparing the years ended August 31, 2021, and 2020.

Cost of revenues

Cost of revenues increased by approximately $1.6

million or 18% to $10.6 million for the year ended August 31, 2020 compared to $9.0 million for the year ended August 31, 2019.

cost is primarily due to an increase in consulting-related labor costs of $1.6 million.

A significant portion of cost of revenues for

pharmaceutical software products is the systematic amortization of capitalized software development costs, which is a fixed cost rather

than a variable cost related to revenues.

The amortization cost for fiscal year 2020 was $2.4 million, an increase of $103 thousand compared

to fiscal year 2019.

Cost of revenues as a percentage of revenue decreased

to 25.6% in fiscal year 2020 from 26.6% in fiscal year 2019.

Gross profit increased $6.0 million or 24% to

$30.9 million for the year ended August 31, 2020, compared to $24.9 million for the year ended August 31, 2019.

The increase is due to

an increase in gross profit for the software business of $3.2 million or 20%, as well as an increase in gross profit for the consulting

services business of $2.8 million or 30% over the same periods.

Overall gross margin percentage increased by 1%

to 74% for the year ended August 31, 2020, compared to the year ended August 31, 2019.

Cost of revenues remained relatively consistent for the year ended August 31, 2021, and 2020.

The decrease is primarily due to lower contract research organization fees of $0.2 million, lower tech-support costs of $0.1 million, lower labor-related costs of $0.1 million, and lower training and travel costs of $0.1 million, partially offset by higher amortization of software development costs of $0.5 million related to the purchase of Lixoft.

A significant portion of cost of revenues for pharmaceutical software products is the systematic amortization of capitalized software development costs, which is a fixed cost rather than a variable cost related to revenues.

The amortization cost of $2.8 million for the year ended August 31, 2021, increased by $0.5 million compared to fiscal year 2020.

Cost of revenues as a percentage of revenue was 22.8% for the year ended August 31, 2021, compared to 25.6% for the year ended August 31, 2020, resulting in a decrease of 2.8%.

Gross profit increased $4.9 million, or 16%, to $35.9 million for the year ended August 31, 2021, compared to $30.9 million for the year ended August 31, 2020.

The increase is due to an increase in gross profit for the software business of $5.7 million, or 31%, offset by a $0.8 million, or 7%, decrease in gross profit for the services business.

Overall gross margin percentage was 77% and 74% for the year ended August 31, 2021, and 2020, respectively.

Research and development

We incurred approximately $5.3 million of research

and development costs during year ended August 31, 2020.

Of this amount, approximately $2.3 million was capitalized and $3.0 million was

We incurred approximately $4.3 million of research and development costs during year ended August 31, 2019.

Of this amount,

$1.8 million was capitalized and $2.5 million was expensed.

The increase of approximately $1.0 million in total research and development

expenditures in fiscal year 2020 compared to fiscal year 2019 was primarily due to increased costs in the Simulations Plus and DILIsym

We incurred $6.9 million of research and development costs during year ended August 31, 2021.

Of this amount, $2.9 million was capitalized and $4.0 million was expensed.

We incurred $5.3 million of research and development costs during year ended August 31, 2020.

Of this amount, $2.3 million was capitalized and $3.0 million was expensed.

The year-over-year increase of $1.6 million, or 30%, in research and development expenditures was primarily due to increased costs in the Simulations Plus, DILIsym, and Lixoft divisions.

Selling, general, and administrative expenses

SG&A expenses increased by $4.6 million, or

39% to $16.4 million for the year ended August 31, 2020 compared to $11.8 million for the year ended August 31, 2019.

The increase was

primarily due to a $1.5 million increase in general and administrative salaries;

$1.4 million in legal, accounting and consulting fees

associated with the Lixoft acquisition;

an increase in payroll tax expense of $478 thousand;

an increase in director compensation of $394

thousand due to additional paid directors and increases in compensation;

an increase in insurance costs of $259 thousand due to higher

headcount and a $226 thousand increase in commission costs related to increased revenues domestically and in Asia.

As a percent of revenues, selling, general and

administrative expenses was 39.3% for fiscal year 2020, compared to 34.7% for fiscal year 2019.

