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Item 7. Management’s Discussion and Analysis

2021-10-27 compared with 2020-11-16 · 527 added, 554 removed, 53 unchanged (95% of the section changed)

ITEM 7 – MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should

be read in conjunction with the Financial Statements and related notes included in this Annual Report on Form 10-K.

ITEM 7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and

Analysis is intended to assist the reader in understanding our results of operations and financial condition.

Management’s Discussion

and Analysis is provided as a supplement to, and should be read in conjunction with, our audited consolidated financial statements beginning

on page F-1 of this Annual Report on Form 10-K.

This Annual Report on Form 10-K includes certain statements that may be deemed to be “forward-looking

statements” within the meaning of Section 27A of the Securities Act of 1933, as amended.

All statements, other than statements of

historical fact, included in this Annual Report on Form 10-K that address activities, events or developments that we expect, project,

believe, or anticipate will or may occur in the future, including matters having to do with expected and future revenue, our ability to

fund our operations and repay debt, business strategies, expansion and growth of operations and other such matters, are forward-looking

These statements are based on certain assumptions and analyses made by our management in light of its experience and its perception

of historical trends, current conditions, expected future developments, and other factors it believes are appropriate in the circumstances.

These statements are subject to a number of assumptions, risks and uncertainties, including general economic and business conditions,

the business opportunities (or lack thereof) that may be presented to and pursued by us, our performance on our current contracts and

our success in obtaining new contracts, our ability to attract and retain qualified employees, and other factors, many of which are beyond

You are cautioned that these forward-looking statements are not guarantees of future performance and those actual results

or developments may differ materially from those projected in such statements.

Management Overview

Fiscal year 2020 highlights:

We acquired Lixoft of Paris, adding the Monolix Suite to our product offerings

We completed a follow-on public offering in August 2020;

net proceeds from the offering were $107.7 million

Entered into several funded collaborations to enhance Gastro Plus to include an intra-articular delivery model, a virtual bioequivalence trial simulator;

and expansion of Mechanistic Oral Absorption (ACAT)

Entered a funded collaboration with large pharmaceutical company to enhance PKPlus

Entered a collaboration agreement with Bayer AG to advance ADMET predictor, improving structure and tautomer handling capabilities supporting data integrity across their discovery platforms

Entered into an agreement with a large pharmaceutical company for

a new component, a QSP (Quantitative Systems Pharmacology) model focused on treating heart failure, such as can occur after

myocardial infarction

Entered a collaboration agreement to advance ADMET Predictor software for use within integrated drug discover workflows, by enhancing the HTPK Simulation Model that incorporates PBPK modeling into the partner’s discovery platform to support compound screening activities

Received notice of an FDA funded agreement to develop physiologically based pharmacokinetics/pharmacodynamics (PBPK/PD) approaches to support inter species translation for ocular drug delivery in GastroPlus

We released Version 4.3 of our KIWI™ Pharmacometric Communication and Collaboration Platform

Continued quarterly payment of dividend of 6 cents per share

Fiscal Year 2020 Financial Summary:

Consolidated net revenues increased by $7.62 million, or 22.4%, to $42 million in fiscal year 2020 from $34 million in fiscal year 2019

Consolidated gross margin increased $6.0 million or 24.0%, to $30.9 million in fiscal year 2020 from $24.9 million in fiscal year 2019

Net income from operations increased $956,000, or 9.0%, to $11.6

million in fiscal year 2020 from $10.6 million in fiscal year 2019.

Fiscal year 2020 includes one-time acquisition costs of $1.4

million related to Lixoft

Net income increased by $749,000, or 8.7%, to $9.33 million in fiscal year 2020 from $8.58 million in fiscal year 2019

Diluted earnings per share increased by $0.02 or 4.2% to $0.50 in 2020 from $0.48 in 2019

Fiscal Year 2021 Financial Highlights:

Consolidated revenues increased by $4.9 million, or 11.7%, to $46.5 million for the year ended August 31, 2021, compared to $41.6 million for the year ended August 31, 2020.

Consolidated gross profit increased by approximately $5.0 million or 15.9%, to $35.9 million for the year ended August 31, 2021, compared to $30.9 million for the year ended August 31, 2020.

Income from operations decreased by $352

thousand, or 3.0%, to approximately $11.3 million for the year ended August 31, 2021, from $11.6 million for the year ended August

Fiscal year 2020 includes a one-time acquisition cost of $1.4 million related to Lixoft.

Net income increased by $450 thousand or 4.8% to $9.8 million for the year ended August 31, 2021, compared to $9.3 million for the year ended August 31, 2020.

Diluted earnings per share decreased by $0.03 or 6.0% to $0.47 for the year ended August 31, 2021, compared to $0.50 for the year ended August 31, 2020.

Strategy Going Forward:

Continue to pursue funded and unfunded collaborations in support of improving our products and services

Continue our aggressive marketing and sales campaign, including numerous scientific conferences and meetings

Continue our aggressive marketing and sales campaign

Continue to expand our use of social media and advertising

2 unchanged sentences

Seek accretive acquisitions that complement our existing offerings and expand our markets

Expand infrastructure to support corporate growth

Fiscal year 2020 was yet another record

year for the Company.

We saw increased growth in the midst of a COVID-19 economic environment.

Fiscal year 2021 was yet another record year for the Company.

good growth in the midst of the fiscal year that had to bear the brunt of the COVID-19 global pandemic.

We believe the continued growth

of our pharmaceutical software and services business is the result of steadily increasing adoption and awareness of the value of

simulation and modeling software tools across the pharmaceutical industry, the continuing push by regulatory agencies for increased

use of modeling and simulation, and the expertise we offer as consultants to assist companies involved in the research and development

of new medicines.

We have received a continuing series of study contracts with pharmaceutical companies ranging from several of

the largest in the world to a number of medium-sized and smaller companies in the U.S., Europe, and Japan.

In August 2020 we completed a follow-on

public offering that will enable an expedited approach to potential acquisitions, continue our research and development activities,

and invest in staffing and infrastructure to meet the needs of a wider customer base and the growth of the business.

We do not have any stock repurchase programs

currently in place or pending;

however, our Board of Directors may consider such programs from time to time.

of our pharmaceutical software and services business is the result of steadily increasing adoption and awareness of the value of simulation

and modeling software tools across the pharmaceutical industry, the continuing push by regulatory agencies for increased use of modeling

and simulation, and the expertise we offer as consultants to assist companies involved in the research and development of new medicines.

We continue to be a leader in the fast- growing $2 billion bio-simulation industry.

Results of Operations

FY20 COMPARED WITH FY19

The following sets forth selected items

from our statements of operations (in thousands) and the percentages that such items bear to net sales for the fiscal years ended

August 31, 2020 (FY20) and August 31, 2019 (FY19) (Because of rounding, numbers may not foot.)

Fiscal year ended

A discussion regarding our financial condition

and results of operations for fiscal 2019 compared to fiscal 2018 can be found under Item 7 in our Annual Report on Form 10-K for the

fiscal year ended August 31, 2019, filed with the SEC on November 13, 2019, which is available free of charge on the SEC’s website

at www.sec.gov and our corporate website at https://www.simulations-plus.com/investorscorporate-profile/sec-filings/.

Comparison of fiscal year 2021 and fiscal

(in thousands)

Year Ended August 31,

Cost of revenues

Selling, general and administrative

Research and development

Selling, general and administrative

Total operating expenses

Income from operations

Other income (expense)

Net income before taxes

Other income (expense), net

Income before income taxes

Provision for income taxes

Consolidated net revenues increased

by 22.4% or $7.6 million to $41.59 million in FY20 from $33.97 million in FY19.

Our Lancaster, California division increased

revenues by $2.4 million or 12.1%, to $22.0 million in FY20 from $19.6 million in FY19.

$1.78 million was an increase from

revenues generated by our Buffalo subsidiary (Cognigen), an increase of 19.1%.

DILIsym Services, Inc.

(DILIsym) increased

revenues by $1.88 million or 37.2%.

$1.58 million of revenue was generated by our French subsidiary (Lixoft), which was

acquired April 1, 2020.

FY20 software and software-related revenues increased $3.1 million or 16.8% while consulting revenues

increased by $4.5 million or 29.1% compared to FY19.

Revenues increased by approximately $4.9 million

or 12% to $46.5 million for the year ended August 31, 2021, compared to approximately $41.6 million for the year ended August 31, 2020.

This increase is primarily due to a $6.1 million or 28% increase in software-related revenue, offset by a $1.2 million or 6% decrease

in consulting services and analytical study revenue when comparing the years ended August 31, 2021, and 2020.

Cost of revenues

Consolidated cost of revenues increased

by $1.6 million or 18.0% to $10.6 million in FY20 from $9.0 million in FY19.

Labor-related cost incurred increased by $1.6 million,

mainly in support of increased consulting revenues.

Cost of revenues for direct contract-related cost increased by $274,000, offset

by a decrease of approximately $217,000 of royalty expenses as well as $212,000 in training-related expenses in FY2020.

A significant portion of cost of revenues

for pharmaceutical software products is the systematic amortization of capitalized software development costs, which is an independent

fixed cost rather than a variable cost related to revenues.

This amortization cost of $2.36 million in FY20 increased by approximately

$103,000 as compared to FY19.

Cost of revenues as a percentage of revenue

remained fairly consistent at 25.6% in FY20 as compared to 26.6% in FY19, a decrease of 1.0% year over year.

Consolidated gross margin increased $6.0

million or 24.0%, to $30.9 million in FY20 from $24.9 million in FY19.

$2.7 million of this increase is from the California division,

which showed an 86.7% gross margin.

The Buffalo Division gross margin increased $959,000 or 19% with margins of 53.3%.

of North Carolina recorded a $997,000 increase, a 67.3% margin, versus a 72.7% margin in FY19.

Lixoft recorded a margin of $1.3

million or 83.1%.

Overall gross margin has increased to 74.4%

in FY20 as compared to 73.4% in FY19 an increase of 1.0% year over year.

Selling, General and Administrative

Selling, general, and administrative (SG&A)

expenses increased $4.56 million, or 38.7% to $16.4 million in FY20 from $11.80 million in FY19.

As a percent of revenues, SG&A

was 39.3% for FY20, compared to 34.7% in FY19.

The major increases in SG&A expense

During the year the Company incurred approximately $1,416,000 of costs associated with the acquisition of Lixoft.

These fees included legal and accounting, due diligence, and M&A related consulting.

Commission expenses were up $226,000, this increase is related to increased sales in Asia as well as domestic sales

Contract labor increased $152,000 for other temporary labor and consulting costs related to various corporate initiatives

G&A salaries and wages increased by $1.49 million;

this increase is a combination of increased headcount both from acquisitions and salaries in support of corporate growth

Insurance expense increased $259,000;

$136,000 was health-related medical costs from increased headcount and rate increases

Payroll tax expense increased $478,000, the effect of higher employee count and salary expense

Director compensation increase by $394,000, based on an increase in the number of paid directors and compensation increases

401k expense increased $52,000 due to increased staffing

The major decreases in SG&A expense

Trade show and travel related costs decreased by $145,000 mainly due to lower attendance and less travel costs due to COVID-19

Recruiting fees decreased by $86,000

Cost of revenues remained relatively consistent

with a slight decrease of $49 thousand or approximately 1% for the year ended August 31, 2021, compared to the year ended August 31, 2020.

The decrease is primarily due to lower contract research organization fees of $204 thousand, lower tech-support costs of $135 thousand,

lower labor-related costs of $100 thousand, and lower training and travel costs of $97 thousand, partially offset by higher amortization

of software development costs of $455 thousand related to the purchase of Lixoft.

A significant portion of cost of revenues for

pharmaceutical software products is the systematic amortization of capitalized software development costs, which is a fixed cost rather

than a variable cost related to revenues.

The amortization cost of $2.8 million for the year ended August 31, 2021, increased by approximately

$455 thousand compared to fiscal year 2020.

Cost of revenues as a percentage of revenue was

22.8% for the year ended August 31, 2021, compared to 25.6% for the year ended August 31, 2020, resulting in a decrease of 2.8%.

Gross profit increased by approximately $5.0 million

or 16% to $35.9 million for the year ended August 31, 2021, compared to approximately $30.9 million for the year ended August 31, 2020.

The increase is due to an increase in gross profit for the software business of $5.7 million or 31%, partially offset by a decrease in

gross profit for the consulting services business of $0.7 million or 7% over the same periods.

Overall gross margin percentage increased by 2.8%

to 77.2% for the year ended August 31, 2021, from 74.4% for the year ended August 31, 2020.

Research and development

We incurred approximately $5,328,000 of

research and development costs during FY20.

Of this amount, $2,353,000 was capitalized and $2,975,000 was expensed.

approximately $4,268,000 of research and development costs during FY19.

Of this amount, $1,768,000 was capitalized and $2,500,000

was expensed.

The increase of $1,060,000, or 24.8%, in total research and development expenditures from FY19 to FY20 was mainly

from increased costs in the Lancaster and DILIsym divisions.

We incurred approximately $6.9 million of research

and development costs during the year ended August 31, 2021.

Of this amount, $2.9 million was capitalized and $4.0 million was expensed.

We incurred approximately $5.3 million of research and development costs during year ended August 31, 2020.

Of this amount, $2.3 million

was capitalized and $3.0 million was expensed.

The year-over-year increase of $1.6 million, or 30%, in research and development expenditures

was primarily due to increased costs in the Simulations Plus, DILIsym and Lixoft divisions.

Selling, general and administrative expenses

Selling, general, and administrative (“SG&A”)

expenses increased by $4.2 million, or 26% to $20.6 million for the year ended August 31, 2021, compared to $16.4 million for the year

ended August 31, 2020, primarily due to the following:

An increase in salaries and wages of $3.3

million due to higher corporate salaries, bonuses, stock-based compensation, and 401K costs, as well as an increase in headcount.

An increase in payroll tax expense of $707 thousand, resulting from higher salary and wage related costs.

As a percent of revenues, SG&A expense was

44% for the year ended August 31, 2021, compared to 39% for the year ended August 31, 2020.

Other income/expense

Total other expense was $168 thousand for the

year ended August 31, 2021, compared to total other expense of $218 thousand for the year ended August 31, 2020.

The variance of $50 thousand

is primarily due to an increase in currency exchange gain $184 thousand and an increase in interest income of $171 thousand, offset by

an increase in the change in the value of contingent consideration of $283 thousand.

Provision for income taxes

The provision for income taxes was $2.05

million for FY20 compared to $1.97 million for FY19.

Our effective tax rate decreased slightly to 18.0% in FY20 from 18.7% in FY19.

effective rate differs from anticipated combined statutory rates of approximately 25.7% due to R&D credits, foreign tax related

items (tax credits and foreign deemed intangible income deductions), and the tax effect of stock compensation related items for

stock compensation and disqualifying dispositions.

In the last part of FY20, as occurred also in FY19, as a result of an increase

in stock prices, a number of employees exercised and sold incentive stock options granted to them under their corporate incentive

plans, creating corporate tax deductions that lowered the effective tax rate.

Net income increased by $749,000 or 8.7%,

to $9.3 million in FY20 from $8.6 million in FY19.

FY19 COMPARED WITH FY18

The following sets forth selected items

from our statements of operations (in thousands) and the percentages that such items bear to net sales for the fiscal years ended

August 31, 2019 (FY19) and August 31, 2018 (FY18) (Because of rounding, numbers may not foot.)

Fiscal year ended

The provision for income taxes was $1.3 million

for the year ended August 31, 2021, compared to $2.1 million for the year ended August 31, 2020.

Our effective tax rate decreased by 6.2%

to 11.8% for the year ended August 31, 2021, from 18.0% for the year ended August 31, 2020.

The effective rate differs from anticipated combined

statutory rates of approximately 24.5% due to R&D credits, foreign-tax related items (tax credits and foreign-deemed intangible income

deductions), and the tax effect of stock-compensation related items for stock compensation and disqualifying dispositions.

years ended August 31, 2021, and 2020, as a result of an increase in stock prices, a number of employees exercised and sold incentive

stock options granted to them under their corporate incentive plans, creating corporate tax deductions that lowered the effective tax

Comparison of fiscal year 2020 and fiscal

(in thousands)

Year Ended August 31,

Cost of revenues

Selling, general and administrative

Research and development

Selling, general and administrative

Total operating expenses

Income from operations

Other income (expense)

Net income before taxes

Other income (expense), net

Income before income taxes

Provision for income taxes

Consolidated net revenues increased by

14.5% or $4.3 million to $33.97 million in FY19 from 29.67 million in FY18.

Our Lancaster, California division increased revenues

by $2.03 million or 11.6%, to $19.6 million in FY19 from $17.6 million in FY18.

$1.46 million of this increase was from revenues

generated by our Buffalo subsidiary (Cognigen), an increase of 18.6%.

DILIsym Services, Inc.

(DILIsym) increased revenues by $807,000

FY19 software and software-related revenues increased $1.8 million or 11.0% while consulting revenues increased by $2.5

million or 19.0% compared to FY18.

Revenues increased by approximately $7.6 million

or 22% to $41.6 million for the year ended August 31, 2020 compared to $34.0 million for the year ended August 31, 2019.

This increase

is primarily due to a $4.5 million or 29.1% increase in consulting services revenue.

Software-related revenue increased $3.1 million or

16.8% when comparing the fiscal years ended August 31, 2020 and 2019.

Cost of Revenues

Consolidated cost of revenues increased

by $1.03 million or 12.9% to $9.0 million in FY19 from $8.0 million in FY18.

Labor-related cost incurred by our Lancaster and Buffalo

divisions increased by $190,000 and $1.06 million, respectively mainly in support of increased consulting revenues.

This was offset

by a $380,000 decrease in cost of revenues for direct contract expenses paid for testing at DILIsym.

We saw a decrease of approximately

$52,000 in training-related expenses in FY2019.

A significant portion of cost of revenues

for pharmaceutical software products is the systematic amortization of capitalized software development costs, which is an independent

fixed cost rather than a variable cost related to revenues.

This amortization cost of $1.33 million in FY19 increased by approximately

$31,000 in FY19.

Cost of revenues as a percentage of revenue

remained fairly consistent at 26.6% in FY19 as compared to 26.9% in FY18, a decrease of 0.3% year over year.

Consolidated gross margin increased $3.27

million or 15.1%, to $24.94 million in FY19 from $21.67 million in FY18.

$1.8 million of this increase is from the California division,

which showed an 83.3% gross margin.

The Buffalo Division gross margin increased $325,000 or 7% with a margin of 53.2%.

of North Carolina recorded a $1.14 million increase, a 72.7% margin, versus a 59.6% margin in FY18.

Overall gross margin has remained fairly

consistent at 73.4% in FY19 as compared to 73.1% in FY18, an increase of 0.3% year-over-year.

Selling, General and Administrative

Selling, general, and administrative (SG&A)

expenses increased $2.22 million, or 23.1% to $11.80 million in FY19 from $9.58 million in FY18.

As a percent of revenues, SG&A

was 34.6% for FY19, compared to 32.3% in FY18.

The major increases in SG&A expense

Commission expenses were up $122,000, mainly related to increased sales through representatives in Asia

Accounting and audit fees increased by $73,000, associated with costs of consolidated audits and other compliance-related expenses

Contract labor increased $172,000 due to increased director fees and consulting related to various corporate initiatives

G&A salaries and wages increased by $939,000;

this increase is a combination of increased headcount and salaries in support of corporate growth

Insurance expense increased $218,000;

$174,000 was health-related medical costs from increased headcount and rate increases

Payroll tax expense increased $116,000, the effect of higher salary expense

401k expense increased $78,000 due to the increased staffing

Recruiting and hiring costs increased $214,000 mainly due to recruiting fees of scientific personnel

Software licenses costs increased $87,000 mainly due to sales volume related license fee increases

The major decreases in SG&A expense

Trade-show-related costs decreased by $52,000 mainly due to lower attendance costs

Cost of revenues increased by approximately $1.6

million or 18% to $10.6 million for the year ended August 31, 2020 compared to $9.0 million for the year ended August 31, 2019.

cost is primarily due to an increase in consulting-related labor costs of $1.6 million.

A significant portion of cost of revenues for

pharmaceutical software products is the systematic amortization of capitalized software development costs, which is a fixed cost rather

than a variable cost related to revenues.

The amortization cost for fiscal year 2020 was $2.4 million, an increase of $103 thousand compared

to fiscal year 2019.

Cost of revenues as a percentage of revenue decreased

to 25.6% in fiscal year 2020 from 26.6% in fiscal year 2019.

Gross profit increased $6.0 million or 24% to

$30.9 million for the year ended August 31, 2020, compared to $24.9 million for the year ended August 31, 2019.

The increase is due to

an increase in gross profit for the software business of $3.2 million or 20%, as well as an increase in gross profit for the consulting

services business of $2.8 million or 30% over the same periods.

Overall gross margin percentage increased by 1%

to 74% for the year ended August 31, 2020, compared to the year ended August 31, 2019.

Research and Development

We incurred approximately $4,268,000 of

research and development costs during FY19.

Of this amount, $1,768,000 was capitalized and $2,500,000 was expensed.

approximately $3,936,000 of research and development costs during FY18.

Of this amount, $2,145,000 was capitalized and $1,791,000

was expensed.

The increase of $332,000, or 8.4%, in total research and development expenditures from FY18 to FY19 was mainly from

$316,000 of costs incurred by DILIsym Services Inc.

We incurred approximately $5.3 million of research

and development costs during year ended August 31, 2020.

Of this amount, approximately $2.3 million was capitalized and $3.0 million was

We incurred approximately $4.3 million of research and development costs during year ended August 31, 2019.

Of this amount,

$1.8 million was capitalized and $2.5 million was expensed.

The increase of approximately $1.0 million in total research and development

expenditures in fiscal year 2020 compared to fiscal year 2019 was primarily due to increased costs in the Simulations Plus and DILIsym

Selling, General and Administrative Expenses

SG&A expenses increased by $4.6 million, or

39% to $16.4 million for the year ended August 31, 2020 compared to $11.8 million for the year ended August 31, 2019.

The increase was

primarily due to a $1.5 million increase in general and administrative salaries;

$1.4 million in legal, accounting and consulting fees

associated with the Lixoft acquisition;

an increase in payroll tax expense of $478 thousand;

an increase in director compensation of $394

thousand due to additional paid directors and increases in compensation;

an increase in insurance costs of $259 thousand due to higher

headcount and a $226 thousand increase in commission costs related to increased revenues domestically and in Asia.

As a percent of revenues, selling, general and

administrative expenses was 39.3% for fiscal year 2020, compared to 34.7% for fiscal year 2019.

Other income/expense

Total other expense was $218 thousand for the

year ended August 31, 2020 compared to $92 thousand for the year ended August 31, 2019.

The variance of $126 thousand is primarily due

to a change in the valuation of contingent consideration.

Provision for Income Taxes

The provision for income taxes was $1.97

million for FY19, compared to $1.20 million for FY18.

Our effective tax rate increased to 18.7% in FY19 from 11.9% in FY18.

This increase results mainly from a second

quarter 2018 assessment of deferred taxes based on the new tax rates enacted under the Tax Cuts and Jobs Act of 2017 (the “2017

Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic 740, Income

Taxes (“ASC 740”) requires that the company recognize the effects of changes in tax laws or tax rates in the financial

statements for the period in which such changes were enacted.

Among other things, changes in tax laws or tax rates can affect the

amount of taxes payable for the current period, as well as the amount and timing of deferred tax liabilities and deferred tax assets.

Based on the assessment, the Company posted a one-time tax benefit in the amount of $1,500,000 in the second fiscal quarter of

2018, the result of estimating future deferred liabilities at the lower tax rates under the newly enacted tax laws.

The effective rate differs from anticipated

combined statutory rates of approximately 25.4% due to R&D credits and the tax effect of disqualifying dispositions.

last part of FY19, as a result of increase in stock prices, a number of employees exercised and sold incentive stock options granted

to them under their corporate incentive plans, creating corporate tax deductions that lowered the effective rate.

Net income decreased by $351,000 or 3.9%,

to $8.6 million in FY19 from $8.93 million in FY18.

The decrease in income was substantially effected by the deferred tax benefit

of $1.5 million discussed above in the note on Provision for Income Taxes, which reduced taxes in FY18.

Our sales exhibit some seasonal fluctuations,

with the fourth fiscal quarter (June-August) generally having the lowest sales due to summer vacations and reduced activities at

our customers’ sites.

This unaudited quarterly sales information has been prepared on the same basis as the annual information

presented elsewhere in this Annual Report on Form 10-K and, in the opinion of management, reflects all adjustments (consisting

of normal recurring entries) necessary for a fair presentation of the information presented.

Net sales for any quarter are not

necessarily indicative of sales for any future period;

however, because our pharmaceutical software is licensed on an annual basis,

renewals are usually within the same quarter year after year.

(Numbers may not foot because of rounding.)

Net Sales (in thousands of dollars)

First Quarter

Second Quarter

Third Quarter

Fourth Quarter

The provision for income taxes was approximately

$2.1 million for the year ended August 31, 2020, compared to $2.0 million for the year ended August 31, 2019.

Our effective tax rate decreased

slightly to 18.0% from 18.7 % for the same periods.

The effective rate differs from anticipated combined

statutory rates of approximately 25.7% due to R&D credits, foreign-tax related items (tax credits and foreign-deemed intangible income

deductions), and the tax effect of stock-compensation related items for stock compensation and disqualifying dispositions.

part of fiscal year 2020, as occurred also in fiscal year 2019, because of an increase in stock prices, a number of employees exercised

and sold incentive stock options granted to them under their corporate incentive plans, creating corporate tax deductions that lowered

the effective tax rate.

Segment Results of Operations

Comparison of fiscal year 2021 and fiscal

thousands) Year

Ended August 31,

Simulations Plus

*As Lixoft was acquired on April 1, 2020, five

months of activity is reflected for fiscal year 2020.

Cost of Revenues

thousands) Year

Ended August 31,

Simulations Plus

* As Lixoft was acquired on April 1, 2020, five

months of activity is reflected for fiscal year 2020.

thousands) Year

Ended August 31,

Simulations Plus

* As Lixoft was acquired on April 1, 2020, five

months of activity is reflected for fiscal year 2020.

Simulations Plus

For the year ended August 31, 2021, the revenues increase of $3.2 million

or 14% compared to the year ended August 31, 2020, was primarily due to higher revenues from GastroPlus of $2.2 million and an increase

in revenues from ADMET Software of $831 thousand.

Cost of revenue increased marginally during the same periods, and gross profit increased

by $3.1 million or 16%, primarily due to the increase in revenue.

For the year ended August 31, 2021, the revenue decrease of $559 thousand

or 5% compared to the year ended August 31, 2020, was primarily due to a decrease in grant revenue of $672 thousand, partially offset

by an increase in training revenue of $90 thousand.

Cost of revenue decreased $365 thousand or 7%, primarily due to lower salary cost

related to employees working on service contracts of $726 thousand, partially offset by an increase in consulting related costs of $346

Gross profit decreased by approximately $194 thousand or 3% for the same periods.

For the year ended August 31, 2021, the revenue decrease of $833 thousand

or 12% compared to the year ended August 31, 2020, was primarily due to lower revenue from consulting services of $869 thousand.

of revenue decreased by $235 thousand or 10% during the same periods, primarily due to lower contract research organization fees of $204

Gross profit decreased by $598 thousand or 13%.

For the year ended August 31, 2021, the revenue increase of $3.1 million

compared to the year ended August 31, 2020 was primarily due to an increase in revenues from MonolixSuite of $2.9 million;

this increase

was primarily the result of the purchase of Lixoft on April 1, 2020.

Software sales of the MonolixSuite generated 97% of total revenue

and consulting services generated 3% of total revenue.

Cost of revenue increased by $471 thousand, and gross profit increased by $2.6

million also due to the purchase of Lixoft on April 1, 2020.

Comparison of fiscal year 2020 and fiscal

thousands) Year

Ended August 31,

Simulations Plus

*As Lixoft was acquired on April 1, 2020, five

months of activity is reflected for fiscal year 2020.

Cost of Revenues

thousands) Year

Ended August 31,

Simulations Plus

*As Lixoft was acquired on April 1, 2020, five

months of activity is reflected for fiscal year 2020.

thousands) Year

Ended August 31,

Simulations Plus

*As Lixoft was acquired on April 1, 2020, five

months of activity is reflected for fiscal year 2020.

Simulations Plus

For the year ended August 31, 2020, the revenue

increase of $2.4 million or 12% compared to the year ended August 31, 2019 was primarily due to increases in revenue from GastroPlus of

$1.3 million, from ADMET Software of $630 thousand and from services revenue totaling $525 thousand.

The cost of revenue decrease of $355

thousand or 11% during the same periods was primarily due to lower royalty expense of $222 thousand resulting from the renegotiation of

the agreement with Dassault Systemes Americas Corp.

in June 2019 and a decrease in amortization expense of capitalized software of $98

Gross profit increased by $2.7 million or 17%, primarily due to the increase in revenue.

For the year ended August 31, 2020, the revenue

increase of $1.8 million or 19% compared to the year ended August 31, 2019 was primarily due to an increase in grant revenue.

revenue increased by $824 thousand or 19%, primarily due to an increase in salary contracts of $367 thousand and higher international

subcontractor costs of $335 thousand.

Gross profit increased by approximately $960 thousand or 19% for the same periods.

For the year ended August 31, 2020, the revenue increase of $1.9 million

or 37% compared to the year ended August 31, 2019, was primarily due to higher revenue from consulting services of $2.1 million, partially

offset by lower licensing revenue of $114 thousand.

Cost of revenue increased by $887 thousand or 64% during the same periods, primarily

due to higher salary cost of $277 thousand, higher contract research organization fees of $274 thousand, and higher bonus accrual of $160

Gross profit increased by approximately $1.0 million or 27% for the same periods.

For the year ended August 31, 2020, the revenue

increase of $1.6 million compared to the August 31, 2019 was due to the purchase of Lixoft on April 1, 2020.

Software sales of the MonolixSuite

generated 98% of total revenue and 2% was generated from consulting services.

Cost of revenue increased $267 thousand, and gross profit

increased $1.3 million primarily due to the purchase of Lixoft on April 1, 2020.

LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of capital have been

cash flows from our operations.

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

August 2020, the company closed an underwritten public offering of 2,090,909 shares of its 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 the company from this offering were approximately $115 million, before deducting underwriting discounts

and commissions;

As of August 31, 2021, the Company had $37.0 million

in cash and cash equivalents and $86.6 million in short-term investments.

Our principal sources of capital have been cash flows from our

operations and a public offering in 2020.

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

In August 2020, the Company closed an underwritten

public offering of 2,090,909 shares of its 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 the Company from this offering were approximately

$115.0 million, before deducting underwriting discounts and commissions;

net proceeds were approximately $107.7 million.

The company intends to use the net proceeds from the offering

for strategic mergers and acquisitions (although the company has no present commitments or agreements to enter into any such mergers

or acquisitions), working capital requirements, and other general corporate purposes, including investing in enhanced information

and accounting systems, and personnel in support of corporate growth.

As of August 31, 2020, the Company had $49.2 million in cash

and cash equivalents and $66.8 million in short-term investments.

We believe that our existing capital and

anticipated funds from operations will be sufficient to meet our anticipated cash needs for working capital and capital expenditures

for the foreseeable future.

Thereafter, if cash generated from operations is insufficient to satisfy our capital requirements,

we may draw from our revolving line of credit with the bank, or we may have to sell additional equity or debt securities or obtain

expanded credit facilities.

In the event such financing is needed in the future, there can be no assurance that such financing

will be available to us, or, if available, that it will be in amounts and on terms acceptable to us.

If cash flows from operations

became insufficient to continue operations at the current level, and if no additional financing was obtained, then management would

restructure the Company in a way to preserve its pharmaceutical business while maintaining expenses within operating cash flows.

We are not aware of any trends or demands,

commitments, events or uncertainties that are reasonably likely to result in a decrease in liquidity of our assets.

The trend over

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

foreseeable future.

On March 31, 2020, the Company entered into a Stock Purchase

and Contribution Agreement (the “Agreement”) with Lixoft, a French société par actions simplifiée

On April 1, 2020, the Company consummated the acquisition of all outstanding equity interests of Lixoft

pursuant to the terms of the Agreement, with Lixoft becoming a wholly owned subsidiary of the Company.

Under the terms of the Agreement,

the Company will pay the former shareholders of Lixoft total consideration of up to $16,500,000, consisting of two-thirds cash

and one-third newly issued, unregistered shares of the Company’s common stock.

In addition, the Company paid $3,456,029 of

excess working capital based on the March 31, 2020 financial statements of Lixoft.

As part of the total consideration, the agreement

calls for earnout payments up to an additional $5,500,000, two-thirds cash and one-third newly issued, unregistered shares of the

Company’s common stock based on a revenue growth formula each year for the two years subsequent to April 1, 2020.

shareholders can earn up to $2,000,000 the first year and $3,500,000 in year two.

See Note 14 for a further description of the

On May 1, 2017 we signed a stock acquisition

agreement with DILIsym Services, Inc.

of Research Triangle Circle, North Carolina, and on June 1, 2017 consummated the acquisition

of all the outstanding capital stock of DILIsym Services, Inc.

pursuant to a Stock Purchase Agreement.

DILIsym became a wholly-owned

subsidiary of Simulations Plus.

Under the terms of the Agreement, the Company:

(1) paid to the DILIsym Shareholders Five Million

Dollars, $4,515,982 payable at the closing of the Acquisition subject to certain adjustments and holdbacks.

As part of the consideration

there were certain earnout provisions in the agreement, subject to those provisions the company paid $5,000,000 in payments over

the 3 years ended August 31, 2020 based on earnings of DILIsym before income taxes.

We will continue to seek opportunities

for strategic acquisitions.

If one or more such acquisitions is identified, a substantial portion of our cash reserves may be required

to complete it;

however, we intend to maintain sufficient cash reserves after any acquisition to provide reasonable assurance that

outside financing will not be necessary to continue operations.

If we identify an attractive acquisition that would require more

cash to complete than we are willing or able to use from our cash reserves, we will consider financing options to complete the

acquisition, including obtaining loans and issuing additional securities.

Quarterly dividend payments made in FY19

and FY20 are listed in the following table.

Outstanding on

The Board of directors has indicated its

intention to pay $0.06 quarterly dividends;

however, there can be no assurances that our Board of Directors will continue the dividend

distributions as the decision is made on a quarterly basis based on current financial conditions and strategic plans.

2020, our Board of Directors declared a dividend distribution of $0.06 per share.

The dividend was paid in November 2020.

The Company has

used, and intends to continue to use the net proceeds from the offering for strategic mergers and acquisitions (although the Company has

no present commitments or agreements to enter into any such mergers or acquisitions), working capital requirements, and other general

corporate purposes, including investing in enhanced information and accounting systems, and personnel in support of corporate growth.

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, the Company entered into a

Stock Purchase and Contribution Agreement (the “Lixoft Agreement”) with Lixoft, a French société par actions

simplifiée (“Lixoft”).

On April 1, 2020, the Company consummated the acquisition of all outstanding equity interests

of Lixoft pursuant to the terms of the Lixoft Agreement, with Lixoft becoming a wholly owned subsidiary of the Company.

Under the terms

of the Agreement, the Company 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 the Company’s common stock.

In addition, the Company paid approximately

$3.5 million of excess working capital based on the March 31, 2020 financial statements of Lixoft.

As part of the total consideration,

the agreement calls for earnout payments up to an additional $5.5 million, two-thirds cash and one-third newly issued, unregistered shares

of the Company’s common stock based on a revenue growth formula each year for the two years subsequent to April 1, 2020.

shareholders earned $2.0 million in the first year and can earn up to $3.5 million in year two.

See Note 14 for a further description

of the Lixoft Agreement.

We believe that our existing capital and anticipated

funds from operations will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for the foreseeable

Thereafter, if cash generated from operations is insufficient to satisfy our capital requirements, we may draw from our revolving

line of credit with the bank, or we may have to sell additional equity or debt securities or obtain expanded credit facilities.

event such financing is needed in the future, there can be no assurance that such financing will be available to us, or, if available,

that it will be in amounts and on terms acceptable to us.

If cash flows from operations became insufficient to continue operations at

the current level, and if no additional financing was obtained, then management would restructure the Company in a way to preserve its

pharmaceutical business while maintaining expenses within operating cash flows.

We continue to seek opportunities for strategic

acquisitions.

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

however, we intend to maintain sufficient cash reserves after any acquisition to provide reasonable assurance that outside financing will

not be necessary to continue operations.

If we identify an attractive acquisition that would require more cash to complete than we are

willing or able to use from our cash reserves, we will consider financing options to complete the acquisition, including obtaining loans

and issuing additional securities.

We are not aware of any trends or demands, commitments,

events or uncertainties that are reasonably likely to result in a decrease in liquidity of our assets.

The trend over the last ten years

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

Operating Activities

provided by operating activities was $19.2 million for the year ended August 31, 2021.

Our operating cash flows resulted primarily

from our net income of $9.8 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 inflow from changes in balances of operating assets and liabilities

was $1.0 million, and non-cash charges were $8.4 million.

The change in operating assets and liabilities was primarily the result of an

increase in accrued payroll and other expenses, partially offset by an increase in accounts receivable.

provided by operating activities was $10.9 million for the year ended August 31, 2020.

Our operating cash flows resulted primarily

from our net income of $9.3 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 $2.8 million, offset by non-cash charges of $4.4 million.

The change in operating assets and liabilities was primarily the result

of an increase in accounts receivable and a decrease in billings in excess of revenues.

Investing Activities

Net cash used in investing activities during the

year ended August 31, 2021, of $26.7 thousand was primarily due to the purchase of short-term investments of $122.4 million and computer

software development costs of $2.9 million, partially offset by proceeds from the sale of short-term investments totaling $100.2 million.

Cash used for investing activities during the

year ended August 31, 2020 of $75.5 million was primarily due to the purchase of $67.2 million of short-term investments and costs associated

with the acquisition of a subsidiary totaling $9.5 million.

Financing Activities

For the year ended August 31, 2021, net cash used

in financing activities of $4.7 million, was primarily due to dividend payments totaling $4.8 million and a $1.3 million earnout payment

to the former shareholders of Lixoft, partially offset by proceeds from the exercise of stock options totaling $1.5 million.

Net cash provided by financing activities during

the year ended August 31, 2020 of $102.4 million was primarily due to the net proceeds from a public offering of $107.7 million, partially

offset by dividend payments totaling $4.3 million for the period.

Refer to Note 8 – Shareholders’ Equity

of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K) for details regarding dividends.

KNOWN TRENDS OR UNCERTAINTIES

Although we have not seen any significant

reduction in revenues to date, we have seen some consolidation in the pharmaceutical industry during economic downturns.

consolidations have not had a negative effect on our total sales to that industry;

however, should consolidations and downsizing

in the industry continue to occur, those events could adversely impact our revenues and earnings going forward.

As discussed in the risk section of this

10-K, the world has been affected due to the COVID-19 pandemic.

Though there has not been a substantial impact on sales revenues,

until the pandemic has passed, there remains uncertainty as to the effect on our business in both the short and long-term.

Although we have not seen any significant reduction

in total revenues to date, we did see a reduction in PKPD services during the year ended August 31, 2021, primarily resulting from project

disruptions due to customer delays, holds, and drug development program cancellations.

We have also seen consolidation in the pharmaceutical

industry during economic downturns, although these consolidations have not had a negative effect on our total revenues to that industry.

Should customer delays, holds, program cancellations, or consolidations and downsizing in the industry continue to occur, those events

could adversely impact our revenues and earnings going forward.

As discussed in the Risk Factor section of this

Annual Report on Form 10-K, the world has been affected due to the COVID-19 pandemic.

Although there has not been a substantial impact

on revenues to date, until the pandemic has passed, there remains uncertainty as to the effect on our business in both the short and long-term.

We believe that the need for improved productivity

in the research and development activities directed toward developing new medicines will continue to result in increasing adoption

of simulation and modeling tools such as those we produce.

New product developments in the pharmaceutical business segments could

result in increased revenues and earnings if they are accepted by our markets;

however, there can be no assurances that new products

will result in significant improvements to revenues or earnings.

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

development activities.

Our continued quest for acquisitions could

result in a significant change to revenues and earnings if one or more such acquisitions are completed.

The potential for growth in new markets

(e.g., healthcare) is uncertain.

We will continue to explore these opportunities until such time as we either generate sales or

determine that resources would be more efficiently used elsewhere.

We have not been affected materially by

inflation during the periods presented, and no material effect is expected in the near future.

in the research and development activities directed toward developing new medicines will continue to result in increasing adoption of

simulation and modeling tools such as those we produce.

New product developments in the pharmaceutical business segments could result

in increased revenues and earnings if they are accepted by our markets;

however, there can be no assurances that new products will result

in significant improvements to revenues or earnings.

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

Our continued quest for acquisitions could result

in a significant change to revenues and earnings if one or more such acquisitions are completed.

The potential for growth in new markets (e.g.,

healthcare) is uncertain.

We will continue to explore these opportunities until such time as we either generate revenues or determine

that resources would be more efficiently used elsewhere.

OFF-BALANCE SHEET ARRANGEMENTS

As of August 31, 2020, we did not have

any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance

or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or

other contractually narrow or limited purposes.

As such, we are not materially exposed to any financing, liquidity, market, or

credit risk that could arise if we had engaged in such relationships.

We do not have relationships or transactions

with persons or entities that derive benefits from their non-independent relationship with us or our related parties.

As of August 31, 2021, we did not have any relationships

with unconsolidated entities or financial partnerships, such as entities often referred to as structured-finance or special-purpose entities,

which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited

As such, we are not materially exposed to any financing, liquidity, market, or credit risk that could arise if we had engaged

in such relationships.

We do not have relationships or transactions with

persons or entities that derive benefits from their non-independent relationship with us or our related parties.

CONTRACTUAL OBLIGATIONS

The following table provides aggregate information regarding

our contractual obligations as of August 31, 2020 (in thousands).

The following table provides aggregate information

regarding our contractual obligations as of August 31, 2021:

(in thousands)

Payments due by period

Contractual obligations:

Operating lease obligations

Contracts payable (1)

RECENTLY ISSUED OR NEWLY ADOPTED

ACCOUNTING STANDARDS

In May 2014, the Financial Accounting Standards

Board (FASB) issued Accounting Standards Update (ASU) 2014-09 and its related amendments regarding Accounting Standards Codification

Topic 606 (ASC Topic 606), Revenue from Contracts with Customers.

The standard provides principles for recognizing revenue for

the transfer of promised goods or services to customers with the consideration to which the entity expects to be entitled in exchange

for those goods or services.

The standard also provides guidance on the recognition of incremental costs related to obtaining customer

We adopted ASC Topic 606, effective September 1, 2018, utilizing the modified retrospective method.

This approach was

applied to contracts that were in process as of September 1, 2018, and the corresponding incremental costs of obtaining those contracts,

which resulted in a cumulative effect adjustment of $493,279 to the opening balance of retained earnings at the date of adoption.

The adoption of this ASU primarily impacts the timing of our revenue recognition for certain sales contracts, the capitalization

and amortization of incremental costs of obtaining a contract, and related disclosures.

The reported results for fiscal year 2019

reflect the application of ASC Topic 606.

Operating lease obligations (2)

(1) Contracts payable are related to our Stock Purchase and Contribution Agreement that the Company entered into with Lixoft

on March 31, 2020.

Under the terms of the agreement, we agreed to pay the former shareholders of Lixoft earnout

payments up to an $5.5 million, two-thirds cash and one-third newly issued, unregistered shares of the Company’s common stock based

on a revenue growth formula each year for the two years subsequent to April 1, 2020.

For further details regarding our contracts payable,

refer to Note 6 and Note 14 to the “Notes to Consolidated Financial Statements” in Part II, Item 8 of this of this Annual

Report on Form 10-K.

(2) Operating lease obligations relate to our office

space and facilities.

The lease terms expire in various years through 2026 and are generally renewable

at our option.

For more information on our operating lease, refer to Note 7 to the “Notes to Consolidated Financial Statements”

in Part II, Item 8 of this of this Annual Report on Form 10-K.

We believe that our current cash and cash equivalents

and cash generated from operations will be sufficient to meet our working capital, capital expenditures and contractual obligation requirements.

RECENTLY ISSUED OR NEWLY ADOPTED ACCOUNTING

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.

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.

The Company adopted this ASU on September 1, 2019.

In April 2016, the FASB issued ASU 2016-10,

Revenue from Contracts with Customers (Topic 606), which amends certain aspects of the Board's new revenue standard, ASU 2014-09,

Revenue from Contracts with Customers.

The standard was adopted concurrently with the adoption of ASU 2014-09 which is effective

for annual and interim periods beginning after December 15, 2017.

SIGNIFICANT ACCOUNTING POLICIES

Our financial statements and accompanying

notes are prepared in accordance with GAAP.

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.

In December 2019, the FASB issued ASU 2019-12 , Income Taxes (Topic

Simplifying the Accounting for Income Taxes , which is intended to simplify various areas related to the accounting for income

taxes and improve consistent application of Topic 740.

The guidance eliminates certain exceptions related to the approach for intra-period

tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for

outside basis differences related to changes in ownership of equity-method investments and foreign subsidiaries.

The guidance also simplifies

aspects of accounting for franchise taxes and the accounting for the enacted changes in tax laws or rates, as well as the accounting for

the step-up in the tax basis of goodwill.

ASU 2019-12 is effective for us beginning in fiscal 2022.

The adoption of the new standard is

not expected to have a material impact on the Company’s consolidated financial statements.

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.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our financial statements and accompanying notes

are prepared in accordance with GAAP.

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 software development costs, valuation of stock options,

and accounting for income taxes.

Significant accounting policies for us include revenue

recognition, accounting for capitalized software development costs, valuation of stock options, and accounting for income taxes.

Revenue Recognition

The Company adopted Topic 606 effective

September 1, 2018 using the modified retrospective method applying this guidance to all open contracts at the date of initial

application, which resulted in an adjustment to retained earnings for the cumulative effect of applying this guidance.

significant impact of Topic 606 on revenue to the Company relates to the timing of revenue recognition for one of its payment contracts.

Under 606 the revenues under the contract are being recognized as time is expended and costs are being expensed as incurred.

ASC 605 revenues were recognized as invoiced and certain costs were capitalized as development.

We generate revenue primarily from the

sale of software licenses and providing consulting services to the pharmaceutical industry for drug development.

The Company determines revenue recognition

through the following steps:

We generate revenue primarily from the sale of

software licenses and providing consulting services to the pharmaceutical industry for drug development.

The Company determines revenue recognition through

the following steps:

Identification of the contract, or contracts, with a customer

3 unchanged sentences

Recognition of revenue when, or as, the Company satisfies a performance obligation

The Company accounts for a contract when

it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract

has commercial substance and collectability of consideration is probable.

Contracts generally have fixed pricing terms and are

not subject to variable pricing.

The Company considers the nature and significance of each specific performance obligation under

a contract when allocating the proceeds under each contract.

Accounting for contracts includes significant judgement in the estimation

of estimated hours/cost to be incurred on consulting contracts, and the di minimis nature of the post-sales costs associated

with software sales.

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 the Company’s trade accounts receivable balances.

If we determine that the financial conditions of any of our customers

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.

Capitalized Computer Software Development

Software development costs are capitalized

in accordance with FASB 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

The Company accounts for a contract when it has

approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial

substance and collectability of consideration is probable.

Contracts generally have fixed pricing terms and are not subject to variable

The Company considers the nature and significance of each specific performance obligation under a contract when allocating the

proceeds under each contract.

Accounting for contracts includes significant judgement in the estimation of estimated hours/cost to be

incurred on consulting contracts, and the di minimis nature of the post-sales costs associated with software sales.

Capitalized Computer Software Development Costs

Software development costs are capitalized in

accordance with FASB 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

and the ongoing assessment for recoverability of capitalized computer software development costs require considerable judgment by management

with respect to certain external factors including, but not limited to, technological feasibility, anticipated future gross revenues,

estimated economic life, and changes in software and hardware technologies.

Capitalized computer software development costs are

comprised primarily of salaries and direct payroll-related costs and the purchase or licensing of existing software to be used

in the Company’s software products.

Total capitalized computer software development costs were $2,353,000, $1,768,000 and

$2,145,000 for the fiscal years ending August 31, 2020, 2019 and 2018, respectively.

Capitalized software development costs are comprised primarily

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

Total capitalized computer software development costs were $2.9 million, $2.4 million and $1.8 million for the fiscal years ending August

31, 2021, 2020 and 2019, respectively.

Amortization of capitalized computer software

development costs is calculated on a product-by-product basis on the straight-line method over the estimated economic life of the

products not to exceed five years.

Amortization of software development costs amounted to $1,225,544, $1,331,753 and $1,300,434

for the fiscal years ending August 31, 2020, 2019 and 2018, respectively.

We expect future amortization expense to vary due to

increases in capitalized computer software development costs.

development costs is calculated on a product-by-product basis on the straight-line method over the estimated economic life of the products

not to exceed five years.

Amortization of software development costs amounted to $1.4 million, $1.2 million and $1.3 million for the fiscal

years ending August 31, 2021, 2020 and 2019, 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:

Computer equipment

Furniture and fixtures

Leasehold improvements

Shorter of life of asset or lease

Maintenance and minor replacements are

charged to expense as incurred.

Gains and losses on disposals are included in the results of operations.

Intangible Assets and Goodwill

The Company performs 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 name, and noncompete agreements.

The Company determines 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 the Company's use of the acquired assets or the strategy for the Company's overall business, significant negative

industry or economic trends or significant under-performance relative to expected historical or projected future results of operations.

Goodwill is tested for impairment at the

reporting unit level, which is one level below or the same as an operating segment.

As of August 31, 2020, the Company determined

that it has four reporting units, Simulations Plus, Cognigen Corporation, DILIsym Services, Inc.

goodwill for impairment, the Company first performs 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.

The Company is 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 the Company's 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.

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 the Company's 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.

As of August 31, 2020, the entire balance

of goodwill was attributed to three of the Company's 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.

The Company recognized any impairment charges during FY20, FY19 and FY18.

Reconciliation of Goodwill for FY20, FY19

Balance, August 31, 2017

Balance, August 31, 2018

Balance, August 31, 2019

Balance, August 31, 2020

Other Intangible Assets

The following table summarizes other intangible

assets as of August 31, 2020:

Customer relationships-Cognigen

Straight line 8 years

Trade Name-Cognigen

Covenants not to compete-Cognigen

Straight line 5 years

Covenants not to compete-DILIsym

Straight line 4 years

Trade Name-DILIsym

Customer relationships-DILIsym

Straight line 10 years

Customer relationships-Lixoft

Straight line 14 years

Trade Name-Lixoft

Covenants not to compete-Lixoft

Straight line 3 years

Amortization expense for FY20, FY19, and

FY18 was $431,725, $357,500, and $357,500, respectively.

The Company performs 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 name, and noncompete

The Company determines 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 the Company's

use of the acquired assets or the strategy for the Company's overall business, significant negative industry or economic trends or significant

under-performance relative to expected historical or projected future results of operations.

Goodwill is tested for impairment at the reporting

unit level, which is one level below or the same as an operating segment.

As of August 31, 2021, the Company determined that it had four reporting

units, Simulations Plus, Cognigen Corporation, DILIsym Services, Inc.

When testing goodwill for impairment, the Company first

performs 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.

The Company is 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 the Company's 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 the Company's 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.

As of August 31, 2021, the entire balance of goodwill

was attributed to three of the Company's 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.

has not recognized any impairment charges during the periods ended August 31, 2021, 2020 and 2019.

Business Acquisitions

The Company accounted for the acquisition

of Cognigen, DILIsym Services Inc., and Lixoft using the purchase method of accounting where the assets acquired and liabilities

assumed are recognized based on their respective estimated fair values.

The excess of the purchase price over the estimated fair

values of the net assets acquired is recorded as goodwill.

Determining the fair value of certain acquired assets and liabilities

is subjective in nature and often involves the use of significant estimates and assumptions, including, but not limited to, the

selection of appropriate valuation methodology, projected revenue, expenses, and cash flows, weighted average cost of capital,

discount rates and estimates of terminal values.

Business acquisitions are included in the Company's consolidated financial statements

as of the date of the acquisition.

Fair Value of Financial Instruments

Assets and liabilities recorded at fair

value in the 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:

Input Definition:

Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date.

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.

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, contract payable, accrued payroll, and other expenses, and accrued bonus to officer,

the amounts approximate fair value due to their short maturities.

The Company accounted for the acquisition of Cognigen,

DILIsym Services Inc., and Lixoft using the purchase method of accounting where the assets acquired and liabilities assumed are recognized

based on their respective estimated fair values.

The excess of the purchase price over the estimated fair values of the net assets acquired

is recorded as goodwill.

Determining the fair value of certain acquired assets and liabilities is subjective in nature and often involves

the use of significant estimates and assumptions, including, but not limited to, the selection of appropriate valuation methodology, projected

revenue, expenses, and cash flows, weighted average cost of capital, discount rates and estimates of terminal values.

Business acquisitions

are included in the Company's consolidated financial statements as of the date of the acquisition.

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 experiment,

and purchased software that was developed by other companies and incorporated into, or used in the development of, our final products.

The Company accounts 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.

Research and development costs are charged to

expense as incurred until technological feasibility has been established.

These costs include salaries, laboratory experiment, and purchased

software that was developed by other companies and incorporated into, or used in the development of, our final products.

The Company accounts 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

The provision for income taxes represents the tax payable for the period and the change during the period in deferred tax

assets and liabilities.

Stock-Based Compensation

The Company accounts for stock options

using the modified prospective method in accordance with FASB ASC 718-10, “Compensation-Stock Compensation” .

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

Stock-based compensation was $1,286,625, $865,848 and $562,079 for the fiscal years ended August 31, 2020, 2019 and 2018,

respectively, and is included in the statements of operations as Consulting, Salaries, and Research and Development expense.

The Company accounts for stock options using the

modified prospective method in accordance with FASB ASC 718-10, “Compensation-Stock Compensation” .

Under this method,

compensation costs include estimated grant date fair value of the awards amortized over the options’ vesting period.

compensation expense, not including shares issued to Directors for services, was $2.4 million, $1.3 million and $866 thousand for the

years ended August 31, 2021, 2020 and 2019, respectively, and is included in the statements of operations as Consulting, Salaries, and

Research and Development expense.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis