Simulations Plus, Inc. 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 statements. 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 our control. 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 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 31, 2020. 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 · Continue to expand our use of social media and advertising · Continue to expand our sales staff, both in-house and in the field · Continue to recruit scientific and other resources to support our product and scientific consulting services · Seek accretive acquisitions that complement our existing offerings and expand our markets 37 Fiscal year 2021 was yet another record year for the Company. We saw 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 continue to be a leader in the fast- growing $2 billion bio-simulation industry. Results of Operations 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 year 2020 (in thousands) Year Ended August 31, 2021 2020 $ Change % Change Revenues $ 46,466 $ 41,589 $ 4,877 12 % Cost of revenues 10,600 10,649 (49 ) (1)% Gross profit 35,866 30,940 4,926 16 % Research and development 4,047 2,975 1,072 36 % Selling, general and administrative 20,566 16,360 4,206 26 % Total operating expenses 24,613 19,335 5,278 27 % Income from operations 11,253 11,605 (352 ) (3)% Other income (expense), net (168 ) (218 ) 50 (23)% Income before income taxes 11,085 11,387 (302 ) (3)% Provision for income taxes (1,303 ) (2,055 ) 752 (37)% Net income $ 9,782 $ 9,332 $ 450 5 % Revenues 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 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%. 38 Gross profit 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 $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 $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. During the years ended August 31, 2021, and 2020, as a result of an increase in stock prices, a number of employees exercised and sold incentive stock options granted to them under their corporate incentive plans, creating corporate tax deductions that lowered the effective tax rate. 39 Comparison of fiscal year 2020 and fiscal year 2019 (in thousands) Year Ended August 31, 2020 2019 $ Change % Change Revenues $ 41,589 $ 33,970 $ 7,619 22% Cost of revenues 10,649 9,026 1,623 18% Gross profit 30,940 24,944 5,996 24% Research and development 2,975 2,500 475 19% Selling, general and administrative 16,360 11,796 4,564 39% Total operating expenses 19,335 14,296 5,039 35% Income from operations 11,605 10,648 957 9% Other income (expense), net (218 ) (92 ) (126 ) 137% Income before income taxes 11,387 10,556 831 8% Provision for income taxes (2,055 ) (1,973 ) (82 ) 4% Net income $ 9,332 $ 8,583 $ 749 9% Revenues 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 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. The higher 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 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 $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 expensed. 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 divisions. 40 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 approximately $2.1 million for the year ended August 31, 2020, compared to $2.0 million for the year ended August 31, 2019. Our effective tax rate decreased slightly to 18.0% from 18.7 % for the same periods. The effective rate differs from anticipated combined statutory rates of approximately 25.7% due to R&D credits, foreign-tax related items (tax credits and foreign-deemed intangible income deductions), and the tax effect of stock-compensation related items for stock compensation and disqualifying dispositions. In the last part of fiscal year 2020, as occurred also in fiscal year 2019, because of an increase in stock prices, a number of employees exercised and sold incentive stock options granted to them under their corporate incentive plans, creating corporate tax deductions that lowered the effective tax rate. Segment Results of Operations Comparison of fiscal year 2021 and fiscal year 2020 Revenues (in thousands) Year Ended August 31, 2021 2020 Change ($) Change (%) Simulations Plus $ 25,142 $ 21,961 $ 3,181 14 % Cognigen 10,546 11,105 (559 ) (5)% DILIsym 6,115 6,948 (833 ) (12)% Lixoft* 4,663 1,575 3,088 196 % Total $ 46,466 $ 41,589 $ 4,877 12 % *As Lixoft was acquired on April 1, 2020, five months of activity is reflected for fiscal year 2020. 41 Cost of Revenues (in thousands) Year Ended August 31, 2021 2020 Change ($) Change (%) Simulations Plus $ 3,001 $ 2,921 $ 80 3 % Cognigen 4,825 5,190 (365 ) (7)% DILIsym 2,036 2,271 (235 ) (10)% Lixoft* 738 267 471 176 % Total $ 10,600 $ 10,649 $ (49 ) (1)% * As Lixoft was acquired on April 1, 2020, five months of activity is reflected for fiscal year 2020. Gross Profit (in thousands) Year Ended August 31, 2021 2020 Change ($) Change (%) Simulations Plus $ 22,141 $ 19,040 $ 3,101 16 % Cognigen 5,721 5,915 (194 ) (3)% DILIsym 4,079 4,677 (598 ) (13)% Lixoft* 3,925 1,308 2,617 200 % Total $ 35,866 $ 30,940 $ 4,926 16 % * 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. Cognigen 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 thousand. Gross profit decreased by approximately $194 thousand or 3% for the same periods. 