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Item 7. Management’s Discussion and Analysis

2024-10-30 compared with 2023-10-27 · 156 added, 192 removed, 110 unchanged (76% of the section changed)

9 unchanged sentences

Fiscal Year 2024 Financial Highlights:

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

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

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

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

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

• Consolidated revenues increased by $10.4 million, or 18%, to $70.0 million for the fiscal year ended August 31, 2024, compared to $59.6 million for the fiscal year ended August 31, 2023

• Consolidated gross profit decreased by $4.8 million, or 10%, to $43.2 million for the fiscal year ended August 31, 2024, compared to $47.9 million for the fiscal year ended August 31, 2023

• Income from operations decreased by $2.6 million, or 30%, to $6.1 million for the fiscal year ended August 31, 2024, from $8.7 million for the fiscal year ended August 31, 2023

• Net income remained unchanged at $10.0 million for the fiscal year ended August 31, 2024, compared to $10.0 million for the fiscal year ended August 31, 2023

• Diluted earnings per share remained unchanged at $0.49 for the fiscal year ended August 31, 2024, compared to $0.49 for the fiscal year ended August 31, 2023

Strategy Going Forward:

3 unchanged sentences

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

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

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

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

Fiscal year 2023 was a successful year for the Company.

Fiscal year 2024 was a successful year for the Company on several fronts.

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

4 unchanged sentences

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

On June 16, 2023, the Company completed the acquisition of Immunetrics for an estimated consideration of $15.3 million.

The Company made the first cash earnout payment issuable pursuant to the Merger Agreement entered into in connection with the Immunetrics acquisition, in the aggregate amount of $2.5 million, to the former equity holders and employees of Immunetrics in 2023.

The Company has a remaining earnout obligation related to the Immunetrics acquisition for up to $5.5 million, as well as $1.8 million holdback liability, which are expected to be paid out and released, to the extent earned and less any applicable deductions, in early calendar year 2025.

On June 11, 2024, the Company entered into a Stock Purchase Agreement, pursuant to which it acquired Pro-ficiency for an estimated consideration of $100.2 million.

At closing, an aggregate of $1.0 of the purchase price was placed in escrow to fund payment obligations of the sellers with respect to post-closing purchase price adjustments and post-closing indemnification obligations of the sellers.

The primary purpose of this acquisition was to bring together two businesses, each with complementary expertise and services that are grounded in science and focused on applying advanced technologies like AI to enhance actionable data analytics.

Results of Operations

Comparison of fiscal years 2024 and 2023

(in thousands) Years ended August 31,

2023 2022 $ Change % Change

(in thousands) Years ended % of Revenue

August 31, 2024 August 31, 2023 August 31, 2024 August 31, 2023 $ Change % Change

Revenue $ 70,013 $ 59,577 100 % 100 % $ 10,436 18 %

2 unchanged sentences

Research and development 5,754 4,504 8 % 8 % 1,250 28 %

Selling, general, and administrative 34,718 24,965 9,753 39 %

Sales and marketing 8,915 6,558 13 % 11 % 2,357 36 %

General and administrative 22,351 28,160 32 % 47 % (5,809) (21) %

Total operating expenses 37,020 39,222 53 % 66 % (2,202) (6) %

4 unchanged sentences

Net income $ 9,954 $ 9,961 14 % 17 % $ (7) — %

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

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

Revenues increased by $10.4 million, or 18%, to $70.0 million for the fiscal year ended August 31, 2024, compared to $59.6 million for the fiscal year ended August 31, 2023.

This increase is due to an increase of $4.5 million, or 12%, in software-related revenue primarily driven by higher revenues from Monolix™ of $1.3 million, higher revenues from GastroPlus® of $1.0 million, higher revenues from QSP of $0.5 million, higher revenues from ADMET Predictor® of $0.4 million, and incremental revenues from ALI of $1.1 million.

