Simulations Plus, Inc. 10-Q

Table of Contents SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q ☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Security Exchange Act of 1934 for the quarterly period ended February 28, 2021 OR ☐ Transmission Report Pursuant to Section 13 or 15(d) of the Security Exchange Act of 1937 for the transition period from ______ to ______ Commission file number: 001-32046 Simulations Plus, Inc. (Name of registrant as specified in its charter) California 95-4595609 (State or other jurisdiction of Incorporation or Organization) (I.R.S. Employer identification No.) 42505 10th Street West Lancaster , CA 93534-7059 (Address of principal executive offices including zip code) ( 661 ) 723-7723 (Registrant’s telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Title of Each Class Common Stock, par value $0.001 per share Trading Symbol SLP Name of Each Exchange on Which Registered NASDAQ Stock Market LLC Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filings requirements for the past 90 days. Yes ☒ No ☐ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a nonaccelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act (Check one): ☐ Large accelerated filer ☐ Accelerated filer ☒ Non-accelerated Filer ☒ Smaller reporting company ☐ Emerging Growth Company If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ The number of shares outstanding of the registrant’s common stock, par value $0.001 per share, as of April 12, 2021 was 20,107,895 ; no shares of preferred stock were outstanding. Simulations Plus, Inc. FORM 10-Q For the Quarterly Period Ended February 28, 2021 Table of Contents PART I. FINANCIAL INFORMATION Page Item 1. Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets at February 28, 2021 and August 31, 2020 3 Condensed Consolidated Statements of Operations and Comprehensive Income for the three and six months ended February 28, 2021 and February 29, 2020 4 Condensed Consolidated Statements of Shareholders’ Equity for the three and six months ended February 28, 2021 and February 29, 2020 5 Condensed Consolidated Statements of Cash Flows for the six months ended February 28, 2021 and February 29, 2020 6 Notes to Condensed Consolidated Financial Statements 7 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 26 Item 3. Quantitative and Qualitative Disclosures about Market Risk 37 Item 4. Controls and Procedures 37 PART II. OTHER INFORMATION Item 1. Legal Proceedings 38 Item 1A. Risk Factors 38 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 38 Item 3. Defaults upon Senior Securities 38 Item 4. Mine Safety Disclosures 38 Item 5. Other Information 38 Item 6. Exhibits 38 Signatures 39 2 Part I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements SIMULATIONS PLUS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (Audited) February 28, August 31, (in thousands, except share and per share amounts) 2021 2020 ASSETS Current assets Cash and cash equivalents $ 42,385 $ 49,207 Accounts receivable, net of allowance for doubtful accounts of $ 100 and $ 50 11,306 7,422 Revenues in excess of billings 3,837 3,093 Prepaid income taxes 1,250 970 Prepaid expenses and other current assets 1,408 1,596 Short-term investments 75,367 66,804 Total current assets 135,553 129,092 Long-term assets Capitalized computer software development costs, net of accumulated amortization of $ 14,271 and $ 13,582 6,871 6,087 Property and equipment, net 924 438 Operating lease right of use assets 1,532 927 Intellectual property, net of accumulated amortization of $ 5,801 and $ 5,087 11,184 11,898 Other intangible assets, net of accumulated amortization of $ 1,917 and $ 1,642 6,733 7,008 Goodwill 12,921 12,921 Other assets 51 51 Total assets $ 175,769 $ 168,422 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable $ 400 $ 351 Accrued payroll and other expenses 2,891 2,251 Current portion - contracts payable 2,000 2,000 Billings in excess of revenues 258 141 Operating lease liability, current portion 469 463 Deferred revenue 523 300 Total current liabilities 6,541 5,506 Long-term liabilities Deferred income taxes, net 2,360 2,354 Operating lease liability 1,064 463 Payments due under contracts payable 4,307 4,064 Total liabilities 14,272 12,387 Commitments and contingencies Shareholders' equity Preferred stock, $ 0.001 par value 10,000,000 shares authorized, no shares issued and outstanding – – Common stock, $ 0.001 par value and additional paid in capital — 50,000,000 shares authorized, 20,059,528 and 19,923,277 shares issued and outstanding 130,713 128,541 Retained earnings 30,730 27,436 Accumulated other comprehensive income 54 58 Total shareholders' equity 161,497 156,035 Total liabilities and shareholders' equity $ 175,769 $ 168,422 The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. 3 SIMULATIONS PLUS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME For the three and six months ended February 28, 2021 and February 29, 2020 (in thousands, except per common share amounts) Three Months Ended Six Months Ended (Unaudited) (Unaudited) 2021 2020 2021 2020 Revenues $ 13,147 $ 10,350 $ 23,848 $ 19,751 Cost of revenues 2,911 2,666 5,344 5,309 Gross margin 10,236 7,684 18,504 14,442 Operating expenses Selling, general, and administrative 5,458 4,110 9,866 7,623 Research and development 1,292 748 2,101 1,274 Total operating expenses 6,750 4,858 11,967 8,897 Income from operations 3,486 2,826 6,537 5,545 Other income (expense) Interest income 58 12 119 22 Interest expense ( 22 ) – ( 22 ) – Change in value of contingent consideration ( 122 ) – ( 243 ) – Income/(Loss) on currency exchange 23 ( 2 ) 28 2 Total other income (expense) ( 63 ) 10 ( 118 ) 24 Income before provision for income taxes 3,423 2,836 6,419 5,569 Provision for income taxes ( 212 ) ( 686 ) ( 729 ) ( 1,361 ) Net Income $ 3,211 $ 2,150 $ 5,690 $ 4,208 Earnings per share Basic $ 0.16 $ 0.12 $ 0.28 $ 0.24 Diluted $ 0.15 $ 0.12 $ 0.27 $ 0.23 Weighted-average common shares outstanding Basic 20,006 17,638 19,968 17,624 Diluted 20,842 18,316 20,786 18,306 Other Comprehensive Income (Loss), net of tax Foreign currency translation adjustments ( 4 ) – ( 4 ) – Comprehensive Income $ 3,207 $ 2,150 $ 5,686 $ 4,208 The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. 4 SIMULATIONS PLUS, INC. CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the three and six months ended February 28, 2021 and February 29, 2020 (in thousands, except per common share amounts) Three Months Ended Six Months Ended (Unaudited) (Unaudited) 2021 2020 2021 2020 Common stock and additional paid in capital Balance, beginning of period $ 129,253 $ 15,830 $ 128,541 $ 15,327 Exercise of stock options 656 167 836 303 Stock-based compensation 717 345 1,166 640 Shares issued to Directors for services 87 72 170 144 Balance, end of period $ 130,713 $ 16,414 $ 130,713 $ 16,414 Retained earnings Balance, beginning of period $ 28,720 $ 23,357 $ 27,436 $ 22,355 Declaration of dividend ( 1,201 ) ( 1,059 ) ( 2,396 ) ( 2,115 ) Net income 3,211 2,150 5,690 4,208 Balance, end of period $ 30,730 $ 24,448 $ 30,730 $ 24,448 Accumulated other comprehensive income Balance, beginning of period $ 58 $ – $ 58 $ – Other comprehensive income (loss) ( 4 ) – ( 4 ) – Balance, end of period $ 54 $ – $ 54 $ –     Total shareholders’ equity – – 156,035 – Other comprehensive income (loss) – – – – Total shareholders’ equity $ 161,497 $ 40,862 $ 161,497 $ 40,862 Common dividends declared per common share $ 0.06 $ 0.06 $ 0.12 $ 0.12 The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. 5 SIMULATIONS PLUS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended (in thousands) February 28, 2021 February 29, 2020 Cash flows from operating activities Net income $ 5,690 $ 4,208 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 1,776 1,345 Change in value of contingent consideration 243 – Amortization of note premiums 1,276 – Stock-based compensation 1,336 784 Deferred income taxes 6 ( 17 ) Currency translation adjustments ( 4 ) – (Increase) decrease in Accounts receivable ( 3,884 ) ( 2,218 ) Revenues in excess of billings ( 744 ) ( 880 ) Prepaid income taxes ( 280 ) 308 Prepaid expenses and other assets 188 92 Increase (decrease) in Accounts payable 51 421 Accrued payroll and other expenses 640 ( 114 ) Billings in excess of revenues 117 93 Deferred revenue 223 ( 197 ) Net cash provided by operating activities 6,634 3,825 Cash flows used in investing activities Purchases of property and equipment ( 583 ) ( 73 ) Purchases of short-term investments ( 40,789 ) – Proceeds from sale of short-term investments 30,950 – Capitalized computer software development costs ( 1,474 ) ( 1,127 ) Net cash used in investing activities ( 11,896 ) ( 1,200 ) Cash flows used in financing activities Payment of dividends ( 2,396 ) ( 2,115 ) Proceeds from the exercise of stock options 836 303 Net cash used in financing activities ( 1,560 ) ( 1,812 ) Net increase (decrease) in cash and cash equivalents ( 6,822 ) 813 Cash and cash equivalents, beginning of year 49,207 11,436 Cash and cash equivalents, end of period $ 42,385 $ 12,249 Supplemental disclosures of cash flow information Income taxes paid $ 878 $ 1,066 Non-Cash Investing and Financing Activities Right of use assets capitalized $ 905 $ 903 The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. 6 SIMULATIONS PLUS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1: GENERAL This report on Form 10-Q for the quarter ended February 28, 2021, should be read in conjunction with the our Annual Report on Form 10-K for the year ended August 31, 2020, filed with the Securities and Exchange Commission (“SEC”) on November 16, 2020. As contemplated by the SEC under Article 8 of Regulation S-X, the accompanying consolidated financial statements and footnotes have been condensed and therefore do not contain all disclosures required by generally accepted accounting principles. The interim financial data are unaudited; however, in the opinion of Simulations Plus, Inc. ("we", "our", "us"), the interim data includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the interim periods. Results for interim periods are not necessarily indicative of those to be expected for the full year. 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, Inc. In June 2017, Simulations Plus acquired DILIsym Services, Inc. (“DILIsym”) as a wholly owned subsidiary. In April 2020, Simulations Plus, Inc. acquired Lixoft, a French société par actions simplifiée (“Lixoft”) as a wholly owned subsidiary pursuant to a stock purchase and contribution agreement. (Collectively, “Company”, “we”, “us”, “our”). 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 artificial intelligence and machine learning based technology. We also provide consulting services ranging from early drug discovery through preclinical and clinical trial data analysis and for submissions to regulatory agencies. Our software and consulting services are provided to major pharmaceutical, biotechnology, agrochemical, cosmetics, food industry companies, and to regulatory agencies worldwide for use in the conduct of industry-based research. NOTE 2: SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The accompanying consolidated financial statements include the accounts of Simulations Plus, Inc. and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated upon 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. Significant accounting policies for us include revenue recognition, accounting for capitalized computer software development costs, valuation of stock options, and accounting for income taxes. Reclassifications Certain numbers in the prior year have been reclassified to conform to the current year's presentation. Revenue Recognition We generate revenue primarily from the sale of software licenses and by providing consulting services to the pharmaceutical industry for drug development. 