Simulations Plus, Inc. 10-K

ITEM 9A – CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures Our Chief Executive Officer and our Chief Financial Officer, after evaluating our “disclosure controls and procedures” (as defined in Securities Exchange Act of 1934 (the “Exchange Act”) Rules 13a-15(e) and 15d-15(e) as of the end of the period covered by this Annual Report on Form 10-K (the “Evaluation Date”), have concluded that as of the Evaluation Date, our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and to ensure that information required to be disclosed by us in such reports is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, where appropriate, to allow timely decisions regarding required disclosure. Management Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of consolidated financial statements for external purposes in accordance with U.S. GAAP. Management assessed our internal control over financial reporting as of August 31, 2021, the end of our fiscal year. Management based its assessment on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Management’s assessment included evaluation of elements such as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and our overall control environment. Based on this assessment, management has concluded that our internal control over financial reporting was effective as of the end of the fiscal year to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external reporting purposes in accordance with U.S. GAAP. We reviewed the results of management’s assessment with the Audit Committee of our Board of Directors. Inherent Limitations on Effectiveness of Controls Our management, including the CEO and CFO, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well-designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of the effectiveness of controls to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Changes in Internal Control over Financial Reporting No change in the Company’s internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. ITEM 9B – OTHER INFORMATION None 51 PART III ITEM 10 – DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE Information required by Item 10 is incorporated by reference from the Company’s definitive proxy statement, to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. ITEM 11 – EXECUTIVE COMPENSATION The information required by Item 11 is incorporated by reference from the Company’s definitive proxy statement, to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. ITEM 12 – SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required by Item 12 is incorporated by reference from the Company’s definitive proxy statement, to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. ITEM 13 – CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information required by Item 13 is incorporated by reference from the Company’s definitive proxy statement, to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. ITEM 14 – PRINCIPAL ACCOUNTING FEES AND SERVICES The information required by Item 14 is incorporated by reference from the Company’s definitive proxy statement, to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. 52 PART IV ITEM 15 – EXHIBITS, FINANCIAL STATEMENT SCHEDULES (a) (1) Financial Statements. The consolidated financial statements are included in this Annual Report on Form 10-K beginning on page F-1. (2) Financial Statement Schedules. All financial statement schedules have been omitted since the information is either not applicable or required or was included in the financial statements or notes included in this Annual Report on Form 10-K. (3) List of Exhibits required by Item 601 of Regulation S-K. See part (b) below. (b) Exhibits. The following exhibits are filed or furnished with this report. Those exhibits marked with a (†) refer to management contracts or compensatory plans or arrangements. EXHIBIT NUMBER DESCRIPTION 2.1 (4)^ Agreement and Plan of Merger, dated July 23, 2014, by and among the Company, Cognigen Corporation and the other parties thereto. 2.2 (12)^ Share Purchase and Contribution Agreement, dated March 31, 2020 . 3.1 (2) Articles of Incorporation of the Company. 3.2 (2) Amended and Restated Bylaws of the Company. 3.3 (15) Certificate of Amendment to the Amended and Restated Bylaws of Simulations Plus, Inc . 4.1 (1) Form of Common Stock Certificate. 4.2 (1) Share Exchange Agreement. 4.3(13) Revolving Line of Credit Note, dated as of March 31, 2020, by and between the Company, as borrower, and Wells Fargo Bank, National Association, as lender. 4.4(13) Credit Agreement, dated as of March 31, 2020, by and between the Company, as borrower, and Wells Fargo Bank, National Association, as lender. 10.1 (3) (†) The Company’s 2007 Stock Option Plan, as amended. 10.2 (10) Second Amendment to Lease by and between the Company and Crest Development LLC, dated as of May 1, 2016. 10.3 (5) (†) Employment Agreement by and between the Company and Walter S. Woltosz, dated as of August 8, 2016. 10.4 (6) Form of Indemnification Agreement. 10.5 (8) 2017 Equity Incentive Plan. 10.6 (7) Stock Purchase Agreement by and among Simulation Plus, Inc., DILIsym Services, Inc., The Shareholders’ Representative and The Shareholders of DILIsym Services, Inc., dated as of May 1, 2017. 10.7 (9)(†) Employment Agreement by and between the Company and Walter S. Woltosz, dated as of September 1, 2017. 10.8 (9) (†) Employment Agreement by and between the Company and John DiBella, dated as of September 1, 2017. 10.9 (9) (†) Employment Agreement by and between the Company and Thaddeus H Grasela Jr., dated as of September 2, 2017. 10.10 (11) (†) Employment Agreement by and between the Company and Shawn O’Connor dated June 26, 2018 10.12 (14) (†) Employment Agreement by and between the Company and Shawn O’Connor dated September 3, 2020 . 10.13 (17) (†) Employment Agreement by and between the Company and Will Frederick, dated December 1, 2020. 10.14 (18)(†) Separation Agreement, dated December 1, 2020, by and between the Company and John Kneisel . 10.15 (16) Third Amendment to Lease by and between the Company and Crest Development LLC , dated as of December 28, 2020. 10.16 (19)(†) Simulation Plus, Inc. 2021 Equity Incentive Plan. 21.1 * List of Subsidiaries. 23.1 * Consent of Independent Registered Public Accounting Firm. 31.1 * Section 302 – Certification of the Principal Executive Officer. 31.2 * Section 302 – Certification of the Principal Financial Officer. 32.1 * Section 906 – Certification of the Chief Executive Office and Chief Financial Officer. 101.INS** Inline XBRL Instance Document 101.SCH ** Inline XBRL Taxonomy Extension Schema Document 101.CAL ** Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF ** Inline XBRL Taxonomy Extension Definition Linkbase Document 101.LAB ** Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE ** Inline XBRL Taxonomy Extension Presentation Linkbase Document 53 __________________________ ^ Schedules and exhibits omitted pursuant to Item 601(b)(2) of Registration S-K. The registrant agrees to furnish supplementally a copy of any omitted schedule to the SEC upon request. * Filed herewith. ** The XBRL related information in Exhibit 101 shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document. (†) Refers to management contracts or compensatory plans or arrangements (1) Incorporated by reference to the Company’s Registration Statement on Form SB-2 (Registration No. 333-6680) filed on March 25, 1997. (2) Incorporated by reference to an exhibit to the Company’s Form 10-K for the fiscal year ended August 31, 2010. (3) Incorporated by reference to an exhibit to the Company’s Form 10-Q filed April 9, 2014. (4) Incorporated by reference to an exhibit to the Company’s Form 8-K/A filed November 18, 2014. (5) Incorporated by reference to an exhibit to the Company’s Form 8-K filed August 11, 2016. (6) Incorporated by reference to an exhibit to the Company’s Form 8-K filed August 10, 2016. (7) Incorporated by reference to an exhibit to the Company’s Form 10-Q filed July 10, 2017. (8) Incorporated by reference to Appendix A to the Company’s Schedule 14A filed December 29. 2016. (9) Incorporated by reference to an exhibit to the Company’s Form 8-K filed September 6, 2017. (10) Incorporated by reference to an exhibit to the Company’s Form 10-K for the fiscal year ended August 31, 2016. (11) Incorporated by reference to an exhibit to the Company’s Form 10-Q filed July 10, 2018. (12) Incorporated by reference to an exhibit to the Company’s Form 8-K filed April 2, 2020. (13) Incorporated by reference to an exhibit to the Company’s Form 8-K filed April 3, 2020. (14) Incorporated by reference to an exhibit to the Company’s Form 8-K filed September 9, 2020. (15) Incorporated by reference to Appendix A to the Company’s Definitive Schedule 14A filed December 31, 2018. (16) Incorporated by reference to an exhibit to the Company’s Form 8-K filed January 4, 2021. (17) Incorporated by reference to an exhibit to the Company’s Form 10-Q filed January 11, 2021. (18) Incorporated by reference to an exhibit to the Company’s Form 10-Q filed April 14, 2021. (19) Incorporated by reference to an exhibit to the Company’s Form 8-K filed June 8, 2021. (c) Financial Statement Schedule. See Item 15(a)(2) above. 