$5.9 million, or 26%, of the overall increase in revenues is due to an increase in service-related revenues, primarily driven by higher revenues from QSP services of $3.2 million, higher revenues from CPP services of $2.0 million, offset by lower revenues from PBPK services of $0.4 million.

Cost of revenues

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

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

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

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

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

Cost of revenues increased by $15.2 million, or 131%, for the fiscal year ended August 31, 2024, compared to the fiscal year ended August 31, 2023.

This corresponds to an 18% increase in cost of revenue as a percentage of revenue.

$6.8 million of the increase in cost of revenues is due to the reorganization of our internal structure from divisions based on prior acquisitions to business units organized around key product and service offerings.

As part of this reorganization, we evaluated our departmental structure with a focus on continuing to improve operational performance and profitability while providing our investors improved visibility to our progress.

Accordingly, we moved all services personnel into cost of revenues departments, moved all research and development personnel into research and development expense departments, moved all sales and marketing personnel into sales and marketing expense departments, and moved all general and administrative personnel into general and administrative (“G&A”) expense departments.

These movements completed the final step toward consolidating the Company from the various acquired company divisions to a company-wide business unit structure.

$6.8 million of the increase in cost of revenues corresponds to a $6.8 million decrease in G&A expenses discussed below from the reorganization reclassification.

$3.0 million of the increase in cost of revenues is due to the acquisition of Pro-ficiency.

$1.6 million of the increase in cost of revenues is due to a full year's recognition of expenses associated with the acquisition of Immunetrics in June 2023.

$2.8 million of the increase is due to compensation-related increases, primarily attributable to the addition of scientific headcount as well as general annual salary adjustments for existing employees.

Gross profit decreased by $4.8 million, or 10%, to $43.2 million for the fiscal year ended August 31, 2024, compared to $47.9 million for the fiscal year ended August 31, 2023.

The decrease in gross profit is primarily due to a decrease in gross profit for our services business of $6.5 million, or 43%, primarily resulting from the reorganization of our internal structure as well as additional services headcount from the Pro-ficiency acquisition, partially offset by an increase in gross profit for our software business of $1.7 million, or 5%, reflecting the strong revenue growth and operating leverage of our software business.

Overall gross margin percentage was 62% and 80% for the fiscal year ended August 31, 2024, and 2023 , respectively.

Research and development

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

We incurred $9.0 million of R&D costs during the fiscal year ended August 31, 2024.

Of this amount, $3.2 million was capitalized as a part of capitalized software development costs and $5.8 million was expensed.

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

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

Of this amount, $3.3 million was capitalized and $4.5 million was expensed.

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

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

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

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

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

Selling, general, and administrative expenses

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

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

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

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

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

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

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

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

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

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

R&D spend increased by $1.2 million, or 16% , for the fiscal year ended August 31, 2024, compared to the fiscal year ended August 31, 2023.

The increase is mainly due to an increase of $0.5 million from the acquisition of Immunetrics, and an increase of $0.3 million from the acquisition of Proficiency.

R&D spend as a percentage of revenue is consistent at 13% for both periods.

Sales and marketing expenses

Sales and marketing expenses increased by $2.4 million, or 36% , to $8.9 million for the fiscal year ended August 31, 2024, compared to $6.6 million for the fiscal year ended August 31, 2023.

This corresponds to a 2% increase in sales and marketing expense as a percentage of revenue.

The increase was primarily due to an increase of $0.9 million of compensation-related increases driven by an increase in stock compensation expense of $0.3 million, the addition to our team of a Chief Revenue Officer, sales commissions on the strong revenue growth year over year, and general annual salary adjustments for existing employees.

Additionally, the acquisitions of Pro-ficiency and Immunetrics, increased sales and marketing expenses by $0.6 million and $0.3 million, respectively.

General, and administrative expenses

G&A expenses decreased $5.8 million, or 21%, to $22.4 million for the fiscal year ended August 31, 2024, compared to $28.2 million for the fiscal year ended August 31, 2023.