7 In accordance with Accounting Standards Codification Topic 606 (ASC Topic 606), “ Revenue from Contracts with Customers”, 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 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. Sales commissions for new contracts are deferred and then amortized on a straight-line basis over a period of benefit. We determined the period of benefit by taking into consideration our customer contracts, our technology, and other factors. Sales commissions for renewal contracts are deferred and then amortized on a straight-line basis over the related contractual renewal period. Amortization expense is included in sales and marketing expenses on the condensed consolidated statements of operations. We apply the practical expedient in ASC Topic 606 to expense costs as incurred for sales commissions when the period of benefit would have been one year or less. Most of our contracts are of a duration of one year or less, while few, if any of the longer-term contracts have commissions associated with them. Practical Expedients and Exemptions We have elected the following additional practical expedients in applying Topic 606: · Commission Expense : We apply the practical expedient in ASC Topic 606 to expense costs as incurred for sales commissions when the period of benefit is one year or less. Most of our contracts are of a duration of one year or less; few, if any of the longer term contracts have commissions associated with them . · Transaction Price Allocated to Future Performance Obligations : ASC 606 requires that we disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied as of February 28, 2021. ASC 606 provides certain practical expedients that limit the requirement to disclose the aggregate amount of transaction price allocated to unsatisfied performance obligations. We applied the practical expedient to not disclose the amount of transaction price allocated to unsatisfied performance obligations when the performance obligation is part of a contract that has an original expected duration of one year or less. 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 We analyze the age of customer balances, historical bad-debt experience, customer creditworthiness, and changes in customer payment terms when making estimates of the collectability of our trade accounts receivable balances. If we determine that the financial conditions of any of our customers have deteriorated, whether due to customer-specific or general economic issues, an increase in the allowance may be made. Accounts receivable are written off when all collection attempts have failed. 8 Investments We 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. We account for our investment in marketable securities in accordance with Financial Accounting Standards Board (FASB) 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 reported at amortized cost. Discounts and premiums to par value of the debt securities are amortized to interest income/expense over the term of the security. No gains or losses on investment securities are realized until they are sold or a decline in fair value is determined to be other-than-temporary. 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 with unrealized gains or losses excluded from earnings and reported as a separate component of shareholders’ equity. We classify our investments in marketable debt securities based on the facts and circumstances present at the time of purchase of the securities. During the quarter ended February 28, 2021, 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, “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 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 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 $ 365 thousand and $ 314 thousand for the three months ended February 28, 2021 and February 29, 2020, respectively and $ 690 thousand and $ 628 thousand for the six months ended February 28, 2021 and February 29, 2020, respectively. We expect future amortization expense to vary due to increases in capitalized computer software development costs. We test capitalized computer software development costs for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Property and Equipment Property and equipment are recorded at cost, less accumulated depreciation and amortization. Depreciation and amortization are provided using the straight-line method over the estimated useful lives as follows: Property and Equipment estimated useful lives Equipment 5 years Computer equipment 3 to 7 years Furniture and fixtures 5 to 7 years Leasehold improvements Shorter of life of asset or lease 9 Internal-use Software We have a service contract related to the implementation of internally used software. In accordance with ASC 350-40 “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” , we have capitalized certain internal-use software which are included in long-term assets. The amortization will be classified as selling, general, and administrative expenses on the condensed consolidated statement of operations and maintenance and minor upgrades are charged to expense as incurred. Gains and losses on disposals are included in the results of operations. No amortization has been expensed for the project as it is still in progress. Leases Supplemental balance sheet information related to operating leases was as follows as of February 28, 2021: Schedule of lease cost (in thousands) Right of use assets $ 1,532 Lease Liabilities, Current $ 469 Lease Liabilities, Long-term $ 1,064 Operating lease costs $ 314 Weighted Average remaining lease term 3.0 years Weighted Average Discount rate 3.79 % Intangible Assets and Goodwill We perform valuations of assets acquired and liabilities assumed on each acquisition accounted for as a business combination and recognizes the assets acquired and liabilities assumed at their acquisition-date fair value. Acquired intangible assets include customer relationships, software, trade 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. Intangible assets are amortized over their estimated useful lives using the straight-line method, which approximates the pattern in which the majority of the economic benefits are expected to be consumed. Goodwill represents the excess of the cost of an acquired entity over the fair value of the acquired net assets. Goodwill is not amortized, instead it is tested for impairment annually or when events or circumstances change that would indicate that goodwill might be impaired. Events or circumstances that could trigger an impairment review include, but are not limited to, a significant adverse change in legal factors or in the business climate, an adverse action or assessment by a regulator, unanticipated competition, a loss of key personnel, significant changes in the manner of 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 is tested for impairment at the reporting unit level, which is one level below or the same as an operating segment. As of February 28, 2021, we determined that we have four reporting units: Simulations Plus, Cognigen, DILIsym and Lixoft. When testing goodwill for impairment, we first perform a qualitative assessment to determine whether it is necessary to perform step one of a two-step annual goodwill impairment test for each reporting unit. we are required to perform step one only if it concludes that it is more likely than not that a reporting unit's fair value is less than its carrying value. Should this be the case, the first step of the two-step process is to identify whether a potential impairment exists by comparing the estimated fair values of our reporting units with their respective book values, including goodwill. If the estimated fair value of the reporting unit exceeds book value, goodwill is considered not to be impaired, and no additional steps are necessary. If, however, the fair value of the reporting unit is less than book value, then the second step is performed to determine if goodwill is impaired and to measure the amount of impairment loss, if any. The amount of the impairment loss is the excess of the carrying amount of the goodwill over its implied fair value. The estimate of implied fair value of goodwill is primarily based on an estimate of the discounted cash flows expected to result from that reporting unit, but may require valuations of certain internally generated and unrecognized intangible assets such as our software, technology, patents, and trademarks. If the carrying amount of goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess. 10 As of February 28, 2021, the entire balance of goodwill was attributed to three of the our reporting units: Cognigen, DILIsym, and Lixoft. Intangible assets subject to amortization are reviewed for impairment whenever events or circumstances indicate that the carrying amount of these assets may not be recoverable. We did not recognize any impairment charges during the three months and six months ended February 28, 2021 and February 29, 2020. Reconciliation of Goodwill as of February 28, 2021: Schedule of reconciliation of goodwill (in thousands) Cognigen DILIsym Lixoft Total Balance, August 31, 2020 $ 4,789 $ 5,598 $ 2,534 $ 12,921 Addition – – – – Impairments – – – – Balance, February 28, 2021 $ 4,789 $ 5,598 $ 2,534 $ 12,921 Fair Value of Financial Instruments Assets and liabilities recorded at fair value in the Condensed Balance Sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. The categories, as defined by the standard are as follows: Level Input: Input Definition: Level I Inputs 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, accrued payroll and other expenses, accrued bonuses to officers, and accrued warranty and service costs, the amounts approximate fair value due to their short maturities. The following table summarizes fair value measurements at February 28, 2021 and August 31, 2020 for assets and liabilities measured at fair value on a recurring basis: Schedule of fair value measurements February 28, 2021: (in thousands) Level 1 Level 2 Level 3 Total Cash and cash equivalents $ 42,385 $ – $ – $ 42,385 Short-term investments $ 75,367 $ – $ – 75,367 Acquisition-related contingent consideration obligations $ – $ – $ 4,974 $ 4,974 August 31, 2020: (in thousands) Level 1 Level 2 Level 3 Total Cash and cash equivalents $ 49,207 $ – $ – $ 49,207 Short-term investments $ 66,804 $ – $ – $ 66,804 Acquisition-related contingent consideration obligations $ – $ – $ 4,731 $ 4,731 11 As of February 28, 2021 and August 31, 2020, we had a liability for contingent consideration related to our acquisition of Lixoft. The fair value measurement of the contingent consideration obligations is determined using Level 3 inputs. The fair value of contingent consideration obligations is 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 the market. 