SG&A expenses increased by $4.2 million, or 26% to $20.6 million for the year ended August 31, 2021, compared to $16.4 million for the year ended August 31, 2020.

The increase was primarily due to a $4.0 million increase in personnel costs.

As a percent of revenues, selling, general and administrative expenses was 44% for the year ended August 31, 2021, compared to 39% for the year ended August 31, 2020.

Other income/expense

Total other expense was $218 thousand for the

year ended August 31, 2020 compared to $92 thousand for the year ended August 31, 2019.

The variance of $126 thousand is primarily due

to a change in the valuation of contingent consideration.

Total other expense was $0.2 million for the year ended August 31, 2021, compared to $0.2 million for the year ended August 31, 2020.

There was an increase in currency exchange gain of $0.2 million and an increase in interest income of $0.2 million, offset by an increase in the value of contingent consideration of $0.3 million.

Provision for income taxes

The provision for income taxes was approximately

$2.1 million for the year ended August 31, 2020, compared to $2.0 million for the year ended August 31, 2019.

Our effective tax rate decreased

slightly to 18.0% from 18.7 % for the same periods.

The effective rate differs from anticipated combined

statutory rates of approximately 25.7% due to R&D credits, foreign-tax related items (tax credits and foreign-deemed intangible income

deductions), and the tax effect of stock-compensation related items for stock compensation and disqualifying dispositions.

part of fiscal year 2020, as occurred also in fiscal year 2019, because of an increase in stock prices, a number of employees exercised

and sold incentive stock options granted to them under their corporate incentive plans, creating corporate tax deductions that lowered

the effective tax rate.

Segment Results of Operations

Comparison of fiscal year 2021 and fiscal

thousands) Year

Ended August 31,

Simulations Plus

*As Lixoft was acquired on April 1, 2020, five

months of activity is reflected for fiscal year 2020.

The provision for income taxes was $1.3 million for the year ended August 31, 2021, compared to $2.1 million for the year ended August 31, 2020.

Our effective tax rate decreased by 6% to 12% from 18% for the same periods.

The effective rate differs from anticipated combined statutory rates of 25% due to R&D credits, foreign-tax-related items (tax credits and foreign-deemed intangible income deductions), and the tax effect of stock-compensation-related items for stock compensation and disqualifying dispositions.

During the years ended August 31, 2021, and 2020, as a result of an increase in stock prices, a number of employees exercised and sold incentive stock options granted to them under their corporate incentive plans, creating corporate tax deductions that lowered the effective tax rate

Results of Operations by Business Unit

Comparison of fiscal year 2022 and fiscal year 2021

(in thousands) Twelve Months Ended August 31,

2022 2021 Change ($) Change (%)

Software $ 32,642 $ 27,670 $ 4,972 18 %

Services 21,264 18,796 2,468 13 %

Total $ 53,906 $ 46,466 $ 7,440 16 %

Cost of Revenues

thousands) Year

Ended August 31,

Simulations Plus

* As Lixoft was acquired on April 1, 2020, five

months of activity is reflected for fiscal year 2020.

thousands) Year

Ended August 31,

Simulations Plus

* As Lixoft was acquired on April 1, 2020, five

months of activity is reflected for fiscal year 2020.

Simulations Plus

For the year ended August 31, 2021, the revenues increase of $3.2 million

or 14% compared to the year ended August 31, 2020, was primarily due to higher revenues from GastroPlus of $2.2 million and an increase

in revenues from ADMET Software of $831 thousand.

Cost of revenue increased marginally during the same periods, and gross profit increased

by $3.1 million or 16%, primarily due to the increase in revenue.

For the year ended August 31, 2021, the revenue decrease of $559 thousand

or 5% compared to the year ended August 31, 2020, was primarily due to a decrease in grant revenue of $672 thousand, partially offset

by an increase in training revenue of $90 thousand.

Cost of revenue decreased $365 thousand or 7%, primarily due to lower salary cost

related to employees working on service contracts of $726 thousand, partially offset by an increase in consulting related costs of $346

Gross profit decreased by approximately $194 thousand or 3% for the same periods.