This corresponds to 15% decrease in G&A expense as a percentage of revenue.

The decrease is primarily driven by a $6.8 million shift from G&A expense to cost of revenues, as referenced above, due to the reorganization of our internal structure from divisions based on prior acquisitions to business units organized around key product and service offerings and a decrease of $1.1 million in mergers and acquisition expense, offset by an increase of $0.7 million from the acquisition of Pro-ficiency, an increase of $0.5 million from the acquisition of Immunetrics, an increase of $1.0 million in compensation costs due to general annual salary adjustments for existing employees, an increase in professional fees of $0.3 million, an increase in software license costs of $0.2 million, and an increase in amortization of internal-use software of $0.1 million.

Total other income was $6.3 million for the fiscal year ended August 31, 2024, compared to total other income of $3.0 million for the fiscal year ended August 31, 2023.

The increase is primarily due to a decrease of $2.3 million in the fair value of the earnout liability related to the Immunetrics acquisition.

The decrease in the fair value of the earnout liability is attributable to a partial earnout attainment for the first earnout measurement period and more modest revenue projections for the second earnout measurement period.

The earnout target for the first measurement period was $4.0 million, however, based on revenue attainment, we only paid $2.5 million in March 2024 for the first earnout measurement period.

As a result of the partial attainment, there is a catch-up opportunity for the second measurement period's earnout payment to increase from the target of $4.0 million to $5.5 million.

Additionally, part of the increase is due to a foreign currency exchange gain of $0.4 million for the fiscal year ended August 31, 2024 compared to a foreign currency exchange loss of $0.5 million for the fiscal year ended August 31, 2023, and an increase in interest income of $0.2 million from our investments in debt securities driven by an increase in interest rates.

Provision for income taxes

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

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

The provision for income taxes was $2.5 million for the fiscal year ended August 31, 2024, compared to $1.7 million for the fiscal year ended August 31, 2023.

Our effective tax rate increased to 20% for the fiscal year ended August 31, 2024 from 15% for the fiscal year ended August 31, 2023 primarily due to a larger return to provision adjustment in the fiscal year ended August 31, 2023 which lowered the effective tax rate in that year.

This effect was partially offset by lower state income taxes during the fiscal year ended August 31, 2024.

Comparison of fiscal years 2023 and 2022

(in thousands) Years ended August 31,

2022 2021 $ Change % Change

(in thousands) Years ended % of Revenue

August 31, 2023 August 31, 2022 August 31, 2023 August 31, 2022 $ Change % Change

Revenue $ 59,577 $ 53,906 100 % 100 % $ 5,671 11 %

2 unchanged sentences

Research and development 4,504 3,208 8 % 6 % 1,296 40 %

Selling, general, and administrative 24,965 20,566 4,399 21 %

Sales and marketing 6,558 4,879 11 % 9 % 1,679 34 %

General and administrative 28,160 20,086 47 % 37 % 8,074 40 %

Total operating expenses 39,222 28,173 66 % 52 % 11,049 39 %

4 unchanged sentences

Net income $ 9,961 $ 12,483 17 % 23 % $ (2,522) (20) %

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

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

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

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

Cost of revenues

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

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

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

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

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

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

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

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

Research and development

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

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

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

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

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

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

Selling, general, and administrative expenses

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

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

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

Other income/expense

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

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

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

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

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

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

Sales and marketing expenses

Sales and marketing expenses increased by $1.6 million, or 34%, to $6.6 million for the fiscal year ended August 31, 2023, compared to $4.9 million for the fiscal year ended August 31, 2022.

This corresponds to a 2% increase in sales and marketing expense as a percentage of revenue.

This increase was primarily due to a $1.7 million increase in employee and labor-related expenses from a 11% headcount increase to meet the robust and growing demand for our services, as well as market compensation adjustments following the Company’s engagement during fiscal year 2022 of an external consulting firm, Arthur J.