54 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. October 27, 2021 SIMULATIONS PLUS, INC. By: /s/ Will Frederick Will Fredrick Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title /s/ Shawn O’Connor Chief Executive Officer (Principal executive officer) Shawn O’Connor October 27, 2021 /s/ Walter S. Woltosz Chairman of the Board of Directors Walter S. Woltosz October 27, 2021 /s/ Dr. Lisa LaVange Director Dr. Lisa LaVange October 27, 2021 /s/ Dr. Daniel Weiner Director Dr. Daniel Weiner October 27, 2021 /s/ Dr. David L. Ralph Director Dr. David L. Ralph October 27, 2021 /s/ Dr. John K. Paglia Director Dr. John K. Paglia October 27, 2021 /s/ Will Frederick Chief Financial Officer (Principal financial Will Frederick officer and principal accounting officer) October 27, 2021 55 SIMULATIONS PLUS, INC. & SUBSIDIARY CONTENTS August 31, 2021, 2020 and 2019 Page REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-2 - F-4 FINANCIAL STATEMENTS Consolidated Balance Sheets F-5 Consolidated Statements of Operations and Comprehensive Income F-6 Consolidated Statements of Shareholders’ Equity F-7 Consolidated Statements of Cash Flows F-8 Notes to Consolidated Financial Statements F-9 – F-34 F- 1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Simulations Plus, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Simulations Plus, Inc. and Subsidiaries (the Company) as of August 31, 2021, and 2020, and the related consolidated statements of operations and comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended August 31, 2021, and the related notes (collectively referred to as the financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of August 31, 2021, and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended August 31, 2021, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of August 31, 2021, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated October 27, 2021, expressed an unqualified opinion. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Revenue Recognition – Contract cost estimates Description of the Matter As discussed in Note 2 and Note 3 to the Consolidated Financial Statements, the Company earns a portion of its revenue through consulting service agreements. For performance obligations related to services that are required to be recognized over time, the Company generally measures its progress to completion using an input measure of total labor costs incurred divided by total labor costs expected to be incurred. F- 2 Auditing revenue recognition is complex and highly judgmental due to the variability and uncertainty associated with the Company’s assessment of measure of progress. Changes in these estimates would have a significant effect on the amount of revenue recognized. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls that address the risk of material misstatement of consulting services revenue including those associated with cost to complete estimates. We tested controls over management’s process to collect, review, and approve the data used in assessing revenue recognized over time. To test the measures of progress used for performance obligations related to services that are required to be recognized over time, our audit procedures included, among others, evaluating the appropriateness of the Company’s accounting policy for each type of arrangement, testing the identified measure of performance by reading contracts with customers, including all amendments, and reviewing the contract analyses prepared by management. We evaluated whether the selected measures of progress towards satisfaction of performance obligations were applied consistently. We also tested the completeness and accuracy of the underlying data used for the measure of progress by testing the underlying cost data. Rose, Snyder & Jacobs LLP We have served as the Company’s auditor since 2004. Encino, California October 27, 2021 F- 3 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Simulations Plus, Inc. Opinion on Internal Control over Financial Reporting We have audited Simulations Plus, Inc. and Subsidiaries (the Company’s) internal control over financial reporting as of August 31, 2021, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of August 31, 2021, based on criteria established in Internal Control—Integrated Framework (2013) issued by COSO. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet as of August 31, 2021, and the related consolidated statements of operations and comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended August 31, 2021, and related notes, and our report dated October 27, 2021, expressed an unqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Rose, Snyder & Jacobs LLP Encino, CA October 27, 2021 F- 4 SIMULATIONS PLUS, INC. CONSOLIDATED BALANCE SHEETS August 31, (in thousands, except share and per share amounts) 2021 2020 ASSETS Current assets Cash and cash equivalents $ 36,984 $ 49,207 Accounts receivable, net of allowance for doubtful accounts of $ 78 and $ 50 9,851 7,422 Revenues in excess of billings 3,150 3,093 Prepaid income taxes 1,012 970 Prepaid expenses and other current assets 1,696 1,596 Short-term investments 86,620 66,804 Total current assets 139,313 129,092 Long-term assets Capitalized computer software development costs, net of accumulated amortization of $ 14,438 and $ 13,582 7,646 6,087 Property and equipment, net 1,838 438 Operating lease right of use asset 1,276 927 Intellectual property, net of accumulated amortization of $ 6,516 and $ 5,087 10,469 11,898 Other intangible assets, net of accumulated amortization of $ 2,186 and $ 1,642 6,464 7,008 Goodwill 12,921 12,921 Other assets 51 51 Total assets $ 179,978 $ 168,422 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable $ 387 $ 351 Accrued payroll and other expenses 5,604 2,251 Contracts payable - current portion 4,550 2,000 Billings in excess of revenues 117 141 Operating lease liability - current portion 382 463 Deferred revenue 534 300 Total current liabilities 11,574 5,506 Long-term liabilities Deferred income taxes, net 1,726 2,354 Operating lease liability 896 463 Contracts payable – net of current portion – 4,064 Total liabilities 14,196 12,387 Commitments and contingencies – – Shareholders' equity Preferred stock, $ 0.001 par value 10,000,000 shares authorized no shares issued and outstanding $ – $ – Common stock, $ 0.001 par value and additional paid-in capital — 50,000,000 shares authorized, 20,141,521 and 19,923,277 shares issued and outstanding 133,418 128,541 Retained earnings 32,407 27,436 Accumulated other comprehensive income (loss) ( 43 ) 58 Total shareholders' equity 165,782 156,035 Total liabilities and shareholders' equity $ 179,978 $ 168,422 The accompanying notes are an integral part of these consolidated financial statements. F- 5 SIMULATIONS PLUS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME Years Ended August 31, (in thousands, except per common share amounts) 2021 2020 2019 Revenues $ 46,466 $ 41,589 $ 33,970 Cost of revenues 10,600 10,649 9,026 Gross profit 35,866 30,940 24,944 Operating expenses Research and development 4,047 2,975 2,500 Selling, general and administrative 20,566 16,360 11,796 Total operating expenses 24,613 19,335 14,296 Income from operations 11,253 11,605 10,648 Other income (expense) Interest income 201 30 34 Interest expense ( 22 ) – – Change in value of contingent consideration ( 486 ) ( 203 ) ( 109 ) Gain (loss) on currency exchange 139 ( 45 ) ( 17 ) Total other income (expense), net ( 168 ) ( 218 ) ( 92 ) Income before income taxes 11,085 11,387 10,556 Provision for income taxes ( 1,303 ) ( 2,055 ) ( 1,973 ) Net Income $ 9,782 $ 9,332 $ 8,583 Earnings per share Basic $ 0.49 $ 0.52 $ 0.49 Diluted $ 0.47 $ 0.50 $ 0.48 Weighted-average common shares outstanding Basic 20,045 17,819 17,492 Diluted 20,743 18,538 18,057 Other comprehensive income (loss), net of tax Foreign currency translation adjustments ( 101 ) 58 – Comprehensive income $ 9,681 $ 9,390 $ 8,583 The accompanying notes are an integral part of these consolidated financial statements. F- 6 SIMULATIONS PLUS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Year ended August 31, (in thousands, except per common share amounts) 2021 2020 2019 Common stock and additional paid in capital Balance, beginning of period $ 128,541 $ 15,327 $ 13,461 Exercise of stock options 1,461 630 788 Stock-based compensation 2,405 1,287 866 Shares issued to Directors for services 345 290 212 Shares issued - Lixoft 666 3,260 – Common stock issued for cash, net – 107,747 – Balance, end of period 133,418 128,541 15,327 Retained earnings Balance, beginning of period 27,436 22,354 18,461 Cumulative effect of changes related to adoption of ASC 606 – – ( 493 ) Declaration of dividends ( 4,811 ) ( 4,250 ) ( 4,197 ) Net income 9,782 9,332 8,583 Balance, end of period 32,407 27,436 22,354 Accumulated other comprehensive income Balance, beginning of period 58 – – Other comprehensive income (loss) ( 101 ) 58 – Balance, end of period ( 43 ) 58 – Total shareholders’ equity 156,035 37,681 – Other comprehensive income (loss) – – – Total shareholders’ equity $ 165,782 $ 156,035 $ 37,681 Cash dividends declared per common share $ 0.24 $ 0.24 $ 0.24 The accompanying notes are an integral part of these consolidated financial statements. F- 7 SIMULATIONS PLUS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended August 31, (in thousands) 2021 2020 2019 Cash flows from operating activities Net income $ 9,782 $ 9,332 $ 8,583 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 3,590 2,962 2,750 Change in value of contingent consideration 486 203 109 Amortization of investment premiums 2,350 – – Stock-based compensation 2,750 1,577 1,078 Deferred income taxes ( 628 ) ( 378 ) ( 299 ) Currency translation adjustments ( 101 ) – – (Increase) decrease in Accounts receivable ( 2,429 ) ( 2,018 ) 488 Revenues in excess of billings ( 57 ) 140 ( 1,248 ) Prepaid income taxes ( 42 ) ( 12 ) ( 453 ) Prepaid expenses and other assets ( 100 ) ( 399 ) ( 94 ) Increase (decrease) in Accounts payable 39 221 ( 148 ) Accrued payroll and other expenses 3,353 23 487 Billings in excess of revenues ( 24 ) ( 658 ) 414 Deferred revenue 234 ( 81 ) ( 30 ) Net cash provided by operating activities 19,203 10,912 11,637 Cash flows from investing activities Purchases of property and equipment ( 1,627 ) ( 231 ) ( 138 ) Purchases of intellectual property – – ( 50 ) Purchase of short-term investments ( 122,395 ) ( 67,249 ) – Proceeds from sale of short-term investments 100,229 – – Cash used to acquire subsidiaries – ( 9,471 ) – Cash received in acquisition – 3,799 – Capitalized computer software development costs ( 2,949 ) ( 2,353 ) ( 1,768 ) Net cash used in investing activities ( 26,742 ) ( 75,505 ) ( 1,956 ) Cash flows from financing activities Payment of dividends ( 4,811 ) ( 4,250 ) ( 4,197 ) Payments on contracts payable ( 1,334 ) ( 1,761 ) ( 4,239 ) Proceeds from the exercise of stock options 1,461 630 788 Proceeds from follow-on public offering, net – 107,747 – Net cash provided by (used in) financing activities ( 4,684 ) 102,366 ( 7,648 ) Net increase (decrease) in cash and cash equivalents ( 12,223 ) 37,773 2,033 Cash and cash equivalents, beginning of year 49,207 11,434 9,401 Cash and cash equivalents, end of period $ 36,984 $ 49,207 $ 11,434 Supplemental disclosures of cash flow information Income taxes paid $ 1,857 $ 2,353 $ 2,673 Non-Cash Investing and Financing Activities Stock issued for acquisition of Lixoft $ 666 $ 3,261 $ – Creation of contract liabilities for acquisition of subsidiaries $ – $ 4,528 $ – Right of use assets capitalized $ 905 $ 1,499 $ – The accompanying notes are an integral part of these consolidated financial statements. F- 8 Simulations Plus, Inc. Notes to Consolidated Financial Statements For the Year Ended August 31, 2021 NOTE 1 – ORGANIZATION AND LINES OF BUSINESS Organization Simulations Plus, Inc. (“The Company”) was incorporated on July 17, 1996. In September 2014, Simulations Plus acquired all of the outstanding equity interests of Cognigen Corporation (“Cognigen”) and Cognigen became a wholly-owned subsidiary of Simulations Plus, Inc. In June 2017, Simulations Plus acquired DILIsym Services, Inc. (“DILIsym”) as a wholly-owned subsidiary. In April 2020, Simulations Plus, Inc. acquired Lixoft, a French société par actions simplifiée (“Lixoft) as a wholly-owned subsidiary pursuant to a stock purchase and contribution agreement. (Collectively, “Company”, “we”, “us”, “our”). Effective September 1, 2021, the Company merged both Cognigen Corporation and DILIsym, Services, Inc. with and into Simulations Plus, Inc. through short-form mergers (the “Mergers”). To effectuate the Mergers, the Company filed Certificates of Ownership with the Secretaries of State of the states of Delaware (Cognigen’s and DILIsym’s state of incorporation) and California (the Company’s state of incorporation). Consummation of the Mergers was not subject to approval of the Company’s stockholders and did not impact the rights of the Company’s stockholders. Lines of Business We are a premier developer of drug discovery and development software for modeling and simulation, and for the prediction of molecular properties utilizing both artificial intelligence (“AI”) as well as machine learning based technology. We also provide consulting services ranging from early drug discovery through preclinical and clinical trial data analysis and for submissions to regulatory agencies. Our software and consulting services are provided to major pharmaceutical, biotechnology, agrochemical, cosmetics and food industry companies, and to regulatory agencies worldwide for use in the conduct of industry-based research. NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of Simulations Plus and, as of September 2, 2014, its wholly-owned subsidiary, Cognigen, as of June 1, 2017, the accounts of DILIsym, and as of April 1, 2020, Lixoft. All significant intercompany accounts and transactions are eliminated in consolidation. Use of Estimates Our financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management’s application of accounting policies. Actual results could differ from those estimates. Significant accounting policies for us include revenue recognition, accounting for capitalized computer software development costs, valuation of stock options, and accounting for income taxes. Reclassifications Certain numbers in the prior year have been reclassified to conform to the current year's presentation. Revenue Recognition We generate revenue primarily from the sale of software licenses and providing consulting services to the pharmaceutical industry for drug development. F- 9 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 Deferred Commissions Sales commissions earned by our sales force and our commissioned sales representatives are considered incremental and recoverable costs of obtaining a contract with a customer. Sales commissions for new contracts are deferred and then amortized on a straight-line basis over a period of benefit. We determined the period of benefit by taking into consideration our customer contracts, our technology and other factors. Sales commissions for renewal contracts are deferred and then amortized on a straight-line basis over the related contractual renewal period. Amortization expense is included in sales and marketing expenses on the consolidated statements of operations and comprehensive income as Selling, general, and administrative expense. Practical Expedients and Exemptions The Company has elected the following additional practical expedients in applying Topic 606: · Commission Expense : We apply the practical expedient in ASC Topic 606 to expense costs as incurred for sales commissions when the period of benefit is one year or less. Most of our contracts are of a duration of one year or less, few, if any of the longer-term contracts have commissions associated with them . This expense is included in the consolidated statements of operations and comprehensive income as Selling, general, and administrative expense. · Transaction Price Allocated to Future Performance Obligations ASC 606 requires that the Company disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied as of August 31, 2021. ASC 606 provides certain practical expedients that limit the requirement to disclose the aggregate amount of transaction price allocated to unsatisfied performance obligations. The Company applied the practical expedient to not disclose the amount of transaction price allocated to unsatisfied performance obligations when the performance obligation is part of a contract that has an original expected duration of one year or less. Cash and Cash Equivalents For purposes of the statements of cash flows, the Company considers 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 have deteriorated, whether due to customer-specific or general economic issues, an increase in the allowance may be made. Accounts receivable are written off when reasonable collection attempts have failed. F- 10 Investments We may invest excess cash balances in short-term and long-term marketable debt securities. Investments may consist of certificates of deposit, money market accounts, government-sponsored enterprise securities, corporate bonds and/or commercial paper. The Company accounts for its investment in marketable securities in accordance with FASB ASC 320, Investments – Debt and Equity Securities. This statement requires debt securities to be classified into three categories: Held-to-maturity—Debt securities that the entity has the positive intent and ability to hold to maturity are reported at amortized cost. Discounts and premiums to par value of the debt securities are amortized to interest income/expense over the term of the security. No gains or losses on investment securities are realized until they are sold or a decline in fair value is determined to be other-than-temporary. Trading Securities—Debt securities that are bought and held primarily for the purpose of selling in the near term are reported at fair value, with unrealized gains and losses included in earnings. Available-for-Sale—Debt securities not classified as either securities held-to-maturity or trading securities are reported at fair value with unrealized gains or losses excluded from earnings and reported as a separate component of shareholders’ equity. We classify our investments in marketable debt securities based on the facts and circumstances present at the time of purchase of the securities. During the year ended August 31, 2021, all of our investments were classified as held-to-maturity. Held-to-maturity investments are measured and recorded at amortized cost on the Company’s Consolidated Balance Sheets. Discounts and premiums to par value of the debt securities are amortized to interest income/expense over the term of the security. No gains or losses on investment securities are realized until they are sold or a decline in fair value is determined to be other-than-temporary. Capitalized Computer Software Development Costs Software development costs are capitalized in accordance with ASC 985-20, “Costs of Software to Be Sold, Leased, or Marketed” . Capitalization of software development costs begins upon the establishment of technological feasibility and is discontinued when the product is available for sale. The establishment of technological feasibility and the ongoing assessment for recoverability of capitalized software development costs require considerable judgment by management with respect to certain external factors including, but not limited to, technological feasibility, anticipated future gross revenues, estimated economic life, and changes in software and hardware technologies. Capitalized computer 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. Amortization of capitalized computer software development costs is provided 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 years ended 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, or fair market value for property and equipment acquired in business combinations, less accumulated depreciation and amortization. Depreciation and amortization are provided using the straight-line method over the estimated useful lives as follows: Property and Equipment estimated useful lives Equipment 5 years Computer equipment 3 to 7 years Furniture and fixtures 5 to 7 years Leasehold improvements Shorter of life of asset or lease Maintenance and minor replacements are charged to expense as incurred. Gains and losses on disposals are included in the results of operations. F- 11 Internal-use Software We have a service contract related to the implementation of internally used software. In accordance with ASC 350-40 “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” , we have capitalized certain internal-use software which are included in long-term assets. The amortization will be classified as Selling, general, and administrative expenses on the consolidated statement of operations and comprehensive income and maintenance and minor upgrades are charged to expense as incurred. Gains and losses on disposals are included in the results of operations. No amortization has been expensed for the project as it is still in progress. Leases We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets and operating lease liabilities (current and long-term) in our consolidated balance sheets. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we generally use our incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Supplemental balance sheet information related to operating leases was as follows as of August 31, 2021: Schedule of lease cost (in thousands) Right of use assets $ 1,276 Lease Liabilities, Current $ 382 Lease Liabilities, Long-term $ 896 Operating lease costs $ 595 Weighted Average remaining lease term 2.50 years Weighted Average Discount rate 3.79 % 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 names, and noncompete agreements. We determine the appropriate useful life by performing an analysis of expected cash flows based on historical experience of the acquired businesses. Intangible assets are amortized over their estimated useful lives using the straight-line method, which approximates the pattern in which the majority of the economic benefits are expected to be consumed. Goodwill represents the excess of the cost of an acquired entity over the fair value of the acquired net assets. Goodwill is not amortized, instead it is tested for impairment annually or when events or circumstances change that would indicate that goodwill might be impaired. Events or circumstances that could trigger an impairment review include, but are not limited to, a significant adverse change in legal factors or in the business climate, an adverse action or assessment by a regulator, unanticipated competition, a loss of key personnel, significant changes in the manner of our use of the acquired assets or the strategy for our overall business, significant negative industry or economic trends, or significant underperformance relative to expected historical or projected future results of operations. F- 12 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 has 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 Corporation, DILIsym Services, Inc. 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 no t recognized any impairment charges during the periods ended August 31, 2021, 2020 and 2019. Reconciliation of Goodwill as of August 31, 2021, and 2020: Schedule of reconciliation of goodwill (in thousands) Cognigen DILIsym Lixoft Total Balance, August 31, 2019 $ 4,789 $ 5,598 $ – $ 10,387 Addition – – 2,534 2,534 Impairments – – – – Balance, August 31, 2020 4,789 5,598 2,534 12,921 Addition – – – – Impairments – – – – Balance, August 31, 2021 $ 4,789 $ 5,598 $ 2,534 $ 12,921 Other Intangible Assets The following table summarizes other intangible assets as of August 31, 2021: Schedule of other intangible assets (in thousands) Amortization Period Acquisition Value Accumulated Amortization Net book value Cognigen Customer relationships Straight line 8 years $ 1,100 $ 963 $ 137 Trade Name None 500 – 500 Covenants not to compete Straight line 5 years 50 50 – DILIsym Customer relationships Straight line 10 years 1,900 807 1,093 Trade Name None 860 – 860 Covenants not to compete Straight line 4 years 80 80 – Lixoft Customer relationships Straight line 14 years 2,550 258 2,292 Trade Name None 1,550 – 1,550 Covenants not to compete Straight line 3 years 60 28 32 $ 8,650 $ 2,186 $ 6,464 F- 13 The following table summarizes other intangible assets as of August 31, 2020: (in thousands) Amortization Period Acquisition Value Accumulated Amortization Net book value Cognigen Customer relationships Straight line 8 years $ 1,100 $ 825 $ 275 Trade Name None 500 – 500 Covenants not to compete Straight line 5 years 50 50 – DILIsym Customer relationships Straight line 10 years 1,900 618 1,282 Trade Name None 860 – 860 Covenants not to compete Straight line 4 years 80 65 15 Lixoft Customer relationships Straight line 14 years 2,550 76 2,474 Trade Name None 1,550 – 1,550 Covenants not to compete Straight line 3 years 60 8 52 $ 8,650 $ 1,642 $ 7,008 Total amortization expense for the years ended August 31, 2021, 2020 and 2019 was $ 544 thousand, $ 432 thousand, and $ 358 thousand, respectively. Future amortization of intangible assets for the next five years is as follows: Schedule of future amortization (in thousands) Year ending August 31, Amount 2022 $ 530 2023 $ 384 2024 $ 372 2025 $ 372 2026 $ 372 Business Acquisitions The Company accounted for the acquisition of Cognigen, DILIsym, 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, estimates of advertiser and publisher turnover rates and estimates of terminal values. Business acquisitions are included in the Company's consolidated financial statements as of the date of the acquisition. F- 14 Fair Value of Financial Instruments Assets and liabilities recorded at fair value in the Consolidated Balance Sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. The categories, as defined by the standard are as follows: Level Input: Input Definition: Level I Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date. Level II Inputs, other than quoted prices included in Level I, that are observable for the asset or liability through corroboration with market data at the measurement date. Level III Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. For certain of our financial instruments, including accounts receivable, accounts payable, and accrued payroll and other expenses, the carrying amounts approximate fair value due to their short-term nature. The following table summarizes fair value measurements as of August 31, 2021, and August 31, 2020, for assets and liabilities measured at fair value on a recurring basis: Summarizes fair value measurements August 31, 2021 (in thousands) Level 1 Level 2 Level 3 Total Cash and cash equivalents $ 36,984 $ – $ – $ 36,984 Short-term investments $ 86,620 $ – $ – $ 86,620 Acquisition-related contingent consideration obligations $ – $ – $ 3,217 $ 3,217 August 31, 2020 (in thousands) Level 1 Level 2 Level 3 Total Cash and cash equivalents $ 49,207 $ – $ – $ 49,207 Short-term investments $ 66,804 $ – $ – $ 66,804 Acquisition-related contingent consideration obligations $ – $ – $ 4,731 $ 4,731 As of August 31, 2021, and 2020, the Company had a liability for contingent consideration related to its acquisition of Lixoft and DILIsym. The fair value measurement of the contingent consideration obligations is determined using Level 3 inputs. The fair value of contingent consideration obligations is based on a discounted cash flow model using a probability-weighted income approach. These fair value measurements represent Level 3 measurements as they are based on significant inputs not observable in the market. Significant judgment is employed in determining the appropriateness of these assumptions as of the acquisition date and for each subsequent period. Accordingly, changes in assumptions could have a material impact on the amount of contingent consideration expense the Company records in any given period. Changes in the value of the contingent consideration obligations are recorded in the Company’s Consolidated Statement of Operations. The following is a reconciliation of contingent consideration value: Reconciliation of contingent consideration value (in thousands) Value as of August 31, 2020 $ 4,731 Contingent consideration payments ( 2,000 ) Change in value of contingent consideration 486 Value as of August 31, 2021 $ 3,217 F- 15 Marketing The Company expenses marketing and advertising costs as incurred. Marketing costs for the years ended August 31, 2021, 2020 and 2019 were approximately $ 60 thousand, $ 64 thousand and $ 83 thousand, respectively. 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 which 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. Intellectual property On February 28, 2012, we bought out the royalty agreement with Enslein Research. The cost of $ 75 thousand is being amortized over 10 years under the straight-line method . On May 15, 2014, we entered into a termination and non-assertion agreement with TSRL, Inc., pursuant to which the parties agreed to terminate an exclusive software licensing agreement entered into between the parties in 1997. As a result, the Company obtained a perpetual right to use certain source code and data, and TSRL relinquished any rights and claims to any GastroPlus products and to any claims to royalties or other payments under that 1997 agreement. We agreed to pay TSRL total consideration of $ 6 million, which is being amortized over 10 years under the straight-line method . On June 1, 2017, as part of the acquisition of DILIsym the Company acquired certain developed technologies associated with the drug induced liver disease (DILI). These technologies were valued at approximately $ 2.9 million and are being amortized over 9 years under the straight-line method . In September 2018, we purchased certain intellectual property rights of Entelos Holding Company. The cost of $ 50 thousand is being amortized over 10 years under the straight-line method . On April 1, 2020, as part of the acquisition of Lixoft, the Company acquired certain developed technologies associated with the Lixoft scientific software. These technologies were valued at approximately $ 8.0 million and are being amortized over 16 years under the straight-line method . F- 16 The following table summarizes intellectual property as of August 31, 2021: Summary of intellectual property (in thousands) Amortization Period Acquisition Value Accumulated Amortization Net Book Value Royalty Agreement buy out-Enslein Research Straight line 10 years $ 75 $ 71 $ 4 Termination/nonassertion agreement-TSRL Inc. Straight line 10 years 6,000 4,375 1,625 Developed technologies–DILIsym acquisition Straight line 9 years 2,850 1,346 1,504 Intellectual rights of Entelos Holding Company Straight line 10 years 50 15 35 Developed technologies–Lixoft acquisition Straight line 16 years 8,010 709 7,301 $ 16,985 $ 6,516 $ 10,469 The following table summarizes intellectual property as of August 31, 2020: (in thousands) Amortization Period Acquisition Value Accumulated Amortization Net Book Value Royalty Agreement buy out-Enslein Research Straight line 10 years $ 75 $ 64 $ 11 Termination/nonassertion agreement-TSRL Inc. Straight line 10 years 6,000 3,775 2,225 Developed technologies–DILIsym acquisition Straight line 9 years 2,850 1,029 1,821 Intellectual rights of Entelos Holding Company Straight line 10 years 50 10 40 Developed technologies–Lixoft acquisition Straight line 16 years 8,010 209 7,801 $ 16,985 $ 5,087 $ 11,898 Total amortization expense for intellectual property agreements for the years ended August 31, 2021, 2020 and 2019 was $ 1.4 million, $ 1.1 million, and $ 929 thousand, respectively. Future amortization of intellectual property for the next five years is as follows: Schedule of future amortization expenses (in thousands) Year ending August 31, Amount 2022 $ 1,426 2023 $ 1,422 2024 $ 1,247 2025 $ 822 2026 $ 743 F- 17 Earnings per Share The Company reports earnings per share in accordance with FASB ACS 260-10. Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of common shares available. Diluted earnings per share is computed similarly to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. The components of basic and diluted earnings per share for the years ended August 31, 2021, 2020 and 2019 were as follows: Schedule of earnings per share August 31, (in thousands) 2021 2020 2019 Numerator Net income attributable to common shareholders $ 9,782 $ 9,332 $ 8,583 Denominator Weighted-average number of common shares outstanding during the year 20,045 17,819 17,492 Dilutive effect of stock options 698 719 565 Common stock and common stock equivalents used for diluted earnings per share 20,743 18,538 18,057 Stock-Based Compensation Compensation costs related to stock options are determined in accordance with FASB ASC 718-10, “Compensation-Stock Compensation”, using the modified prospective method. Under this method, compensation cost is calculated based on the grant-date fair value estimated in accordance with FASB ASC 718-10, amortized on a straight-line basis over the options’ vesting period. Stock-based compensation expense related to stock options, 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. This expense is included in the consolidated statements of operations and comprehensive income as selling, general, and administration and research and development expense. Impairment of Long-lived Assets The Company accounts for the impairment and disposition of long-lived assets in accordance with ASC 350, “Intangibles – Goodwill and Other ” and ASC 360, “Property and Equipment” . Long-lived assets to be held and used are reviewed for events or changes in circumstances that indicate that their carrying value may not be recoverable. We measure recoverability by comparing the carrying amount of an asset to the expected future undiscounted net cash flows generated by the asset. If we determine that the asset may not be recoverable, or if the carrying amount of an asset exceeds its estimated future undiscounted cash flows, we recognize an impairment charge to the extent of the difference between the fair value and the asset's carrying amount. No impairment losses were recorded during the years ended August 31, 2021, 2020 and 2019. Recently Issued 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. F- 18 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 is not expected to have a material impact on our financial statements or related disclosures. NOTE 3 – 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 Components of Revenue The following is a description of principal activities from which the Company generates revenue. As part of the accounting for these arrangements, the Company must develop assumptions that require judgment to determine the stand-alone selling price for each performance obligation identified in the contract. Stand-alone selling prices are determined based on the prices at which the Company separately sells its services or goods. Revenue Components Typical Payment Terms Software Revenues: Software revenues are generated primarily from sales of software licenses at the time the software is unlocked and the term commences. The license period typically is one year or less. Along with the license a di minimis amount of customer support is provided to assist the customer with the software. Should the customer need more than a di minimis amount of support they can choose to enter into a separate contract for additional training. Most software is installed on our customers’ servers and the Company has no control of the software once the sale is made. For certain software arrangements the Company hosts the licenses on servers maintained by the Company, Revenue for those arrangements are accounted as Software as a Service over the life of the contract. These arrangements are a small portion of software revenues of the Company. Payments are generally due upon invoicing on a net 30 basis unless other payment terms are negotiated with the customer based on customer history. Typical industry standards apply. Consulting Contracts: Consulting services provided to our customers are generally recognized over time as the contracts are performed and the services are rendered. The company measures its consulting revenue based on time expended compared to total estimated hours to complete a project. The Company believes the methods chosen for its contract revenue best depicts the transfer of benefits to the customer under the contracts. Payment terms vary, depending on the size of the contract, credit history and history with the client and deliverables within the contract. Consortium Member Based Services: The performance obligation is recognized on a time elapsed basis, by month, for which the services are provided, as the Company transfers control evenly over the contractual period. Payment is due at the beginning of the period, generally on a net 30 or 60 basis. F- 19 Remaining performance obligations that do not fall under the expedients, require the Company to perform various consulting and software development services and consortium memberships of approximately $6.2 million. It is anticipated these revenues will be recognized within the next year. Contract Liabilities During the year ended August 31, 2021, the Company recognized $430 thousand of revenue that was included in contract liabilities as of August 31, 2020. Disaggregation of Revenues The components of disaggregation of revenue for the years ended August 31, 2021, 2020 and 2019 were as follows: Schedule of disaggregation of revenues Year ended August 31, (in thousands) 2021 2020 2019 Software licenses Point in time $ 26,725 $ 20,668 $ 17,425 Over time 945 919 1,054 Consulting services Over time 18,796 20,002 15,491 Total revenue $ 46,466 $ 41,589 $ 33,970 Contracts in Progress Contracts in progress are included in the accompanying balance sheets under the following captions: Schedule of contract in progress Year ended August 31, (in thousands) 2021 2020 2019 Revenues in excess of billings $ 3,150 $ 3,093 $ 3,234 Billings in excess of revenues ( 117 ) ( 141 ) ( 799 ) Revenues over billings on uncompleted contracts $ 3,033 $ 2,952 $ 2,435 Cost, estimated earnings, and billings on uncompleted contracts are summarized as follows as of August 31, 2021, 2020 and 2019: August 31, (in thousands) 2021 2020 2019 Revenues earned to date on uncompleted contracts $ 15,184 $ 20,235 $ 19,255 Billings to date on uncompleted contracts ( 12,151 ) ( 17,283 ) ( 16,820 ) Revenues over billings on uncompleted contracts $ 3,033 $ 2,952 $ 2,435 Balance increases and decreases in these accounts are due to the timing of amounts billed, payments received, and revenue recognized. F- 20 NOTE 4 – PROPERTY AND EQUIPMENT Property and equipment consisted of the following: August 31, (in thousands) 2021 2020 Equipment $ 606 $ 865 Computer equipment 293 548 Furniture and fixtures 36 161 Leasehold improvements 13 114 Construction in progress 1,302 – Subtotal 2,250 1,688 Less accumulated depreciation and amortization ( 412 ) ( 1,250 ) Total $ 1,838 $ 438 Depreciation expense was $ 226 thousand, $ 166 thousand and $ 132 thousand for the years ended August 31, 2021, 2020, and 2019, respectively. NOTE 5 – INVESTMENTS The Company invests a portion of its excess cash balances in short-term debt securities. Investments at August 31, 2021, consisted of corporate bonds with maturities remaining of less than 12 months. The Company may also invest excess cash balances in certificates of deposits, money market accounts, government-sponsored enterprise securities, corporate bonds and/or commercial paper. The Company accounts for its investments in accordance with FASB ASC 320, Investments – Debt and Equity Securities. As of August 31, 2021, all investments were classified as held-to-maturity securities. The following tables summarize the Company’s short-term investments as of August 31, 2021, and 2020: Schedule of short term investment August 31, 2021 (in thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Commercial notes (due within one year) $ 86,620 $ – $ ( 136 ) $ 86,484 Total $ 86,620 $ – $ ( 136 ) $ 86,484 August 31, 2020 (in thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Commercial notes (due within one year) $ 66,804 $ – $ ( 61 ) $ 66,743 Total $ 66,804 $ – $ ( 61 ) $ 66,743 F- 21 NOTE 6 – CONTRACTS PAYABLE DILIsym Acquisition Liabilities: On June 1, 2017, we acquired DILIsym. The agreement provided for a working capital adjustment, an eighteen-month $1.0 million holdback provision against certain representations and warranties, and an earnout agreement of up to an additional $5.0 million in earnout payments based on earnings over three years following acquisition. The earnout liability has been recorded at an estimated