42 DILIsym 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. Cost of revenue decreased by $235 thousand or 10% during the same periods, primarily due to lower contract research organization fees of $204 thousand. Gross profit decreased by $598 thousand or 13%. Lixoft 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 $2.6 million also due to the purchase of Lixoft on April 1, 2020. Comparison of fiscal year 2020 and fiscal year 2019 Revenues (in thousands) Year Ended August 31, 2020 2019 Change ($) Change (%) Simulations Plus $ 21,961 $ 19,584 $ 2,377 12 % Cognigen 11,105 9,321 1,784 19 % DILIsym 6,948 5,065 1,883 37 % Lixoft* 1,575 – 1,575 – Total $ 41,589 $ 33,970 $ 7,619 22 % *As Lixoft was acquired on April 1, 2020, five months of activity is reflected for fiscal year 2020. Cost of Revenues (in thousands) Year Ended August 31, 2020 2019 Change ($) Change (%) Simulations Plus $ 2,921 $ 3,276 $ (355 ) (11)% Cognigen 5,190 4,366 824 19 % DILIsym 2,271 1,384 887 64 % Lixoft* 267 – 267 – Total $ 10,649 $ 9,026 $ 1,623 18 % *As Lixoft was acquired on April 1, 2020, five months of activity is reflected for fiscal year 2020. 43 Gross Profit (in thousands) Year Ended August 31, 2020 2019 Change ($) Change (%) Simulations Plus $ 19,040 $ 16,308 $ 2,732 17 % Cognigen 5,915 4,955 960 19 % DILIsym 4,677 3,681 996 27 % Lixoft* 1,308 – 1,308 – Total $ 30,940 $ 24,944 $ 5,996 24 % *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 thousand. Gross profit increased by $2.7 million or 17%, primarily due to the increase in revenue. Cognigen 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. Cost of 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. DILIsym 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 thousand. Gross profit increased by approximately $1.0 million or 27% for the same periods. Lixoft 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. 44 LIQUIDITY AND CAPITAL RESOURCES 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 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. The former 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 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 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. 45 Cash Flows Operating Activities Net cash 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. Net cash 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. DIVIDENDS 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 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. 46 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 revenues or determine that resources would be more efficiently used elsewhere. OFF-BALANCE SHEET ARRANGEMENTS 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 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. CONTRACTUAL OBLIGATIONS The following table provides aggregate information regarding our contractual obligations as of August 31, 2021: (in thousands) Payments due by period Contractual obligations: Total 1 year 2–3 years 4–5 years More than 5 years Contracts payable (1) $ 4,550 $ 4,550 $ – $ – $ – Operating lease obligations (2) 1,366 422 650 294 – Total $ 5,916 $ 4,972 $ 650 $ 294 $ – (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. 47 RECENTLY ISSUED OR NEWLY ADOPTED ACCOUNTING STANDARDS 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. The Company adopted this ASU on September 1, 2019. In December 2019, the FASB issued ASU 2019-12 , Income Taxes (Topic 740): 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 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. Revenue Recognition 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: 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, 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. 48 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 computer software development costs require considerable judgment by management with respect to certain external factors including, but not limited to, technological feasibility, anticipated future gross revenues, estimated economic life, and changes in software and hardware technologies. Capitalized software development costs are comprised primarily of salaries and direct payroll-related costs and the purchase of existing software to be used in the Company’s software products. Total capitalized computer software development costs were $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 $1.4 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. 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, 2021, the Company determined that it had four reporting units, Simulations Plus, Cognigen Corporation, DILIsym Services, Inc. and Lixoft. 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. The Company has not recognized any impairment charges during the periods ended August 31, 2021, 2020 and 2019. 49 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. 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. Income Taxes 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. 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 period. Stock-based 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.