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 we record in any given period. Changes in the value of the contingent consideration obligations are recorded in our Consolidated Statement of Operations. The following is a reconciliation of contingent consideration value: Reconciliation of contingent consideration value (in thousands) Value at August 31, 2020 $ 4,731 Contingent consideration payments – Change in value of contingent consideration 243 Value at February 28, 2021 $ 4,974 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 740-10, “Income Taxes” which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The provision for income taxes represents the tax payable for the period and the change during the period in deferred tax assets and liabilities. Intellectual property The following table summarizes intellectual property as of February 28, 2021: (in thousands) Amortization Period Acquisition Value Accumulated Amortization Net Book Value Royalty Agreement buy out-Enslein Research Straight line 10 years $ 75 $ 67 $ 8 Termination/nonassertion agreement-TSRL Inc. Straight line 10 years 6,000 4,075 1,925 Developed technologies–DILIsym acquisition Straight line 9 years 2,850 1,188 1,662 Intellectual rights of Entelos Holding Corp. Straight line 10 years 50 12 38 Developed technologies–Lixoft acquisition Straight line 16 years 8,010 459 7,551 $ 16,985 $ 5,801 $ 11,184 12 The following table summarizes intellectual property as of August 31, 2020: (in thousands) Amortization Period Acquisition Value Accumulated Amortization Net Book Value Royalty Agreement buy out-Enslein Research Straight line 10 years $ 75 $ 64 $ 11 Termination/nonassertion agreement-TSRL Inc. Straight line 10 years 6,000 3,775 2,225 Developed technologies–DILIsym acquisition Straight line 9 years 2,850 1,029 1,821 Intellectual rights of Entelos Holding Corp. Straight line 10 years 50 10 40 Developed technologies–Lixoft acquisition Straight line 16 years 8,010 209 7,801 $ 16,985 $ 5,087 $ 11,898 Total amortization expense for intellectual property agreements for the three months ended February 28, 2021 and February 29, 2020 was $ 357 thousand and $ 232 thousand, respectively, and total amortization expense for the six months ended February 28, 2021 and February 29, 2020 was $ 714 thousand and $ 465 thousand, respectively. Other intangible assets Schedule of other intangible assets The following table summarizes the Company’s other intangible assets as of February 28, 2021: (in thousands) Amortization Period Acquisition Value Accumulated Amortization Net Book Value Cognigen Customer relationships Straight line 8 years $ 1,100 $ 894 $ 206 Trade name None 500 – 500 Covenants not to compete Straight line 5 years 50 50 – DILIsym Customer relationships Straight line 10 years 1,900 713 1,187 Trade name None 860 – 860 Covenants not to compete Straight line 4 years 80 75 5 Lixoft Customer relationships Straight line 14 years 2,550 167 2,383 Trade name None 1,550 – 1,550 Covenants not to compete Straight line 3 years 60 18 42 $ 8,650 $ 1,917 $ 6,733 13 The following table summarizes the Company’s other intangible assets as of August 31, 2020: (in thousands) Amortization Period Acquisition Value Accumulated Amortization Net Book Value Cognigen Customer relationships Straight line 8 years $ 1,100 $ 825 $ 275 Trade name None 500 – 500 Covenants not to compete Straight line 5 years 50 50 – DILIsym Customer relationships Straight line 10 years 1,900 618 1,282 Trade name None 860 – 860 Covenants not to compete Straight line 4 years 80 65 15 Lixoft Customer relationships Straight line 14 years 2,550 76 2,474 Trade name None 1,550 – 1,550 Covenants not to compete Straight line 3 years 60 8 52 $ 8,650 $ 1,642 $ 7,008 Total amortization expense for other intangible assets for the three months ended February 28, 2021 and February 29, 2020 was $ 138 thousand and $ 87 thousand, respectively, and total amortization expense for the six months ended February 28, 2021 and February 29, 2020 was $ 275 thousand and $ 174 thousand, respectively. According to policy in addition to normal amortization, these assets are tested for impairment as needed. Earnings per Share We report earnings per share in accordance with FASB ASC 260-10. Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of common shares available. Diluted earnings per share is computed similar 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 three and six months ended February 28, 2021 and February 29, 2020 were as follows: Schedule of earnings per share (in thousands) Three Months ended Six Months Ended 2021 2020 2021 2020 Numerator: Net income attributable to common shareholders $ 3,211 $ 2,150 $ 5,690 $ 4,208 Denominator: Weighted-average number of common shares outstanding during the period 20,006 17,638 19,968 17,624 Dilutive effect of stock options 836 678 818 682 Common stock and common stock equivalents used for diluted earnings per share 20,842 18,316 20,786 18,306 14 Stock-Based Compensation Compensation costs related to stock options are determined in accordance with FASB ASC 718-10, “Compensation-Stock Compensation”, using the modified prospective method. Under this method, compensation cost is calculated based on the grant-date fair value estimated in accordance with FASB ASC 718-10, amortized on a straight-line basis over the options’ vesting period. Stock-based compensation expense was $ 804 thousand and $ 417 thousand for the three months ended February 28, 2021 and February 29, 2020, respectively, and $ 1.3 million and $ 784 thousand for the six months ended February 28, 2021 and February 29, 2020, respectively. This expense is included in the condensed consolidated statements of operations as Selling, general, and administration and Research and development expense. Impairment of Long-lived Assets We account for the impairment and disposition of long-lived assets in accordance with ASC 350, “Intangibles – Goodwill and Other ” and ASC 360, “Property and Equipment” . Long-lived assets to be held and used are reviewed for events or changes in circumstances that indicate that their carrying value may not be recoverable. We measure recoverability by comparing the carrying amount of an asset to the expected future undiscounted net cash flows generated by the asset. If we determine that the asset may not be recoverable, or if the carrying amount of an asset exceeds its estimated future undiscounted cash flows, we recognize an impairment charge to the extent of the difference between the fair value and the asset's carrying amount. No impairment losses were recorded during the six months ended February 28, 2021 and February 29, 2020. Recently Issued Accounting Pronouncements In March 2020, the FASB issued Accounting Standards Update (“ASU”) 2020-04 , Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). The amendments in ASU 2020-04 provide temporary optional expedients and exceptions for applying GAAP to contract modifications, hedging relationships and other transactions to ease the potential accounting and financial reporting burden associated with transitioning away from reference rates that are expected to be discontinued, including the London Interbank Offered Rate (“LIBOR”). This ASU is effective as of March 12, 2020 through December 31, 2022. The adoption of the new standard has not had and is not expected to have a material impact on our financial statements or related disclosures. In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes existing guidance on accounting for leases in "Leases (Topic 840)" and generally requires all leases to be recognized in the consolidated balance sheet. ASU 2016-02 is effective for annual and interim reporting periods beginning after December 15, 2018. We adopted this ASU on September 1, 2019. NOTE 3: REVENUE RECOGNITION Contract Liabilities During the three and six months ended February 28, 2021, we recognized $ 104 thousand and $ 400 thousand, respectively, of revenue that was included in contract liabilities as of August 31, 2020, and during the three and six months ended February 29, 2020, we recognized $ 338 thousand and $ 773 thousand, respectively, of revenue that was included in contract liabilities as of August 31, 2019. Disaggregation of Revenues The components of disaggregation of revenue for the three and six months ended February 28, 2021 and February 29, 2020 were as follows: Schedule of disaggregation of revenues (in thousands) Three Months Ended Six Months Ended 2021 2020 2021 2020 Software licenses: Point in time $ 7,536 $ 5,131 $ 13,472 $ 9,494 Over time 291 254 503 504 Consulting services: Over time 5,320 4,965 9,873 9,753 Total revenue $ 13,147 $ 10,350 $ 23,848 $ 19,751 15 Remaining Performance Obligations Remaining performance obligations that do not fall under the expedients require us to perform various consulting and software development services of approximately $ 3.8 million. It is anticipated that a majority of these revenues will be recognized within the next twelve months. NOTE 4: PROPERTY AND EQUIPMENT Property and equipment consisted of the following: Schedule of property and equipment (in thousands) February 28, 2021 August 31, 2020 Equipment $ 1,012 $ 865 Computer equipment 583 548 Furniture and fixtures 161 161 Leasehold improvements 123 114 Construction in progress 391 – Sub total 2,270 1,688 Less: accumulated depreciation ( 1,346 ) ( 1,250 ) Net book value $ 924 $ 438 NOTE 5: INVESTMENTS We invest a portion of our excess cash balances in short-term debt securities. Investments at February 28, 2021 consisted of corporate bonds with maturities remaining of less than 12 months. We may also invest excess cash balances in certificates of deposit, money market accounts, government-sponsored enterprise securities, corporate bonds and/or commercial paper. We account for investments in accordance with FASB ASC 320, Investments – Debt and Equity Securities. At February 28, 2021, all investments were classified as held-to-maturity securities. The following tables summarize our short-term investments as of February 28, 2021 and August 31, 2020: Schedule of short term investment February 28, 2021 (in thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Commercial notes (due within one year) $ 75,367 $ – $ ( 65 ) $ 75,302 Total $ 75,367 $ – $ ( 65 ) $ 75,302 August 31, 2020 (in thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Commercial notes (due within one year) $ 66,804 $ – $ ( 61 ) $ 66,743 Total $ 66,804 $ – $ ( 61 ) $ 66,743 16 NOTE 6: CONTRACTS PAYABLE DILIsym Acquisition Liabilities : On June 1, 2017, we acquired DILIsym. The agreement provided for a working capital adjustment, an eighteen-month $1.0 million holdback provision against certain representations and warranties, and an earnout agreement of up to an additional $5.0 million in earnout payments based on earnings over three years following acquisition. The earnout liability has been recorded at an estimated fair value. Payments under the earnout liability started in fiscal year 2019. In September 2018, $1.6 million was paid out under the first earnout payment, a second earnout payment was made in August 2019 in the amount of $1.7 million. The final payment of $1.8 million was paid in August 2020. In addition, no claims were made against the holdback and the $1.0 million holdback provision was released eighteen months after June 1, 2017. Lixoft Acquisition Liabilities : On April 1, 2020, we acquired Lixoft. The agreement provided for a 24 month $2.0 million holdback escrow provision against certain representations and warrantees, comprised of $1.3 million of cash and shares of stock valued at $667 thousand issued at the date of the agreement. In addition, based on a revenue growth formula for the two years subsequent to April 1, 2020, the agreement calls for earnout payments of up to $5.5 million (two-thirds cash and one-third newly issued, restricted shares of our common stock). The former shareholders of Lixoft can earn up to $2.0 million the first year and $3.5 million in year two. As of February 28, 2021 and August 31, 2020 the following liabilities have been recorded: Schedule of Liabilities (in thousands) February 28, 2021 August 31, 2020 Holdback liability — Lixoft $ 1,333 $ 1,333 Earnout liability — Lixoft 4,974 4,731 Sub total $ 6,307 $ 6,064 Less: current portion 2,000 2,000 Long-term portion $ 4,307 $ 4,064 NOTE 7: COMMITMENTS AND CONTINGENCIES Leases We lease approximately 9,255 square feet of space in Lancaster, California. The original lease had a five-year term with two, three-year options to extend. The initial five-year term expired in February 2011, and we extended the lease to February 2, 2014. In June 2013, the lease was amended to extend the term to February 2, 2017. The amended lease also provides for an annual base rent increase of 3% per year and two, two-year options to extend. In May 2016, we exercised the two, two-year options extending the term of the lease through February 2, 2021 at a fixed rate of $25 thousand per month. In December 2020, the lease was amended to extend the term to January 31, 2026. The amendment decreased the leased square footage from 13,500 sq. ft to 9,255 sq. ft, and correspondingly reduced the base rent from $25 thousand per month to $16.7 thousand per month. The amended lease also allows us to opt out of the last 4 years of the lease upon 180-day notice to the landlord with no penalty. 17 Our Cognigen subsidiary leases approximately 12,623 square feet of space in Buffalo, New York. The initial five-year term expired in October 2018 and was renewed for a three-year option extending it to November 2021. The new base rent is $16 thousand per month. DILIsym leases approximately 2,700 square feet of space in Research Triangle Park, North Carolina. The initial three-year term was due to expire October 2020. An amendment to the initial lease became effective April 1, 2020, which added 686 square feet and extended the term of the lease to September 30, 2023. The new base rent is approximately $8 thousand per month with an annual 3% adjustment. In Paris, France, Lixoft leases approximately 2,300 square feet of office space, which as of April 1, 2020, had minimum payments equaling $288 thousand. The lease is for a 9-year term, with an option to terminate every 3 years, and expires in November of 2024. The rent is $16 thousand per quarter (approximately $5.3 thousand per month) and can be adjusted each December based on a consumer price index. Rent expense, including common area maintenance fees for the three months ended February 28, 2021, and February 29, 2020 was $ 147 thousand and $ 150 thousand, respectively, and $ 332 thousand and $ 295 thousand for the six months ended February 28, 2021 and February 29, 2020, respectively. Future minimum lease payments under noncancelable operating leases with remaining terms of one year or more at February 28, 2021 were as follows: Future minimum lease payments (in thousands) Years Ending February 28, 2022 $ 513 2023 370 2024 328 2025 244 2026 183 Future minimum lease payments $ 1,638 Line of Credit On March 31, 2020, we entered into a Credit Agreement with Wells Fargo Bank, N.A. The Credit Agreement provides us with a credit facility of $ 3.5 million through April 15, 2022 . As of February 28, 2021, there were no amounts drawn against the line of credit. Employment Agreements In the normal course of business, we have entered into employment agreements with certain of our key management personnel that may require compensation payments upon termination. License Agreement We had a royalty agreement with Dassault Systèmes Americas Corp. for access to their Metabolite Database for developing our Metabolite Module within ADMET Predictor™. The module was renamed the Metabolism Module when we released ADMET Predictor version 6 on April 19, 2012. Under this agreement, we paid a royalty of 25% of revenue derived from the sale of the Metabolism/Metabolite module. This agreement was renegotiated, and we do not bear any royalty obligations towards Dassault Systèmes Americas Corp. effective as of June 30, 2019. In addition, the license agreement terminated on September 5, 2020. We have not experienced any adverse impact on revenue since terminating the license agreement. We are in the process of making arrangements to replace the database, which is expected to be completed by the end of fiscal year 2021. 18 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 year 2017 thru 2019 are open for audit, and our state tax returns for fiscal year 2016 through 2019 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. Legal Proceedings We may be subject to litigation, claims, investigations and audits arising from time to time in the ordinary course of our business; however, at this time, we are not a party to any legal proceedings and are not aware of any pending, threatened, or unasserted legal proceedings of any kind. NOTE 8: SHAREHOLDERS’ EQUITY Dividends Our Board of Directors declared cash dividends during fiscal years 2021 and 2020. The details of the dividends paid are in the following tables: Schedule of dividends declared and paid (in thousands, except dividend per share amounts) Fiscal Year 2021 Record Date Distribution Date Number of Shares Outstanding on Record Date Dividend per Share Total Amount 10/26/2020 11/02/2020 19,924 $ 0.06 $ 1,195 1/25/2021 2/01/2021 20,010 $ 0.06 1,201 Total $ 2,396 (in thousands, except dividend per share amounts Fiscal Year 2020 Record Date Distribution Date Number of Shares Outstanding on Record Date Dividend per Share Total Amount 10/25/2019 11/01/2019 17,606 $ 0.06 $ 1,056 1/27/2020 2/03/2020 17,646 $ 0.06 1,059 4/24/2020 5/01/2020 17,769 $ 0.06 1,066 7/27/2020 8/03/2020 17,820 $ 0.06 1,069 Total $ 4,250 Stock Option Plans On February 23, 2007, the Board of Directors adopted and the shareholders approved the 2007 Stock Option Plan under which a total of 1.0 million shares of common stock were reserved for issuance. On February 25, 2014 the shareholders approved an additional 1.0 million shares increasing the total number of shares available to be granted under the 2007 Stock Option Plan to 2.0 million. This plan terminated in February 2017 by its term. 19 On December 23, 2016 the Board of Directors adopted, and on February 23, 2017 the shareholders approved, the 2017 Equity Incentive Plan under which a total of 1.0 million shares of common stock were reserved for issuance. This plan will terminate in December 2026 by its term. On November 20, 2020, the Board of Directors adopted an amendment to the 2017 Equity Incentive Plan to, subject to shareholder approval, increase the number of shares reserved for issuance under the plan from 1.0 million shares of common stock to 1.75 million shares of common stock. The amendment, which was submitted for shareholder approval at our 2021 annual shareholder meeting, was not approved by the shareholders. As a result, we expect to submit a new equity plan for adoption by the Board of Directors and shareholders in May 2021. If approved, the new equity incentive plan will replace the 2017 Equity Incentive Plan, except that outstanding awards granted prior to the adoption of the new equity incentive plan will continue to be governed by the 2017 Equity Incentive Plan. As of February 28, 2021, employees and directors hold Qualified Incentive Stock Options (“ISOs”) and Non-Qualified Stock Options (“NQSOs) to purchase 1.3 million shares of common stock at exercise prices ranging from $6.85 to $61.84. The following table summarizes information about stock options: Schedule of stock option activity (in thousands, except per share and weighted-average amounts) Transactions during the six months ended February 28, 2021 Number of Options Weighted- Average Exercise Price Per Share Weighted- Average Remaining Contractual Life Outstanding, August 31, 2020 1,224 $ 17.76 6.79 Granted 206 $ 57.83 Exercised ( 134 ) $ 13.11 Cancelled/Forfeited ( 34 ) $ 26.19 Outstanding, February 28, 2021 1,262 $ 24.57 6.88 Exercisable, February 28, 2021 657 $ 11.68 5.31 The weighted-average remaining contractual life of options outstanding issued under the Plan, both ISOs and NQSOs, was 6.88 years at February 28, 2021. The total fair value of nonvested stock options as of February 28, 2021 was $ 20.1 million and is amortizable over a weighted average period of 3.73 years. The fair value of these options was estimated at the date of grant using the Black-Scholes option-pricing model. The Black-Scholes option-valuation model was developed for use in estimating the fair value of traded options, which do not have vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. The following table summarizes the fair value of the options, including both ISOs and NQSOs, granted during the six months ended February 28, 2021 and fiscal year 2020: Schedule of fair value of options (in thousands except pricing) Six months ended February 28, 2021 Fiscal Year 2020 Estimated fair value of awards granted $ 4,657 $ 2,997 Unvested forfeiture rate 0 % 0 % Weighted average grant price $ 57.83 $ 39.23 Weighted average market price $ 57.83 $ 39.23 Weighted average volatility 40.47 % 33.56 % Weighted average risk-free rate 0.60 % 1.39 % Weighted average dividend yield 0.41 % 0.65 % Weighted average expected life 6.64 years 6.67 years 20 The exercise prices for the options outstanding at February 28, 2021 ranged from $6.85 to $61.84, and the information relating to these options is as follows: (in thousands except prices) Schedule of options by exercise price range 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 $ 8.00 150 3.50 years $ 6.85 150 3.50 years $ 6.85 $ 8.01 $ 16.00 470 5.55 years $ 9.93 402 5.48 years $ 9.89 $ 16.01 $ 24.00 191 7.21 years $ 20.47 65 6.41 years $ 20.42 $ 24.01 $ 38.00 189 8.66 years $ 33.45 39 8.63 years $ 33.82 $ 38.01 $ 52.00 15 9.09 years $ 38.59 1 8.98 years $ 38.81 $ 52.01 $ 61.84 247 9.68 years $ 58.53 – – $ – 1,262 6.88 years $ 24.57 657 5.31 years $ 11.68 During the three and six months ended February 28, 2021 we issued 1,105 and 2,380 shares of stock valued at $ 87 and $ 170 thousand to our nonmanagement directors as compensation for services rendered to us. In August 2020, we closed an underwritten public offering of approximately 2.1 million shares of our common stock to the public at $ 55.00 per share, which included the full exercise of the underwriters’ option to purchase approximately 273 thousand additional shares of common stock. The aggregate gross proceeds to the company from this offering were approximately $ 115 million before deducting underwriting discounts and commissions. Net proceeds were approximately $ 107.7 million. The offering was made pursuant to our automatic shelf registration statement on Form S-3 filed with the SEC on July 9, 2020. The balance of par value common stock and additional paid in capital as of February 28, 2021 was $10 thousand and $130.7 million, respectively. NOTE 9: CONCENTRATIONS AND UNCERTAINTIES Financial instruments that potentially subject us to concentration of credit risk consist principally of cash, cash equivalents, trade accounts receivable and short-term investments. We hold cash and cash equivalents at banks located in California and North Carolina with balances that often exceed FDIC-insured limits. In addition, we hold cash at a bank in France that is not FDIC-insured. Historically, we have not experienced any losses in such accounts. However, considering the current banking environment, we are investigating alternative ways to minimize our exposure to such risks. While we may be exposed to credit losses due to the nonperformance of our counterparties, we do not expect the settlement of these transactions to have a material effect on our results of operations, cash flows, or financial condition. We maintain cash at financial institutions that may, at times, exceed federally insured limits. As of February 28, 2021 we had cash and cash equivalents exceeding insured limits by $12.7 million. Revenue concentration shows that international sales accounted for 34 % and 33 % of net sales for the six months ended February 28, 2021 and February 29, 2020, respectively. Two customers accounted for 13 % and 5 % of net sales during the six months ended February 28, 2021. Three customers accounted for 7 % , 6 % (a dealer account in Japan representing various customers), and 6 % of net sales during the six months ended February 29, 2020. 21 Accounts receivable concentration shows that four customers comprised 15 % , 10 % , 6 % , and 5 % (a dealer account in Japan representing various customers) of accounts receivable at February 28, 2021. Accounts receivable concentration shows that four customers comprised 10 % (a dealer account in Japan representing various customers), 5 % , 5 % and 5 % at February 29, 2020. We operate in the computer software industry, 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. The majority of our customers are in the pharmaceutical industry. During economic downturns, we have seen consolidations in the pharmaceutical industry. The extent to which the COVID-19 pandemic impacts our business going forward will depend on numerous factors we cannot reliably predict, including the duration and scope of the pandemic; businesses and individuals' actions in response to the pandemic; and the impact on economic activity including the possibility of recession or financial market instability. These factors may adversely impact consumer, business, and government spending as well as customers' ability to pay for our products and services on an ongoing basis . As a result, our growth rate could be affected by consolidation and downsizing in the pharmaceutical industry. NOTE 10: SEGMENT AND GEOGRAPHIC REPORTING We account for segments and geographic revenues in accordance with guidance issued by the FASB. Our reportable segments are strategic business units that offer different products and services. Results for each segment and consolidated results are as follows for the three and six months ended February 28, 2021 and February 29, 2020: Schedule of consolidated results from reportable segments (in thousands) Three Months Ended February 28, 2021 Simulations Plus Cognigen DILIsym Lixoft* Eliminations Total Revenues $ 6,646 $ 2,783 $ 2,114 $ 1,604 $ – $ 13,147 Income from operations before income taxes $ 2,121 $ 279 $ 260 $ 826 $ – $ 3,486 Total assets $ 165,712 $ 12,712 $ 15,242 $ 21,420 $ ( 39,317 ) $ 175,769 Capital expenditures $ 232 $ 126 $ 5 $ 15 $ – $ 378 Capitalized software costs $ 588 $ 5 $ 35 $ 118 $ – $ 746 Depreciation and amortization $ 485 $ 84 $ 149 $ 193 $ – $ 911 *Lixoft was purchased on April 1, 2020. (in thousands) Three Months Ended February 29, 2020 Simulations Plus Cognigen DILIsym Eliminations Total Revenues $ 5,904 $ 2,750 $ 1,696 $ – $ 10,350 Income from operations $ 2,004 $ 276 $ 546 $ – $ 2,826 Total assets $ 42,881 $ 10,465 $ 13,555 $ ( 17,702 ) $ 49,199 Capital expenditures $ 9 $ 20 $ 13 $ – $ 42 Capitalized software costs $ 573 $ 16 $ 31 $ – $ 620 Depreciation and amortization $ 435 $ 89 $ 151 $ – $ 675 22 (in thousands) Six Months Ended February 28, 2021 Simulations Plus Cognigen DILIsym Lixoft* Eliminations Total Revenues $ 12,078 $ 5,451 $ 3,486 $ 2,833 $ – $ 23,848 Income from operations before income taxes $ 4,486 $ 485 $ 215 $ 1,351 $ – $ 6,537 Total assets $ 165,712 $ 12,712 $ 15,242 $ 21,420 $ (39,317 ) $ 175,769 Capital expenditures $ 371 $ 189 $ 5 $ 18 $ – $ 583 Capitalized software costs $ 1,156 $ 5 $ 78 $ 235 $ – $ 1,474 Depreciation and amortization $ 936 $ 165 $ 298 $ 377 $ – $ 1,776 *Lixoft was purchased on April 1, 2020. (in thousands) Six Months Ended February 29, 2020 Simulations Plus Cognigen DILIsym Eliminations Total Revenues $ 10,830 $ 5,137 $ 3,784 $ – $ 19,751 Income from operations $ 3,907 $ 316 $ 1,322 $ – $ 5,545 Total assets $ 42,881 $ 10,465 $ 13,555 $ (17,702 ) $ 49,199 Capital expenditures $ 17 $ 41 $ 15 $ – $ 73 Capitalized software costs $ 1,030 $ 36 $ 61 $ – $ 1,127 Depreciation and amortization $ 870 $ 175 $ 300 $ – $ 1,345 In addition, we allocate revenues to geographic areas based on the locations of our customers. Geographical revenues for the three and six months ended February 28, 2021 and February 29, 2020 were as follows: Schedule of geographical revenues (in thousands) Three Months Ended February 28, 2021 Americas EMEA Asia Pacific Total Simulations Plus $ 2,884 $ 2,350 $ 1,412 $ 6,646 Cognigen 2,783 – – 2,783 DILIsym 2,067 45 2 2,114 Lixoft 928 676 – 1,604 Total $ 8,662 $ 3,071 $ 1,414 $ 13,147 (in thousands) Three Months Ended February 29, 2020 Americas EMEA Asia Pacific Total Simulations Plus $ 2,607 $ 1,610 $ 1,687 $ 5,904 Cognigen 2,750 – – 2,750 DILIsym 1,469 126 101 1,696 Total $ 6,826 $ 1,736 $ 1,788 $ 10,350 23 (in thousands) Six Months Ended February 28, 2021 Americas EMEA Asia Pacific Total Simulations Plus $ 5,403 $ 4,239 $ 2,436 $ 12,078 Cognigen 5,451 – – 5,451 DILIsym 3,393 66 27 3,486 Lixoft 1,538 1,255 40 2,833 Total $ 15,785 $ 5,560 $ 2,503 $ 23,848 (in thousands) Six Months Ended February 29, 2020 Americas EMEA Asia Pacific Total Simulations Plus $ 5,153 $ 2,757 $ 2,920 $ 10,830 Cognigen 5,137 – – 5,137 DILIsym 3,207 451 126 3,784 Total $ 13,497 $ 3,208 $ 3,046 $ 19,751 NOTE 11: EMPLOYEE BENEFIT PLAN We maintain a 401(k) Plan for all eligible employees, and we make matching contributions equal to 100% of the employee’s elective deferral, not to exceed 4% of total employee compensation. We can also elect to make a profit-sharing contribution. Our contributions to this Plan amounted to $ 131 thousand and $ 109 thousand for the three months ended February 28, 2021 and February 29, 2020, respectively and $ 252 thousand and $ 202 thousand for the six months ended February 28, 2021 and February 29, 2020, respectively. NOTE 12: ACQUISITION On March 31, 2020, we entered into a Stock Purchase and Contribution Agreement (the “Agreement”) with Lixoft. On April 1, 2020, we completed the acquisition of all outstanding equity interests of Lixoft pursuant to the terms of the Agreement, with Lixoft becoming our wholly owned subsidiary. We believe the combination of Simulations Plus and Lixoft provides substantial potential based on the complementary strengths of each of the companies. Under the terms of the Agreement, as described below, we will pay the former shareholders of Lixoft total consideration of up to $16.5 million, consisting of two-thirds cash and one-third newly issued, unregistered shares of our common stock. In addition, we will pay $3.5 million of excess working capital based on the March 31, 2020 financial statements of Lixoft. On April 1, 2020, we paid the former shareholders of Lixoft a total of $10.8 million, comprised of cash in the amount of $9.5 million and the issuance of 111,682 shares of our common stock valued at $3.7 million, net of adjustments and a holdback for representations and warranties. Under the terms of the Agreement a price of approximately $32.15 dollars per share was used based upon the volume-weighted average closing price of our shares of common stock for the 30-consecutive-trading-day period ending two trading days prior to April 1, 2020. A total of 9,669 shares are held in an escrow account for potential offset for representations and warrantees. Within three business days following the two-year anniversary of March 31, 2020 (the date of the Agreement) and subject to any offsets for representations and warrantees, we will pay the former shareholders of Lixoft a total of $2.0 million, comprised of $1.3 million of cash and shares released from escrow valued at $666 thousand issued at the date of the Agreement. The Agreement provides for a two-year market standoff period in which the newly issued shares may not be sold by the recipients thereof. 24 In addition, the Agreement calls for earnout payments up to an additional $5.5 million, two-thirds cash and one-third newly issued, unregistered shares of our common stock based on a revenue growth formula each year for the two years subsequent to April 1, 2020. The former shareholders can earn up to $2.0 million the first year and $3.5 million in year two. The earnout liability has been recorded at fair value. Under the acquisition method of accounting, the total purchase price reflects Lixoft’s tangible and intangible assets and liabilities based on their estimated fair values at the date of the completion of the acquisition (April 1, 2020). The following table summarizes the preliminary allocation of the purchase price for Lixoft: Allocation of purchase price (in thousands) Assets acquired, including cash of $3,799 and accounts receivable of $629 $ 5,007 Developed technologies acquired 8,010 Estimated value of intangible assets acquired (customer lists, trade name etc.) 4,160 Estimated goodwill acquired 2,534 Liabilities assumed ( 1,118 ) Total consideration $ 18,593 Goodwill was provided in the transaction based on estimates of future earnings of this subsidiary including anticipated synergies associated with the positioning of the combined company as a leader in Model-Based Drug Development. Consolidated supplemental Pro Forma information The following unaudited consolidated supplemental pro forma information assumes that the acquisition of Lixoft took place on September 1, 2019 for the income statement for the three and six months ended February 28, 2021. These amounts have been calculated after applying our accounting policies and adjusting the results of Lixoft to reflect the same expenses in the three and six months ended February 29, 2020. The adjustments include costs of acquisition, and amortization of intangibles and other technologies acquired during the merger, assuming the fair value adjustments applied on September 1, 2019, together with consequential tax effects. Schedule of Pro Forma Information (Unaudited) (Unaudited) For the three months ended For the six months ended (Actual) (Pro forma) (Actual) (Pro forma) February 28, 2021 February 29, 2020 February 28, 2021 February 29, 2020 Net Sales $ 13,147 $ 11,486 $ 23,848 $ 22,007 Net Income $ 3,211 $ 2,777 $ 5,690 $ 5,293 NOTE 13: SUBSEQUENT EVENTS On Friday, April 9, 2021, our Board of Directors declared a quarterly cash dividend of $ 0.06 per share to our shareholders. The dividend amount of $1.2 million will be distributed on Monday, May 3, 2021, for shareholders of record as of Monday, April 26, 2021. 25 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements This document and the documents incorporated in this document by reference contain forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact contained in this document and the materials accompanying this document are forward-looking statements. The forward-looking statements are based on the beliefs of our management, as well as assumptions made by and information currently available to our management. Frequently, but not always, forward-looking statements are identified by the use of the future tense and by words such as “believes,” expects,” “anticipates,” “intends,” “will,” “may,” “could,” “would,” “projects,” “continues,” “estimates” or similar expressions. Forward-looking statements are not guarantees of future performance and actual results could differ materially from those indicated by the forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause our or our industry’s actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by the forward-looking statements. The forward-looking statements contained or incorporated by reference in this document are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”) and are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. These statements include declarations regarding our plans, intentions, beliefs, or current expectations. Among the important factors that could cause actual results to differ materially from those indicated by forward-looking statements are the risks and uncertainties described under “Risk Factors” in our Annual Report on Form 10-K for the year ended August 31, 2020 filed with the Securities and Exchange Commission (“SEC”) on November 16, 2020 and elsewhere in this document and in our other filings with the SEC. Forward-looking statements are expressly qualified in their entirety by this cautionary statement. The forward-looking statements included in this document are made as of the date of this document and we do not undertake any obligation to update forward-looking statements to reflect new information, subsequent events, or otherwise. General BUSINESS OVERVIEW Simulations Plus, Inc., incorporated in 1996, is a premier developer of modeling and simulation software for drug discovery and development, including the prediction of properties of molecules utilizing artificial-intelligence- and machine-learning-based technology. We also provide consulting services ranging from early drug discovery through preclinical and clinical trial development to regulatory submissions in support of product approval. Our software and consulting services are provided to major pharmaceutical, biotechnology, agrochemical, cosmetics, and food industry companies and to academic and regulatory agencies worldwide for use in the conduct of industry-based research. SLP is headquartered in Southern California, with offices in Buffalo, NY, Research Triangle Park, NC, and Paris, France. Our common stock trades on the Nasdaq Capital Market under the symbol “SLP”. We are a global leader focused on improving the ways scientists use knowledge and data to predict the properties and outcomes of pharmaceutical and biotechnology agents by providing a wide range of early discovery, preclinical, and clinical consulting services and software. Our innovations in integrating new and existing science in medicinal and computational chemistry, pharmaceutical science, biology, physiology, and machine learning into our software have enabled us to be a leading software provider for physiologically based pharmacokinetics “(PBPK”) modeling and simulation, pharmacometric modeling and simulation, prediction of molecular properties from structure, and prediction of the propensity of drugs to induce liver injury or to treat nonalcoholic fatty liver disease. Our scientific consulting staff draw upon extensive experience across multiple therapeutic areas and a full range of modeling and simulation techniques to assist our clients across the full spectrum of drug development. 26 We generate revenue by delivering relevant, cost-effective software and creative and insightful consulting services. Pharmaceutical and biotechnology companies use our software programs and scientific consulting services to guide early drug discovery (molecule design screening and lead optimization), preclinical, and clinical development programs, including using our software products and services to enhance their understanding of the properties of potential new medicines and to use emerging data to improve formulations, select and justify dosing regimens, support the generics industry, optimize clinical trial designs, and simulate outcomes in special populations, such as in elderly and pediatric patients. Simulations Plus acquired Cognigen Corporation (Cognigen) as a wholly owned subsidiary in September 2014. Cognigen was originally incorporated in 1992. Through the integration of Cognigen into Simulations Plus, Simulations Plus became a leading provider of population modeling and simulation contract research services for the pharmaceutical and biotechnology industries. Our clinical-pharmacology-based consulting services include pharmacokinetic and pharmacodynamic modeling, clinical trial simulations, data programming, and technical writing services in support of regulatory submissions. We have also developed software for harnessing cloud-based computing in support of modeling and simulation activities and secure data archiving, and we provide consulting services to improve interdisciplinary collaborations and research and development productivity. Simulation Plus acquired DILIsym Services, Inc. (DILIsym) as a wholly owned subsidiary in June 2017. The acquisition of DILIsym positioned us as the leading provider of Drug Induced Liver Injury (DILI) modeling and simulation software and related scientific consulting services. In addition to the DILIsym® software for analysis of potential drug-induced liver injury, DILIsym also has developed a simulation program for analyzing nonalcoholic fatty liver disease (NAFLD) called NAFLDsym™. Both the DILIsym and NAFLDsym software programs require outputs from PBPK software as inputs. Outputs generated by the GastroPlus™ PBPK software that are required by DILIsym software can be automatically mapped to DILIsym applications; thus, the integration of these technologies provides a seamless capability for analyzing the potential for drug-induced liver injury for new drug compounds and for investigating the potential for new therapeutic agents to treat NAFLD. Since the acquisition, DILIsym has applied its mechanistic modeling resources in other disease areas including idiopathic pulmonary fibrosis (IPF). Simulations Plus acquired Lixoft as a wholly owned subsidiary on April 1, 2020. Lixoft brings to Simulations Plus its powerful software products, Monolix, Simulx and PKanalix, which can take modeling projects from data exploration to clinical trial simulations. In addition, Lixoft provides training and focused consulting services which can accelerate pharmacometric studies. Lixoft’s technologies were developed as a result of a research program led by the French national research institute for digital science and technology (Inria), on nonlinear mixed effect models for advanced population analysis, pharmacometrics, pre-clinical, and clinical trial modeling and simulation. Lixoft continues to work with Inria. PRODUCTS General We currently offer eleven software products for pharmaceutical research and development: five simulation programs that provide time-dependent results based on solving large sets of differential equations: GastroPlus; DDDPlus™; MembranePlus™; DILIsym; and NAFLDsym ® ; three programs that are based on predicting and analyzing static (not time-dependent) properties of chemicals: ADMET Predictor; MedChem Designer™; and MedChem Studio™ (the combination of ADMET Predictor, MedChem Designer, and MedChem Studio is called our ADMET Design Suite); a program which is designed for rapid clinical trial data analysis and regulatory submissions called PKPlus™; a cloud-based communication and collaboration platform for exploratory data analysis, population PK/PD modeling and reporting called KIWI TM ; and in April 2020 with the acquisition of Lixoft, we added the Monolix Suite of products – a modeling and simulation solution that allows nonparametric analyses, population PKPD analyses, and modeling and clinical trial simulation. 27 Software business Our software business represented 59% of our total revenue during the first six months of fiscal year 2021, and was primarily generated by the following products: GastroPlus ® Our flagship product, originally introduced in 1998, and currently our largest single source of software revenue, is GastroPlus. GastroPlus mechanistically simulates the absorption, pharmacokinetics, pharmacodynamics, and drug-drug interactions (DDI) of compounds administered to humans and animals and is currently one of the most widely used commercial software of its type by industry, the U.S. Food and Drug Administration (FDA), the U.S. National Institutes of Health (NIH), and other government agencies in the U.S. and around the world. In February 2021, GastroPlus version 9.8.1, which included new mechanisms and updated documentation for key DDI standards models, was released. ADMET Predictor ® ADMET Predictor is a top-ranked, chemistry-based computer program that takes molecular structures (i.e., drawings of molecules represented in various formats) as inputs and uses artificial intelligence/machine learning technologies to predict approximately 175 different properties for them at an average rate of over 200,000 compounds per hour on a modern laptop computer. This capability allows chemists to generate estimates for a large number of important molecular properties without the need to synthesize and test the molecules, as well as to generate estimates of unknown properties for molecules that have been synthesized, but for which only a limited number of experimental properties have been measured. In September 2020, ADMET Predictor® Version 10.0 (APX), which integrates Artificial Intelligence-driven Drug Design (AIDD) with PBPK, was released. DILIsym ® The DILIsym software is a quantitative systems pharmacology (“QSP”) program that was introduced in 2011. QSP software models are based on the fundamental understanding of complex biological pathways, disease processes, and drug mechanisms of action, integrating information from experiments and forming hypotheses for the next experimental model. DILIsym deals with the propensity for some drug molecules to induce temporary or permanent changes in biological functions within liver cells (hepatocytes) that can result in damage to the liver (i.e., drug-induced liver injury or DILI). Monolix Suite ™ The Monolix Suite is a unique solution for modeling and simulation for pharmaceutical companies, biotechs, and hospitals. It supports nonparametric analyses, population PKPD analyses and modeling, and clinical trial simulation. The extended MonolixSuite contains three main products: Monolix, Simulx, and PKanalix. These products are interconnected and interoperable, i.e., allowing users to go from one application to another one without changing anything in terms of data set or of biological models. Monolix 2020R1 was released in November 2020, which combines the most advanced algorithms with unique ease of use. Consulting Services Our consulting business represented 41% of our total revenue during the first six months of fiscal year 2021, and was primarily generated by the following services: PKPD Our clinical-pharmacology-based consulting services include population pharmacokinetic and pharmacodynamic modeling, exposure-response analyses, clinical trial simulations, data programming, and technical writing services in support of regulatory submissions. In addition to modeling and simulation consulting services, we provide expertise and assistance with development-related decision making and support for regulatory interactions related to dose selection, clinical trial design, and understanding of the determinants of safety and efficacy for new medicines. 28 QSP/QST We provide creative and insightful consulting services to support our QSP/QST modeling focused on heart failure, liver safety, and radiation syndrome, as well as other areas. Pharmaceutical and biotechnology companies use our scientific consulting services to guide early drug discovery (molecule design screening and lead optimization), preclinical, and clinical development programs. This includes using our software products and services to enhance their understanding of the properties of potential new medicines and to use emerging data to improve formulations, select and justify dosing regimens, support the generics industry, optimize clinical trial designs, and simulate outcomes in special populations, such as in elderly and pediatric patients. PBPK Beginning in 2014, the FDA and other regulatory agencies began to emphasize the need to encourage mechanistic PBPK modeling and simulation in clinical pharmacology, with final guidance documents completed in 2018. New draft guidance documents were released in October 2020 focused on additional applications for biopharmaceuticals. This has resulted in an increased need for us to provide consulting-related services to support this sophisticated technique. We support Model Informed Drug Discovery and Development throughout the entire product lifecycle: from discovery through translation research and clinical development when an organization does not have the time or resources to use our software, directly. More specifically, our clients seek out our consulting services to acquire scientific, therapeutic-area-related modeling and simulation expertise that they do not have in-house. Summary Results of Operations Three Months Ended February 28, 2021 compared with Three Months Ended February 29, 2020: (in thousands) Three Months Ended February 28, 2021 February 29, 2020 $ Change % Change Revenues $ 13,147 $ 10,350 $ 2,797 27 % Cost of revenues 2,911 2,666 245 9 Gross margin 10,236 7,684 2,552 33 Selling, general and administrative 5,458 4,110 1,348 33 Research and development 1,292 748 544 73 Total operating expenses 6,750 4,858 1,892 39 Income from operations 3,486 2,826 660 23 Other income (expense) (63 ) 10 (73 ) (730 ) Income before provision for income taxes 3,423 2,836 587 21 (Provision for) income taxes (212 ) (686 ) 474 (69 ) Net income $ 3,211 $ 2,150 $ 1,061 49 % Revenues Consolidated revenues increased by $2.8 million or 27% to $13.1 million for the three months ended February 28, 2021 compared to consolidated revenue of approximately $10.3 million for the three months ended February 29, 2020. This increase is primarily due to a $2.4 million or 45% increase in consolidated software-related revenue, and a $0.4 million or 7% increase in consolidated consulting and analytical study revenues when comparing the three months ended February 28, 2021 and February 29, 2020. Cost of Revenues Consolidated cost of revenues increased by $0.2 million, or 9%, to $2.9 million for the three months ended February 28, 2021 compared to $2.7 million for the three months period ended February 29, 2020. The increase is primarily due to a $0.2 million or 9% increase in labor-related contract research organization fees for the DILIsym division. 29 Gross Margin Consolidated gross margin increased by approximately $2.5 million or 33% to $10.2 million for the three months ended February 28, 2021 compared to $7.7 million for the three months ended February 29, 2020. The higher gross margin is primarily due to the addition of the Lixoft division, which contributed $1.4 million to the increase, as well as the Simulations Plus division’s gross margin increase of $0.8 million or 16%. The gross margin for the Cognigen and DILIsym Divisions both increased by approximately $0.2 million, respectively, for the quarter. Overall gross margin percentage increased by 4% to 78% for the three months ended February 28, 2021 from 74% for the three months period ended February 29, 2020. Selling, General and Administrative Expenses Selling, general, and administrative expenses increased by approximately $1.4 million, or 33% to $5.5 million for the three months period ended February 28, 2021 from $4.1 million for the three months period ended February 29, 2020. As a percent of revenues, Selling, general, and administrative expense increased from 40% to 42% for the same comparative periods. The increase in Selling, General, and Administrative expense was primarily due to the following: · Salaries and wages increased by $0.7 million due to higher corporate salaries, bonuses, and severance costs, as well as an increase in headcount and higher contract labor costs; · Payroll tax expense increased $0.3 million due to higher headcount and wages; · Insurance expense increased by $0.1 million due to cost increases, higher employee counts and increased liability-related insurance. Research and Development Costs Total research and development costs increased by $0.7 million for the three months ended February 28, 2021 compared to the three months ended February 29, 2020. During the second quarter of fiscal year 2021, we incurred approximately $2.0 million of research and development costs; of this amount, $0.7 million was capitalized and $1.3 million was expensed. For the three months ended February 29, 2020, we incurred approximately $1.3 million of research and development costs; of this amount, approximately $0.6 million was capitalized and approximately $0.7 million was expensed. Other Income (Expense) Total other expense was $63 thousand for the three months ended February 28, 2021 compared to total other income of $10 thousand for the three months ended February 29, 2020. The variance of $73 thousand is primarily due to a change in the valuation of contingent consideration, partially offset by an increase in interest income resulting from short-term investments. Provision for Income Taxes The provision for income taxes was $0.2 million for the three months ended February 28, 2021 compared to $0.7 million for the same period in the previous year. Our effective tax rate decreased 18.0% to 6.2% for the three months ended February 28, 2021 from 24.2% during the same period of the previous year primarily due to the disqualified disposition of options exercised. 30 Six Months Ended February 28, 2021 compared with Six Months Ended February 29, 2020: (in thousands) Six Months Ended February 28, 2021 February 29, 2020 Change ($) Change (%) Revenues $ 23,848 $ 19,751 $ 4,097 21 % Cost of revenues 5,344 5,309 35 1 Gross margin 18,504 14,442 4,062 28 Selling, general and administrative 9,866 7,623 2,243 29 Research and development 2,101 1,274 827 65 Total operating expenses 11,967 8,897 3,070 35 Income from operations 6,537 5,545 992 18 Other income (expense) (118 ) 24 (142 ) (592 ) Income before provision for income taxes 6,419 5,569 850 15 Provision for income taxes (729 ) (1,361 ) 632 (46 ) Net income $ 5,690 $ 4,208 $ 1,482 35 % Revenues Consolidated revenues increased by$4.1 million or 21% to $23.8 million for the six months ended February 28, 2021 compared to approximately $19.7 million for the six months ended February 29, 2020. This increase is primarily due to a $4.0 million or 40% increase in consolidated software-related revenue when comparing the six months ended February 28, 2021 and February 29, 2020. Cost of Revenues Consolidated cost of revenues increased slightly for the six months ended February 28, 2021 compared to the six months ended February 29, 2020. The increase is primarily due to higher amortization of software development costs with the purchase of Lixoft, offset by lower salary contracts for the Cognigen division. Gross Margin Consolidated gross margin increased $4.1 million or 28% to $18.5 million for the six months ended February 28, 2021 compared to $14.4 million for the six months ended February 29, 2020. The higher gross margin is primarily due to the addition of the Lixoft division, which contributed $2.5 million to the increase, as well as the Simulations Plus division’s gross margin increase of $1.4 million or 15%. The Cognigen Division gross margin increased $0.6 million or 22%. This was offset by a decrease for DILIsym Divisions’ gross margin of $0.3 million or 11% for the quarter. Overall gross margin percentage increased by 5% to 78% for the six months ended February 28, 2021 from 73% for the six months ended February 29, 2020. Selling, General and Administrative Expenses Selling, general, and administrative expenses increased $2.2 million, or 29% to $9.9 million for the six months ended February 28, 2021 from approximately $7.7 million for the six months ended February 29, 2020. As a percent of revenues, Selling, general, and administrative expense increased from 39% to 41% for the same comparative periods. 31 The increase in Selling, General, and Administrative expense was primarily due to the following: · Salaries and wage increased by $1.1 million due to higher corporate salaries, bonuses, and severance costs, as well as an increase in headcount and higher contract labor costs; · Payroll tax expense increased $0.5 million due to higher headcount and wages; · Insurance expense increased by $0.2 million due to cost increases, higher employee counts and increased liability-related insurance; · Professional fees increased by $0.2 million primarily due to higher accounting costs. Research and Development Costs Total research and development costs increased by $1.1 million for the six months ended February 28, 2021 compared to the six months ended February 29, 2020. During the first two quarters of fiscal year 2021, we incurred approximately $3.5 million of research and development costs; of this amount, $1.4 million was capitalized and $2.1 million was expensed. For the six months ended February 29, 2020 we incurred approximately $2.4 million of research and development costs; of this amount, $1.1 million was capitalized and $1.3 million was expensed. Other Income (Expense) Total other expense was $118 thousand for the six months ended February 28, 2021 compared to total other income of $24 thousand for the six months ended February 29, 2020. The variance of $142 thousand is primarily due to a change in the valuation of contingent consideration, partially offset by an increase in interest income resulting from short-term investments. Provision for Income Taxes The provision for income taxes was $0.7 million for the six months ended February 28, 2021 compared to $1.4 million for the same period in the previous year. Our effective tax rate decreased 13.0% to 11.4% for the six months ended February 28, 2021 from 24.4% during the same period of the previous year primarily due to the disqualified disposition of options exercised. Segment Results of Operations Three Months Ended February 28, 2021 compared with Three Months Ended February 29, 2020: Revenues (in thousands) Three Months Ended February 28, 2021 February 29, 2020 Change ($) Change (%) Simulations Plus $ 6,646 $ 5,904 $ 742 13 % Cognigen 2,783 2,750 33 1 DILIsym 2,114 1,696 418 25 Lixoft* 1,604 – 1,604 100 Total $ 13,147 $ 10,350 $ 2,797 27 % 32 Cost of Revenues (in thousands) Three Months Ended February 28, 2021 February 29, 2020 Change ($) Change (%) Simulations Plus $ 773 $ 846 $ (73 ) (9 )% Cognigen 1,224 1,341 (117 ) (9 ) DILIsym 725 479 246 51 Lixoft* 189 – 189 100 Total $ 2,911 $ 2,666 $ 245 9 % Gross Margin (in thousands) Three Months Ended February 28, 2021 February 29, 2020 Change ($) Change (%) Simulations Plus $ 5,873 $ 5,058 $ 815 16 % Cognigen 1,559 1,409 150 11 DILIsym 1,389 1,217 172 14 Lixoft* 1,415 – 1,415 100 Total $ 10,236 $ 7,684 $ 2,552 33 % *Lixoft was acquired on April 1, 2020. Simulations Plus For the three months ended February 28, 2021, the revenue increase of $0.7 million or 13%, compared to the three months ended February 29, 2020 was primarily due to higher sales from GastroPlus ($0.5 million) and ADMET Software ($0.2 million). Cost of revenue decreased $0.1 million during the same periods and gross margin increased $0.8 million or 16%, primarily due to the change in revenue. Cognigen For the three months ended February 28, 2021, revenue increased marginally compared to the three months ended February 29, 2020. Cost of revenues decreased $0.1 million or 9%, primarily due to a reduction in salaries. Gross margin increased $0.2 million or 11%, primarily due to the decrease in the cost of revenues. DILIsym For the three months ended February 28, 2021, the revenue increase of $0.4 million or 25% compared to the three months ended February 29, 2020 was primarily due to higher revenue from DILIsym consulting services of $0.3 million. Cost of revenue increased $0.2 million or 51%, primarily due to an increase in contract research organization fees. Gross margin increased $0.2 million or 14%. Lixoft For the three months ended February 28, 2021, the revenue increase of $1.6 million compared to the three months ended February 29, 2020 was primarily due to the purchase of Lixoft on April 1, 2020. Software sales of Monolix Suite generated 97% of total revenue and 3% was generated from consulting services. Cost of revenue and gross margin increases of $0.2 million and $1.4 million, respectively, were both due to the purchase of Lixoft on April 1, 2020. 33 Six Months Ended February 28, 2021 compared with Six Months Ended February 29, 2020: Revenues (in thousands) Six Months Ended February 28, 2021 February 29, 2020 Change ($) Change (%) Simulations Plus $ 12,078 $ 10,830 $ 1,248 12 % Cognigen 5,451 5,137 314 6 DILIsym 3,486 3,784 (298 ) (8 ) Lixoft* 2,833 – 2,833 100 Total $ 23,848 $ 19,751 $ 4,097 21 % Cost of Revenues (in thousands) Six Months Ended February 28, 2021 February 29, 2020 Change ($) Change (%) Simulations Plus $ 1,484 $ 1,591 $ (107 ) (7 )% Cognigen 2,370 2,611 (241 ) (9 ) DILIsym 1,110 1,107 3 – Lixoft* 380 – 380 100 Total $ 5,344 $ 5,309 $ 35 1 % Gross Margin (in thousands) Six Months Ended February 28, 2021 February 29, 2020 Change ($) Change (%) Simulations Plus $ 10,594 $ 9,239 $ 1,355 15 % Cognigen 3,081 2,526 555 22 DILIsym 2,376 2,677 (301 ) (11 ) Lixoft* 2,453 – 2,453 100 Total $ 18,504 $ 14,442 $ 4,062 28 % *Lixoft was acquired on April 1, 2020. Simulations Plus For the six months ended February 28, 2021, the revenue increase of $1.2 million or 12% compared to the six months ended February 29, 2020 was primarily due to higher sales from GastroPlus ($0.9 million) and ADMET Software ($0.3 million). Cost of revenue decreased $0.1 million or 7% during the same periods, and gross margin increased $1.4 million or 15%, primarily due to the change in revenue. 34 Cognigen For the six months ended February 28, 2021, the revenue increase of $0.3 million or 6% compared to the six months ended February 29, 2020 was primarily due to an increase in grant revenue. Cost of revenue decreased $0.2 million or 9%, primarily due to a reduction in salaries during the same periods. Gross margin increased by approximately $0.6 million or 22%. DILIsym For the six months ended February 28, 2021, the revenue decrease of $0.3 million or 8% compared to the six months ended February 29, 2020 was primarily due to lower revenue from DILIsym consulting services. Cost of revenue increased slightly during the same periods. Gross margin decreased $0.3 million or 11%, primarily due to the change in revenue. Lixoft For the six months ended February 28, 2021, the revenue increase of $2.8 million compared to the six months ended February 29, 2020 was due to the purchase of Lixoft on April 1, 2020. Software sales of Monolix Suite generated 96% of total revenue and 4% was generated from consulting services. Cost of revenue increased $0.4 million, and gross margin was $2.5 million due to the purchase of Lixoft on April 1, 2020. Liquidity and Capital Resources Historically, liquidity is provided by available cash and cash equivalents, cash generated from operations and access to capital markets. In August 2020, we closed an underwritten public offering of 2,090,909 shares of our common stock to the public at $55.00 per share, which included the full exercise of the underwriters’ option to purchase 272,727 additional shares of common stock. The aggregate gross proceeds to us from this offering were approximately $115 million, before deducting underwriting discounts and commissions; net proceeds were approximately $107.7 million. The offering was made pursuant to our automatic shelf registration statement on Form S-3 filed with the SEC on July 9, 2020. On March 31, 2020, we entered into a Stock Purchase and Contribution Agreement (the “Agreement”) with Lixoft. On April 1, 2020, we completed the acquisition of all outstanding equity interests of Lixoft pursuant to the terms of the Agreement, with Lixoft becoming our wholly owned subsidiary. We believe the combination of Simulations Plus and Lixoft provides substantial future potential based on the complementary strengths of each of the companies. Under the terms of the Agreement, we agreed to pay the former shareholders of Lixoft total consideration of up to $16.5 million, consisting of two-thirds cash and one-third newly issued, unregistered shares of our common stock. At closing, we paid the former shareholders of Lixoft a total of $10.8 million, comprised of cash in the amount of $9.5 million and the issuance of 111,682 shares of our common stock valued at $3.7 million, net of adjustments and a holdback for representations and warranties. In addition, we paid $3.5 million of excess working capital based on the March 31, 2020 financial statements of Lixoft. In addition, the Agreement calls for earnout payments up to an additional $5.5 million, two-thirds cash and one-third newly issued, unregistered shares of our common stock based on a revenue growth formula each year for the two years subsequent to April 1, 2020. The former shareholders can earn up to $2 million the first year and $3.5 million in year two. See Note 12, Acquisition, to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for a further description of the Agreement. Operating Activities Net cash provided by operating activities was $6.6 million for the six months ended February 28, 2021. Our operating cash flows resulted primarily from our net income of $5.7 million, which was generated by cash received from our customers, offset by cash payments we made to third parties for their services and employee compensation. In addition, net cash outflow from changes in balances of operating assets and liabilities was $3.7 million, offset by non-cash charges of $4.6 million. The change in operating assets and liabilities was primarily a result of an increase in accounts receivable. 35 Net cash provided by operating activities was $3.8 million for the six months ended February 29, 2020. Our operating cash flows resulted primarily from our net income of $4.2 million, which was generated by cash received from our customers, offset by cash payments we made to third parties for their services and employee compensation. In addition, net cash outflow from changes in balance of operating assets and liabilities was $2.5 million, offset by non-cash charges of $2.1 million. The change in operating assets and liabilities was primarily a result of an increase in accounts receivable, revenue in excess of billings and a decrease in deferred revenue, offset by an increase in accounts payable and a decrease in prepaid income taxes. Investing Activities Cash used for investing activities during the six months ended February 28, 2021 of $11.9 million was primarily due to the purchase of short-term investments of $40.8 million, the costs associated with the development of computer software of $1.5 million and the purchase of equipment of $0.6 million, offset by the proceeds from the sale of short-term investments of $31.0 million. Cash used for investing activities during the six months ended February 29, 2020 of $1.2 million was primarily due to costs associated with the development of computer software. Financing Activities For the six months ended February 28, 2021, net cash used by financing activities of $1.6 million, was primarily driven by the payment of dividends totaling $2.4 million, partially offset by proceeds from the exercise of stock options totaling $0.8 million. Net cash used by financing activities for the comparable period in fiscal year 2020 of $1.8 million, was primarily due to dividend payments totaling $2.1 million, partially offset by proceeds of $0.3 million from the exercise of stock options. Cash and Working Capital Cash and cash equivalents were $42.4 million as of February 28, 2021 compared to $49.2 million as of August 31, 2020. At February 28, 2021, we had working capital of $129.0 million, a ratio of current assets to current liabilities of 20.7 and a ratio of debt to equity of 0.1. At August 31, 2020, we had working capital of $123.6 million, a ratio of current assets to current liabilities of 23.4 and a ratio of debt to equity of 0.1. Based upon our current operating plans, we believe that our existing cash and cash equivalents, together with anticipated funds from operations, will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for the foreseeable future. Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially. We have based this estimate on assumptions that may prove to be wrong, and we could deplete our capital resources sooner than we expect. Critical Accounting Estimates Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of the condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements, and the reported amounts of expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including those related to recoverability and useful lives of long-lived assets, stock compensation, valuation of derivative instruments, allowances, contingent consideration, contingent value rights, fixed payment arrangements and going concern. Management bases its estimates and judgments on historical experience and on various other factors, including the COVID-19 pandemic, that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The methods, estimates, and judgments used by us in applying these critical accounting policies have a significant impact on the results we report in our condensed consolidated financial statements. Our significant accounting policies and estimates are included in our Annual Report on Form 10-K for the fiscal year ended August 31, 2020, filed with the SEC on November 16, 2020. 36 Information regarding our significant accounting policies and estimates can also be found in Note 2, Significant Accounting Policies, to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. Item 3. Quantitative and Qualitative Disclosures about Market Risk There has been no material change in our exposure to market risk from that described in Item 7A of our Annual Report on Form 10-K for the year ended August 31, 2020. Item 4. Controls and Procedures Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of February 28, 2021. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well-designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, management concluded as of February 28, 2021, that our disclosure controls and procedures were effective. Changes in Internal Controls over Financial Reporting No change in our internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 37 PART II. OTHER INFORMATION Item 1. Legal Proceedings For a description of our material pending legal proceedings, please see Note 7, Commitments and Contingencies, to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. Item 1A. Risk Factors Please carefully consider the information set forth in this Quarterly Report on Form 10-Q and the risk factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended August 31, 2020, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K, as well as other risks and uncertainties, could materially and adversely affect our business, results of operations and financial condition, which in turn could materially and adversely affect the trading price of shares of our Common Stock. Additional risks not currently known or currently material to us may also harm our business. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds None. Item 3. Defaults Upon Senior Securities None. Item 4. Mine Safety Disclosures Not applicable. Item 5. Other Information None. Item 6. Exhibits EXHIBIT NUMBER DESCRIPTION 10.1 (1) Third Amendment to Lease, dated as of December 28, 2020 10.2*† Separation Agreement, dated December 1, 2020, by and between the Company and John Kneisel 31.1* Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* 31.2* Certification of the Principal Financial Officer 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* XBRL Instance Document. 101.SCH* XBRL Taxonomy Extension Schema Document. 101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document. 101.DEF* XBRL Taxonomy Extension Definition Linkbase Document. 101.LAB* XBRL Taxonomy Extension Label Linkbase Document. 101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document. 104* Cover Page Interactive Data File – the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. ________________________ * Filed herewith (1) Incorporated by reference to the Company’s Form 8-K filed with the SEC on January 4, 2021. † Those exhibits marked with a (†) refer to management contracts or compensatory plans or arrangements. 38 SIGNATURE In accordance with Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Lancaster, State of California, on April 14, 2021. Simulations Plus, Inc. Date: April 14, 2021 By: /s/ Will Frederick Will Frederick Chief Financial Officer 39