fair value. Payments under the earnout liability started in fiscal year 2019. In September 2018, $1.6 million was paid out under the first earnout payment, a second earnout payment was made in August 2019 in the amount of $1.7 million. The final payment of $1.8 million was paid in August 2020. In addition, no claims were made against the holdback and the $1.0 million holdback provision was released eighteen months after June 1, 2017. Lixoft Acquisition Liabilities : On April 1, 2020, the Company acquired Lixoft. The agreement provided for a 24-month $2.0 million holdback provision against certain representations and warrantees, comprised of $1.3 million of cash and shares of stock valued at $666 thousand issued at the date of the Agreement. In addition, based on a revenue growth formula for the two years subsequent to April 1, 2020, the agreement calls for earnout payments up to $5.5 million (two thirds cash and one-third newly issued, unregistered shares of the Company’s common stock). The former shareholders can earn up to $2.0 million the first year and $3.5 million in year two. In June 2021, $2.0 million was paid to former Lixoft shareholder under the first earnout payment, which was comprised of $1.3 million of cash and $666 thousand worth of common stock. As of August 31, 2021, and 2020 the following liabilities have been recorded: Schedule of Liabilities (in thousands) August 31, 2021 August 31, 2020 Holdback Liability $ 1,333 $ 1,333 Earnout Liability 3,217 4,731 Subtotal $ 4,550 $ 6,064 Less: Current Portion 4,550 2,000 Long-Term $ – $ 4,064 NOTE 7 – COMMITMENTS AND CONTINGENCIES Leases Our corporate headquarters is located in Lancaster, California, where we lease 9,255 square feet of office space. The term of the lease extends to January 31, 2026 and the base rent is approximately $17 thousand per month. The lease agreement gives the Company the right, upon 180 days’ prior notice, to opt out of all or part of the last four years of the term, with no penalty. We lease 12,623 square feet of office space in Buffalo, New York. The initial five-year lease term expired in October 2018; and was renewed for a three-year option, extending it to November 2021 at a base rent of approximately $16 thousand per month. On August 3, 2021, a new lease agreement was signed for a different property for a five-year term at a base rent of approximately $7 thousand per month with an annual 2% increase, and with two, five-year renewal options. Due to ongoing construction, the Company has not yet moved into the new property but anticipates doing so and commencing the lease term no later than November 2021. We lease approximately 2,700 square feet of space in Research Triangle Park, North Carolina. The initial three-year term was due to expire in October 2020. An amendment to the initial lease became effective on April 1, 2020, which added 686 square feet and extended the term of the lease to September 30, 2023. The new base rent is approximately $8 thousand per month with an annual 3% increase. F- 22 We lease approximately 2,300 square feet of office space in Paris, France. As of April 1, 2020, the lease agreement had minimum payments equaling approximately $288 thousand. The lease is for a 9-year term, with an option to terminate every 3 years, and expires in November of 2024. The base rent is $16 thousand per quarter (approximately $5.3 thousand per month) and can be adjusted each December based on a consumer price index. Rent expense, including common area maintenance fees for the years ended August 31, 2021, 2020 and 2019 was $ 655 thousand, $ 644 thousand and $ 584 thousand, respectively. Lease liability maturities as of August 31, 2021, were as follows: Future minimum lease payments (in thousands) Years Ending August 31, Amount 2022 $ 422 2023 375 2024 275 2025 211 2026 83 Total undiscounted liabilities 1,366 Less: imputed interest ( 88 ) Total future minimum lease payments $ 1,278 Line of Credit On March 31, 2020, the Company entered into a Credit Agreement with Wells Fargo Bank, N.A. The Credit Agreement, has provided the Company with a credit facility of $ 3,500,000 through April 15, 2022 . As of August 31, 2021, there were no amounts drawn against the line of credit. Interest accrues daily at the bank’s base rate. The base rate is the rate equal to the highest of (i) the Prime Rate in effect, (ii) 1.5% above Daily One Month LIBOR, and (iii) the Federal Funds Rate plus 1.5%. The rate as of August 31, 2021, was 3.25%. Under the terms of the agreement the borrower is to maintain a zero balance under this line of credit for a period of thirty consecutive days during each 12-month period commencing March 31, 2020. The Credit Agreement is collateralized by the assets of the Simulations Plus Division and is subject to certain financial covenants. Employment Agreements In the normal course of business, the Company has entered into employment agreements with certain of its key management personnel that may require compensation payments upon termination. License Agreement The Company had a royalty agreement with Dassault Systèmes Americas Corp. for access to their Metabolite Database for developing our Metabolite Module within ADMET Predictor. The module was renamed the Metabolism Module when we released ADMET Predictor version 6 on April 19, 2012. Under this agreement, we paid a royalty of 25% of revenue derived from the sale of the Metabolism/Metabolite module. This agreement was renegotiated, and the Company does not bear any royalty obligations towards Dassault Systèmes Americas Corp. effective June 30, 2019. In addition, the license agreement terminated on September 5, 2020. Under this agreement for the years ended August 31, 2021, 2020 and 2019 we incurred royalty expense (benefit) of $ 0 , $( 26 ) thousand and $ 196 thousand, respectively. We have not experienced any adverse impact on revenue since terminating the license agreement. In addition, the Company has developed a database to replace the Metabolite Database, which was completed at the end of fiscal year 2021. Litigation We are not a party to any legal proceedings and are not aware of any pending legal proceedings of any kind. F- 23 NOTE 8 – SHAREHOLDERS' EQUITY Shares Outstanding Shares of common stock outstanding for the years ended August 31, 2021, 2020 and 2019 were as follows: August 31, 2021 2020 2019 Common stock outstanding, beginning of year 19,923,277 17,591,834 17,416,445 Common stock issued during the year 218,244 2,331,443 175,389 Common stock outstanding, end of year 20,141,521 19,923,277 17,591,834 Dividends The Company’s Board of Directors declared cash dividends during the years ended August 31, 2021, and 2020. The details of dividends paid are in the following tables: Schedule of dividends declared and paid (in thousands, except dividend per share) Fiscal Year 2021 Record Date Distribution Date Number of Shares Outstanding on Record Date Dividend per Share Total Amount 10/26/2020 11/02/2020 19,924 $ 0.06 $ 1,195 1/25/2021 2/01/2021 20,010 $ 0.06 1,201 4/26/2021 5/03/2021 20,115 $ 0.06 1,207 7/26/2021 8/02/2021 20,139 $ 0.06 1,208 Total $ 4,811 (in thousands, except dividend per share) Fiscal Year 2020 Record Date Distribution Date Number of Shares Outstanding on Record Date Dividend per Share Total Amount 10/25/2019 11/01/2019 17,606 $ 0.06 $ 1,056 1/27/2020 2/03/2020 17,646 $ 0.06 1,059 4/24/2020 5/01/2020 17,769 $ 0.06 1,066 7/27/2020 8/03/2020 17,820 $ 0.06 1,069 Total $ 4,250 F- 24 Stock Option Plans On February 23, 2007, the Board of Directors adopted, and the shareholders approved, the 2007 Stock Option Plan under which a total of 1,000,000 shares of common stock had been reserved for issuance. On February 25, 2014 the shareholders approved an additional 1,000,000 shares increasing the total number of shares that may be granted under the Option Plan to 2,000,000. This plan terminated in February 2017 by its term. On December 23, 2016 the Board of Directors adopted, and on February 23, 2017 the shareholders approved, the 2017 Equity Incentive Plan under which a total of 1,000,000 shares of common stock has been reserved for issuance. This plan will terminate in December 2026. Effective April 9, 2021, the Board of Directors approved, subject to shareholder approval, the adoption of a new 2021 Equity Incentive Plan (the “2021 Plan”) under which 1.3 million shares are reserved for issuance. The 2021 Plan, which was submitted for shareholder approval at our 2021 Special Meeting of Shareholders held on June 23, 2021, was approved by the shareholders. As a result, the 2021 Plan became effective as of April 9, 2021, and the Company may issue equity awards to permitted recipients thereunder. The maximum contractual life of the plan is ten years. As of August 31, 2021, employees and directors held Qualified Incentive Stock Options (ISOs) and Non-Qualified Stock Options (“NQSOs”) to purchase 1.2 million shares of common stock at exercise prices ranging from $6.85 to $66.14 per share. The following tables summarize information about stock options: Schedule of stock option activity (in thousands, except per share and weighted-average amounts) Transactions During Fiscal Year 2021 Number of Options Weighted-Average Exercise Price Per Share Weighted-Average Remaining Contractual Life Outstanding, August 31, 2020 1,224 $ 17.76 6.79 Granted 226 57.60 Exercised ( 204 ) 12.53 Canceled/Forfeited ( 62 ) 29.83 Outstanding, August 31, 2021 1,184 $ 25.63 6.47 Vested and Exercisable, August 31, 2021 619 $ 13.36 4.95 Vested and Expected to Vest, August 31, 2021 1,173 $ 25.69 6.47 (in thousands, except per share and weighted-average amounts) Transactions During Fiscal Year 2020 Number of Options Weighted-Average Exercise Price Per Share Weighted-Average Remaining Contractual Life Outstanding, August 31, 2019 1,163 $ 12.63 7.13 Granted 223 39.23 Exercised ( 121 ) 9.29 Canceled/Forfeited ( 41 ) 14.19 Outstanding, August 31, 2020 1,224 $ 17.76 6.79 Vested and Exercisable, August 31, 2020 596 $ 10.69 5.59 Vested and Expected to Vest, August 31, 2020 1,194 $ 17.75 6.77 F- 25 (in thousands, except per share and weighted-average amounts) Transactions During Fiscal Year 2019 Number of Options Weighted-Average Exercise Price Per Share Weighted-Average Remaining Contractual Life Outstanding, August 31, 2018 1,135 $ 9.44 7.31 Granted 264 22.78 Exercised ( 167 ) 7.15 Canceled/Forfeited ( 69 ) 12.17 Outstanding, August 31, 2019 1,163 $ 12.63 7.13 Vested and Exercisable, August 31, 2019 515 $ 8.57 6.09 Vested and Expected to Vest, August 31, 2019 1,102 $ 12.39 7.07 The following table summarizes the Intrinsic Value of options outstanding and options exercisable: Intrinsic value of options outstanding and options exercisable (in thousands) Intrinsic Value of Options Outstanding Intrinsic Value of Options Exercisable Intrinsic Value of Options Exercised Fiscal Year 2019 $ 27,313 $ 14,195 $ 3,224 Fiscal Year 2020 $ 51,273 $ 29,151 $ 4,086 Fiscal Year 2021 $ 25,705 $ 19,373 $ 11,554 The weighted-average remaining contractual life of options outstanding issued under the Plans, for both ISOs and NQSOs, was 6.47 years at August 31, 2021. The total fair value of non-vested stock options as of August 31, 2021, was $ 6.3 million and is amortizable over a weighted average period of 3.43 years. The fair value of these options was estimated at the date of grant using the Black-Scholes option-pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which do not have vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. The following table summarizes the fair value of the options, including both ISOs and NQSOs, granted during the current fiscal year 2021 and fiscal year 2020: Schedule of fair value of options (in thousands, except prices) Fiscal Year 2021 Fiscal Year 2020 Estimated fair value of awards granted $ 5,092 $ 2,997 Unvested Forfeiture Rate 0 % 0 % Weighted average grant price $ 57.60 $ 39.23 Weighted average market price $ 57.60 $ 39.23 Weighted average volatility 40.49 % 33.56 % Weighted average risk-free rate 0.64 % 1.39 % Weighted average dividend yield 0.42 % 0.65 % Weighted average expected life 6.63 years 6.67 years F- 26 The exercise prices for the options outstanding at August 31, 2021, ranged from $6.85 to $66.14, and the information relating to these options is as follows: (in thousands except prices) Schedule of options by exercise price range Exercise Price Awards Outstanding Awards Exercisable Low High Quantity Weighted Average Remaining Contractual Life Weighted Average Exercise Price Quantity Weighted Average Remaining Contractual Life Weighted Average Exercise Price $ 6.85 $ 8.28 144 3.00 years $ 6.85 144 3.00 years $ 6.85 $ 8.29 $ 10.03 183 4.52 years $ 9.72 183 4.52 years $ 9.72 $ 10.04 $ 12.20 221 5.48 years $ 10.05 162 5.48 years $ 10.05 $ 12.21 $ 28.16 184 6.66 years $ 20.37 66 5.88 years $ 20.25 $ 28.17 $ 57.04 230 8.40 years $ 37.22 51 8.08 years $ 34.19 $ 57.05 $ 66.14 222 9.17 years $ 58.77 13 8.88 years $ 61.84 1,184 6.47 years $ 25.63 619 4.95 years $ 13.36 During the fiscal years ended August 31, 2021, 2020, and 2019, we issued 5,620, 7,205 and 8,686 shares of stock valued at $ 345 thousand, $ 290 thousand, and $ 212 thousand, respectively, to our non-management directors as compensation for board-related duties. The balance of our par value common stock and additional paid-in capital as of August 31, 2021, was $ 10 thousand and $ 133.4 million, respectively, and the balance of our par value common stock and additional paid-in capital as of August 31, 2020 was $ 10 thousand and $ 128.5 million, respectively. NOTE 9 – INCOME TAXES We utilize FASB 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. F- 27 The components of the income tax provision for the years ended August 31, 2021, 2020 and 2019 were as follows: Components of the income tax provision (in thousands) 2021 2020 2019 Current Federal $ 1,315 $ 2,098 $ 1,795 State 450 478 426 Foreign 166 39 51 Total current tax expense 1,931 2,615 2,272 Deferred Federal ( 379 ) ( 428 ) ( 141 ) State ( 249 ) ( 132 ) ( 158 ) Total deferred federal and state ( 628 ) ( 560 ) ( 299 ) Total $ 1,303 $ 2,055 $ 1,973 A reconciliation of the expected income tax computed using the federal statutory income tax rate to the Company's effective income tax rate is as follows for the years ended August 31, 2021, 2020 and 2019: Effective income tax rate 2021 2020 2019 Income tax computed at federal statutory tax rate 21.0 % 21.0 % 21.0 % State taxes, net of federal benefit 2.0 4.1 4.1 Meals & entertainment – 0.1 0.1 Stock based compensation ( 6.8 ) ( 1.2 ) ( 2.6 ) Other permanent differences ( 0.3 ) ( 0.3 ) ( 0.7 ) Research and development credit ( 1.6 ) ( 2.8 ) ( 2.3 ) Foreign tax related differences ( 2.6 ) ( 1.4 ) – Research & credit adjustments to expense 0.2 0.3 – Change in prior year estimated taxes ( 0.1 ) ( 1.8 ) ( 0.9 ) Total 11.8 % 18.0 % 18.7 % F- 28 Significant components of the Company's deferred tax assets and liabilities for income taxes for the years ended August 31, 2021, and 2020 are as follows: Components of company deferred tax assets and liabilities (in thousands) 2021 2020 Deferred tax assets: Accrued payroll and other expenses $ 586 $ 402 Deferred revenue 102 7 Capitalized merger costs 703 742 Intellectual property 7 8 Research and development credits 66 – State taxes 72 100 Allowance for doubtful accounts 20 13 State tax deferred 80 125 Total deferred tax assets 1,636 1,397 Less: Valuation allowance – – Deferred tax asset 1,636 1,397 Deferred tax liabilities: Property and equipment ( 83 ) ( 82 ) State tax deferred ( 26 ) ( 19 ) Intellectual property ( 1,456 ) ( 1,876 ) Capitalized computer software development costs ( 1,797 ) ( 1,774 ) Total deferred tax liabilities ( 3,362 ) ( 3,751 ) Net deferred tax liabilities $ ( 1,726 ) $ ( 2,354 ) We follow guidance issued by the FASB with regard to our accounting for uncertainty in income taxes recognized in the financial statements. Such guidance prescribes a recognition threshold of more likely than not and a measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In making this assessment, a company must determine whether it is more likely than not that a tax position will be sustained upon examination, based solely on the technical merits of the position and must assume that the tax position will be examined by taxing authorities. Our policy is to include interest and penalties related to income tax expense. Interest and penalties were immaterial for fiscal years 2021, 2020, and 2019, respectively. We file income tax returns with the IRS and various state jurisdictions as well as with the countries of India and France. Our federal income tax returns for fiscal year 2018 thru 2020 are open for audit, and our state tax returns for fiscal year 2017 through 2020 remain open for audit. Our review of prior year tax positions using the criteria and provisions presented in guidance issued by FASB did not result in a material impact on our financial position or results of operations. NOTE 10 – CONCENTRATIONS AND UNCERTAINTIES Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash, cash equivalents, trade accounts receivable and short-term investments. The Company holds cash and cash equivalents at banks located in California, with balances that often exceed FDIC insured limits. In addition, we hold cash at a bank in France that is not FDIC-insured. Historically, the Company has not experienced any losses in such accounts. However, we are investigating alternative way to minimize our exposure to such risk. While the Company may be exposed to credit losses due to the nonperformance of its counterparties, the Company does not expect the settlement of these transactions to have a material effect on its results of operations, cash flows or financial condition. The Company maintains cash at financial institutions that may, at times, exceed federally insured limits. F- 29 Revenue concentration shows that international sales accounted for 31 %, 29 % and 34 % of revenue for the years ended August 31, 2021, 2020 and 2019, respectively. Three customers accounted for 11 %, 4 % and 3 % of revenue for fiscal year 2021. Three customers accounted for 9 %, 7 % (a dealer account in Japan representing various customers), and 7 % of revenue for fiscal year 2020. Three customers accounted for 8 %, 8 % (a dealer account in Japan representing various customers), and 7 % of revenue for fiscal year 2019. Accounts receivable concentrations show that three customers each comprised between 5 % and 16 % of accounts receivable as of August 31, 2021, respectively; two customers comprised 13 % and 10 % of accounts receivable as of August 31, 2020, respectively. We operate in the computer software industry, which is highly competitive and changes rapidly. Our operating results could be significantly affected by our ability to develop new products and find new distribution channels for new and existing products. The majority of our customers are in the pharmaceutical industry. During economic downturns, we have seen consolidations in the pharmaceutical industry. The extent to which the COVID-19 pandemic impacts our business going forward will depend on numerous factors we cannot reliably predict, including the duration and scope of the pandemic; businesses and individuals' actions in response to the pandemic; and the impact on economic activity including the possibility of recession or financial market instability. These factors may adversely impact consumer, business, and government spending as well as customers' ability to pay for our products and services on an ongoing basis . As a result, our growth rate could be affected by consolidation and downsizing in the pharmaceutical industry. NOTE 11 – SEGMENT AND GEOGRAPHIC REPORTING We account for segments and geographic revenues in accordance with guidance issued by the FASB. Our reportable segments are strategic business units that offer different products and services. Results for each divisional segment and consolidated results are as follows for the years ended August 31, 2021, 2020 and 2019: (in thousands) Year ended August 31, 2021 Simulations Plus Cognigen DILIsym Lixoft Eliminations Total Revenues $ 25,142 $ 10,546 $ 6,115 $ 4,663 $ – $ 46,466 Income (loss) from operations $ 9,286 $ 376 $ ( 112 ) $ 1,703 $ – $ 11,253 Total assets $ 168,923 $ 13,121 $ 14,884 $ 19,344 $ ( 36,294 ) $ 179,978 Goodwill $ – $ 4,789 $ 5,598 $ 2,534 $ – $ 12,921 Capital expenditures $ 1,212 $ 279 $ 18 $ 118 $ – $ 1,627 Capitalized software costs $ 2,289 $ 12 $ 170 $ 478 $ – $ 2,949 Depreciation and amortization $ 1,885 $ 347 $ 590 $ 768 $ – $ 3,590 (in thousands) Year ended August 31, 2020 Simulations Plus Cognigen DILIsym Lixoft* Eliminations Total Revenues $ 21,961 $ 11,105 $ 6,948 $ 1,575 $ – $ 41,589 Income from operations $ 7,374 $ 1,770 $ 1,744 $ 717 $ – $ 11,605 Total assets $ 162,807 $ 11,654 $ 14,084 $ 19,972 $ ( 40,095 ) $ 168,422 Goodwill $ – $ 4,789 $ 5,598 $ 2,534 $ – $ 12,921 Capital expenditures $ 111 $ 87 $ 31 $ 2 $ – $ 231 Capitalized software costs $ 2,029 $ 40 $ 124 $ 160 $ – $ 2,353 Depreciation and amortization $ 1,713 $ 349 $ 600 $ 300 $ – $ 2,962 * As Lixoft was purchased on April 1, 2020, five months of activity is reflected for fiscal year 2020. F- 30 (in thousands) Year ended August 31, 2019 Simulations Plus Cognigen DILIsym Eliminations Total Revenues $ 19,584 $ 9,321 $ 5,065 $ – $ 33,970 Income from operations $ 7,751 $ 1,481 $ 1,416 $ – $ 10,648 Total assets $ 38,535 $ 11,196 $ 13,168 $ ( 17,702 ) $ 45,197 Goodwill $ – $ 4,789 $ 5,598 $ – $ 10,387 Capital expenditures $ 39 $ 79 $ 20 $ – $ 138 Capitalized software costs $ 1,482 $ 114 $ 172 $ – $ 1,768 Depreciation and amortization $ 1,806 $ 364 $ 580 $ – $ 2,750 Results for each business unit segment and consolidated results for the years ended August 31, 2021, 2020 and 2019 were as follows: (in thousands) Year ended August 31, 2021 Software Services Total Revenues $ 27,670 $ 18,796 $ 46,466 Cost of revenues 3,235 7,365 10,600 Gross profit $ 24,435 $ 11,431 $ 35,866 Gross margin 88 % 61 % 77 % Our software business and services business represented 60% and 40% of total revenue, respectively, for the year ended August 31, 2021. (in thousands) Year ended August 31, 2020 Software Services Total Revenues $ 21,587 $ 20,002 $ 41,589 Cost of revenues 2,883 7,766 10,649 Gross profit $ 18,704 $ 12,236 $ 30,940 Gross margin 87 % 61 % 74 % Our software business and services business represented 52% and 48% of total revenue, respectively, for the 2020 fiscal year. (in thousands) Year ended August 31, 2019 Software Services Total Revenues $ 18,479 $ 15,491 $ 33,970 Cost of revenues 2,957 6,069 9,026 Gross profit $ 15,522 $ 9,422 $ 24,944 Gross margin 84 % 61 % 73 % Our software business and services business represented 54% and 46% of total revenue, respectively, for the 2019 fiscal year. F- 31 In addition, the Company allocates revenues to geographic areas based on the locations of its customers. Geographical revenues for the years ended August 31, 2021, 2020 and 2019 were as follows: (in thousands) Year ended August 31, 2021 2020 2019 $ % of total $ % of total $ % of total Americas $ 32,549 70 % $ 29,674 71 % $ 22,576 67 % EMEA 7,906 17 5,827 14 5,829 17 Asia Pacific 6,011 13 6,088 15 5,565 16 Total $ 46,466 100 % $ 41,589 100 % $ 33,970 100 % NOTE 12 – RELATED PARTY TRANSACTIONS On April 1, 2020, the Company acquired Lixoft. As part of that agreement the Company paid $ 6.7 million and issued stock with a value of $ 2.6 million to former shareholders of Lixoft, some who are currently employees of the Company. In addition, as part of the acquisition agreement the Company owes approximately $ 947 thousand of acquisition liabilities at August 31, 2021, to the former shareholders who are still employees of the Company. During the fiscal year 2021, under the terms of the agreement, the Company made payments totaling $ 2.0 million to the former shareholders of Lixoft comprised of two-thirds cash and one-third newly issued, unregistered shares of the Company’s common stock. NOTE 13 – EMPLOYEE BENEFIT PLAN We maintain a 401(k) Plan for eligible employees. We make matching contributions equal to 100% of the employee’s elective deferral, not to exceed 4% of the total employee compensation. We can also elect to make a profit-sharing contribution. We contributed $ 535 thousand, $ 456 thousand and $ 405 thousand for fiscal years 2021, 2020 and 2019, respectively. NOTE 14 – ACQUISITION On March 31, 2020, the Company entered into a Stock Purchase and Contribution Agreement (the “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 Agreement, with Lixoft becoming a wholly-owned subsidiary of the Company. We believe the combination of Simulations Plus and Lixoft provides substantial future potential based on the complementary strengths of each of the companies. Under the terms of the Agreement, as described below, 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 will pay $3,456,029 of excess working capital based on the March 31, 2020 financial statements of Lixoft. On April 1, 2020, the Company paid the former shareholders of Lixoft a total of $10.8 million, comprised of cash in the amount of $9.5 million and the issuance of 111,682 shares of the Company’s common stock valued at $3.7 million, net of adjustments and a holdback for representations and warranties (under the terms of the Agreement a price of approximately $32.15 dollars per share was used based upon the volume-weighted average closing price of the Company’s shares of common stock for the 30-consecutive-trading-day period ending two trading days prior to April 1, 2020). 9,669 shares are held in an escrow for offset for representations and warrantees. Within three business days following the two-year anniversary of March 31, 2020 (the date of the Agreement) and subject to any offsets for representations and warrantees, the Company will pay the former shareholders of Lixoft a total of $2.0 million, comprised of $1.3 million of cash and the release from an escrow shares of stock valued at $666 thousand issued at the date of the Agreement. The Agreement provides for a two-year market standoff period in which the newly issued shares may not be sold by the recipients thereof. F- 32 In addition, the agreement calls for earnout payments up to an additional $5.5 million, two-thirds cash and one-third newly issued, unregistered shares of 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 can earn up to $2.0 million the first year and $3.5 million in year two. The earnout liability has been recorded at fair value. Under the acquisition method of accounting, the total purchase price reflects Lixoft’s tangible and intangible assets and liabilities based on their estimated fair values at the date of the completion of the acquisition (April 1, 2020). The following table summarizes the preliminary allocation of the purchase price for Lixoft: Allocation of purchase price (in thousands) Assets acquired, including cash of $3,799 and accounts receivable of $629 $ 5,007 Developed technologies acquired 8,010 Estimated value of intangible assets acquired (customer lists, trade name etc.) 4,160 Estimated goodwill acquired 2,534 Liabilities assumed ( 1,118 ) Total consideration $ 18,593 Goodwill has been provided in the transaction based on estimates of future earnings of this subsidiary including anticipated synergies associated with the positioning of the combined company as a leader in model-based drug development. Consolidated Supplemental Pro Forma Information The following unaudited consolidated supplemental pro forma information assumes that the acquisition of Lixoft took place on September 1, 2017 for the income statement years ended August 31, 2020. These amounts have been calculated after applying the Company’s accounting policies and adjusting the results of Lixoft to reflect the same expenses in the years ended August 31, 2019 and 2018. The adjustments include costs of acquisition, and amortization of intangibles and other technologies acquired during the merger, assuming the fair-value adjustments applied on September 1, 2017, together with consequential tax effects. Schedule of statement of income (Actual) (Pro forma) (Pro forma) 2021 2020* 2019 (in thousands) (Audited) (unaudited) (unaudited) Revenue $ 46,466 $ 43,970 $ 36,918 Net Income $ 9,782 $ 10,630 $ 9,250 * Balances include five months actual results for Lixoft. F- 33 NOTE 15 – UNAUDITED QUARTERLY FINANCIAL DATA The following table presents selected unaudited quarterly financial data for each full quarterly period for the years ended August 31, 2021, and 2020: (in thousands) Year ended August 31, 2021 First Second Third Fourth Quarter Quarter Quarter Quarter Revenues $ 10,701 $ 13,147 $ 12,777 $ 9,841 Gross profit $ 8,268 $ 10,236 $ 10,306 $ 7,056 Net income $ 2,479 $ 3,211 $ 3,787 $ 305 Earnings per share, basic $ 0.12 $ 0.16 $ 0.19 $ 0.02 Earnings per share, diluted $ 0.12 $ 0.15 $ 0.18 $ 0.01 (in thousands) Year ended August 31, 2020 First Second Third Fourth Quarter Quarter Quarter Quarter Revenues $ 9,401 $ 10,350 $ 12,298 $ 9,540 Gross profit $ 6,759 $ 7,683 $ 9,633 $ 6,865 Net income $ 2,058 $ 2,150 $ 2,936 $ 2,188 Earnings per share, basic $ 0.12 $ 0.12 $ 0.17 $ 0.12 Earnings per share, diluted $ 0.11 $ 0.12 $ 0.16 $ 0.11 NOTE 16 - SUBSEQUENT EVENTS Dividend Declared On Wednesday, October 13, 2021, our Board of Directors declared a quarterly cash dividend of $0.06 per share to our shareholders. The dividend in the amount of $1.2 million will be distributed on Monday, November 1, 2021, for shareholders of record as of Monday, October 25, 2021. Effective September 1, 2021, the Company merged both Cognigen Corporation and DILIsym, Services, Inc. with and into Simulations Plus, Inc. through short form mergers (the “Mergers”). To effectuate the Mergers, the Company filed Certificates of Ownership with the Secretaries of State of the states of Delaware (Cognigen’s and DILIsym’s state of incorporation) and California (the Company’s state of incorporation). Consummation of the Mergers was not subject to approval of the Company’s stockholders and did not impact the rights of the Company’s stockholders. F- 34