For the year ended August 31, 2021, the revenue decrease of $833 thousand

or 12% compared to the year ended August 31, 2020, was primarily due to lower revenue from consulting services of $869 thousand.

of revenue decreased by $235 thousand or 10% during the same periods, primarily due to lower contract research organization fees of $204

Gross profit decreased by $598 thousand or 13%.

For the year ended August 31, 2021, the revenue increase of $3.1 million

compared to the year ended August 31, 2020 was primarily due to an increase in revenues from MonolixSuite of $2.9 million;

this increase

was primarily the result of the purchase of Lixoft on April 1, 2020.

Software sales of the MonolixSuite generated 97% of total revenue

and consulting services generated 3% of total revenue.

Cost of revenue increased by $471 thousand, and gross profit increased by $2.6

million also due to the purchase of Lixoft on April 1, 2020.

Comparison of fiscal year 2020 and fiscal

thousands) Year

Ended August 31,

Simulations Plus

*As Lixoft was acquired on April 1, 2020, five

months of activity is reflected for fiscal year 2020.

(in thousands) Twelve Months Ended August 31,

2022 2021 Change ($) Change (%)

Software $ 3,060 $ 3,235 $ (175) (5) %

Services 7,762 7,365 397 5 %

Total $ 10,822 $ 10,600 $ 222 2 %

(in thousands) Twelve Months Ended August 31,

2022 2021 Change ($) Change (%)

Software $ 29,582 $ 24,435 $ 5,147 21 %

Services 13,502 11,431 2,071 18 %

Total $ 43,084 $ 35,866 $ 7,218 20 %

Software Business

For the year ended August 31, 2022, the revenue increase of $5.0 million, or 18%, compared to the year ended August 31, 2021, was primarily due to higher revenues from GastroPlus of $2.4 million and an increase in revenue from MonolixSuite Software of $1.6 million.

Cost of revenue decreased by $0.2 million or 5% during the same periods, and gross profit increased by $5.1 million, or 21%, primarily due to the increase in revenue.

Services Business

For the year ended August 31, 2022, the revenue increase of $2.5 million, or 13%, compared to the year ended August 31, 2021, was primarily due to higher revenues from PBPK of $1.4 million and an increase in revenues from QSP/QST of $0.5 million.

Cost of revenue increased by $0.4 million, or 5%.

Gross profit increased by $2.1 million, or 18%, for the same periods.

Comparison of fiscal year 2021 and fiscal year 2020

(in thousands) Twelve Months Ended August 31,

2021 2020* Change ($) Change (%)

Software $ 27,670 $ 21,587 $ 6,083 28 %

Services 18,796 20,002 (1,206) (6) %

Total $ 46,466 $ 41,589 $ 4,877 12 %

*As Lixoft was acquired on April 1, 2020, five months of activity is reflected for fiscal year 2020.

Cost of Revenues

thousands) Year

Ended August 31,

Simulations Plus

*As Lixoft was acquired on April 1, 2020, five

months of activity is reflected for fiscal year 2020.

thousands) Year

Ended August 31,

Simulations Plus

*As Lixoft was acquired on April 1, 2020, five

months of activity is reflected for fiscal year 2020.

Simulations Plus

For the year ended August 31, 2020, the revenue

increase of $2.4 million or 12% compared to the year ended August 31, 2019 was primarily due to increases in revenue from GastroPlus of

$1.3 million, from ADMET Software of $630 thousand and from services revenue totaling $525 thousand.

The cost of revenue decrease of $355

thousand or 11% during the same periods was primarily due to lower royalty expense of $222 thousand resulting from the renegotiation of

the agreement with Dassault Systemes Americas Corp.

in June 2019 and a decrease in amortization expense of capitalized software of $98

(in thousands) Twelve Months Ended August 31,

2021 2020* Change ($) Change (%)

Software $ 3,235 $ 2,883 $ 352 12 %

Services 7,365 7,766 (401) (5) %

Total $ 10,600 $ 10,649 $ (49) — %

*As Lixoft was acquired on April 1, 2020, five months of activity is reflected for fiscal year 2020.

(in thousands) Twelve Months Ended August 31,

2021 2020* Change ($) Change (%)

Software $ 24,435 $ 18,704 $ 5,731 31 %

Services 11,431 12,236 (805) (7) %

Total $ 35,866 $ 30,940 $ 4,926 16 %

*As Lixoft was acquired on April 1, 2020, five months of activity is reflected for fiscal year 2020.

Software Business

For the year ended August 31, 2021, the revenue increase of $6.1 million, or 28%, compared to the year ended August 31, 2020, was primarily due to increases in revenue from MonolixSuite of $2.9 million, an increase from GastroPlus revenue of $2.2 million and an increase from ADMET Predictor Software of $0.8 million.

The cost of revenue increased by $0.4 million, or 12%.

Gross profit increased by $5.7 million, or 31%, primarily due to the increase in revenue.

For the year ended August 31, 2020, the revenue

increase of $1.8 million or 19% compared to the year ended August 31, 2019 was primarily due to an increase in grant revenue.

revenue increased by $824 thousand or 19%, primarily due to an increase in salary contracts of $367 thousand and higher international

subcontractor costs of $335 thousand.

Gross profit increased by approximately $960 thousand or 19% for the same periods.

For the year ended August 31, 2020, the revenue increase of $1.9 million

or 37% compared to the year ended August 31, 2019, was primarily due to higher revenue from consulting services of $2.1 million, partially

offset by lower licensing revenue of $114 thousand.

Cost of revenue increased by $887 thousand or 64% during the same periods, primarily

due to higher salary cost of $277 thousand, higher contract research organization fees of $274 thousand, and higher bonus accrual of $160

Gross profit increased by approximately $1.0 million or 27% for the same periods.

For the year ended August 31, 2020, the revenue

increase of $1.6 million compared to the August 31, 2019 was due to the purchase of Lixoft on April 1, 2020.

Software sales of the MonolixSuite

generated 98% of total revenue and 2% was generated from consulting services.

Cost of revenue increased $267 thousand, and gross profit

increased $1.3 million primarily due to the purchase of Lixoft on April 1, 2020.

Services Business

For the year ended August 31, 2021, the revenue decrease of $1.2 million, or 6%, compared to the year ended August 31, 2020, was primarily due to a decrease from other services revenue of $1.4 million, a decrease from QSP/QST revenue of $1.0 million, partially offset by an increase from PKPD revenue of $1.1 million.

Cost of revenue decreased by $0.4 million, or 5%.

Gross profit decreased by $0.8 million, or 7%, for the same periods.

LIQUIDITY AND CAPITAL RESOURCES

As of August 31, 2021, the Company had $37.0 million

in cash and cash equivalents and $86.6 million in short-term investments.

Our principal sources of capital have been cash flows from our

operations and a public offering in 2020.

We have achieved continuous positive operating cash flow over the last twelve fiscal years.

In August 2020, the Company closed an underwritten

public offering of 2,090,909 shares of its 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 the Company from this offering were approximately

$115.0 million, before deducting underwriting discounts and commissions;

net proceeds were approximately $107.7 million.

The Company has

used, and intends to continue to use the net proceeds from the offering for strategic mergers and acquisitions (although the Company has

no present commitments or agreements to enter into any such mergers or acquisitions), working capital requirements, and other general

corporate purposes, including investing in enhanced information and accounting systems, and personnel in support of corporate growth.

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, the Company entered into a

Stock Purchase and Contribution Agreement (the “Lixoft Agreement”) with Lixoft, a French société par actions

simplifiée (“Lixoft”).

On April 1, 2020, the Company consummated the acquisition of all outstanding equity interests

of Lixoft pursuant to the terms of the Lixoft Agreement, with Lixoft becoming a wholly owned subsidiary of the Company.

Under the terms

of the Agreement, the Company will 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 the Company’s common stock.

In addition, the Company paid approximately

$3.5 million of excess working capital based on the March 31, 2020 financial statements of Lixoft.

As part of the total consideration,

the agreement calls for earnout payments up to an additional $5.5 million, two-thirds cash and one-third newly issued, unregistered shares

of the Company’s common stock based on a revenue growth formula each year for the two years subsequent to April 1, 2020.

shareholders earned $2.0 million in the first year and can earn up to $3.5 million in year two.

See Note 14 for a further description

of the Lixoft Agreement.

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

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.

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 continue to seek opportunities for strategic

acquisitions.

As of August 31, 2022, the Company had $51.6 million in cash and cash equivalents, $76.7 million in short-term investments and working capital of $139.1 million.

Our principal sources of capital have been cash flows from our operations.

We have achieved continuous positive operating cash flow over the last thirteen fiscal years.

On March 31, 2020, the Company entered into a Credit Agreement with Wells Fargo Bank, N.A.

The Credit Agreement provided us with a credit facility of $3.5 million through April 15, 2022 (the "Termination Date"), on which date the Credit Agreement terminated in accordance with its terms.

As a result, we can no longer draw down against the line of credit.

We chose not to renew or pursue an alternative credit facility as we do not foresee a need to utilize such credit facility within the next twelve months.

As of the Termination Date, there were no amounts drawn against the line of credit.

On March 31, 2020, we entered into a Share Purchase and Contribution Agreement (the “SPCA”) with Lixoft.

Under the terms of the SPCA, 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 $2.0 million 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 SPCA called for earnout payments of up to an additional $5.5 million, payable in 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 could earn up to $2.0 million the first year and $3.5 million in year two.

In June 2021, $2.0 million was paid out under the first earnout payment, which was comprised of $1.3 million of cash and shares of our common stock valued at $0.7 million.

In April 2022, we released from escrow and distributed the $2.0 million holdback consideration, consisting of $1.3 million in cash and shares of our common stock valued at $0.7 million (amounting to an aggregate of 20,326 unregistered shares of our common stock), to the former shareholders of Lixoft.

In May 2022, $3.5 million was paid out under the second earnout payment, which was comprised of $2.3 million of cash and shares of our common stock valued at $1.2 million (amounting to an aggregate of 23,825 unregistered shares of our common stock), to the former shareholders of Lixoft in accordance with the SPCA.

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 have to sell additional equity or debt securities or obtain a new credit facility.

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 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.

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.

Except as discussed elsewhere in this 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.

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.

Operating Activities

provided by operating activities was $19.2 million for the year ended August 31, 2021.

Our operating cash flows resulted primarily

from our net income of $9.8 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 inflow from changes in balances of operating assets and liabilities

was $1.0 million, and non-cash charges were $8.4 million.

The change in operating assets and liabilities was primarily the result of an

increase in accrued payroll and other expenses, partially offset by an increase in accounts receivable.

provided by operating activities was $10.9 million for the year ended August 31, 2020.

Our operating cash flows resulted primarily

from our net income of $9.3 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 $2.8 million, offset by non-cash charges of $4.4 million.

The change in operating assets and liabilities was primarily the result

of an increase in accounts receivable and a decrease in billings in excess of revenues.

Net cash provided by operating activities was $17.9 million for the year ended August 31, 2022.

Our operating cash flows resulted primarily from our net income of $12.5 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, $2.6 million related to changes in balances of operating assets and liabilities was subtracted from net income and $8.0 million related to non-cash charges was added to net income to reconcile to cash flow from operations.

Net cash provided by operating activities was $19.2 million for the year ended August 31, 2021.

Our operating cash flows resulted primarily from our net income of $9.8 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, $1.0 million related to changes in balances of operating assets and liabilities was added to net income and $8.4 million related to non-cash charges was added to net income to reconcile to cash flow from operations.

Investing Activities

Net cash used in investing activities during the

year ended August 31, 2021, of $26.7 thousand was primarily due to the purchase of short-term investments of $122.4 million and computer

software development costs of $2.9 million, partially offset by proceeds from the sale of short-term investments totaling $100.2 million.

Cash used for investing activities during the

year ended August 31, 2020 of $75.5 million was primarily due to the purchase of $67.2 million of short-term investments and costs associated

with the acquisition of a subsidiary totaling $9.5 million.

Net cash provided by investing activities during the year ended August 31, 2022, was $4.3 million, primarily due to the proceeds from the sale of short-term investments of $109.1 million, offset by the purchase of short-term investments of $100.8 million and computer software development costs of $3.2 million.

Net cash used for investing activities during the year ended August 31, 2021, was $26.7 million, primarily due to the purchase of short-term investments of $122.4 million and computer software development costs of $2.9 million, offset by proceeds from the sale of short-term investments totaling $100.2 million.

Financing Activities

For the year ended August 31, 2021, net cash used

in financing activities of $4.7 million, was primarily due to dividend payments totaling $4.8 million and a $1.3 million earnout payment

to the former shareholders of Lixoft, partially offset by proceeds from the exercise of stock options totaling $1.5 million.

Net cash provided by financing activities during

the year ended August 31, 2020 of $102.4 million was primarily due to the net proceeds from a public offering of $107.7 million, partially

offset by dividend payments totaling $4.3 million for the period.

Refer to Note 8 – Shareholders’ Equity

of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K) for details regarding dividends.

Net cash used in financing activities during the year ended August 31, 2022, was $7.6 million, primarily due to dividend payments totaling $4.8 million and a $3.7 million earnout payment to the former shareholders of Lixoft, partially offset by proceeds from the exercise of stock options totaling $0.9 million.

Net cash used in financing activities during the year ended August 31, 2021, was $4.7 million, primarily due to dividend payments totaling $4.8 million and a $1.3 million earnout payment to the former shareholders of Lixoft, partially offset by proceeds from the exercise of stock options totaling $1.5 million.

Refer to Note 8 – Shareholders’ Equity of the Notes to Financial Statements (Part II, Item 8 of this Report) for details regarding dividends.

KNOWN TRENDS OR UNCERTAINTIES

Although we have not seen any significant reduction

in total revenues to date, we did see a reduction in PKPD services during the year ended August 31, 2021, primarily resulting from project

disruptions due to customer delays, holds, and drug development program cancellations.

We have also seen consolidation in the pharmaceutical

industry during economic downturns, although these consolidations have not had a negative effect on our total revenues to that industry.

Should customer delays, holds, program cancellations, or consolidations and downsizing in the industry continue to occur, those events

could adversely impact our revenues and earnings going forward.

As discussed in the Risk Factor section of this

Annual Report on Form 10-K, the world has been affected due to the COVID-19 pandemic.

Although there has not been a substantial impact

on revenues to date, 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.

We have seen some consolidation in the pharmaceutical industry during economic downturns, although these consolidations have not had a negative effect on our total revenues to that industry.

Should customer delays, holds, program cancellations, or consolidations and downsizing in the industry continue to occur, those events could adversely impact our revenues and earnings going forward.

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 our 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.

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 revenues or determine

that resources would be more efficiently used elsewhere.

OFF-BALANCE SHEET ARRANGEMENTS

As of August 31, 2021, we did not have any relationships

with unconsolidated entities or financial partnerships, such as entities often referred to as structured-finance or special-purpose entities,

which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited

As such, we are not materially exposed to any financing, liquidity, market, or credit risk that could arise if we had engaged

in such relationships.

We do not have relationships or transactions with

persons or entities that derive benefits from their non-independent relationship with us or our related parties.

CONTRACTUAL OBLIGATIONS

The following table provides aggregate information

regarding our contractual obligations as of August 31, 2021:

(in thousands)

Payments due by period

Contractual obligations:

Contracts payable (1)

Operating lease obligations (2)

(1) Contracts payable are related to our Stock Purchase and Contribution Agreement that the Company entered into with Lixoft

on March 31, 2020.

Under the terms of the agreement, we agreed to pay the former shareholders of Lixoft earnout

payments up to an $5.5 million, two-thirds cash and one-third newly issued, unregistered shares of the Company’s common stock based

on a revenue growth formula each year for the two years subsequent to April 1, 2020.

For further details regarding our contracts payable,

refer to Note 6 and Note 14 to the “Notes to Consolidated Financial Statements” in Part II, Item 8 of this of this Annual

Report on Form 10-K.

(2) Operating lease obligations relate to our office

space and facilities.

The lease terms expire in various years through 2026 and are generally renewable

at our option.

For more information on our operating lease, refer to Note 7 to the “Notes to Consolidated Financial Statements”

in Part II, Item 8 of this of this Annual Report on Form 10-K.

We believe that our current cash and cash equivalents

and cash generated from operations will be sufficient to meet our working capital, capital expenditures and contractual obligation requirements.

RECENTLY ISSUED OR NEWLY ADOPTED ACCOUNTING

In February 2016, the FASB issued ASU 2016-02,

Leases (Topic 842), which supersedes existing guidance on accounting for leases in "Leases (Topic 840)" and generally requires

all leases to be recognized in the consolidated balance sheet.

ASU 2016-02 is effective for annual and interim reporting periods beginning

after December 15, 2018.

The Company adopted this ASU on September 1, 2019.

In December 2019, the FASB issued ASU 2019-12 , Income Taxes (Topic

Simplifying the Accounting for Income Taxes , which is intended to simplify various areas related to the accounting for income

taxes and improve consistent application of Topic 740.

The guidance eliminates certain exceptions related to the approach for intra-period

tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for

outside basis differences related to changes in ownership of equity-method investments and foreign subsidiaries.

The guidance also simplifies

aspects of accounting for franchise taxes and the accounting for the enacted changes in tax laws or rates, as well as the accounting for

the step-up in the tax basis of goodwill.

ASU 2019-12 is effective for us beginning in fiscal 2022.

The adoption of the new standard is

not expected to have a material impact on the Company’s consolidated financial statements.

In March 2020, the FASB issued Accounting Standards

Update (“ASU”) 2020-04 , Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on

Financial Reporting (“ASU 2020-04”).

The amendments in ASU 2020-04 provide temporary optional expedients and exceptions

for applying GAAP to contract modifications, hedging relationships and other transactions to ease the potential accounting and financial

reporting burden associated with transitioning away from reference rates that are expected to be discontinued, including the London Interbank

Offered Rate (“LIBOR”).

This ASU is effective as of March 12, 2020, through December 31, 2022.

The adoption of the new standard

has not had and is not expected to have a material impact on our financial statements or related disclosures.

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 revenues or determine that resources would be more efficiently used elsewhere.

RECENTLY ISSUED OR NEWLY ADOPTED ACCOUNTING STANDARDS

In October 2021, the FASB issued ASU No.

2021-08, Business Combinations (Topic 805):

Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU 2021-08”).

The amendment requires contract assets and contract liabilities acquired in a business combination to be recognized and measured in accordance with ASC 606, Revenue from Contracts with Customers, as if the acquirer had originated the contract.

The amendment is intended to improve the accounting for acquired revenue contracts with customers in a business combination, related to the recognition of an acquired contract liability, and to payment terms and their effect on subsequent revenue recognized by the acquirer.

The amendment also provides certain practical expedients when applying the guidance.

ASU 2021-08 is effective for interim and annual periods beginning after December 15, 2022, on a prospective basis, with early adoption permitted.

The Company expects to adopt ASU 2021-08 in the first quarter of fiscal year 2024.

The Company is currently evaluating the potential impact of ASU 2021-08 to its consolidated financial statements.

In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832), which requires business entities to disclose information about transactions with a government that are accounted for by applying a grant or contribution model by analogy (for example, IFRS guidance in IAS 20 or guidance on contributions for not-for-profit entities in ASC 958-605).

For transactions within scope, the new standard requires the disclosure of information about the nature of the transaction, including significant terms and conditions, as well as the amounts and specific financial statement line items affected by the transaction.

The new guidance is effective for annual reporting periods beginning after December 15, 2021.

The Company does not expect that the adoption of this standard will have a material impact on its consolidated financial statements;

however, the Company expects to increase its disclosures with respect to government assistance beginning in the first quarter of fiscal year 2023.

CRITICAL ACCOUNTING POLICIES AND 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.

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.

Significant accounting policies for us include revenue

recognition, accounting for capitalized software development costs, valuation of stock options, and accounting for income taxes.

Significant accounting policies for us include revenue recognition, accounting for capitalized software development costs, valuation of stock options, and accounting for income taxes.

Revenue Recognition

We generate revenue primarily from the sale of

software licenses and providing consulting services to the pharmaceutical industry for drug development.

The Company determines revenue recognition through

the following steps:

We generate revenue primarily from the sale of software licenses and providing consulting services to the pharmaceutical industry for drug development.

The Company determines revenue recognition through the following steps:

Identification of the contract, or contracts, with a customer

3 unchanged sentences

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

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 estimated hours/cost to be

incurred on consulting contracts, and the di minimis nature of the post-sales costs associated with software sales.

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 estimated hours/cost to be incurred on consulting contracts, and the di minimis nature of the post-sales costs associated with software sales.

Capitalized Computer Software Development Costs

Software development costs are capitalized in

accordance with FASB 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 $2.9 million, $2.4 million and $1.8 million for the fiscal years ending August

31, 2021, 2020 and 2019, 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 $1.4 million, $1.2 million and $1.3 million for the fiscal

years ending August 31, 2021, 2020 and 2019, respectively.

We expect future amortization expense to vary due to increases 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.

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 $3.2 million, $2.9 million, and $2.4 million for the fiscal years ending August 31, 2022, 2021, and 2020, 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 $1.2 million, $1.4 million, and $1.2 million for the fiscal years ending August 31, 2022, 2021, and 2020, respectively.

We expect future amortization expense to vary due to increases 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 name, and noncompete

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

under-performance 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 August 31, 2021, the Company determined that it had four reporting

units, Simulations Plus, Cognigen Corporation, DILIsym Services, Inc.

When testing goodwill for impairment, the Company first

performs a qualitative assessment to determine whether it is necessary to perform step one of a two-step annual goodwill impairment test

for each reporting unit.

The Company is required to perform step one only if it concludes that it is more likely than not that a reporting

unit's fair value is less than its carrying value.

Should this be the case, the first step of the two-step process is to identify whether

a potential impairment exists by comparing the estimated fair values of the Company's reporting units with their respective book values,

including goodwill.

If the estimated fair value of the reporting unit exceeds book value, goodwill is considered not to be impaired, and

no additional steps are necessary.

If, however, the fair value of the reporting unit is less than book value, then the second step is

performed to determine if goodwill is impaired and to measure the amount of impairment loss, if any.

The amount of the impairment loss

is the excess of the carrying amount of the goodwill over its implied fair value.

The estimate of implied fair value of goodwill is primarily

based on an estimate of the discounted cash flows expected to result from that reporting unit, but may require valuations of certain internally

generated and unrecognized intangible assets such as the Company's software, technology, patents and trademarks.

If the carrying amount

of goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess.

As of August 31, 2021, the entire balance of goodwill

was attributed to three of the Company's reporting units Cognigen, DILIsym and Lixoft.

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.

has not recognized any impairment charges during the periods ended August 31, 2021, 2020 and 2019.

Business Acquisitions

The Company accounted for the acquisition of Cognigen,

DILIsym Services Inc., and Lixoft using the purchase 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.

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 name, 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 under-performance 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 August 31, 2022, the Company determined that it had four reporting units, Simulations Plus, Cognigen, DILIsym, and Lixoft.

As of August 31, 2022, the entire balance of goodwill was attributed to three of the Company's reporting units, Cognigen, DILIsym, and Lixoft.

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.

The Company did not recognize any impairment charges during the periods ended August 31, 2022, 2021, or 2020.

Business Acquisitions

are included in the Company's consolidated financial statements as of the date of the acquisition.

The Company accounted for the acquisition of Cognigen, DILIsym, and Lixoft 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

Research and development costs are charged to

expense as incurred until technological feasibility has been established.

These costs include salaries, laboratory experiment, and purchased

software that was developed by other companies and incorporated into, or used in the development of, our final products.

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 the 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

The provision for income taxes represents the tax payable for the period and the change during the period in deferred tax

assets and liabilities.

Research and development 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, laboratory experiment, and purchased software that was developed by other companies and incorporated into, or used in the development of, our final products.

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 using the

modified prospective method in accordance with FASB ASC 718-10, “Compensation-Stock Compensation” .

Under this method,

compensation costs include estimated grant date fair value of the awards amortized over the options’ vesting period.

compensation expense, not including shares issued to Directors for services, was $2.4 million, $1.3 million and $866 thousand for the

years ended August 31, 2021, 2020 and 2019, respectively, and is included in the statements of operations as Consulting, Salaries, and

Research and Development expense.

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 expense, not including shares issued to Directors for services, was $2.7 million, $2.4 million and $1.3 million for the years ended August 31, 2022, 2021, and 2020, respectively, and is included in the statements of operations as Consulting, Salaries, and Research and Development expense.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis