What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2023-10-27 compared with 2022-10-28 · 130 added, 112 removed, 172 unchanged (58% of the section changed)

11 unchanged sentences

• Consolidated gross profit increased by $4.9 million, or 11%, to $47.9 million for the year ended August 31, 2023, compared to $43.1 million for the year ended August 31, 2022

• 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

• Income from operations decreased by $6.2 million, or 41%, to $8.7 million for the year ended August 31, 2023, from $14.9 million for the year ended August 31, 2022

• Net income decreased by $2.5 million, or 20%, to $10.0 million for the year ended August 31, 2023, compared to $12.5 million for the year ended August 31, 2022

• Diluted earnings per share decreased by $0.11, or 18%, to $0.49 for the year ended August 31, 2023, compared to $0.60 for the year ended August 31, 2022

Strategy Going Forward:

• Continue to invest in research and development to enhance and expand our scientific product functionality and service capabilities

• 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 our aggressive marketing campaigns to open new market opportunities

• Continue to expand our sales and marketing staff and distributor channels

• Continue to recruit and retain 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.

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.

Fiscal year 2023 was a successful year for the Company.

We enhanced our leadership in modeling and simulation with the release of new technology.

We expanded our collaborations with industry and regulatory leaders.

We executed on our strategy to expand our business and market opportunity through acquisitions.

We also grew our scientific staff through excellent retention and recruiting efforts.

We believe the continued growth of our 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

Comparison of fiscal year 2022 and fiscal year 2021

(in thousands) Year ended August 31

Comparison of fiscal years 2023 and 2022

(in thousands) Years ended August 31,

2023 2022 $ Change % Change

6 unchanged sentences

Income from operations 8,725 14,911 (6,186) (41) %

Other income (expense), net 204 (168) 372 (221) %

Other income, net 2,970 204 2,766 1,356 %

Income before income taxes 11,695 15,115 (3,420) (23) %

2 unchanged sentences

Revenues increased by $5.7 million, or 11%, to $59.6 million for the year ended August 31, 2023, compared to $53.9 million for the year ended August 31, 2022.

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.

This increase is primarily due to an increase of $3.9 million, or 12% in software-related revenue driven by timing of the software license renewals and foreign currency exchange rate fluctuations when comparing the years ended August 31, 2023, and 2022 and a $1.8 million, or 8%, increase in service-related revenue driven by addition of Immunetrics services revenue.

Cost of revenues

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.

Cost of revenues increased by $0.8 million, or 7%, for the year ended August 31, 2023, compared to the year ended August 31, 2022.

The increase is primarily due to an increase of $0.6 million, or 19%, in software-related cost of revenue and an increase of $0.2 million, or 3%, in service-related cost of revenue driven by addition of Immunetrics services cost when compared to the year ended August 31, 2022.

Gross profit increased by $4.9 million, or 11%, to $47.9 million for the year ended August 31, 2023, compared to $43.1 million, for the year ended August 31, 2022.

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%.

The increase in gross profit is primarily due to an increase in gross profit for our software business of $3.3 million, or 11%, and an increase in gross profit for our services business of $1.6 million, or 12%.

Overall gross margin percentage was 80% and 80% for the years ended August 31, 2023, and 2022, respectively.

Research and development

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

We incurred $7.8 million of research and development costs during year ended August 31, 2023.

Of this amount, $3.3 million was capitalized as a part of capitalized software development costs and $4.5 million was expensed.

1 unchanged sentence

Of this amount, $3.2 million was capitalized and $3.2 million was expensed.

The overall increase in research and development costs is primarily due to development of the newest version of our MonolixSuite product, version 2023R1, which was released on February 28, 2023, the development of the newest version of our GastroPlus product, version X, and the development of the newest version of our ADMET Predictor, version 11, with significant enhancements to the AIDD module;

as well as an increase in personnel costs from market compensation adjustments following the Company’s engagement during fiscal year 2022 of an external consulting firm, Arthur J.

Gallagher & Co., to complete a full market study on the compensation payable to our employees compared to those of our “peers”.

The Company rebuilt its career grading system based on the results of the compensation study to ensure competitive and equitable pay for all our employees across the organization in base salary, cash bonus, and stock option grants.

We believe that the market study and resulting compensation adjustments were necessary in light of the highly competitive employment market to attract and retain superior talent.

Selling, general, and administrative expenses

Selling, general, and administrative (“SG&A”) expenses increased by $9.8 million, or 39%, to $34.7 million for the year ended August 31, 2023, compared to $25.0 million for the year ended August 31, 2022.

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.

This increase was primarily due to a $5.4 million increase in employee and labor-related expenses from a 11% headcount increase to meet the robust and growing demand for our services, as well as market compensation adjustments following the Company’s engagement during fiscal year 2022 of an external consulting firm, Arthur J.

Gallagher & Co., to complete a full market study on the compensation payable to our employees compared to those of our “peers”.

We believe that the market study and resulting compensation adjustments were necessary in light of the highly competitive employment market to attract and retain superior talent.

The $5.4 million increase in personnel costs includes an increase in base salaries of $1.7 million, an increase in accrued bonuses of $1.2 million, an increase in stock compensation of $1.6 million, and an increase in employee benefits of $0.4 million.

Additionally, the overall increase in SG&A expenses is due to an increase in one-time charges such as merger and acquisition costs of $3.0 million, including a $1.6 million bonus compensation charge for Immunetrics employees, an impairment charge $0.5 million for Cognigen trade name due to management strategy to no longer use Cognigen trade name.

In addition, SG&A also increased due to an increase in director compensation of $0.2 million, an increase in accounting and tax fees of $0.2 million, an increase in commissions to distributors of $0.1 million, and an increase of $0.1 million due to the newly required excise tax on share repurchases completed during fiscal year 2023.

As a percent of revenues, SG&A expense was 58% for the year ended August 31, 2023, compared to 46% for the year ended August 31, 2022.

Other income/expense

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.

Total other income was $3.0 million for the year ended August 31, 2023, compared to total other income of $0.2 for the year ended August 31, 2022.

The increase is primarily due to an increase in interest income of $3.4 million driven by an increase in interest rates, partially offset by the change in the fair value of contingent consideration of $0.4 million mainly driven by increase in the fair value of contingent consideration by $0.7 million for the Immunetrics earnout, when compared to $0.2 million for the year ended August 31, 2022.

Provision for income taxes

The provision for income taxes was $1.7 million for the year ended August 31, 2023, compared to $2.6 million for the year ended August 31, 2022.

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

Our effective tax rate decreased to 15% mainly due to favorable foreign income tax rates for the year ended August 31, 2023, when compared to 17% for the year ended August 31, 2022.

Comparison of fiscal years 2022 and 2021

(in thousands) Years ended August 31,

2022 2021 $ Change % Change

6 unchanged sentences

Income from operations 14,911 11,253 3,658 33 %

Other income (expense), net (168) (218) 50 (23) %

Other income, net 204 (168) 372 221 %

Income before income taxes 15,115 11,085 4,030 36 %

2 unchanged sentences

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 $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 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.

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.

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 $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 $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.

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 $4.2 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.

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.

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 $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.

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 change in the value of contingent consideration by $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 $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 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

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.

Results of Operations by Business Unit

Comparison of fiscal year 2022 and fiscal year 2021

(in thousands) Twelve Months Ended August 31,

Comparison of fiscal years 2023 and 2022

(in thousands) Years ended August 31,

2023 2022 Change ($) Change (%)

3 unchanged sentences

Cost of Revenues

(in thousands) Twelve Months Ended August 31,

(in thousands) Years ended August 31,

2023 2022 Change ($) Change (%)

2 unchanged sentences

Total $ 11,630 $ 10,822 $ 808 7 %

(in thousands) Twelve Months Ended August 31,

(in thousands) Years ended August 31,

2023 2022 Change ($) Change (%)

3 unchanged sentences

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.

For the year ended August 31, 2023, the revenue increase of $3.9 million, or 12%, compared to the year ended August 31, 2022, was primarily due to higher revenue from GastroPlus® of $2.0 million, higher revenue from MonolixSuite of $0.9 million, and higher revenue from ADMET Predictor® of $0.4 million.

Cost of revenues increased by $0.6 million, or 19%, during the same periods, and gross profit increased by $3.3 million, or 11%, for the year ended August 31, 2023, compared to the year ended August 31, 2022.

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%.

For the year ended August 31, 2023, the revenue increase of $1.8 million, or 8%, compared to the year ended August 31, 2022, was primarily due to higher revenues from PKPD services of $1.0 million and an increase in revenues from PBPK services of $1.0 million, slight increase in revenues from QSP driven by addition of Immunetrics services revenue, partially offset by a decrease of $0.2 million from other revenues.

Cost of revenues increased by $0.2 million, or 3%.

Gross profit increased by $1.6 million, or 12%, for the same periods.

Comparison of fiscal year 2021 and fiscal year 2020

(in thousands) Twelve Months Ended August 31,

Comparison of fiscal years 2022 and 2021

(in thousands) Years ended August 31,

2022 2021 Change ($) Change (%)

2 unchanged sentences

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

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

Cost of Revenues

(in thousands) Twelve Months Ended August 31,

(in thousands) Years ended August 31,

2022 2021 Change ($) Change (%)

2 unchanged sentences

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

*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,

(in thousands) Years ended August 31,

2022 2021 Change ($) Change (%)

2 unchanged sentences

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

*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.

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, 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.

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

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

LIQUIDITY AND CAPITAL RESOURCES

As of August 31, 2023, the Company had $57.5 million in cash and cash equivalents, $57.9 million in short-term investments, and working capital of $118.4 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.

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.

Our principal sources of capital have been a follow-on public offering in August 2020 for $107.7 million and cash flows from our operations.

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

On December 29, 2022, our Board of Directors authorized and approved a share repurchase program for up to $50 million of the outstanding shares of our common stock, including the repurchase of up to $20 million of our outstanding shares through an accelerated share repurchase transaction.

Under the repurchase program, shares may be repurchased at our discretion based on ongoing assessment of the capital needs of our business, the market price of shares of our common stock, and general market conditions.

Repurchases may be made pursuant to certain SEC regulations, which permit common shares to be repurchased when we would otherwise be prohibited from doing so under insider trading laws.

There is no time limit in place for the completion of our share repurchase program, and the program may be suspended or discontinued at any time.

Except as was required by the ASR Agreement, we are not obligated to repurchase any shares under the repurchase program.

We have funded share repurchases to date, and will fund future repurchases, if any, through cash on hand and cash generated from operations.

On January 11, 2023, the Company entered into the ASR Agreement with Morgan Stanley to repurchase an aggregate of $20 million of our outstanding shares of common stock.

The ASR Agreement was executed as part of our existing $50 million share repurchase program.

Pursuant to the terms of the ASR Agreement, we made an initial payment, using available cash balances, of $20 million to Morgan Stanley and received an initial delivery of 408,685 shares of Company common stock from Morgan Stanley.

These 408,685 shares were retired and are treated as authorized, unissued shares.

At final settlement on May 20, 2023, based on the volume-weighted average price of our common stock during the term of the ASR Agreement, Morgan Stanley delivered an additional 83,356 shares of Company common stock to the Company, which shares were also retired and treated as authorized, unissued shares.

On June 16, 2023, the Company acquired Immunetrics through a reverse triangular merger, pursuant to which Immunetrics became a wholly owned subsidiary of the Company.

As consideration for the acquisition, at closing, the Company paid the equity holders of Immunetrics a cash payment in the aggregate amount of approximately $13.7 million, and also paid the representative of the Immunetrics stockholders $250,000 as an expense fund to cover expenses that it incurs in its role as such (collectively, the “Closing Payments”).

In addition to the Closing Payments, the Company held back $1.8 million to cover any negative working capital adjustments (if any) and Immunetrics’ indemnification obligations under the Merger Agreement (the “Holdback Amount”), the balance of which, less any deductions, if any, will be distributed to the Immunetrics stockholders after expiration of the applicable hold back period.

Furthermore, the Company agreed to pay the Immunetrics equity holders an aggregate amount of up to $8.0 million in earnout payments if Immunetrics achieves certain revenue milestones for the calendar years 2023 and 2024 (the “Earnout Payments,” and together with the Closing Payments and Holdback Amount, the “Merger Consideration”).

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, including to complete the remaining repurchases available under our $50 million share repurchase program, if we so choose.

Thereafter, if cash generated from operations is insufficient to satisfy our capital requirements, we may have to sell additional equity or debt securities.

In the event that additional 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.

We continue to seek opportunities for strategic acquisitions, investments, and partnerships.

If one or more such strategic opportunities are identified, a substantial portion of our cash reserves may be required to complete it;

however, we intend to maintain sufficient cash reserves to provide reasonable assurance that outside financing will not be necessary to continue operations.

If we identify an attractive strategic opportunity that would require more cash to complete than we are willing or able to use from our cash reserves, we will consider financing options to complete the transaction, 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.

2 unchanged sentences

Net cash provided by operating activities was $21.9 million for the year ended August 31, 2023.

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.

Our operating cash flows resulted in part from our net income of $10.0 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, $5.1 million related to changes in balances of operating assets and liabilities was added to net income and $6.8 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 $17.9 million for the year ended August 31, 2022.

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 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.

Net cash provided by investing activities during the year ended August 31, 2023, was $7.4 million, primarily due to the proceeds from maturities of short-term investments of $114.9 million, offset by purchase of short-term investments of $95.0 million, $8.2 million for acquisition of Immunetrics, net of cash, and computer software development costs of $3.2 million.

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

Financing Activities

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.

Net cash used in financing activities during the year ended August 31, 2023, was $23.3 million, primarily due to share repurchases of $20.0 million and dividend payments totaling $4.8 million, partially offset by proceeds from the exercise of stock options totaling $1.5 million.

Net cash used in financing activities during the year ended August 31, 2022, was $7.6 million, primarily due to payments on contracts payable of $3.7 million related to the Lixoft acquisition, and dividend payments totaling $4.8 million, partially offset by proceeds from the exercise of stock options totaling $0.9 million.

Refer to Note 6 – Shareholders’ Equity of the Notes to Financial Statements (Part II, Item 8 of this Report) for details regarding dividends.

KNOWN TRENDS OR UNCERTAINTIES

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.

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.

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

New product developments in our pharmaceutical business segments could result in increased revenues and earnings if they are accepted by our markets;

1 unchanged sentence

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 world has been affected by the ongoing conflict between Russia and Ukraine, the developing conflict between Israel and Hamas, other geopolitical instability, and general economic uncertainty, amongst other things.

Inflation has risen, Federal Reserve interest rates have increased, and the general consensus among economists suggests that we should expect a recession risk to continue for the near future.

These factors, amongst other things, could result in further economic uncertainty and volatility in the capital markets in the near term, and could negatively affect our operations.

Historically, we have paid cash dividends of $0.06 per share to holders of shares of our common stock on a quarterly basis.

The declaration of any future dividends will be determined by our Board of Directors each quarter and will depend on earnings, financial condition, capital requirements, and other factors.

Our continued quest for strategic 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.

We will continue to explore these opportunities until such time as we either generate revenues in these new markets or determine that resources would be more efficiently used elsewhere.

CONTRACTUAL OBLIGATIONS

The following table provides aggregate information regarding our contractual obligations as of August 31, 2023:

(in thousands) Payments due by period

Contractual obligations:

Total 1 year 2–3 years 4–5 years More than 5 years

Contracts payable (1)

$ 6,580 $ 3,250 $ 3,330 $ — $ —

(1) Contracts payable are related to our Merger Agreement that the Company entered into with Immunetrics on June 16, 2023.

Under the terms of the agreement, we agreed to pay the former stockholders of Immunetrics earnout payments up to an $8.0 million, consisting of two payouts of up to $4.0 million each, subject to a potential catch-up increase in certain circumstances.

Additionally, a portion of the consideration, in an amount equal to $1.8 million, which was held-back by the Company at closing to cover any negative net working capital adjustments (if any) and Immunetrics’ indemnification obligations under the Merger Agreement.

For further details regarding our contracts payable, refer to Note 11 to the “Notes to Consolidated Financial Statements” in Part II, Item 8 of this of this Report.

RECENTLY ISSUED OR NEWLY ADOPTED ACCOUNTING STANDARDS

8 unchanged sentences

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

35 unchanged sentences

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.

As of August 31, 2023, the Company determined that it had five reporting units, Simulations Plus, Cognigen, DILIsym, Lixoft, and Immunetrics.

As of August 31, 2023, the entire balance of goodwill was attributed to four of the Company's reporting units, Cognigen, DILIsym, Lixoft, and Immunetrics.

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.

As of August 31, 2023, we recognized $0.5 million of impairment charge for the Cognigen trade name, as management determined we will no longer use the Cognigen trade name.

Management determined that this impairment is immaterial and has no bearing on any other intangible assets including goodwill.

No impairment losses were recorded during the years ended 2022 and 2021.

Business Acquisitions

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 Company accounted for the acquisition of Cognigen, DILIsym, Lixoft, and Immunetrics 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.

13 unchanged sentences

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