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

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

The $1.7 million increase in personnel costs includes an increase in base salaries of $0.9 million, an increase in stock compensation of $0.5 million, and an increase in accrued bonuses of $0.2 million.

General and administrative expenses

G&A expenses increased by $8.1 million, or 40%, to $28.2 million for the fiscal year ended August 31, 2023, compared to $20.1 million for the fiscal year ended August 31, 2022.

This corresponds to a 10% increase in G&A expense as a percentage of revenue.

This increase was primarily due to a $3.8 million increase in employee and labor-related expenses from a 11% headcount increase to meet the robust and growing demand for our services, as well as market compensation adjustments following the Company’s engagement of an external consulting firm, Arthur J.

Gallagher & Co., during fiscal year 2022 to complete a full market study on the compensation payable to our employees compared to those of our “peers”.

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

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

The $3.8 million increase in personnel costs includes an increase in base salaries of $0.7 million, an increase in accrued bonuses of $1.0 million, an increase in stock compensation of $1.1 million, and an increase in employee benefits of $0.4 million.

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

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

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

Provision for income taxes

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

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

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

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

Results of Operations by Business Unit

Comparison of fiscal years 2023 and 2022

(in thousands) Years ended August 31,

2023 2022 Change ($) Change (%)

Software $ 36,517 $ 32,642 $ 3,875 12 %

Services 23,060 21,264 1,796 8 %

Total $ 59,577 $ 53,906 $ 5,671 11 %

Cost of Revenues

(in thousands) Years ended August 31,

2023 2022 Change ($) Change (%)

Software $ 3,627 $ 3,060 $ 567 19 %

Services 8,003 7,762 241 3 %

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

(in thousands) Years ended August 31,

2023 2022 Change ($) Change (%)

Software $ 32,890 $ 29,582 $ 3,308 11 %

Services 15,057 13,502 1,555 12 %

Total $ 47,947 $ 43,084 $ 4,863 11 %

Software Business

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

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

Services Business

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

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

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

Comparison of fiscal years 2022 and 2021

(in thousands) Years ended August 31,

2022 2021 Change ($) Change (%)

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

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

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

Cost of Revenues

(in thousands) Years ended August 31,

2022 2021 Change ($) Change (%)

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

Services 7,762 7,365 397 5 %

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

(in thousands) Years ended August 31,

2022 2021 Change ($) Change (%)

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

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

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

Software Business

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

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

Services Business

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

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

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

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

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

Liquidity and Capital Resources

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

We believe that our existing capital and anticipated funds from operations will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for the foreseeable future, including to complete the remaining repurchases available under our $50 million share repurchase program, if we so choose.

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

In the event that additional financing is needed in the future, there can be no assurance that such financing will be available to us, or, if available, that it will be in amounts and on terms acceptable to us.

We expect existing cash, cash equivalents, short-term investments, cash generated by ongoing operations, and working capital, will be sufficient to fund our operating activities and cash commitments for investing and financing activities, and material capital expenditures, for the next 12 months and beyond.

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

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

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

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

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

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

Additionally, our quest for strategic opportunities could result in a significant change to our liquidity position and/or our results of operations if any such opportunities are completed.

Except as discussed elsewhere in this Report, we are not aware of any trends or demands, commitments, events or uncertainties that are reasonably likely to result in a decrease in liquidity of our assets.

The trend over the last ten years has been increasing cash deposits from our operating cash flows, and we expect that trend to continue for the foreseeable future.

Cash, Cash Equivalents, and Investments

At August 31, 2024, the Company had $10.3 million in cash and cash equivalents, $9.9 million in short-term investments, and working capital of $27.3 million.

Short-term investments consist of highly liquid investment-grade fixed-income securities, diversified among industries and issuers.

The investments are U.S.

dollar-denominated securities.

Our fixed-income investments are exposed to interest rate risk and credit risk.

The settlement risk related to these investments is insignificant, given that the short-term investments held are primarily highly liquid investment-grade fixed-income securities and can readily be converted to cash when needed.

Restricted cash that was included within cash and cash equivalents as presented within our consolidated balance sheets as of August 31, 2024 and our consolidated statements of cash flows for the fiscal year ended August 31, 2024 was $0.1 million.

The Company determined this to be immaterial.

The restriction required us to maintain a minimum cash deposit in the Pro-ficiency bank account to collateralize an outstanding corporate credit card balance.

The associated corporate credit card program was terminated as part of the integration of Pro-ficiency and the cash restriction was removed as of October 4, 2024.

Operating Activities

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

Net cash provided by operating activities was $13.3 million for the fiscal year ended August 31, 2024.

Our operating cash flows resulted in part from our net income of $10.0 million, which was generated by cash received from our customers, offset by cash payments we made to third parties for their services and employee compensation.

In addition, $5.1 million related to changes in balances of operating assets and liabilities was added to net income and $6.8 million related to non-cash charges was added to net income to reconcile to cash flow from operations.

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

Our operating cash flows resulted primarily from our net income of $12.5 million, which was generated by cash received from our customers, offset by cash payments we made to third parties for their services and employee compensation.

In addition, $4.2 million related to changes in balances of operating assets and liabilities was subtracted from net income and $7.6 million related to non-cash charges was added to net income to reconcile to cash flow from operations.

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

Our operating cash flows resulted primarily from our net income of $10.0 million.

In addition, $5.1 million related to changes in balances of operating assets and liabilities was added to net income and $6.8 million related to noncash charges was added to net income to reconcile to cash flow from operations.

Net cash provided by operating activities decreased by $8.5 million during the fiscal year ended August 31, 2024, compared to the fiscal year ended August 31, 2023.

This decrease was driven by working capital changes.

Investing Activities

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

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

Net cash used in investing activities during the fiscal year ended August 31, 2024, was $54.0 million, primarily due to the acquisition of Pro-ficiency of $98.8 million, purchase of short-term investments of $67.2 million and computer software development costs of $3.2 million, offset by proceeds from maturities of short-term investments of $71.1 million, and proceeds from sales of investments of $45.2 million.

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

Financing Activities

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

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

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

KNOWN TRENDS OR UNCERTAINTIES

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

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

We believe that the need for improved productivity in the research and development activities directed toward developing new medicines will continue to result in increasing adoption of simulation and modeling tools and consulting services such as those we provide.

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

however, there can be no assurances that new products will result in significant improvements to revenues or earnings.

For competitive reasons, we do not disclose all of our new product development activities.

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

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

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

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

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

Our continued quest for strategic acquisitions could result in a significant change to revenues and earnings if one or more such acquisitions are completed.

The potential for growth in new markets (e.g., healthcare) is uncertain.

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

CONTRACTUAL OBLIGATIONS

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

(in thousands) Payments due by period

Contractual obligations:

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

Contracts payable (1)

$ 6,580 $ 3,250 $ 3,330 $ — $ —

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

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

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

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

RECENTLY ISSUED OR NEWLY ADOPTED ACCOUNTING STANDARDS

In October 2021, the FASB issued ASU No.

2021-08, Business Combinations (Topic 805):

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

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

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

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

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

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

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Net cash used in financing activities during the fiscal year ended August 31, 2024, was $6.6 million, primarily due to dividend payments totaling $4.8 million and the first cash earnout payments in the aggregate amount of $2.5 million to the former equity holders and employees of Immunetrics, partially offset by proceeds from the exercise of stock options totaling $0.7 million.

Net cash used in financing activities during fiscal year ended August 31, 2023, was $23.2 million, primarily due to share repurchases of $20.0 million and dividend payments totaling $4.8 million, offset by proceeds from the exercise of stock options totaling $1.5 million.

Pro-ficiency Acquisition

On June 11, 2024, the Company entered into a Stock Purchase Agreement, by and among the Company, Pro-ficiency, each of the stockholders of Pro-ficiency (collectively, the “Sellers”) and WRYP Stockholders Services, LLC, solely in its capacity as the Sellers’ Representative (the “Purchase Agreement”).

Pursuant to the Purchase Agreement, at closing on June 11, 2024 (the “Closing”), the Company purchased 100% of the issued and outstanding capital stock of Pro-ficiency (the “Acquisition”) from the Sellers for an aggregate purchase price of $100 million in cash, subject to post-closing adjustments for net working capital, closing cash, indebtedness, and transaction expenses (collectively, the “Purchase Price”).

An aggregate of $1 million of the Purchase Price was placed in escrow to fund payment obligations of the Sellers with respect to post-Closing Purchase Price adjustments and post-Closing indemnification obligations of the Sellers, and another portion of the Purchase Price was deposited into an account to reimburse the Seller Representative for any fees and expenses incurred by the Seller Representative in performing its duties under the Purchase Agreement as the representative of the Sellers.

As a result of the Acquisition, at Closing, Pro-ficiency became a wholly-owned subsidiary of the Company.

The Purchase Agreement contains standard representations, warranties and covenants and other terms customary in similar transactions.

Subject to the provisions of the Purchase Agreement, the Sellers have agreed to indemnify the Company and its affiliates for losses resulting from breaches of representations, warranties and covenants of the Sellers and Pro-ficiency in the Purchase Agreement and for certain other specified matters.

The Sellers’ indemnification obligations are subject to various limitations, including, among other things, a deductible, caps, and time limitations.

In connection with the Acquisition, the Company obtained a customary buyer’s representation and warranty insurance policy (the “R&W Insurance Policy”) providing for up to $10 million in coverage in the case of breaches of representations and warranties of the Sellers and Pro-ficiency contained in the Purchase Agreement, subject to certain exclusions and an initial $0.5 million retention.

The Company, on the one hand, and the Sellers, on the other hand, each bore one-half of the cost of obtaining the R&W Insurance Policy.

Immunetrics Acquisition

The Company has a remaining obligation for the Immunetrics acquisition for up to $5.5 million and $1.8 million hold back liability which are expected to be paid out and released, to the extent earned and less any applicable deductions, in early calendar year 2025.

Refer to Note 6 – Shareholders’ Equity of the Notes to Financial Statements (Part I, Item 1 of this Report) for details regarding dividends.

As discussed elsewhere in this Report, our Board of Directors has determined to discontinue the Company’s quarterly cash dividend after the dividend distribution on August 5, 2024, and reallocate these funds to our capital allocation strategy for investing in growth initiatives that are intended to generate long-term shareholder value.

We do not expect to pay dividends to our stockholders at any time in the foreseeable future.

Anyone considering investing in our stock should not rely on such investment to provide dividend income.

Share Repurchases

For the fiscal year ended August 31, 2024, we did not repurchase any shares of Company stock and for the fiscal year ending August 31, 2023, we repurchased 492,041 shares of Company common stock through our share repurchase program.

All repurchases were made using cash resources.

As of August 31, 2024, $30 million remains available for additional repurchases under our authorized repurchase program.

However, we are not obligated to repurchase any additional shares, and the timing, manner, price, and actual amount of further share repurchases will depend on a variety of factors, including stock price, market conditions, other capital management needs and opportunities, and corporate and regulatory considerations.

The share repurchase program has no expiration date but may be terminated at any time at our Board of Directors’ discretion.

Critical Accounting Estimates

Our financial statements and accompanying notes are prepared in accordance with GAAP.

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Revenue Recognition

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

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

The Company determines revenue recognition through the following steps:

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Capitalized Computer Software Development Costs

Software development costs are capitalized in accordance with ASC 985-20, “Costs of Software to Be Sold, Leased, or Marketed”.

Capitalization of software development costs begins upon the establishment of technological feasibility and is discontinued when the product is available for sale.

Software development costs are capitalized in accordance with ASC 985-20, “Costs of Software to Be Sold, Leased, or Marketed.” Capitalization of software development costs begins upon the establishment of technological feasibility and is discontinued when the product is available for sale.

