Simulations Plus, Inc. 10-K

ITEM 9A – CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures Our Chief Executive Officer and our Chief Financial Officer, after evaluating our “disclosure controls and procedures” (as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e) as of the end of the period covered by this Report (the “Evaluation Date”), have concluded that as of the Evaluation Date, our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and to ensure that information required to be disclosed by us in such reports is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, where appropriate, to allow timely decisions regarding required disclosure. Management Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of consolidated financial statements for external purposes in accordance with U.S. GAAP. Management assessed our internal control over financial reporting as of August 31, 2022, the end of our fiscal year. Management based its assessment on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Management’s assessment included evaluation of elements such as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and our overall control environment. Based on this assessment, management has concluded that our internal control over financial reporting was effective as of the end of the fiscal year to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external reporting purposes in accordance with U.S. GAAP. We reviewed the results of management’s assessment with the Audit Committee of our Board of Directors. 43 Table of Contents Inherent Limitations on Effectiveness of Controls Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well-designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of the effectiveness of controls to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Changes in Internal Control over Financial Reporting No change in the Company’s internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. ITEM 9B – OTHER INFORMATION None. ITEM 9C – DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS Not applicable. 44 Table of Contents PART III ITEM 10 – DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE Information required by Item 10 is incorporated herein by reference from the Company’s definitive proxy statement, to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Report. We have adopted the Corporate Code of Business Conduct and Ethics (the "code of ethics") that applies to each of our directors and employees, including our principal executive officer, principal financial officer, controller, and all other employees performing similar functions. The code of ethics is publicly available on our website at https://www.simulations-plus.com/wp-content/uploads/Code-of-Ethics-11-12-2020.pdf. If we make any substantive amendments to the code of ethics or grant any waiver, including any implicit waiver, from a provision of the code of ethics, we will disclose the nature of the amendment or waiver on that website or in a Current Report on Form 8-K. ITEM 11 – EXECUTIVE COMPENSATION The information required by Item 11 is incorporated herein by reference from the Company’s definitive proxy statement, to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Annual Report. ITEM 12 – SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required by this Item pursuant to Item 201(d) of Regulation S-K is set forth under the caption “Market for Registrants Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities” in Part II, Item 5 of this Report, and is incorporated herein by reference. The information required by this Item 12 pursuant to Item 403 of Regulation S-K is incorporated herein by reference from the Company’s definitive proxy statement, to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Report. ITEM 13 – CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information required by this Item 13 is incorporated herein by reference from the Company's definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Report and is incorporated herein by reference. ITEM 14 – PRINCIPAL ACCOUNTING FEES AND SERVICES Our independent registered public accounting firm is Rose, Snyder & Jacobs LLP, Encino, CA, Auditor Firm ID: 468 . The information required by Item 14 is incorporated by reference from the Company’s definitive proxy statement, to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Report. 45 Table of Contents PART IV ITEM 15 – EXHIBITS, FINANCIAL STATEMENT SCHEDULES (a) (1) Financial Statements. The consolidated financial statements are included in this Annual Report on Form 10-K beginning on page F-1. (2) Financial Statement Schedules. All financial statement schedules have been omitted since the information is either not applicable or required or was included in the financial statements or notes included in this Annual Report on Form 10-K. (3) List of Exhibits required by Item 601 of Regulation S-K. See part (b) below. 46 Table of Contents (b) Exhibits. The following exhibits are filed or furnished with this report. Those exhibits marked with a (†) refer to management contracts or compensatory plans or arrangements. EXHIBIT NUMBER DESCRIPTION 2.1 (4)^ Agreement and Plan of Merger, dated July 23, 2014, by and among the Company, Cognigen Corporation and the other parties thereto. 2.2 (12)^ Share Purchase and Contribution Agreement, dated March 31, 2020 . 3.1 (2) Articles of Incorporation of the Company. 3.2 (2) Amended and Restated Bylaws of the Company. 3.3 (15) Certificate of Amendment to the Amended and Restated Bylaws of Simulations Plus, Inc . 4.1 (1) Form of Common Stock Certificate. 4.2 (1) Share Exchange Agreement. 4.3(13) Revolving Line of Credit Note, dated as of March 31, 2020, by and between the Company, as borrower, and Wells Fargo Bank, National Association, as lender. 4.4(13) Credit Agreement, dated as of March 31, 2020, by and between the Company, as borrower, and Wells Fargo Bank, National Association, as lender. 10.1 (3)(†) The Company’s 2007 Stock Option Plan, as amended. 10.2 (10) Second Amendment to Lease by and between the Company and Crest Development LLC, dated as of May 1, 2016. 10.3 (5) Form of Indemnification Agreement. 10.4 (7) 2017 Equity Incentive Plan. 10.5 (6) Stock Purchase Agreement by and among Simulation Plus, Inc., DILIsym Services, Inc., The Shareholders’ Representative and The Shareholders of DILIsym Services, Inc., dated as of May 1, 2017. 10.6 (11)(†) Employment Agreement by and between the Company and Shawn O’Connor dated September 3, 2020 . 10.7 (14)(†) Employment Agreement by and between the Company and Will Frederick, dated December 1, 2020. 10.8 (15)(†) Separation Agreement, dated December 1, 2020, by and between the Company and John Kneisel . 10.9 (13) Third Amendment to Lease by and between the Company and Crest Development LLC, dated as of December 28, 2020. 10.10 (16)(†) Simulation Plus, Inc. 2021 Equity Incentive Plan. 10.11 (17)(†) First Amendment to Employment Agreement, by and between Simulations Plus, Inc. and Shawn O’Connor, dated November 19, 2021. 10.12(†)* Employment Agreement by and between the Company and John DiBella, dated January 1, 2022. 10.13(†)* Employment Agreement by and between the Company and Brett Howell, dated January 1, 2022. 10.14(†)* Employment Agreement by and between the Company and Jill Fiedler-Kelly, dated January 1, 2022. 21.1 * List of Subsidiaries. 23.1 * Consent of Independent Registered Public Accounting Firm. 31.1 * Section 302 – Certification of the Principal Executive Officer. 31.2 * Section 302 – Certification of the Principal Financial Officer. 32.1 * Section 906 – Certification of the Chief Executive Office and Chief Financial Officer. 101.INS** Inline XBRL Instance Document 101.SCH** Inline XBRL Taxonomy Extension Schema Document 101.CAL** Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF** Inline XBRL Taxonomy Extension Definition Linkbase Document 101.LAB** Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE** Inline XBRL Taxonomy Extension Presentation Linkbase Document _____________________________ 47 Table of Contents ^ Schedules and exhibits omitted pursuant to Item 601(b)(2) of Registration S-K. The registrant agrees to furnish supplementally a copy of any omitted schedule to the SEC upon request. * Filed herewith. ** The XBRL related information in Exhibit 101 shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document. (†) Refers to management contracts or compensatory plans or arrangements (1) Incorporated by reference to the Company’s Registration Statement on Form SB-2 (Registration No. 333-6680) filed on March 25, 1997. (2) Incorporated by reference to an exhibit to the Company’s Form 10-K for the fiscal year ended August 31, 2010. (3) Incorporated by reference to an exhibit to the Company’s Form 10-Q filed April 9, 2014. (4) Incorporated by reference to an exhibit to the Company’s Form 8-K/A filed November 18, 2014. (5) Incorporated by reference to an exhibit to the Company’s Form 8-K filed August 10, 2016. (6) Incorporated by reference to an exhibit to the Company’s Form 10-Q filed July 10, 2017. (7) Incorporated by reference to Appendix A to the Company’s Schedule 14A filed December 29. 2016. (8) Incorporated by reference to an exhibit to the Company’s Form 10-K for the fiscal year ended August 31, 2016. (9) Incorporated by reference to an exhibit to the Company’s Form 8-K filed April 2, 2020. (10) Incorporated by reference to an exhibit to the Company’s Form 8-K filed April 3, 2020. (11) Incorporated by reference to an exhibit to the Company’s Form 8-K filed September 9, 2020. (12) Incorporated by reference to Appendix A to the Company’s Definitive Schedule 14A filed December 31, 2018. (13) Incorporated by reference to an exhibit to the Company’s Form 8-K filed January 4, 2021. (14) Incorporated by reference to an exhibit to the Company’s Form 10-Q filed January 11, 2021. (15) Incorporated by reference to an exhibit to the Company’s Form 10-Q filed April 14, 2021. (16) Incorporated by reference to an exhibit to the Company’s Form 8-K filed June 8, 2021. (17) Incorporated by reference to an exhibit to the Company’s Form 8-K filed November 19, 2021. (c) Financial Statement Schedule. See Item 15(a)(2) above. 48 Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. October 28, 2022 SIMULATIONS PLUS, INC. By: /s/ Will Frederick Will Fredrick Chief Financial Officer (Principal financial officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title /s/ Shawn O’Connor Chief Executive Officer (Principal executive officer) Shawn O’Connor October 28, 2022 /s/ Walter S. Woltosz Chairman of the Board of Directors Walter S. Woltosz October 28, 2022 /s/ Dr. Lisa LaVange Director Dr. Lisa LaVange October 28, 2022 /s/ Dr. Daniel Weiner Director Dr. Daniel Weiner October 28, 2022 /s/ Sharlene Evans Director Sharlene Evans October 28, 2022 /s/ Dr. John K. Paglia Director Dr. John K. Paglia October 28, 2022 /s/ Will Frederick Chief Financial Officer (Principal financial officer and principal accounting officer) Will Frederick October 28, 2022 49 Table of Contents SIMULATIONS PLUS, INC. & SUBSIDIARIES CONTENTS August 31, 2022, 2021 and 2020 Page REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F- 2 - F-4 FINANCIAL STATEMENTS Consolidated Balance Sheets F- 5 Consolidated Statements of Operations and Comprehensive Income F- 6 Consolidated Statements of Shareholders’ Equity F- 7 Consolidated Statements of Cash Flows F- 8 Notes to Consolidated Financial Statements F- 9 – F-31 F-1 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Simulations Plus, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Simulations Plus, Inc. and Subsidiaries (the Company) as of August 31, 2022, and 2021, and the related consolidated statements of operations and comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended August 31, 2022, and the related notes (collectively referred to as the financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of August 31, 2022, and 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended August 31, 2022, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of August 31, 2022, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated October 28, 2022, expressed an unqualified opinion. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Revenue Recognition – Contract cost estimates Description of the Matter As discussed in Note 2 to the Consolidated Financial Statements, the Company earns a portion of its revenue through consulting service agreements. For performance obligations related to services that are required to be recognized over time, the Company generally measures its progress to completion using an input measure of total labor costs incurred divided by total labor costs expected to be incurred. Auditing revenue recognition is complex and highly judgmental due to the variability and uncertainty associated with the Company’s assessment of measure of progress. Changes in these estimates would have a significant effect on the amount of revenue recognized. F-2 Table of Contents How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls that address the risk of material misstatement of consulting services revenue including those associated with cost to complete estimates. We tested controls over management’s process to collect, review, and approve the data used in assessing revenue recognized over time. To test the measures of progress used for performance obligations related to services that are required to be recognized over time, our audit procedures included, among others, evaluating the appropriateness of the Company’s accounting policy for each type of arrangement, testing the identified measure of performance by reading contracts with customers, including all amendments, and reviewing the contract analyses prepared by management. We evaluated whether the selected measures of progress towards satisfaction of performance obligations were applied consistently. We also tested the completeness and accuracy of the underlying data used for the measure of progress by testing the underlying cost data. Rose, Snyder & Jacobs LLP We have served as the Company’s auditor since 2004. Encino, California October 28, 2022 F-3 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Simulations Plus, Inc. Opinion on Internal Control over Financial Reporting We have audited Simulations Plus, Inc. and Subsidiaries (the Company’s) internal control over financial reporting as of August 31, 2022, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of August 31, 2022, based on criteria established in Internal Control—Integrated Framework (2013) issued by COSO. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet as of August 31, 2022, and the related consolidated statements of operations and comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended August 31, 2022, and related notes, and our report dated October 28, 2022, expressed an unqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Rose, Snyder & Jacobs LLP Encino, CA October 28, 2022 F-4 Table of Contents SIMULATIONS PLUS, INC. CONSOLIDATED BALANCE SHEETS August 31, (in thousands, except share and per share amounts) 2022 2021 ASSETS Current assets Cash and cash equivalents $ 51,567 $ 36,984 Accounts receivable, net of allowance for doubtful accounts of $ 12 and $ 78 13,787 9,851 Prepaid income taxes 1,391 1,012 Prepaid expenses and other current assets 3,377 4,846 Short-term investments 76,668 86,620 Total current assets 146,790 139,313 Long-term assets Capitalized computer software development costs, net of accumulated amortization of $ 15,672 and $ 14,438 9,563 7,646 Property and equipment, net 632 1,838 Operating lease right-of-use assets 1,420 1,276 Intellectual property, net of accumulated amortization of $ 7,928 and $ 6,516 9,057 10,469 Other intangible assets, net of accumulated amortization of $ 2,662 and $ 2,186 7,560 6,464 Goodwill 12,921 12,921 Other assets 439 51 Total assets $ 188,382 $ 179,978 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable $ 225 $ 387 Accrued compensation 3,254 3,185 Accrued expenses 931 2,419 Contracts payable — 4,550 Operating lease liability - current portion 461 382 Deferred revenue 2,864 651 Total current liabilities 7,735 11,574 Long-term liabilities Deferred income taxes, net 1,456 1,726 Operating lease liability 943 896 Total liabilities 10,134 14,196 Commitments and contingencies — — Shareholders' equity Preferred stock, $ 0.001 par value 10,000,000 shares authorized, no shares issued and outstanding $ — $ — Common stock, $ 0.001 par value and additional paid-in capital — 50,000,000 shares authorized; 20,260,070 and 20,141,521 shares issued and outstanding 138,512 133,418 Retained earnings 40,044 32,407 Accumulated other comprehensive loss ( 308 ) ( 43 ) Total shareholders' equity 178,248 165,782 Total liabilities and shareholders' equity $ 188,382 $ 179,978 The accompanying notes are an integral part of these consolidated financial statements. F-5 Table of Contents SIMULATIONS PLUS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME Years Ended August 31, (in thousands, except per common share amounts) 2022 2021 2020 Revenues Software $ 32,642 $ 27,670 $ 21,587 Services 21,264 18,796 20,002 Total revenues 53,906 46,466 41,589 Cost of revenues Software 3,060 3,235 2,883 Services 7,762 7,365 7,766 Total cost of revenues 10,822 10,600 10,649 Gross profit 43,084 35,866 30,940 Operating expenses Research and development 3,208 4,047 2,975 Selling, general, and administrative 24,965 20,566 16,360 Total operating expenses 28,173 24,613 19,335 Income from operations 14,911 11,253 11,605 Other income (expense), net 204 ( 168 ) ( 218 ) Income before income taxes 15,115 11,085 11,387 Provision for income taxes ( 2,632 ) ( 1,303 ) ( 2,055 ) Net Income $ 12,483 $ 9,782 $ 9,332 Earnings per share Basic $ 0.62 $ 0.49 $ 0.52 Diluted $ 0.60 $ 0.47 $ 0.50 Weighted-average common shares outstanding Basic 20,196 20,045 17,819 Diluted 20,749 20,743 18,538 Other comprehensive (loss) income, net of tax Foreign currency translation adjustments ( 265 ) ( 101 ) 58 Comprehensive income $ 12,218 $ 9,681 $ 9,390 The accompanying notes are an integral part of these consolidated financial statements. F-6 Table of Contents SIMULATIONS PLUS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Year ended August 31, (in thousands, except per common share amounts) 2022 2021 2020 Common stock and additional paid in capital Balance, beginning of period $ 133,418 $ 128,541 $ 15,327 Exercise of stock options 891 1,461 630 Stock-based compensation 2,686 2,405 1,287 Shares issued to Directors for services 351 345 290 Shares issued - Lixoft 1,166 666 3,260 Common stock issued for cash, net — — 107,747 Balance, end of period 138,512 133,418 128,541 Retained earnings Balance, beginning of period 32,407 27,436 22,354 Declaration of dividends ( 4,846 ) ( 4,811 ) ( 4,250 ) Net income 12,483 9,782 9,332 Balance, end of period 40,044 32,407 27,436 Accumulated other comprehensive (loss) income Balance, beginning of period ( 43 ) 58 — Other comprehensive (loss) income ( 265 ) ( 101 ) 58 Balance, end of period ( 308 ) ( 43 ) 58 Total shareholders’ equity $ 178,248 $ 165,782 $ 156,035 Cash dividends declared per common share $ 0.24 $ 0.24 $ 0.24 The accompanying notes are an integral part of these consolidated financial statements. F-7 Table of Contents SIMULATIONS PLUS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended August 31, (in thousands) 2022 2021 2020 Cash flows from operating activities Net income $ 12,483 $ 9,782 $ 9,332 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 3,574 3,590 2,962 Change in value of contingent consideration 283 486 203 Amortization of investment premiums 1,678 2,350 — Stock-based compensation 3,037 2,750 1,577 Deferred income taxes ( 270 ) ( 628 ) ( 378 ) Currency translation adjustments ( 265 ) ( 101 ) — (Increase) decrease in Accounts receivable ( 3,936 ) ( 2,429 ) ( 2,018 ) Prepaid income taxes ( 379 ) ( 42 ) ( 12 ) Prepaid expenses and other assets 1,081 ( 157 ) ( 259 ) Increase (decrease) in Accounts payable ( 162 ) 39 221 Other liabilities ( 1,437 ) 3,353 23 Deferred revenue 2,213 210 ( 739 ) Net cash provided by operating activities 17,900 19,203 10,912 Cash flows from investing activities Purchases of property and equipment ( 819 ) ( 1,627 ) ( 231 ) Purchase of short-term investments ( 100,846 ) ( 122,395 ) ( 67,249 ) Proceeds from sale of short-term investments 109,121 100,229 — Cash used to acquire subsidiaries — — ( 9,471 ) Cash received in acquisition — — 3,799 Capitalized computer software development costs ( 3,151 ) ( 2,949 ) ( 2,353 ) Net cash provided by (used in) investing activities 4,305 ( 26,742 ) ( 75,505 ) Cash flows from financing activities Payment of dividends ( 4,846 ) ( 4,811 ) ( 4,250 ) Payments on contracts payable ( 3,667 ) ( 1,334 ) ( 1,761 ) Proceeds from the exercise of stock options 891 1,461 630 Proceeds from follow-on public offering, net — — 107,747 Net cash (used in) provided by financing activities ( 7,622 ) ( 4,684 ) 102,366 Net increase (decrease) in cash and cash equivalents 14,583 ( 12,223 ) 37,773 Cash and cash equivalents, beginning of year $ 36,984 $ 49,207 $ 11,434 Cash and cash equivalents, end of period $ 51,567 $ 36,984 $ 49,207 Supplemental disclosures of cash flow information Income taxes paid $ 3,233 $ 1,857 $ 2,353 Non-Cash Investing and Financing Activities Stock issued for acquisition of Lixoft $ 1,166 $ 666 $ 3,261 Creation of contract liabilities for acquisition of subsidiaries $ — $ — $ 4,528 Right of use assets capitalized $ 624 $ 905 $ 1,499 The accompanying notes are an integral part of these consolidated financial statements. F-8 Table of Contents Simulations Plus, Inc. Notes to Consolidated Financial Statements For the Year Ended August 31, 2022 NOTE 1 – ORGANIZATION AND LINES OF BUSINESS Organization Simulations Plus, Inc. (the "Company") was incorporated on July 17, 1996. In September 2014, Simulations Plus acquired all of the outstanding equity interests of Cognigen Corporation ("Cognigen") and Cognigen became a wholly-owned subsidiary of Simulations Plus, Inc. In June 2017, Simulations Plus acquired DILIsym Services, Inc. ("DILIsym") as a wholly-owned subsidiary. In April 2020, Simulations Plus, Inc. acquired Lixoft, a French société par actions simplifiée ("Lixoft") as a wholly-owned subsidiary pursuant to a stock purchase and contribution agreement. (Collectively, "Company", "we", "us", "our"). Effective September 1, 2021, the Company merged both Cognigen Corporation and DILIsym with and into Simulations Plus, Inc. through short-form mergers (the “Mergers”). To effectuate the Mergers, the Company filed Certificates of Ownership with the Secretaries of State of the states of Delaware (Cognigen’s and DILIsym’s state of incorporation) and California (the Company’s state of incorporation). Consummation of the Mergers was not subject to approval of the Company’s stockholders and did not impact the rights of the Company’s stockholders. Lines of Business We are a premier developer of drug discovery and development software for modeling and simulation, and for the prediction of molecular properties utilizing both artificial intelligence (“AI”) as well as machine-learning-based technology. We also provide consulting services ranging from early drug discovery through preclinical and clinical trial data analysis and for submissions to regulatory agencies. Our software and consulting services are provided to major pharmaceutical, biotechnology, agrochemical, cosmetics, and food industry companies, and to regulatory agencies worldwide for use in the conduct of industry-based research. NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of Simulations Plus and, as of April 1, 2020, Lixoft. All significant intercompany accounts and transactions are eliminated in consolidation. Use of Estimates Our financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America. 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. Reclassifications Certain numbers in the prior year have been reclassified to conform to the current year's presentation. Revenue Recognition We generate revenue primarily from the sale of software licenses and by providing consulting services to the pharmaceutical industry for drug development. In accordance with ASC 606, we determine 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 F-9 Table of Contents iv. Allocation of the transaction price to the performance obligations in the contract v. Recognition of revenue when, or as, we satisfy a performance obligation Components of Revenue The following is a description of principal activities from which the Company generates revenue. As part of the accounting for these arrangements, the Company must develop assumptions that require judgment to determine the stand-alone selling price for each performance obligation identified in the contract. Stand-alone selling prices are determined based on the prices at which the Company separately sells its services or goods. Revenue Components Typical Payment Terms Software Revenues: Software revenues are generated primarily from sales of software licenses at the time the software is unlocked, and the term commences. The license period typically is one year or less. Along with the license a di minimis amount of customer support is provided to assist the customer with the software. Should the customer need more than a di minimis amount of support, they can choose to enter into a separate contract for additional training. Most software is installed on our customers’ servers and the Company has no control of the software once the sale is made. Payments are generally due upon invoicing on a net 30 basis unless other payment terms are negotiated with the customer based on customer history. Typical industry standards apply. For certain software arrangements the Company hosts the licenses on servers maintained by the Company, Revenue for those arrangements is accounted as Software as a Service over the life of the contract. These arrangements are a small portion of software revenues of the Company. Consulting Contracts: Consulting services provided to our customers are generally recognized over time as the contracts are performed and the services are rendered. The company measures its consulting revenue based on time expended compared to total estimated hours to complete a project. The Company believes the method chosen for its contract revenue best depicts the transfer of benefits to the customer under the contracts. Payment terms vary, depending on the size of the contract, credit history and history with the client and deliverables within the contract. Consortium Member Based Services: The performance obligation is recognized on a time elapsed basis, by month, for which the services are provided, as the Company transfers control evenly over the contractual period. Payment is due at the beginning of the period, generally on a net 30 or 60 basis. Remaining Performance Obligations Transaction price allocated to remaining performance obligations represents contracted revenue that has not yet been recognized, which includes deferred revenue and unbilled amounts that will be recognized as revenue in future periods. As of August 31, 2022, remaining performance obligations were $ 13.5 million. 86 % of the remaining performance obligations are expected to be recognized over the next 12 months, with the remainder recognized thereafter. Remaining performance obligations estimates are subject to change and are affected by several factors, including contract terminations and changes in the scope of contracts. F-10 Table of Contents Disaggregation of Revenues The components of disaggregation of revenue for the years ended August 31, 2022, 2021, and 2020 were as follows: Year ended August 31, (in thousands) 2022 2021 2020 Software licenses Point in time $ 31,587 $ 26,725 $ 20,668 Over time 1,055 945 919 Services Over time 21,264 18,796 20,002 Total revenue $ 53,906 $ 46,466 $ 41,589 In addition, the Company allocates revenues to geographic areas based on the locations of its customers. Geographical revenues for the years ended August 31, 2022, 2021, and 2020 were as follows: (in thousands) Year ended August 31, 2022 2021 2020 $ % of total $ % of total $ % of total Americas $ 37,681 70 % $ 32,549 70 % $ 29,674 71 % EMEA 10,388 19 % 7,906 17 % 5,827 14 % Asia Pacific 5,837 11 % 6,011 13 % 6,088 15 % Total $ 53,906 100 % $ 46,466 100 % $ 41,589 100 % Contract Balances We receive payments from customers based upon contractual billing schedules, while we recognize revenue when, or as, we satisfy our performance obligations. This timing difference results in accounts receivable, contract assets, and contract liabilities. We record accounts receivable when the right to consideration becomes unconditional. We record a contract asset if the right to consideration is conditioned on something other than the passage of time, such as our future performance. Contract assets are included in prepaid expenses and other current assets on our consolidated balance sheets. We record a contract liability when we have an obligation to transfer goods or services to a customer for which we have either received consideration or a payment is due from a customer. We refer to contract liabilities as deferred revenue on our consolidated balance sheets. Contract asset balances as of August 31, 2022, and August 31, 2021, were $ 1.7 million and $ 3.2 million, respectively. During the year ended August 31, 2022, the Company recognized $ 0.6 million of revenue that was included in contract liabilities as of August 31, 2021, and during the year ended August 31, 2021, the Company recognized $ 0.4 million of revenue that was included in contract liabilities as of August 31, 2020. Deferred Commissions Sales commissions earned by our sales force and our commissioned sales representatives are considered incremental and recoverable costs of obtaining a contract with a customer. We apply the practical expedient as described in ASC 340-40-25-4 to expense costs as incurred for sales commissions, since the amortization period of the asset that we otherwise would have recognized is one year or less. This expense is included in the consolidated statements of operations and comprehensive income as selling, general, and administrative expense. F-11 Table of Contents Cash and Cash Equivalents For purposes of the statements of cash flows, we consider all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. Accounts Receivable and Allowance for Credit Losses The Company extends credit to its customers in the normal course of business. The Company evaluates its allowance for credit losses based on its estimate of the collectability of its trade accounts receivable. As part of this assessment, the Company considers various factors including the financial condition of the individual companies with which it does business, the aging of receivable balances, historical experience, changes in customer payment terms, current market conditions, and reasonable and supportable forecasts of future economic conditions. In times of economic turmoil, the Company’s estimates and judgments with respect to the collectability of its receivables is subject to greater uncertainty than in more stable periods. Accounts receivable balances will be charged off against the allowance for credit losses after all means of collection have been exhausted and the potential for recovery is considered remote. Investments The Company may invest excess cash balances in short-term and long-term marketable debt securities. Investments may consist of certificates of deposit, money market accounts, government-sponsored enterprise securities, corporate bonds, and/or commercial paper within the parameters of our Investment Policy and Guidelines. The Company accounts for its investments in marketable securities in accordance with ASC 320, Investments – Debt and Equity Securities. This statement requires debt securities to be classified into three categories: Held-to-maturity—Debt securities that the entity has the positive intent and ability to hold to maturity are measured at amortized cost and are presented at the net amount expected to be collected. Any change in the allowance for credit losses during the period is reflected in earnings. Discounts and premiums to par value of the debt securities are amortized to interest income/expense over the term of the security. Trading Securities—Debt securities that are bought and held primarily for the purpose of selling in the near term are reported at fair value, with unrealized gains and losses included in earnings. Available-for-Sale—Debt securities not classified as either securities held-to-maturity or trading securities are reported at fair value. For available-for-sale debt securities in an unrealized loss position, we evaluate as of the balance sheet date whether the unrealized losses are attributable to a credit loss or other factors. The portion of unrealized losses related to a credit loss is recognized in earnings, and the portion of unrealized loss not related to a credit loss is recognized in other comprehensive income. We classify our investments in marketable debt securities based on the facts and circumstances present at the time of purchase of the securities. We subsequently reassess the appropriateness of that classification at each reporting date. During the year ended August 31, 2022, all of our investments were classified as held-to-maturity. Capitalized Computer Software Development Costs Software development costs are capitalized in accordance with ASC 985-20. 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 software development costs require considerable judgment by management with respect to certain external factors including, but not limited to, technological feasibility, anticipated future gross revenue, 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 our software products. Amortization of capitalized 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 years ended August 31, 2022, 2021, and 2020, respectively. We expect future amortization expense to vary due to increases in capitalized computer software development costs. F-12 Table of Contents We test capitalized computer software development costs for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Property and Equipment Property and equipment are recorded at cost, or fair market value for property and equipment acquired in business combinations, less accumulated depreciation and amortization. Depreciation and amortization are calculated using the straight-line method over the estimated useful lives as follows: Equipment 5 years Computer equipment 3 to 7 years Furniture and fixtures 5 to 7 years Leasehold improvements Shorter of life of asset or lease Maintenance and minor replacements are charged to expense as incurred. Gains and losses on disposals are included in the results of operations. Internal-use Software We have capitalized certain internal-use software costs in accordance with ASC 350-40, which are included in intangible assets. The amortization of such costs is classified as selling, general, and administrative expenses on the consolidated statements of operations. Maintenance of and minor upgrades to internal-use software are also classified as selling, general, and administrative expenses as incurred. Leases We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets and operating lease liabilities (current and long-term) in our consolidated balance sheets. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we generally use our incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at the commencement date. The operating lease ROU asset also includes any lease payments made at or before the commencement date and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense is recognized on a straight-line basis over the lease term. Supplemental balance sheet information related to operating leases was as follows as of August 31, 2022: (in thousands) Right of use assets $ 1,420 Lease liabilities, current $ 461 Lease liabilities, long-term $ 943 Operating lease costs $ 520 Weighted-average remaining lease term 3.05 years Weighted-average discount rate 3.41 % F-13 Table of Contents Intangible Assets and Goodwill We perform valuations of assets acquired and liabilities assumed on each acquisition accounted for as a business combination and recognize the assets acquired and liabilities assumed at their acquisition-date fair value. Acquired intangible assets include customer relationships, software, trade names, and noncompete agreements. We determine the appropriate useful life by performing an analysis of expected cash flows based on historical experience of the acquired businesses. Finite-lived 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. Finite-lived 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. Goodwill represents the excess of the cost of an acquired entity over the fair value of the acquired net assets. Goodwill and indefinite-lived intangible assets are tested for impairment annually or when events or circumstances change that would indicate that they 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 our use of the acquired assets or the strategy for our overall business, significant negative industry or economic trends, or significant underperformance relative to expected historical or projected future results of operations. Goodwill and intangible assets are 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, we determined that we have four reporting units: Simulations Plus, Cognigen, DILIsym, and Lixoft. We did not recognize any impairment charges during the periods ended August 31, 2022, 2021, and 2020. Reconciliation of Goodwill as of August 31, 2022, and 2021: (in thousands) Cognigen DILIsym Lixoft Total Balance, August 31, 2020 $ 4,789 $ 5,598 $ 2,534 $ 12,921 Addition — — — — Impairments — — — — Balance, August 31, 2021 4,789 5,598 2,534 12,921 Addition — — — — Impairments — — — — Balance, August 31, 2022 $ 4,789 $ 5,598 $ 2,534 $ 12,921 The following table summarizes other intangible assets as of August 31, 2022: (in thousands) Amortization Period Acquisition Value Accumulated Amortization Net book value Simulations Plus ERP Straight line 15 years $ 1,702 $ 80 $ 1,622 Cognigen Customer relationships Straight line 8 years 1,100 1,100 — Trade Name None 500 — 500 DILIsym Customer relationships Straight line 10 years 1,900 997 903 Trade Name None 860 — 860 Lixoft Customer relationships Straight line 14 years 2,550 437 2,113 Trade Name None 1,550 — 1,550 Covenants not to compete Straight line 3 years 60 48 12 $ 10,222 $ 2,662 $ 7,560 F-14 Table of Contents The following table summarizes other intangible assets as of August 31, 2021: (in thousands) Amortization Period Acquisition Value Accumulated Amortization Net book value Cognigen Customer relationships Straight line 8 years $ 1,100 $ 963 $ 137 Trade Name None 500 — 500 Covenants not to compete Straight line 5 years 50 50 — DILIsym Customer relationships Straight line 10 years 1,900 807 1,093 Trade Name None 860 — 860 Covenants not to compete Straight line 4 years 80 80 — Lixoft Customer relationships Straight line 14 years 2,550 258 2,292 Trade Name None 1,550 — 1,550 Covenants not to compete Straight line 3 years 60 28 32 $ 8,650 $ 2,186 $ 6,464 Total amortization expense for the years ended August 31, 2022, 2021, and 2020 was $ 0.6 million, $ 0.5 million, and $ 0.4 million, respectively. Future amortization of finite-lived intangible assets for the next five years is as follows: (in thousands) Year ending August 31, Amount 2023 $ 493 2024 $ 481 2025 $ 481 2026 $ 481 2027 $ 434 F-15 Table of Contents Business Acquisitions The Company accounted for the acquisition of 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, estimates of advertiser and publisher turnover rates, and estimates of terminal values. Business acquisitions are included in the Company's consolidated financial statements as of the date of the acquisition. Fair Value of Financial Instruments Assets and liabilities recorded at fair value in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. The categories are as follows: Level Input: Input Definition: Level I Inputs that are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date. Level II Inputs, other than quoted prices included in Level I, that are observable for the asset or liability through corroboration with market data at the measurement date. Level III Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. For certain of our financial instruments, including accounts receivable, accounts payable, and accrued compensation and other accrued expenses, the amounts approximate fair value due to their short maturities. The following table summarizes fair value measurements as of August 31, 2022, and August 31, 2021, for assets and liabilities measured at fair value on a recurring basis: August 31, 2022 (in thousands) Level 1 Level 2 Level 3 Total Cash and cash equivalents $ 51,567 $ — $ — $ 51,567 Short-term investments $ 76,668 $ — $ — $ 76,668 August 31, 2021 (in thousands) Level 1 Level 2 Level 3 Total Cash and cash equivalents $ 36,984 $ — $ — $ 36,984 Short-term investments $ 86,620 $ — $ — $ 86,620 Acquisition-related contingent consideration obligations $ — $ — $ 3,217 $ 3,217 As of August 31, 2022, we had no liability for contingent consideration related to our acquisition of Lixoft as the remaining contingent obligation was settled in May 2022. As of August 31, 2021, we had a liability for contingent consideration related to our acquisition of Lixoft. The fair value measurement of the contingent consideration obligations was determined using Level 3 inputs and was based on a discounted cash flow model using a probability-weighted income approach. The liability is recorded as contracts payable on our consolidated balance sheets, and changes in the fair value of the contingent consideration obligations are recorded as other income (expense), net in our consolidated statements of operations and comprehensive income. F-16 Table of Contents The following is a reconciliation of contingent consideration value: (in thousands) Value as of August 31, 2021 $ 3,217 Contingent consideration payments in cash ( 2,334 ) Contingent consideration payments in stock ( 1,166 ) Change in value of contingent consideration 283 Value as of August 31, 2022 $ — Marketing The Company expenses marketing costs as incurred. Marketing costs for the years ended August 31, 2022, 2021, and 2020 were $ 0.2 million, $ 0.1 million, and $ 0.1 million, respectively. 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 experiments, and purchased software that was developed by other companies and incorporated into, or used in the development of, our final products. Income Taxes We account for income taxes in accordance with ASC 740 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 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. Intellectual property On February 28, 2012, we bought out the royalty agreement with Enslein Research. The cost of $ 0.1 million is being amortized over 10 years under the straight-line method . On May 15, 2014, we entered into a termination and non-assertion agreement with TSRL, Inc., pursuant to which the parties agreed to terminate an exclusive software licensing agreement entered into between the parties in 1997. As a result, the Company obtained a perpetual right to use certain source code and data, and TSRL relinquished any rights and claims to any GastroPlus products and to any claims, royalties, or other payments under that 1997 agreement. We agreed to pay TSRL total consideration of $ 6.0 million, which is being amortized over 10 years under the straight-line method . On June 1, 2017, as part of the acquisition of DILIsym, the Company acquired certain developed technologies associated with the drug-induced liver disease (DILI). These technologies were valued at $ 2.9 million and are being amortized over 9 years under the straight-line method . In September 2018, we purchased certain intellectual property rights of Entelos Holding Company. The cost of $ 0.1 million is being amortized over 10 years under the straight-line method . On April 1, 2020, as part of the acquisition of Lixoft, the Company acquired certain developed technologies associated with the Lixoft scientific software. These technologies were valued at $ 8.0 million and are being amortized over 16 years under the straight-line method . F-17 Table of Contents The following table summarizes intellectual property as of August 31, 2022: (in thousands) Amortization Period Acquisition Value Accumulated Amortization Net Book Value Royalty Agreement buy out-Enslein Research Straight line 10 years $ 75 $ 75 $ — Termination/nonassertion agreement-TSRL Inc. Straight line 10 years 6,000 4,975 1,025 Developed technologies–DILIsym acquisition Straight line 9 years 2,850 1,662 1,188 Intellectual rights of Entelos Holding Company Straight line 10 years 50 20 30 Developed technologies–Lixoft acquisition Straight line 16 years 8,010 1,196 6,814 $ 16,985 $ 7,928 $ 9,057 The following table summarizes intellectual property as of August 31, 2021: (in thousands) Amortization Period Acquisition Value Accumulated Amortization Net Book Value Royalty Agreement buy out-Enslein Research Straight line 10 years $ 75 $ 71 $ 4 Termination/nonassertion agreement-TSRL Inc. Straight line 10 years 6,000 4,375 1,625 Developed technologies–DILIsym acquisition Straight line 9 years 2,850 1,346 1,504 Intellectual rights of Entelos Holding Company Straight line 10 years 50 15 35 Developed technologies–Lixoft acquisition Straight line 16 years 8,010 709 7,301 $ 16,985 $ 6,516 $ 10,469 Total amortization expense for intellectual property agreements for the years ended August 31, 2022, 2021, and 2020 was $ 1.4 million, $ 1.4 million, and $ 1.1 million, respectively. Future amortization of intellectual property for the next five years is as follows: (in thousands) Year ending August 31, Amount 2023 $ 1,373 2024 $ 1,198 2025 $ 773 2026 $ 697 2027 $ 457 F-18 Table of Contents Earnings per Share We report earnings per share in accordance with ASC 260. Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding. Diluted earnings per share is computed similarly to basic earnings per share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. The components of basic and diluted earnings per share for the years ended August 31, 2022, 2021, and 2020 were as follows: August 31, (in thousands) 2022 2021 2020 Numerator Net income attributable to common shareholders $ 12,483 $ 9,782 $ 9,332 Denominator Weighted-average number of common shares outstanding during the year 20,196 20,045 17,819 Dilutive effect of stock options 553 698 719 Common stock and common stock equivalents used for diluted earnings per share 20,749 20,743 18,538 Stock-Based Compensation Compensation costs related to stock options are determined in accordance with ASC 718. Compensation cost is calculated based on the grant-date fair value estimated using the Black-Scholes pricing model and then amortized on a straight-line basis over the requisite service period. Stock-based compensation expense related to stock options, 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. Impairment of Long-lived Assets We account for the impairment and disposition of long-lived assets in accordance with ASC 360. Long-lived assets to be held and used are reviewed for events or changes in circumstances that indicate that their carrying value may not be recoverable. We measure recoverability by comparing the carrying amount of an asset to the expected future undiscounted net cash flows generated by the asset. If we determine that the asset may not be recoverable, or if the carrying amount of an asset exceeds its estimated future undiscounted cash flows, we recognize an impairment charge to the extent of the difference between the fair value and the asset's carrying amount. No impairment losses were recorded during the years ended August 31, 2022, 2021, and 2020. Recently Issued 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. F-19 Table of Contents 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. NOTE 3 – OTHER INCOME (EXPENSE), NET The components of other income (expense), net for the years ended August 31, 2022, 2021, and 2020, were as follows: Year ended August 31, (in thousands) 2022 2021 2020 Interest income $ 717 $ 201 $ 30 Interest expense — ( 22 ) — Change in valuation of contingent consideration ( 283 ) ( 486 ) ( 203 ) Gain on sale of assets 1 — — (Loss) gain on currency exchange ( 231 ) 139 ( 45 ) Total other income (expense), net $ 204 $ ( 168 ) $ ( 218 ) NOTE 4 – PROPERTY AND EQUIPMENT Property and equipment consisted of the following: August 31, (in thousands) 2022 2021 Equipment $ 346 $ 293 Computer equipment 860 606 Furniture and fixtures 61 36 Leasehold improvements 13 13 Construction in progress — 1,302 Subtotal 1,280 2,250 Less accumulated depreciation ( 648 ) ( 412 ) Total $ 632 $ 1,838 Depreciation expense was $ 0.3 million, $ 0.2 million, and $ 0.2 million for the years ended August 31, 2022, 2021, and 2020, respectively. NOTE 5 – INVESTMENTS The Company invests a portion of its excess cash balances in short-term debt securities. Investments at August 31, 2022, consisted of corporate bonds and term deposits with maturities remaining of less than 12 months. The Company may also invest excess cash balances in certificates of deposits, money market accounts, government-sponsored enterprise securities, and/or commercial paper. The Company accounts for its investments in accordance with ASC 320, Investments – Debt and Equity Securities. As of August 31, 2022, all investments were classified as held-to-maturity securities, as the Company has the positive intent and ability to hold these securities until maturity. The Company believes unrealized losses on investments were primarily caused by rising interest rates rather than changes in credit quality and accordingly has not recorded an allowance for credit losses on its debt securities as of August 31, 2022, and 2021. F-20 Table of Contents The following tables summarize the Company’s short-term investments as of August 31, 2022, and 2021: August 31, 2022 (in thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Commercial notes (due within one year) $ 72,168 $ — $ ( 839 ) $ 71,329 Term deposits (due within one year) 4,500 4,500 Total $ 76,668 $ — $ ( 839 ) $ 75,829 August 31, 2021 (in thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Commercial notes (due within one year) $ 86,620 $ — $ ( 136 ) $ 86,484 Total $ 86,620 $ — $ ( 136 ) $ 86,484 NOTE 6 – CONTRACTS PAYABLE DILIsym Acquisition Liabilities: On June 1, 2017, we acquired DILIsym. The agreement provided for a working capital adjustment, an 18-month $ 1.0 million holdback provision against certain representations and warranties, and an earnout agreement of up to an additional $ 5.0 million in earnout payments based on earnings over three years following acquisition. The earnout liability was recorded at an estimated fair value. Payments under the earnout liability started in fiscal year 2019. In September 2018, $ 1.6 million was paid out under the first earnout payment. A second earnout payment was made in August 2019 in the amount of $ 1.7 million. The final payment of $ 1.8 million was paid in August 2020. In addition, no claims were made against the holdback and the $ 1.0 million holdback provision was released eighteen months after June 1, 2017. Lixoft Acquisition Liabilities : On April 1, 2020, the Company acquired Lixoft. The agreement provided for a 24-month $ 2.0 million holdback provision against certain representations and warranties, comprised of $ 1.3 million of cash and shares of common stock valued at $ 0.7 million issued and deposited into an escrow account at the date of the agreement. In April 2022, the shares of common stock were released from escrow and $1.3 million of cash was paid to settle the holdback liability. In addition, based on a revenue-growth formula for the two years subsequent to April 1, 2020, the agreement called for earnout payments up to $ 5.5 million (two-thirds' cash and one-third newly issued, unregistered shares of the Company’s common stock). 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 common stock valued at $ 0.7 million. In May 2022, $ 3.5 million was paid out under the second earnout payment, which was comprised of $ 2.3 million cash and shares of common stock valued at $ 1.2 million. As of August 31, 2022, and 2021 the following liabilities have been recorded: (in thousands) August 31, 2022 August 31, 2021 Holdback liability $ — $ 1,333 Earnout liability — 3,217 Subtotal $ — $ 4,550 Less: Current portion — 4,550 Long-term $ — $ — F-21 Table of Contents NOTE 7 – COMMITMENTS AND CONTINGENCIES Leases We lease 9,255 square feet of office space in Lancaster, California, where our corporate headquarters are located. The lease term extends to January 31, 2026, and the base rent is $ 17 thousand per month. The lease agreement gives the Company the right, upon 180 days’ prior notice, to opt out of all or part of the last four years of the term, with no penalty. We lease 4,317 square feet of office space in Buffalo, New York. The lease term extends to November 30, 2026, and the base rent is $ 7 thousand per month with an annual 2 % increase. The lease agreement provides the Company with two five-year renewal options and the right to terminate the lease with one year’s prior written notice with certain penalties. We previously leased 12,623 square feet of office space at a different location in Buffalo, New York. That lease term extended to November 2021 and the base rent was $ 16 thousand per month. We have a data center colocation space in Buffalo, New York, with a lease term through November 30, 2026, and rent of $ 4 thousand per month with an annual 3 % increase. We lease 3386 square feet of office space in Durham, North Carolina. The lease term extends to September 30, 2023, and the base rent is $ 8 thousand per month with an annual 3 % increase. We lease 2,300 square feet of office space in Paris, France. The lease term extends to November 30, 2024, and the rent is $ 5 thousand per month and adjusted each December based on a consumer price index. Rent expense, including common area maintenance fees for the years ended August 31, 2022, 2021, and 2020 was $ 0.6 million, $ 0.7 million, and $ 0.6 million, respectively. Lease liability maturities as of August 31, 2022, were as follows: (in thousands) Years Ending August 31, Amount 2023 $ 511 2024 411 2025 346 2026 219 2027 34 Total undiscounted liabilities 1,521 Less: imputed interest ( 117 ) Total operating lease liabilities (including current portion) $ 1,404 Line of Credit 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. Employment Agreements In the normal course of business, the Company has entered into employment agreements with certain of its executive officers that may require compensation payments upon termination. Litigation We are not a party to any legal proceedings and are not aware of any pending legal proceedings of any kind. F-22 Table of Contents NOTE 8 – SHAREHOLDERS' EQUITY Shares Outstanding Shares of common stock outstanding for the years ended August 31, 2022, 2021, and 2020 were as follows: August 31, 2022 2021 2020 Common stock outstanding, beginning of year 20,142 19,923 17,592 Common stock issued during the year 119 218 2,331 Common stock outstanding, end of year 20,260 20,142 19,923 Dividends The Company’s Board of Directors declared cash dividends during the years ended August 31, 2022, and 2021. The details of dividends paid are in the following tables: (in thousands, except dividend per share) Fiscal Year 2022 Record Date Distribution Date Number of Shares Outstanding on Record Date Dividend per Share Total Amount 10/25/2021 11/01/2021 20,148 $ 0.06 $ 1,209 1/31/2022 2/07/2022 20,178 $ 0.06 1,211 4/25/2022 5/02/2022 20,207 $ 0.06 1,212 7/25/2022 8/01/2022 20,239 $ 0.06 1,214 Total $ 4,846 (in thousands, except dividend per share) Fiscal Year 2021 Record Date Distribution Date Number of Shares Outstanding on Record Date Dividend per Share Total Amount 10/26/2020 11/02/2020 19,924 $ 0.06 $ 1,195 1/25/2021 2/01/2021 20,010 $ 0.06 1,201 4/26/2021 5/03/2021 20,115 $ 0.06 1,207 7/26/2021 8/02/2021 20,139 $ 0.06 1,208 Total $ 4,811 F-23 Table of Contents Stock Option Plans On December 23, 2016, the Board of Directors adopted, and on February 23, 2017, the shareholders approved, the 2017 Equity Incentive Plan (the "2017 Plan"), under which a total of 1.0 million shares of common stock were reserved for issuance. The 2017 plan would have terminated in December 2026. The 2017 Plan was replaced by the Company’s 2021 Plan (as defined below), and as a result, no further issuances of shares may be made under the 2017 Plan. On April 9, 2021, the Board of Directors adopted, and on June 23, 2021, the shareholders approved, the 2021 Equity Incentive Plan (the “2021 Plan”), under which a total of 1.3 million shares of common stock have been reserved for issuance. The 2021 Plan will terminate in 2031. As of August 31, 2022, employees and directors held Qualified Incentive Stock Options ("ISOs") and Non-Qualified Stock Options ("NQSOs") to purchase 1.2 million shares of common stock at exercise prices ranging from $ 6.85 to $ 66.14 per share. The following tables summarize information about stock options: (in thousands, except per share and weighted-average amounts) Transactions During Fiscal Year 2022 Number of Options Weighted-Average Exercise Price Per Share Weighted-Average Remaining Contractual Life Outstanding, August 31, 2021 1,184 $ 25.63 6.47 Granted 255 42.13 Exercised ( 104 ) 16.15 Canceled/Forfeited ( 90 ) 42.30 Outstanding, August 31, 2022 1,245 $ 28.61 6.14 Vested and Exercisable, August 31, 2022 711 $ 17.65 4.47 Vested and Expected to Vest, August 31, 2022 1,236 $ 28.51 6.12 (in thousands, except per share and weighted-average amounts) Transactions During Fiscal Year 2021 Number of Options Weighted-Average Exercise Price Per Share Weighted-Average Remaining Contractual Life Outstanding, August 31, 2020 1,224 $ 17.76 6.79 Granted 226 57.60 Exercised ( 204 ) 12.53 Canceled/Forfeited ( 62 ) 29.83 Outstanding, August 31, 2021 1,184 $ 25.63 6.47 Vested and Exercisable, August 31, 2021 619 $ 13.36 4.95 Vested and Expected to Vest, August 31, 2021 1,173 $ 25.69 6.47 F-24 Table of Contents (in thousands, except per share and weighted-average amounts) Transactions During Fiscal Year 2020 Number of Options Weighted-Average Exercise Price Per Share Weighted-Average Remaining Contractual Life Outstanding, August 31, 2019 1,163 $ 12.63 7.13 Granted 223 39.23 Exercised ( 121 ) 9.29 Canceled/Forfeited ( 41 ) 14.19 Outstanding, August 31, 2020 1,224 $ 17.76 6.79 Vested and Exercisable, August 31, 2020 596 $ 10.69 5.59 Vested and Expected to Vest, August 31, 2020 1,194 $ 17.75 6.77 The following table summarizes the Intrinsic Value of options outstanding and options exercisable: (in thousands) Intrinsic Value of Options Outstanding Intrinsic Value of Options Exercisable Intrinsic Value of Options Exercised Fiscal Year 2020 $ 51,273 $ 29,151 $ 4,086 Fiscal Year 2021 $ 25,705 $ 19,373 $ 11,554 Fiscal Year 2022 $ 39,208 $ 30,187 $ 3,572 The weighted-average remaining contractual life of options outstanding issued under the Plans, for both ISOs and NQSOs, was 6.14 years at August 31, 2022. The total fair value of non-vested stock options as of August 31, 2022, was $ 9.1 million and is amortizable over a weighted-average period of 3.27 years. The fair value of these options was estimated at the date of grant using the Black-Scholes option-pricing model. The Black-Scholes option-valuation model was developed for use in estimating the fair value of traded options, which do not have vesting restrictions and are fully transferable. In addition, option-valuation models require the input of highly subjective assumptions, including the expected stock price volatility. The following table summarizes the fair value of the options, including both ISOs and NQSOs, granted during the current fiscal year 2022 and fiscal year 2021: (in thousands, except prices) Fiscal Year 2022 Fiscal Year 2021 Estimated fair value of awards granted $ 4,597 $ 5,092 Unvested Forfeiture Rate 1.04 % 0 % Weighted-average grant price $ 42.13 $ 57.60 Weighted-average market price $ 42.13 $ 57.60 Weighted-average volatility 42.80 % 40.49 % Weighted-average risk-free rate 1.74 % 0.64 % Weighted-average dividend yield 0.58 % 0.42 % Weighted-average expected life 6.59 years 6.63 years F-25 Table of Contents The exercise prices for the options outstanding at August 31, 2022, ranged from $ 6.85 to $ 66.14 , and the information relating to these options is as follows: (in thousands except prices) Exercise Price Awards Outstanding Awards Exercisable Low High Quantity Weighted -Average Remaining Contractual Life Weighted-Average Exercise Price Quantity Weighted-Average Remaining Contractual Life Weighted-Average Exercise Price $ 6.85 $ 9.77 286 2.75 years $ 8.29 286 2.75 years $ 8.29 $ 9.78 $ 18.76 200 4.32 years $ 10.37 200 4.32 years $ 10.37 $ 18.77 $ 33.40 241 6.38 years $ 25.21 121 5.97 years $ 24.16 $ 33.41 $ 47.63 229 8.64 years $ 38.47 41 7.01 years $ 35.41 $ 47.64 $ 66.14 289 8.56 years $ 56.30 63 8.14 years $ 58.92 1,245 6.14 years $ 28.61 711 4.47 years $ 17.65 During the fiscal years ended August 31, 2022, 2021, and 2020, we issued 7,120 , 5,620 and 7,205 shares of stock valued at $ 0.4 million, $ 0.3 million, and $ 0.3 million, respectively, to our nonmanagement directors as compensation for board-related duties. The balance of our par-value common stock and additional paid-in capital as of August 31, 2022, was $ 11 thousand and $ 138.5 million, respectively, and the balance of our par-value common stock and additional paid-in capital as of August 31, 2021, was $ 10 thousand and $ 133.4 million, respectively. NOTE 9 – INCOME TAXES We utilize ASC 740 to account for 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 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. The components of the income tax provision for the years ended August 31, 2022, 2021, and 2020 were as follows: (in thousands) 2022 2021 2020 Current Federal $ 2,518 $ 1,315 $ 2,098 State 611 450 478 Foreign ( 228 ) 166 39 Total current tax expense 2,901 1,931 2,615 Deferred Federal ( 4 ) ( 379 ) ( 428 ) State ( 265 ) ( 249 ) ( 132 ) Total deferred federal and state ( 269 ) ( 628 ) ( 560 ) Total $ 2,632 $ 1,303 $ 2,055 F-26 Table of Contents A reconciliation of the expected income tax computed using the federal statutory income tax rate to the Company's effective income tax rate is as follows for the years ended August 31, 2022, 2021, and 2020: 2022 2021 2020 Income tax computed at federal statutory tax rate 21.0 % 21.0 % 21.0 % State taxes, net of federal benefit 3.2 2.0 4.1 Meals & entertainment — — 0.1 Stock-based compensation 0.6 ( 6.8 ) ( 1.2 ) Other permanent differences 0.4 ( 0.3 ) ( 0.3 ) Research and development credit ( 2.2 ) ( 1.6 ) ( 2.8 ) Foreign-tax-related differences ( 3.2 ) ( 2.6 ) ( 1.4 ) Research & credit adjustments to expense — 0.2 0.3 Change in prior year estimated taxes ( 2.4 ) ( 0.1 ) ( 1.8 ) Total 17.4 % 11.8 % 18.0 % Significant components of the Company's deferred tax assets and liabilities for income taxes for the years ended August 31, 2022, and 2021 are as follows: (in thousands) 2022 2021 Deferred tax assets: Accrued compensation $ 563 $ 586 Deferred revenue 241 102 Capitalized merger costs 703 703 Intellectual property 7 7 Research and development credits 347 66 Foreign tax credits 101 — State taxes 128 72 Allowance for doubtful accounts 3 20 State tax deferred 28 80 Total deferred tax assets 2,121 1,636 Less: Valuation allowance — — Deferred tax asset 2,121 1,636 Deferred tax liabilities: Property and equipment ( 109 ) ( 83 ) State tax deferred ( 30 ) ( 26 ) Intellectual property ( 1,139 ) ( 1,456 ) Capitalized computer software development costs ( 2,299 ) ( 1,797 ) Total deferred tax liabilities ( 3,577 ) ( 3,362 ) Net deferred tax liabilities $ ( 1,456 ) $ ( 1,726 ) F-27 Table of Contents We follow ASC 740 with regard to our accounting for uncertainty in income taxes recognized in the financial statements. Such guidance prescribes a recognition threshold of more likely than not and a measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In making this assessment, we determine whether it is more likely than not that a tax position will be sustained upon examination, based solely on the technical merits of the position and assume that the tax position will be examined by taxing authorities. Interest and penalties were immaterial for fiscal years 2022, 2021, and 2020, respectively. We file income tax returns with the IRS and various state jurisdictions as well as with the countries of India, Belgium and France. Our federal income tax returns for fiscal year 2019 through 2021 are open for audit, and our state tax returns for fiscal year 2018 through 2021 remain open for audit. Our review of prior-year tax positions using the criteria and provisions presented in guidance issued by FASB did not result in a material impact on our financial position or results of operations. NOTE 10 – CONCENTRATIONS AND UNCERTAINTIES Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash, cash equivalents, trade accounts receivable, and short-term investments. The Company holds cash and cash equivalents at banks located in California, with balances that often exceed FDIC insured limits. In addition, we hold cash at a bank in France that is not FDIC-insured. Historically, the Company has not experienced any losses in such accounts. While the Company may be exposed to credit losses due to the nonperformance of its counterparties, the Company does not expect the settlement of these transactions to have a material effect on its results of operations, cash flows, or financial condition. The Company maintains cash at financial institutions that may, at times, exceed federally insured limits. Revenue concentration shows that international sales accounted for 30 %, 31 %, and 29 % of revenue for the years ended August 31, 2022, 2021, and 2020, respectively. Our three largest customers in terms of revenue accounted for 5 %, 3 %, and 3 % of revenue for fiscal year 2022. Our three largest customers in terms of revenue accounted for 11 %, 4 %, and 3% of revenue for fiscal year 2021. Our three largest customers in terms of revenue accounted for 9 %, 7 %, and 7 % of revenue for fiscal year 2020. Accounts receivable concentrations show that our three largest customers in terms of accounts receivable each comprised between 4 % and 8 % of accounts receivable as of August 31, 2022, respectively; our two largest customers in terms of accounts receivable comprised 5 % and 16 % of accounts receivable as of August 31, 2021, respectively. We operate in the biosimulation market, which is highly competitive and changes rapidly. Our operating results could be significantly affected by our ability to develop new products and find new distribution channels for new and existing products. NOTE 11 – SEGMENT REPORTING The Company applies ASC 280, Segment Reporting, in determining reportable segments. The Company has two reportable segments: Software and Services. Segment information is presented in the same manner that the chief operating decision maker ("CODM") reviews certain financial information based on these reportable segments. The CODM reviews revenue and gross profit for both of the reportable segments. Gross profit is defined as revenue less cost of revenue incurred by the segment. No operating segments have been aggregated to form the reportable segments. The Company does not allocate assets at the reportable segment level as these are managed on an entity-wide group basis and, accordingly, the Company does not report asset information by segment. The Company does not allocate operating expenses that are managed on an entity-wide group basis and, accordingly, the Company does not allocate and report operating expenses at segment level. There are no internal revenue transactions between the Company’s segments. F-28 Table of Contents The following tables summarize the results for each segment as follows for the years ended August 31, 2022, 2021 and 2020: (in thousands) Year ended August 31, 2022 Software Services Total Revenues $ 32,642 $ 21,264 $ 53,906 Cost of revenues 3,060 7,762 10,822 Gross profit $ 29,582 $ 13,502 $ 43,084 Gross margin 91 % 63 % 80 % Our software business and services business represented 61 % and 39 % of total revenue, respectively, for the year ended August 31, 2022. (in thousands) Year ended August 31, 2021 Software Services Total Revenues $ 27,670 $ 18,796 $ 46,466 Cost of revenues 3,235 7,365 10,600 Gross profit $ 24,435 $ 11,431 $ 35,866 Gross margin 88 % 61 % 77 % Our software business and services business represented 60 % and 40 % of total revenue, respectively, for the year ended August 31, 2021. (in thousands) Year ended August 31, 2020 Software Services Total Revenues $ 21,587 $ 20,002 $ 41,589 Cost of revenues 2,883 7,766 10,649 Gross profit $ 18,704 $ 12,236 $ 30,940 Gross margin 87 % 61 % 74 % Our software business and services business represented 52 % and 48 % of total revenue, respectively, for the year ended August 31, 2020. NOTE 12 – EMPLOYEE BENEFIT PLAN We maintain a 401(k) Plan for eligible employees. We make matching contributions equal to 100 % of the employee’s elective deferral, not to exceed 4 % of the employee's total compensation. We contributed $ 0.6 million, $ 0.5 million, and $ 0.5 million for fiscal years 2022, 2021, and 2020, respectively. F-29 Table of Contents NOTE 13 – ACQUISITION 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 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. Under the acquisition method of accounting, the total purchase price reflects Lixoft’s tangible and intangible assets and liabilities based on their estimated fair values at the date of the completion of the acquisition (April 1, 2020). The following table summarizes the allocation of the purchase price for Lixoft: (in thousands) Assets acquired, including cash of $ 3,799 and accounts receivable of $ 629 $ 5,007 Developed technologies acquired 8,010 Estimated value of intangible assets acquired (customer lists, trade name etc.) 4,160 Estimated goodwill acquired 2,534 Liabilities assumed ( 1,118 ) Total consideration $ 18,593 Goodwill has been provided in the transaction based on estimates of future earnings of this subsidiary including anticipated synergies associated with the positioning of the combined company as a leader in model-based drug development. NOTE 14 - SUBSEQUENT EVENTS Dividend Declared On Thursday, October 20, 2022, our Board of Directors declared a quarterly cash dividend of $ 0.06 per share to our shareholders. The dividend in the amount of $ 1.2 million will be distributed on Wednesday, November 7, 2022, for shareholders of record as of Monday, October 31, 2022. F-30