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, 2023, 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. 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. 50 Table of Contents ITEM 9B – OTHER INFORMATION Rule 10b5-1 Trading Plans The adoption or termination of contracts, instructions or written plans for the purchase or sale of our securities by our Section 16 officers and directors for the quarter ended August 31, 2023, each of which is intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) under the Exchange Act (“Rule 10b5-1 Plan”), were as follows: Name Title Action Date Adopted Expiration Date Aggregate # of Securities to be Purchased/Sold Walter Woltosz (1) Director Termination 7/15/2021 6/30/2023 480,000 Walter Woltosz (1) Director Adoption 7/17/2023 10/3/2025 560,000 John Paglia (2) Director Adoption 8/9/2023 7/31/2024 13,000 (1) On June 30, 2023, the pre-arranged stock trading plan pursuant to Rule 10b5-1, adopted by Walter Woltosz and his spouse on July 15, 2021 (the “Expired Plan”), automatically terminated pursuant to its terms. The Expired Plan provided for the potential sale of up to 480,000 shares of Company common stock until June 30, 2023. On July 17, 2023, Mr. Woltosz and his spouse entered into a new pre-arranged stock trading plan pursuant to Rule 10b5-1 (the “New Plan”), which provides for the potential sale of up to 560,000 shares of Company common stock. The New Plan expires on October 3, 2025, or upon the earlier completion of all authorized transactions under the New Plan. (2) On August 9, 2023, John Paglia entered into a pre-arranged stock trading plan pursuant to Rule 10b5-1, which provides for (i) the potential exercise of vested stock options and the associated sale of up to 11,000 shares of Company common stock underlying such options, and (ii) the potential sale of up to an additional 2,000 shares of Company common stock. The plan expires on July 31, 2024, or upon the earlier completion of all authorized transactions under the plan. Other than those disclosed above, none of our directors or officers adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” in each case as defined in Item 408 of Regulation S-K. Please refer to the information included in Part II, Item 5 under the heading “Repurchases ” for information regarding the Company’s effective share repurchase program, including sales made by the Company under the ASR Agreement during the quarter ended August 31, 2023. ITEM 9C – DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS Not applicable. 51 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 a Code of Conduct (the "code of conduct") 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 conduct is publicly available on our website at https://www.simulations-plus.com/wp-content/uploads/SLP-Code-of-Conduct-09-25-23.pdf. If we make any substantive amendments to the code of conduct or grant any waiver, including any implicit waiver, from a provision of the code of conduct, we will disclose the nature of the amendment or waiver on our 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 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. 52 Table of Contents PART IV ITEM 15 – EXHIBITS, FINANCIAL STATEMENT SCHEDULES EXHIBIT NUMBER DESCRIPTION 2.1^ Agreement and Plan of Merger, dated July 23, 2014, by and among the Company, Cognigen Corporation and the other parties thereto, incorporated by reference to an Exhibit 2.1 to the Company’s Form 8-K/A filed November 18, 2014. 2.2^ Stock Purchase Agreement by and among Simulation Plus, Inc., DILIsym Services, Inc., the Shareholders’ Representative and the Shareholders of DILIsym Services, Inc., incorporated by reference to Exhibit 10.13 to the Company’s Form 10-Q filed July 10, 2017. 2.3^ Share Purchase and Contribution Agreement Relating to Lixoft, dated March 31, 2020, incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed April 2, 2020. 2.4^ Agreement and Plan of Merger, dated June 16, 2023, by and among Simulations Plus, Inc., Insight Merger Sub, Inc., Immunetrics, Inc. and LaunchCyte LLC, incorporated by reference to an Exhibit 2.1 to the Company’s Form 8-K filed June 20, 2023. 3.1 Articles of Incorporation of the Company, incorporated by reference to an Exhibit 3.1 to the Company’s Form 10-K filed November 29, 2010. 3.2 Amended and Restated Bylaws of the Company, incorporated by reference to an exhibit to the Company’s Form 10-K filed November 29, 2010. 3.3 Certificate of Amendment to the Amended and Restated Bylaws of Simulations Plus, Inc., incorporated by reference to Appendix A to the Company’s Definitive Schedule 14A Proxy Statement filed December 31, 2018. 4.1 Form of Common Stock Certificate, incorporated by reference to the Company’s Registration Statement on Form SB-2 (Registration No. 333-6680) filed March 25, 1997. 4.2 Share Exchange Agreement, incorporated by reference to the Company’s Registration Statement on Form SB-2 (Registration No. 333-6680) filed March 25, 1997. 4.3* Description of Securities. 10.1(†) The Company’s 2007 Stock Option Plan, as amended, incorporated by reference to Exhibit 10.3 to the Company’s Form 10-K filed April 9, 2014. 10.2 Second Amendment to Lease by and between the Company and Crest Development LLC, dated as of May 1, 2016, incorporated by reference to Exhibit 10.4(d) to the Company’s Form 10-K filed November 14, 2016. 10.3 Form of Indemnification Agreement, incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed August 10, 2016. 10.4(†) 2017 Equity Incentive Plan, incorporated by reference to Appendix A to the Company’s Definitive Schedule 14A Proxy Statement filed December 29, 2016. 10.5(†) Employment Agreement by and between the Company and Shawn O’Connor dated September 3, 2020 incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed September 9, 2020. 10.6(†) Employment Agreement by and between the Company and Will Frederick, dated December 1, 2020 incorporated by reference to Exhibit 10.2 to the Company’s Form 10-Q filed January 11, 2021. . 10.7(†) Separation Agreement, dated December 1, 2020, by and between the Company and John Kneisel, incorporated by reference to Exhibit 10.2 to the Company’s Form 10-Q filed April 14, 2021. 10.8 Third Amendment to Lease by and between the Company and Crest Development LLC, dated as of December 28, 2020 incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed January 4, 2021. . 10.9(†) Simulation Plus, Inc. 2021 Equity Incentive Plan, incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed June 8, 2021. 10.10(†) First Amendment to Employment Agreement, by and between Simulations Plus, Inc. and Shawn O’Connor, dated November 19, 2021 incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed November 19, 2021. 10.11(†) Employment Agreement by and between the Company and John DiBella, dated January 1, 2022, incorporated by reference to Exhibit 10.12 to the Company’s Form 10-K filed October 28, 2022. 10.12(†) Employment Agreement by and between the Company and Brett Howell, dated January 1, 2022, incorporated by reference to Exhibit 10.13 to the Company’s Form 10-K filed October 28, 2022. 53 Table of Contents 10.13(†) Employment Agreement by and between the Company and Jill Fiedler-Kelly, dated January 1, 2022, incorporated by reference to Exhibit 10.14 to the Company’s Form 10-K filed October 28, 2022. 10.14^ Confirmation for Fixed Dollar Accelerated Share Repurchase Transaction, dated as of January 11, 2023, by and between Simulations Plus, Inc. and Morgan Stanley & Co. LLC, incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed January 12, 2023. 10.15 First Amendment to 2021 Equity Incentive Plan of Simulations Plus, Inc., dated February 9, 2023, incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed February 13, 2023. 10.16 Fourth Amendment to Lease by and between the Company and Crest Development LLC, dated as of February 17, 2023, incorporated by reference to Exhibit 10.3 to the Company’s Form 10-Q filed April 7, 2023. 10.17^ Earnout Agreement by and among Simulations Plus, Inc., Insight Merger Sub, Inc., Immunetrics, Inc. and LaunchCyte LLC, dated June 16, 2023, incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed June 20, 2023. 10.18 Amended and Restated Employment Agreement between Simulations Plus, Inc. and Steven Chang, dated June 16, 2023, incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed June 20, 2023. 21.1 * List of Subsidiaries. 23.1 * Consent of Independent Registered Public Accounting Firm. 31.1 * Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 * Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 ** Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 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 104*** Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101 attachments). _____________________________ ^ 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. ** Furnished 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. 54 Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. October 27, 2023 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, as amended, 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 27, 2023 /s/ Walter S. Woltosz Chairman of the Board of Directors Walter S. Woltosz October 27, 2023 /s/ Dr. Lisa LaVange Director Dr. Lisa LaVange October 27, 2023 /s/ Dr. Daniel Weiner Director Dr. Daniel Weiner October 27, 2023 /s/ Sharlene Evans Director Sharlene Evans October 27, 2023 /s/ Dr. John K. Paglia Director Dr. John K. Paglia October 27, 2023 /s/ Will Frederick Chief Financial Officer (Principal financial officer and principal accounting officer) Will Frederick October 27, 2023 55 Table of Contents SIMULATIONS PLUS, INC. & SUBSIDIARIES CONTENTS August 31, 2023, 2022 and 2021 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- 33 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, 2023, and 2022, and the related consolidated statements of operations and comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended August 31, 2023, and the related notes (collectively referred to as the consolidated 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, 2023, and 2022, and the results of its operations and its cash flows for each of the years in the three-year period ended August 31, 2023, 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, 2023, 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 27, 2023, 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 consolidated 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 consolidated 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 consolidated 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 consolidated 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 consolidated 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 consolidated 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 consolidated 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. F-2 Table of Contents 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. 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 27, 2023 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, 2023, 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, 2023, 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 and the related consolidated statements of operations and comprehensive income, shareholders’ equity, and cash flows for the Company, and our report dated October 27, 2023 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 27, 2023 F-4 Table of Contents SIMULATIONS PLUS, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share amounts) August 31, 2023 August 31, 2022 ASSETS Current assets Cash and cash equivalents $ 57,523 $ 51,567 Accounts receivable, net of allowance for doubtful accounts of $ 46 and $ 12 10,201 13,787 Prepaid income taxes 804 1,391 Prepaid expenses and other current assets 3,904 3,377 Short-term investments 57,940 76,668 Total current assets 130,372 146,790 Long-term assets Capitalized computer software development costs, net of accumulated amortization of $ 17,199 and $ 15,672 11,335 9,563 Property and equipment, net 671 632 Operating lease right-of-use assets 1,247 1,420 Intellectual property, net of accumulated amortization of $ 9,301 and $ 7,928 8,689 9,057 Other intangible assets, net of accumulated amortization of $ 2,107 and $ 2,662 12,825 7,560 Goodwill 19,099 12,921 Deferred tax assets 1,438 — Other assets 425 439 Total assets $ 186,101 $ 188,382 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable $ 144 $ 225 Accrued compensation 4,392 3,254 Accrued expenses 659 931 Contracts payable 3,250 — Operating lease liability - current portion 442 461 Deferred revenue 3,100 2,864 Total current liabilities 11,987 7,735 Long-term liabilities Deferred income taxes, net — 1,456 Operating lease liability 755 943 Contracts payable – net of current portion 3,330 — Total liabilities 16,072 10,134 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; 19,937,961 and 20,260,070 shares issued and outstanding 144,974 138,512 Retained earnings 25,196 40,044 Accumulated other comprehensive loss ( 141 ) ( 308 ) Total shareholders' equity 170,029 178,248 Total liabilities and shareholders' equity $ 186,101 $ 188,382 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) 2023 2022 2021 Revenues Software $ 36,517 $ 32,642 $ 27,670 Services 23,060 21,264 18,796 Total revenues 59,577 53,906 46,466 Cost of revenues Software 3,627 3,060 3,235 Services 8,003 7,762 7,365 Total cost of revenues 11,630 10,822 10,600 Gross profit 47,947 43,084 35,866 Operating expenses Research and development 4,504 3,208 4,047 Selling, general, and administrative 34,718 24,965 20,566 Total operating expenses 39,222 28,173 24,613 Income from operations 8,725 14,911 11,253 Other income (expense), net 2,970 204 ( 168 ) Income before income taxes 11,695 15,115 11,085 Provision for income taxes ( 1,734 ) ( 2,632 ) ( 1,303 ) Net income $ 9,961 $ 12,483 $ 9,782 Earnings per share Basic $ 0.50 $ 0.62 $ 0.49 Diluted $ 0.49 $ 0.60 $ 0.47 Weighted-average common shares outstanding Basic 20,075 20,196 20,045 Diluted 20,465 20,749 20,743 Other comprehensive income (loss), net of tax Foreign currency translation adjustments 167 ( 265 ) ( 101 ) Comprehensive income $ 10,128 $ 12,218 $ 9,681 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 Years ended August 31, (in thousands, except per common share amounts) 2023 2022 2021 Common stock and additional paid in capital Balance, beginning of period $ 138,512 $ 133,418 $ 128,541 Exercise of stock options 1,543 891 1,461 Stock-based compensation 4,319 2,686 2,405 Shares issued to Directors for services 600 351 345 Shares issued - Lixoft — 1,166 666 Balance, end of period 144,974 138,512 133,418 Retained earnings Balance, beginning of period 40,044 32,407 27,436 Declaration of dividends ( 4,809 ) ( 4,846 ) ( 4,811 ) Repurchase and retirement of common shares ( 20,000 ) — — Net income 9,961 12,483 9,782 Balance, end of period 25,196 40,044 32,407 Accumulated other comprehensive loss Balance, beginning of period ( 308 ) ( 43 ) 58 Other comprehensive income (loss) 167 ( 265 ) ( 101 ) Balance, end of period ( 141 ) ( 308 ) ( 43 ) Total shareholders’ equity $ 170,029 $ 178,248 $ 165,782 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 Years ended August 31, (in thousands) 2023 2022 2021 Cash flows from operating activities Net income $ 9,961 $ 12,483 $ 9,782 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 3,840 3,574 3,590 Change in fair value of contingent consideration 680 283 486 Amortization of investment (discounts) premiums ( 1,134 ) 1,678 2,350 Stock-based compensation 4,828 3,037 2,750 Deferred income taxes ( 2,095 ) ( 270 ) ( 628 ) Loss (gain) from disposal of assets 6 — — Impairment of other intangibles 500 — — Currency translation adjustments 167 ( 265 ) ( 101 ) (Increase) decrease in Accounts receivable 4,097 ( 3,936 ) ( 2,429 ) Prepaid income taxes 587 ( 379 ) ( 42 ) Prepaid expenses and other assets ( 501 ) 1,081 ( 157 ) Increase (decrease) in Accounts payable ( 81 ) ( 162 ) 39 Other liabilities 832 ( 1,437 ) 3,353 Accrued income taxes ( 7 ) — — Deferred revenue 176 2,213 210 Net cash provided by operating activities 21,856 17,900 19,203 Cash flows from investing activities Purchases of property and equipment ( 453 ) ( 819 ) ( 1,627 ) Purchase of short-term investments ( 95,045 ) ( 100,846 ) ( 122,395 ) Proceeds from maturities of short-term investments 114,907 109,121 100,229 Purchased intangibles ( 601 ) — — Acquisition of Immunetrics, net of cash acquired ( 8,223 ) — — Capitalized computer software development costs ( 3,219 ) ( 3,151 ) ( 2,949 ) Net cash provided by (used in) investing activities 7,366 4,305 ( 26,742 ) Cash flows from financing activities Payment of dividends ( 4,809 ) ( 4,846 ) ( 4,811 ) Payments on contracts payable — ( 3,667 ) ( 1,334 ) Proceeds from the exercise of stock options 1,543 891 1,461 Repurchase and retirement of common shares ( 20,000 ) — — Net cash used in financing activities ( 23,266 ) ( 7,622 ) ( 4,684 ) Net increase (decrease) in cash and cash equivalents 5,956 14,583 ( 12,223 ) Cash and cash equivalents, beginning of year $ 51,567 $ 36,984 $ 49,207 Cash and cash equivalents, end of period $ 57,523 $ 51,567 $ 36,984 Supplemental disclosures of cash flow information Income taxes paid $ 3,204 $ 3,233 $ 1,857 Non-Cash Investing and Financing Activities Stock issued for acquisition of Lixoft $ — $ 1,166 $ 666 Creation of contract liabilities from acquisition of subsidiaries $ 5,900 $ — $ — Right of use assets capitalized $ 227 $ 624 $ 905 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, 2023 NOTE 1 – ORGANIZATION AND LINES OF BUSINESS Organization Simulations Plus, Inc. (“Simulations Plus”) 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. In June 2017, Simulations Plus acquired DILIsym Services, Inc. (“DILIsym”) as a wholly owned subsidiary. In April 2020, Simulations Plus acquired Lixoft, a French société par actions simplifiée (“Lixoft”), as a wholly owned subsidiary pursuant to a stock purchase and contribution agreement. In June 2023, Simulations Plus acquired Immunetrics, Inc. (“Immunetrics”) as a wholly owned subsidiary through a reverse triangular merger. (Simulations Plus together with its subsidiaries, collectively, the “Company,” “we,” “us,” “our”). Effective September 1, 2021, the Company merged both Cognigen and DILIsym with and into Simulations Plus 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 (Simulation Plus’ 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. On December 20, 2022, Simulations Plus International, Inc. (“SLPI”), a Delaware corporation, was created as a wholly owned subsidiary of Simulations Plus in order to facilitate future international acquisitions, if any, and global integrations. In furtherance of this objective, the Company added the trade name “SLP France” to Lixoft, and on April 25, 2023, Simulations Plus transferred its ownership of Lixoft to SLPI pursuant to a contribution and acceptance agreement, resulting in Lixoft becoming a wholly owned subsidiary of SLPI. The transfer 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-based and machine-learning-based technologies. We also provide consulting services ranging from early drug discovery through preclinical and clinical development 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 academic and regulatory agencies worldwide for use in the conduct of industry-based research. NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of Simulations Plus and its wholly owned operating subsidiaries, Lixoft and Immunetrics. 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. F-9 Table of Contents 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 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 standalone selling price for each performance obligation identified in the contract. Standalone 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 account for 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. F-10 Table of Contents 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, 2023, remaining performance obligations were $ 11.8 million. Ninety-five percent of the remaining performance obligations are expected to be recognized over the next 12 months, with the remainder expected to be 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. Disaggregation of Revenues The components of disaggregation of revenue for the years ended August 31, 2023, 2022, and 2021 were as follows: Years ended August 31, (in thousands) 2023 2022 2021 Software licenses Point in time $ 35,369 $ 31,587 $ 26,725 Over time 1,148 1,055 945 Services Over time 23,060 21,264 18,796 Total revenue $ 59,577 $ 53,906 $ 46,466 In addition, the Company allocates revenues to geographic areas based on the locations of its customers. Geographical revenues for the years ended August 31, 2023, 2022, and 2021 were as follows: Years ended August 31, (in thousands) 2023 2022 2021 $ % of total $ % of total $ % of total Americas $ 40,817 69 % $ 37,681 70 % $ 32,549 70 % EMEA 11,713 20 % 10,388 19 % 7,906 17 % Asia Pacific 7,047 12 % 5,837 11 % 6,011 13 % Total $ 59,577 100 % $ 53,906 100 % $ 46,466 100 % 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, 2023, 2022, and 2021, were $ 2.7 million, $ 1.7 million, and $ 3.2 million, respectively. During the year ended August 31, 2023, the Company recognized $ 2.6 million of revenue that was included in contract liabilities as of August 31, 2022, and 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. F-11 Table of Contents 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. 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. The activity in the allowance for credit losses related to our trade receivables is summarized as follows: Years ended August 31, (in thousands) 2023 2022 2021 Balance, beginning of period $ 12 $ 78 $ 50 Provision for expected credit losses 77 ( 66 ) 28 Write-offs ( 43 ) — — Balance, end of period $ 46 $ 12 $ 78 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 (loss). F-12 Table of Contents 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 years ended August 31, 2023 and 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 $ 1.5 million, $ 1.2 million, $ 1.4 million for the years ended August 31, 2023, 2022, and 2021, respectively. We expect future amortization expense to vary due to increases in capitalized computer software development costs. We test capitalized computer software development costs for impairment 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 the asset life or lease term 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. F-13 Table of Contents 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, 2023: (in thousands) Right of use assets $ 1,247 Lease liabilities, current $ 442 Lease liabilities, long-term $ 755 Operating lease costs $ 463 Weighted-average remaining lease term 3.29 years Weighted-average discount rate 4.91 % 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 the other assets and liabilities acquired as part of the Immunetrics acquisition have been assigned to a separate reporting unit. The goodwill recorded in the Immunetrics reporting unit as of August 31, 2023, was $ 6.2 million. Goodwill and intangible assets are tested for impairment at the reporting unit level, which is either one level below or the same level as an operating segment. As of August 31, 2023, we determined that we have five reporting units: Simulations Plus, Cognigen, DILIsym, Lixoft, and Immunetrics. We recognized an impairment charge $ 0.5 million for the Cognigen trade name, as management's strategy is to no longer use the Cognigen trade name. F-14 Table of Contents Reconciliation of Goodwill as of August 31, 2023, 2022, and 2021: (in thousands) Cognigen DILIsym Lixoft Immunetrics Total 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 Addition — — — 6,178 6,178 Impairments — — — — — Balance, August 31, 2023 $ 4,789 $ 5,598 $ 2,534 $ 6,178 $ 19,099 The following table summarizes other intangible assets as of August 31, 2023: (in thousands) Amortization Period Acquisition Value Accumulated Amortization Net Book Value Trade names None $ 4,210 $ — $ 4,210 Covenants not to compete Straight line 2 to 3 years 30 3 27 Other internal use software Straight line 3 to 5 years 350 10 340 Customer relationships Straight line 8 to 14 years 8,230 1,887 6,343 ERP Straight line 15 years 2,112 207 1,905 $ 14,932 $ 2,107 $ 12,825 The following table summarizes other intangible assets as of August 31, 2022: (in thousands) Amortization Period Acquisition Value Accumulated Amortization Net Book Value Trade names None $ 2,910 $ — $ 2,910 Covenants not to compete Straight line 3 years 60 48 12 Customer relationships Straight line 8 to 14 years 5,550 2,534 3,016 ERP Straight line 15 years 1,702 80 1,622 $ 10,222 $ 2,662 $ 7,560 Total amortization expense for the years ended August 31, 2023, 2022, and 2021 was $ 0.6 million, $ 0.6 million, and $ 0.5 million, respectively. Estimated future amortization of finite-lived intangible assets for the next five years is as follows: (in thousands) Years ending August 31, Amount 2024 $ 960 2025 $ 957 2026 $ 945 2027 $ 898 2028 $ 755 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: F-15 Table of Contents 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 carrying amounts are representative of their fair value due to their short maturities. We invest a portion of our excess cash balances in short-term debt securities. Investments at August 31, 2023, consisted of corporate bonds and term deposits with maturities remaining of less than 12 months. Under the fair-value hierarchy, the fair market values of the Company’s cash equivalents and investments are Level I. We may also invest excess cash balances in certificates of deposit, money market accounts, government-sponsored enterprise securities, and/or commercial paper. We account for our investments in accordance with ASC 320, Investments – Debt and Equity Securities. As of August 31, 2023 and 2022, all investments were classified as held-to-maturity securities, as we have the positive intent and ability to hold these securities until maturity. We believe unrealized losses on investments were primarily caused by rising interest rates rather than changes in credit quality, and, accordingly, we have not recorded an allowance for credit losses on our debt securities as of August 31, 2023, and 2022. The following tables summarize our short-term investments as of August 31, 2023, and August 31, 2022: August 31, 2023 (in thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Commercial notes (due within one year) $ 53,940 $ — $ ( 115 ) $ 53,825 Term deposits (due within one year) 4,000 — — 4,000 Total $ 57,940 $ — $ ( 115 ) $ 57,825 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 As of August 31, 2023, the Company had a liability for contingent consideration related to its acquisition of Immunetrics. The fair value measurement of the contingent consideration obligations are determined using Level 3 inputs. The fair value of contingent consideration obligations are based on a discounted cash flow model using a probability-weighted income approach. These fair value measurements represent Level 3 measurements as they are based on significant inputs not observable in markets. Significant judgment is employed in determining the appropriateness of these assumptions as of the acquisition date and for each subsequent period. Accordingly, changes in assumptions could have a material impact on the amount of contingent consideration expense the Company records in any given period. Changes in the fair value of the contingent consideration obligations are recorded in the Company’s Consolidated Statement of Operations. F-16 Table of Contents The following is a reconciliation of contingent consideration at fair value: (in thousands) Amount Contingent consideration at acquisition date 4,100 Change in fair value of contingent consideration 680 Contingent consideration as of August 31, 2023 $ 4,780 Business Combination The acquisition method of accounting for business combinations requires us to use significant estimates and assumptions, including fair value estimates, as of the business combination date and to refine those estimates as necessary during the measurement period (defined as the period, not to exceed one year, in which we may adjust the provisional amounts recognized for a business combination). Under the acquisition method of accounting, we recognize separately from goodwill the identifiable assets acquired, the liabilities assumed, and any noncontrolling interests in an acquiree, generally at the acquisition date fair value. We measure goodwill as of the acquisition date as the excess of consideration transferred, which we also measure at fair value, over the net of the acquisition date amounts of the identifiable assets acquired and liabilities assumed. Costs that we incur to complete the business combination, such as investment banking, legal, and other professional fees, are not considered part of consideration, and we recognize such costs as general and administrative expenses as they are incurred. Under the acquisition method, we also account for acquired company restructuring activities that we initiate separately from the business combination. Should the initial accounting for a business combination be incomplete by the end of a reporting period that falls within the measurement period, we report provisional amounts in our financial statements. During the measurement period, we adjust the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date, and we record those adjustments to our financial statements. We apply those measurement period adjustments that we determine to be material retrospectively to comparative information in our financial statements, including adjustments to depreciation and amortization expense. Under the acquisition method of accounting for business combinations, if we identify changes to acquired deferred tax asset valuation allowances or liabilities related to uncertain tax positions during the measurement period, and they relate to new information obtained about facts and circumstances that existed as of the acquisition date, those changes are considered a measurement period adjustment and we record the offset to goodwill. We record all other changes to deferred tax asset valuation allowances and liabilities related to uncertain tax positions in current period income tax expense. This accounting applies to all of our acquisitions regardless of acquisition date. 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. F-17 Table of Contents Intellectual property In February 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. In May 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. In June 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. In April 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. In June 2023, we purchased certain developed technology of Immunetrics. The cost of $ 1.1 million is being amortized over 5 years under the straight-line method. The following table summarizes intellectual property as of August 31, 2023: (in thousands) Amortization Period Acquisition Value Accumulated Amortization Net Book Value Termination/nonassertion agreement-TSRL Inc. Straight line 10 years $ 6,000 $ 5,575 $ 425 Developed technologies–DILIsym acquisition Straight line 9 years 2,850 1,978 872 Intellectual rights of Entelos Holding Company Straight line 10 years 50 25 25 Developed technologies–Immunetrics acquisition Straight line 5 years 1,080 45 1,035 Developed technologies–Lixoft acquisition Straight line 16 years 8,010 1,678 6,332 $ 17,990 $ 9,301 $ 8,689 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 Total amortization expense for intellectual property agreements for the years ended August 31, 2023, 2022, and 2021 was $ 1.4 million, $ 1.4 million, and $ 1.4 million, respectively. F-18 Table of Contents Estimated future amortization of intellectual property for the next five years is as follows: (in thousands) Years ending August 31, Amount 2024 $ 1,434 2025 $ 1,009 2026 $ 933 2027 $ 693 2028 $ 648 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, 2023, 2022, and 2021 were as follows: Years ended August 31, (in thousands) 2023 2022 2021 Numerator Net income attributable to common shareholders $ 9,961 $ 12,483 $ 9,782 Denominator Weighted-average number of common shares outstanding during the year 20,075 20,196 20,045 Dilutive effect of stock options 390 553 698 Common stock and common stock equivalents used for diluted earnings per share 20,465 20,749 20,743 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 $ 4.3 million, $ 2.7 million, and $ 2.4 million for the years ended August 31, 2023, 2022, and 2021, 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. As of August 31, 2023, we recognized a $ 0.5 million impairment charge related to the Cognigen trade name, and it is included in SG&A expenses. The Cognigen trade name fair valuation was measured during the acquisition of Cognigen. Management determined to no longer use the Cognigen trade name and to instead focus our marketing strategy on promoting the Simulations Plus brand and our portfolio of products and services. As the Company's other acquired trade names relate to marketed products actively sold to customers, and following management's assessment of other possible triggering events that could indicate a risk of impairment, management concluded that no impairment of other intangible assets or goodwill was necessary. No impairment losses were recorded during the years ended 2022 and 2021. F-19 Table of Contents Recently Issued Accounting Standards None. Recently Adopted Accounting Standards In October 2021, the FASB issued ASU 2021-08, Business Combinations - Accounting for contract assets and contract liabilities from contracts with customers (Topic 805), which requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with Revenues from contracts with customers (Topic 606). For public companies, the guidance is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The Company adopted the guidance during fiscal year 2023. The adoption of this guidance did not have a material impact on the Company’s 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 adopted the guidance during fiscal year 2023. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements. NOTE 3 – OTHER INCOME (EXPENSE), NET The components of other income (expense), net for the years ended August 31, 2023, 2022, and 2021, were as follows: Years ended August 31, (in thousands) 2023 2022 2021 Interest income $ 4,131 $ 717 $ 201 Interest expense — — ( 22 ) Change in fair valuation of contingent consideration ( 680 ) ( 283 ) ( 486 ) (Loss) gain on disposal of assets ( 6 ) 1 — (Loss) gain on currency exchange ( 475 ) ( 231 ) 139 Total other income (expense), net $ 2,970 $ 204 $ ( 168 ) NOTE 4 – PROPERTY AND EQUIPMENT Property and equipment consisted of the following: (in thousands) August 31, 2023 August 31, 2022 Equipment $ 316 $ 346 Computer equipment 809 860 Furniture and fixtures 48 61 Leasehold improvements 24 13 Construction in progress 134 — Subtotal 1,331 1,280 Less accumulated depreciation ( 660 ) ( 648 ) Total $ 671 $ 632 Depreciation expense was $ 0.2 million, $ 0.3 million, and $ 0.2 million for the years ended August 31, 2023, 2022, and 2021, respectively. F-20 Table of Contents NOTE 5 – COMMITMENTS AND CONTINGENCIES Leases On May 25, 2023, we entered into an amendment, effective October 1, 2023, to the lease agreement for our office space in Durham, North Carolina. Prior to entering into the amendment, this lease was scheduled to terminate pursuant to its terms effective on September 30, 2023. The amendment extends the lease through September 30, 2026, and effective October 1, 2023, reduces the leased square footage from 3,386 to approximately 1,510 , and reduces the monthly base rent from $ 8 thousand per month to $ 4 thousand per month with an annual increase of 3 %. The amended lease agreement gives the Company the right, upon 9 months prior notice, to extend the lease for 60 months. On February 17, 2023, we entered into an amendment, effective May 1, 2023, to the lease agreement for our office space in Lancaster, California, where our corporate headquarters are located. Prior to entering into the amendment, this lease was scheduled to terminate pursuant to its terms effective on January 31, 2026. The amendment extends the lease term through April 30, 2028, reduces the leased square footage from 9,255 to approximately 4,200 , and reduces the monthly base rent from $ 18 thousand per month to $ 8 thousand per month with an annual increase of 3 %. The amended lease agreement gives the Company the right, upon 180 days’ prior notice, to opt out of all or part of the last three years of the lease 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 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, which amount is subject to adjustment each December based on a consumer price index. We lease 7,141 square feet of office space in Pittsburgh, Pennsylvania. The lease term extends to May 31, 2025, and the base rent is $ 10 thousand per month. The lease agreement provides the Company with one five-year renewal option. 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. Rent expense, including common area maintenance fees for the years ended August 31, 2023, 2022, and 2021 was $ 0.5 million, $ 0.6 million, and $ 0.7 million, respectively. Lease liability maturities as of August 31, 2023, were as follows: (in thousands) Years ending August 31, Amount 2024 $ 473 2025 390 2026 293 2027 140 2028 68 Total undiscounted liabilities 1,364 Less: imputed interest ( 167 ) Total operating lease liabilities (including current portion) $ 1,197 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. F-21 Table of Contents Income Taxes We follow guidance issued by the FASB 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, a company must 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 must assume that the tax position will be examined by taxing authorities. Our policy is to include interest and penalties related to income tax expense. We file income tax returns with the IRS and various state jurisdictions as well as with the countries of India and France. Our federal income tax returns for fiscal years 2019 through 2022 are open for audit, and our state tax returns for fiscal years 2018 through 2022 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. Litigation We are not a party to any legal proceedings and are not aware of any pending or threatened legal proceedings of any kind. NOTE 6 – SHAREHOLDERS' EQUITY Shares Outstanding Shares of Company common stock outstanding for the years ended August 31, 2023, 2022, and 2021 were as follows: (in thousands) Years ended August 31, 2023 2022 2021 Common stock outstanding, beginning of period 20,260 20,142 19,923 Common stock repurchased during the period * ( 492 ) — — Common stock issued during the period 170 119 218 Common stock outstanding, end of period 19,938 20,260 20,142 *Common stock repurchased per the ASR Agreement, as discussed in further detail, below. Dividends The Company’s Board of Directors declared cash dividends during the fiscal years 2023 and 2022. The details of dividends paid are in the following tables: (in thousands, except dividend per share) For the year ended August 31, 2023 Record Date Distribution Date Number of Shares Outstanding on Record Date Dividend per Share Total Amount 10/31/2022 11/07/2022 20,299 $ 0.06 $ 1,218 1/30/2023 2/06/2023 19,924 $ 0.06 1,195 4/24/2023 5/01/2023 19,999 $ 0.06 1,200 7/31/2023 8/07/2023 19,931 $ 0.06 1,196 Total $ 4,809 F-22 Table of Contents (in thousands, except dividend per share) For the year ended August 31, 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 Stock Option Plans On December 23, 2016, the Company’s Board of Directors adopted, and on February 23, 2017, its shareholders approved, the Company’s 2017 Equity Incentive Plan (the “2017 Plan”), under which a total of 1.0 million shares of common stock were initially reserved for issuance. The 2017 plan would have terminated pursuant to its terms in December 2026; however, 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 Company’s Board of Directors adopted, and on June 23, 2021, its shareholders approved, the Company’s 2021 Equity Incentive Plan (the “2021 Plan,” and together with the 2017 Plan, the “Plans”), under which a total of 1.3 million shares of common stock were initially reserved for issuance. On October 20, 2022, the Company’s Board of Directors approved, and on February 9, 2023, its shareholders approved, an amendment to the 2021 Plan to increase the number of shares of common stock authorized for issuance thereunder from 1.3 million shares to 1.55 million shares of common stock of the Company. The 2021 Plan will terminate in 2031. As of August 31, 2023, employees and directors of the Company held Qualified Incentive Stock Options (“ISOs”) and Non-Qualified Stock Options (“NQSOs”) to purchase an aggregate of 1.5 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) Activity for the year ended August 31, 2023 Number of Options Weighted-Average Exercise Price Per Share Weighted-Average Remaining Contractual Life Outstanding, August 31, 2022 1,245 $ 28.61 6.14 years Granted 465 43.78 Exercised ( 170 ) 12.59 Canceled/Forfeited ( 62 ) 43.14 Outstanding, August 31, 2023 1,478 $ 34.62 6.62 years Vested and Exercisable, August 31, 2023 696 $ 24.26 4.54 years Vested and Expected to Vest, August 31, 2023 1,471 $ 34.56 6.61 years F-23 Table of Contents (in thousands, except per share and weighted-average amounts) Activity for the year ended August 31, 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 years Granted 255 42.13 Exercised ( 104 ) 16.15 Canceled/Forfeited ( 90 ) 42.30 Outstanding, August 31, 2022 1,245 $ 28.61 6.14 years Vested and Exercisable, August 31, 2022 711 $ 17.65 4.47 years Vested and Expected to Vest, August 31, 2022 1,236 $ 28.51 6.12 years (in thousands, except per share and weighted-average amounts) Activity for the year ended August 31, 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 years Granted 226 57.60 Exercised ( 204 ) 12.53 Canceled/Forfeited ( 62 ) 29.83 Outstanding, August 31, 2021 1,184 $ 25.63 6.47 years Vested and Exercisable, August 31, 2021 619 $ 13.36 4.95 years Vested and Expected to Vest, August 31, 2021 1,173 $ 25.69 6.47 years 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 As of August 31, 2023 $ 25,705 $ 19,373 $ 11,554 As of August 31, 2022 $ 39,208 $ 30,187 $ 3,572 As of August 31, 2021 $ 17,875 $ 15,742 $ 5,135 The total grant-date fair value of nonvested stock options as of August 31, 2023, was $ 15.6 million and is amortizable over a weighted-average period of 3.33 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. F-24 Table of Contents The following table summarizes the fair value of the options, including both ISOs and NQSOs, granted during the years ended August 31, 2023, 2022, and 2021: (in thousands, except weighted-average amounts) 2023 2022 2021 Estimated fair value of awards granted $ 10,067 $ 4,597 $ 5,092 Unvested Forfeiture Rate 0.22 % 1.04 % 0.00 % Weighted-average grant price $ 43.78 $ 42.13 $ 57.60 Weighted-average market price $ 43.78 $ 42.13 $ 57.60 Weighted-average volatility 46.14 % 42.80 % 40.49 % Weighted-average risk-free rate 4.29 % 1.74 % 0.64 % Weighted-average dividend yield 0.55 % 0.58 % 0.42 % Weighted-average expected life 6.55 years 6.59 years 6.63 years The exercise prices for the options outstanding at August 31, 2023, ranged from $ 6.85 to $ 66.14 , and the information relating to these options are as follows: (in thousands except prices and weighted-average amounts) 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 $ 9.77 203 1.96 years $ 8.69 203 1.96 years $ 8.69 $ 9.78 $ 18.76 148 3.49 years $ 10.11 148 3.49 years $ 10.11 $ 18.77 $ 33.40 205 5.64 years $ 25.30 141 5.54 years $ 24.51 $ 33.41 $ 47.63 649 8.70 years $ 42.13 81 7.03 years $ 37.96 $ 47.64 $ 66.14 273 7.56 years $ 56.33 123 7.32 years $ 57.87 1,478 6.62 years $ 34.62 696 4.54 years $ 24.26 During the fiscal years ended August 31, 2023, 2022, and 2021, we issued 13,765 , 7,120 , and 5,620 shares of stock valued at $ 0.6 million, $ 0.4 million, and $ 0.3 million, respectively, to our nonmanagement directors as compensation for board-related duties. The Company's par-value common stock and additional paid-in capital as of August 31, 2023, were $ 11 thousand and $ 145.0 million, respectively. Share Repurchases On January 11, 2023, the Company entered into an accelerated share repurchase agreement (the “ASR Agreement”) with Morgan Stanley & Co. LLC (“Morgan Stanley”) to repurchase an aggregate of $ 20 million of the Company’s outstanding shares of common stock. The ASR Agreement was executed as part of the Company’s existing $ 50 million share repurchase program. Pursuant to the terms of the ASR Agreement, the Company 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 the Company's 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. NOTE 7 – INCOME TAXES F-25 Table of Contents 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, 2023, 2022, and 2021 were as follows: (in thousands) 2023 2022 2021 Current Federal $ 2,990 $ 2,518 $ 1,315 State 696 611 450 Foreign 144 ( 228 ) 166 Total current tax expense 3,830 2,901 1,931 Deferred Federal ( 1,818 ) ( 4 ) ( 379 ) State ( 278 ) ( 265 ) ( 249 ) Total deferred federal and state ( 2,096 ) ( 269 ) ( 628 ) Total $ 1,734 $ 2,632 $ 1,303 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, 2023, 2022, and 2021: 2023 2022 2021 Income tax computed at federal statutory tax rate 21.0 % 21.0 % 21.0 % State taxes, net of federal benefit 4.7 3.2 2.0 Meals & entertainment 0.1 — — Stock-based compensation 2.1 0.6 ( 6.8 ) Other permanent differences 3.3 0.4 ( 0.3 ) Research and development credit ( 2.2 ) ( 2.2 ) ( 1.6 ) Foreign-tax-related differences ( 8.2 ) ( 3.2 ) ( 2.6 ) Research & credit adjustments to expense — — 0.2 Change in prior year estimated taxes ( 6.0 ) ( 2.4 ) ( 0.1 ) Total 14.8 % 17.4 % 11.8 % F-26 Table of Contents Significant components of the Company's deferred tax assets and liabilities for income taxes for the years ended August 31, 2023, and 2022 are as follows: (in thousands) 2023 2022 Deferred tax assets: Accrued compensation $ 865 $ 563 Deferred revenue 103 241 Capitalized merger costs 696 703 Operating lease liability 285 — Intellectual property — 7 Research and development credits 274 347 Foreign tax credits — 101 State taxes ( 19 ) 128 Allowance for doubtful accounts 11 3 State tax deferred — 28 Capitalized Research & Development 1,079 — Share-Based Compensation 1,104 — Net Operating Loss Carryforward 2,142 — Total deferred tax assets 6,540 2,121 Less: Valuation allowance — — Deferred tax asset 6,540 2,121 Deferred tax liabilities: Property and equipment ( 90 ) ( 109 ) Operating lease right-of-use assets ( 295 ) — Unrealized Gain/(Loss) ( 122 ) — State tax deferred — ( 30 ) Intellectual property ( 2,353 ) ( 1,139 ) Capitalized computer software development costs ( 2,242 ) ( 2,299 ) Total deferred tax liabilities ( 5,102 ) ( 3,577 ) Net deferred tax assets (liabilities) $ 1,438 $ ( 1,456 ) 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 the years ended August 31, 2023, 2022, and 2021, 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 2022 are open for audit, and our state tax returns for fiscal year 2018 through 2022 remain open for audit. F-27 Table of Contents Net Operating Loss is summarized as follows: (in thousands) Amount Federal NOL as of August 31, 2023 $ 17,775 Subject to expiration 14,440 Carried forward indefinitely 3,335 Amount to expire before Section 382 limitation lifts 9,333 Pennsylvania NOL as of August 31, 2023 16,054 Subject to expiration 16,054 Carried forward indefinitely — Amount to expire before Section 382 limitation lifts 10,935 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 8 – 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 with balances that exceed FDIC insured limits. Cash maintained in excess of these limits is on deposit with a large, national bank. Accordingly, the Company does not have depository exposure to regional banks. In addition, the Company holds cash at a bank in France that is not FDIC-insured. Historically, the Company has not experienced any losses in such accounts, and management believes that the financial institutions at which its cash is held are stable; however, no assurances can be provided. 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. Revenue concentration shows that international sales accounted for 31 %, 30 %, and 31 % of revenue for the years ended August 31, 2023, 2022, and 2021, respectively. Our three largest customers in terms of revenue accounted for 6 %, 4 %, and 3 % of revenue, respectively, for the year ended August 31, 2023. Our three largest customers in terms of revenue accounted for 5 %, 3 %, and 3 % of revenue, respectively, for the year ended August 31, 2022. Our three largest customers in terms of revenue accounted for 11 %, 4 %, and 3 % of revenue, respectively, for the year ended August 31, 2021. Accounts receivable concentrations show that our three largest customers in terms of accounts receivable each comprised between 4 % and 6 % of accounts receivable as of August 31, 2023; our three largest customers in terms of accounts receivable comprised between 4 % and 8 % of accounts receivable as of August 31, 2022. 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. F-28 Table of Contents NOTE 9 – 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 a segment level. There are no internal revenue transactions between the Company’s segments. The following tables summarize the results for each segment as follows for the years ended August 31, 2023, 2022, and 2021: (in thousands) Year ended August 31, 2023 Software Services Total Revenues $ 36,517 $ 23,060 $ 59,577 Cost of revenues 3,627 8,003 11,630 Gross profit $ 32,890 $ 15,057 $ 47,947 Gross margin 90 % 65 % 80 % Our software business and services business represented 61 % and 39 % of total revenue, respectively, for the year ended August 31, 2023. (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. F-29 Table of Contents NOTE 10 – 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 gross salary. We contributed $ 0.6 million, $ 0.6 million, and $ 0.5 million for the years ended August 31, 2023, 2022, and 2021, respectively. NOTE 11 - ACQUISITION On June 16, 2023, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among the Company, Insight Merger Sub, Inc., a wholly-owned subsidiary of the Company (“Merger Sub”), Immunetrics, a company specializing in quantitative systems pharmacology modeling, and LaunchCyte LLC, as representative of the stockholders of Immunetrics (the “Stockholder Representative”). At closing of the Merger, certain key stockholders of Immunetrics delivered executed Joinder Agreements, pursuant to which they became parties to the Merger Agreement. The Merger closed on June 16, 2023 (the “Closing”). Pursuant to the Merger Agreement, at Closing, Merger Sub merged with and into Immunetrics through a reverse triangular merger, with Immunetrics surviving as a wholly-owned subsidiary of the Company (the “Surviving Corporation”) (the “Merger”). As consideration for the Merger, the Company agreed to pay the stockholders, former holders of stock options and former holders of phantom shares of Immunetrics (collectively, the “Equityholders”) the following cash compensation (collectively, the “Merger Consideration”): i. At Closing, a cash payment in the amount of $ 13,705,083 (i.e., $ 12.0 million plus Immunetrics’ Closing cash, net of estimated net working capital adjustments at Closing, minus Immunetrics’ estimated transaction expenses, minus the Closing estimated indebtedness, minus the Holdback Amount (as defined below), minus the Stockholder Representative Expense Fund (as defined below)); ii. 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 (the “Holdback Amount”); and iii. Two future earn-out payments in the aggregate amount of up to $ 8.0 million (the “Earnout Payments”), subject to the terms described below. Additionally, at Closing, the Company funded the payment of Stockholder Representative $ 250,000 as an expense fund to cover expenses that it incurs in its role as Stockholder Representative (the “Stockholder Representative Expense Fund”), the excess amount of which, if any, will be distributed to Immunetrics’ stockholders (subject to certain exceptions) at such time as the Stockholder Representative may determine in its sole discretion. The Company deducted this payment from the closing price. The Merger Consideration is subject to adjustment based on post-closing adjustments to net working capital, closing cash, indebtedness, and transaction expenses of Immunetrics within 90 days of closing. The Merger Agreement contains standard representations, warranties, covenants, indemnification and other terms customary in similar transactions. Concurrently with execution of the Merger Agreement, the Company, Merger Sub, Immunetrics and the Stockholder Representative entered into an Earnout Agreement, which sets forth the terms and conditions applicable to the Earnout Payments. Pursuant to the Earnout Agreement, the Company shall pay the Equityholders an aggregate amount of up to $ 8.0 million of Earnout Payments if the Surviving Corporation achieves certain revenue milestones for the calendar years 2023 and 2024. The primary purpose of this acquisition is to be able to capitalize on a tremendous growth opportunity by providing support for quantitative systems pharmacology (“QSP”) in a greater range of therapeutic areas, including oncology. Under the acquisition method of accounting, the total purchase price reflects Immunetrics’ tangible and intangible assets and liabilities based on their estimated fair values at the date of the completion of the acquisition (June 16, 2023). The following table summarizes the allocation of the preliminary purchase price for Immunetrics: F-30 Table of Contents (in thousands) Base merger consideration $ 12,000 Fair value of earnout 4,100 Cash on hand 1,247 Adjustment to purchase price for closing indebtedness ( 122 ) Net working capital adjustment ( 377 ) D&O Tail ( 7 ) Bonus compensation to Immunetrics staff ( 1,586 ) Total purchase price 15,255 Fair value of identifiable assets acquired: Cash 1,132 Accounts receivable 511 Security deposit 12 ROU asset 227 Deferred tax assets 799 Trade names 1,800 Customer relationships 3,780 Developed Tech 1,080 Non-competes 30 9,371 Fair value of liabilities assumed: Lease liability 227 Selling shareholders' D&O tail responsibility 7 Deferred revenue 60 294 Fair value of identifiable assets acquired and liabilities assumed 9,077 Goodwill $ 6,178 The total purchase consideration related to Immunetrics acquisition consisted of cash consideration. The excess of purchase consideration over the fair value of the net assets acquired was recorded as goodwill, which is primarily attributed to the developed technologies and other intangibles as customer relationships and trade name. Immunetrics is primarily attributable to the Services segment of the Company. Goodwill acquired as part of Immunetrics acquisition has been assigned to a separate reporting unit and the assets and liabilities of Immunetrics are assigned to the same reporting unit, Immunetrics. This goodwill is not expected to be deductible for income tax purposes. Intangible assets consist of indefinite-lived intangible asset trade names and definite-lived intangibles as customer relationships, developed technologies, and covenants not to compete. We amortize purchased definite-lived intangible assets on a straight-line basis over their respective useful lives. The weighted-average life of the total acquired identifiable definite-lived intangible assets is 7.5 years. The following table presents the details of intangible assets acquired. F-31 Table of Contents Estimated useful life Amount Indefinite-lived: Trade names Indefinite $ 1,800 Definite-lived: Customer relationships 9 years 3,780 Developed technologies 5 years 1,080 Covenants not to compete 2 years 30 Total definite-lived intangible assets 4,890 Total intangible assets $ 6,690 The total acquisition-related costs which includes activities for Immunetrics acquisition for the years ended August 31, 2023, 2022, and 2021 were $ 3.3 million, $ 0.3 million, and none , respectively. These transactions costs are reflected in the Selling, general, and administrative expense line item within our consolidated statements of operations and comprehensive income as they were incurred. Estimated future amortization of finite-lived intangible assets for the next five years is as follows: (in thousands) Years ending August 31, Amount 2024 $ 580 2025 $ 580 2026 $ 580 2027 $ 580 2028 $ 535 Consolidated Supplemental Pro Forma Information The following unaudited consolidated supplemental pro forma information assumes that the acquisition of Immunetrics took place on September 1, 2021 for the income statement years ended August 31, 2023. These amounts have been calculated after applying the Company’s accounting policies and adjusting the results of Immunetrics to reflect the same expenses in the years ended August 31, 2023 and 2022. The adjustments include costs of acquisition directly attributable to Immunetrics of $ 2.9 million consists of $ 1.6 million of bonus compensation and $ 1.3 million of other professional fees, and amortization of intangibles including developed technologies acquired during the merger, assuming the fair-value adjustments applied on September 1, 2021, together with consequential tax effects. (Pro forma) 2023 * (Pro forma) 2022 (in thousands) (unaudited) (unaudited) Revenue $ 63,054 $ 57,010 Net income $ 11,422 $ 11,889 * Balances include actual results from acquisition date of June 16, 2023 through August 31, 2023. F-32 Table of Contents NOTE 12 - GOVERNMENT ASSISTANCE The Company receives government assistance in the form of cash grants which vary in size, duration, and conditions from domestic governmental agencies. Accounting for the grant revenue does not fall under ASC 606, Revenue from Contracts with Customers, as the Government will not benefit directly from our offerings. For government assistance in which no specific US GAAP applies, the Company accounts for such transactions as revenue and by analogy to a grant model. Under such model, the Company recognizes the impact of the government assistance on the Consolidated Statements of Income upon complying with the conditions of the grant. The grant revenue is recognized on a gross basis. The Company's accounting policy is to recognize a benefit to the income statement over the duration of the program when the conditions attached to the grant are achieved. If conditions are not satisfied the grants are often subject to reduction, repayment, or termination. The Company classifies the impact of government assistance on the Consolidated Statements of Income as Services Revenue. During the fiscal year ended August 31, 2023, government assistance received primarily consisted of the following: The Company received assistance from domestic governmental agencies to provide reimbursement for various costs incurred for research and development. These include direct grant awards and subawards. The grants awarded are currently set to expire at various dates through 2025. During the fiscal year ended August 31, 2023, the Company recognized $ 1.5 million within Services revenues on the Consolidated Statements of Operations and Comprehensive Income related to such assistance. To the extent amounts have been earned but not yet funded, the amounts are in Account Receivable. Computer equipment allowable by the grants is classified under Fixed Assets. Subawards due to unrelated entities are classified under Accrued Expenses. NOTE 13 - SUBSEQUENT EVENTS Dividend Declared On Thursday, October 19, 2023, our Board of Directors declared a quarterly cash dividend of $ 0.06 per share to our shareholders. The dividend in the amount of approximately $ 1.2 million will be distributed on Monday, November 6, 2023, for shareholders of record as of Monday, October 30, 2023. Effective September 1, 2023, the Company merged Immunetrics with and into Simulations Plus, Inc. through a short-form mergers (the “Merger”). To effectuate the Merger, the Company filed Certificates of Ownership with the Secretaries of State of the states of Delaware (Immunetrics’ state of incorporation) and California (Simulation Plus, Inc.’s state of incorporation). Consummation of the Merger was not subject to approval of the Company’s stockholders and did not impact the rights of the Company’s stockholders. F-33