The establishment of technological feasibility and the ongoing assessment for recoverability of capitalized computer software development costs require considerable judgment by management with respect to certain external factors including, but not limited to, technological feasibility, anticipated future gross revenues, estimated economic life, and changes in software and hardware technologies.

Capitalized software development costs are comprised primarily of salaries and direct payroll-related costs and the purchase of existing software to be used in the Company’s software products.

Total capitalized computer software development costs were $3.3 million, $3.2 million, and $2.9 million for the fiscal years ending August 31, 2023, 2022, and 2021, respectively.

Total capitalized computer software development costs were $3.3 million, $3.3 million, and $3.2 million for the fiscal years ended August 31, 2024, 2023, and 2022, respectively.

Amortization of capitalized computer software development costs is calculated on a product-by-product basis on the straight-line method over the estimated economic life of the products, not to exceed five years.

Amortization of software development costs amounted to $1.5 million, $1.2 million, and $1.4 million for the fiscal years ending August 31, 2023, 2022, and 2021, respectively.

Amortization of software development costs amounted to $2.1 million, $1.5 million, and $1.2 million, respectively for the fiscal years ended August 31, 2024, 2023, and 2022, respectively.

We expect future amortization expense to vary due to increases in capitalized computer software development costs.

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Goodwill is not amortized, instead it is tested for impairment annually or when events or circumstances change that would indicate that goodwill might be impaired.

Events or circumstances that could trigger an impairment review include, but are not limited to, a significant adverse change in legal factors or in the business climate, an adverse action or assessment by a regulator, unanticipated competition, a loss of key personnel, significant changes in the manner of the Company's use of the acquired assets or the strategy for the Company's overall business, significant negative industry or economic trends, or significant under-performance relative to expected historical or projected future results of operations.

Events or circumstances that could trigger an impairment review include, but are not limited to, a significant adverse change in legal factors or in the business climate, an adverse action or assessment by a regulator, unanticipated competition, a loss of key personnel, significant changes in the manner of the Company's use of the acquired assets or the strategy for the Company's overall business, significant negative industry or economic trends, or significant underperformance relative to expected historical or projected future results of operations.

Goodwill is tested for impairment at the reporting unit level, which is one level below or the same as an operating segment.

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

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

As of August 31, 2024, after completion of the Company's internal reorganization, the Company determined that it had six reporting units:

CHEM, PBPK, QSP, CPP, MC, and ALI.

As of August 31, 2024, the entire balance of goodwill was attributed to four of the Company's reporting units, CPP, QSP, ALI, and MC.

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.

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

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

No impairment losses were recorded during the fiscal years ended August 31, 2024, and 2022, respectively.

Business Acquisitions

The Company accounted for the acquisition of Cognigen, DILIsym, Lixoft, and Immunetrics using the acquisition method of accounting where the assets acquired and liabilities assumed are recognized based on their respective estimated fair values.

The Company accounted for the acquisitions of Cognigen, DILIsym, Lixoft, Immunetrics, and Pro-ficiency using the acquisition method of accounting where the assets acquired and liabilities assumed are recognized based on their respective estimated fair values.

The excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill.

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Stock-Based Compensation

The Company accounts for stock options in accordance with ASC 718-10, “Compensation-Stock Compensation”.

Under this method, compensation costs include the estimated grant-date fair value of awards amortized over the options’ vesting period.

Stock-based compensation expense, 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, and is included in the statements of operations as Consulting, Salaries, and Research and Development expense.

The Company accounts for stock options in accordance with ASC 718-10, “Compensation-Stock Compensation.” Under this method, compensation costs include the estimated grant-date fair value of awards amortized over the options’ vesting period.

Stock-based compensation costs, not including shares issued to directors for services, was $6.0 million, $4.3 million, and $2.7 million, for the fiscal years ending August 31, 2024, 2023, and 2022, respectively.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis