Home Short payment terms SIMULATIONS PLUS, INC. MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS (Form 10-K)

SIMULATIONS PLUS, INC. MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS (Form 10-K)

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The following Management's Discussion and Analysis is intended to assist the
reader in understanding our results of operations and financial condition.
Management's Discussion and Analysis is provided as a supplement to, and should
be read in conjunction with, our audited consolidated financial statements
beginning on page F-1 of this Report. This Report includes certain statements
that may be deemed to be "forward-looking statements" within the meaning of
Section 27A of the Securities Act. All statements, other than statements of
historical fact, included in this Report that address activities, events or
developments that we expect, project, believe, or anticipate will or may occur
in the future, including matters having to do with expected and future revenue,
our ability to fund our operations and repay debt, business strategies,
expansion and growth of operations and other such matters, are forward-looking
statements. These statements are based on certain assumptions and analyses made
by our management in light of its experience and its perception of historical
trends, current conditions, expected future developments, and other factors it
believes are appropriate in the circumstances. These statements are subject to a
number of assumptions, risks and uncertainties, including general economic and
business conditions, the business opportunities (or lack thereof) that may be
presented to and pursued by us, our performance on our current contracts and our
success in obtaining new contracts, our ability to attract and retain qualified
employees, and other factors, many of which are beyond our control. You are
cautioned that these forward-looking statements are not guarantees of future
performance and those actual results or developments may differ materially from
those projected in such statements.

Management Overview

Fiscal 2022 Financial Highlights:

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

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

•Income from operations increased by $3.7 million, or 33%, to $14.9 million for
the year ended August 31, 2022, from $11.3 million for the year ended August 31,
2021
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•Net income increased by $2.7 million, or 28% to $12.5 million for the year
ended August 31, 2022, compared to $9.8 million for the year ended August 31,
2021

• Diluted earnings per share increased by $0.13i.e. 28% to $0.60 for the year ended August 31, 2022compared to $0.47 for the year ended August 31, 2021

Upcoming strategy:

• Continue to pursue collaborations with customers to support the expansion of our portfolio of products and services

• Continue our aggressive marketing campaigns and expand our use of social media and digital advertising

• Continue to develop our sales force and distribution channels

• Continue to recruit scientific personnel to support the innovation of our products and services

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

Fiscal year 2022 was yet another record year for the Company. We believe the
continued growth of our pharmaceutical software and services business is the
result of steadily increasing adoption and awareness of the value of simulation
and modeling software tools across the pharmaceutical industry, the continuing
push by regulatory agencies for increased use of modeling and simulation, and
the expertise we offer as consultants to assist companies involved in the
research and development of new medicines. We continue to be a leader in the
fast-growing global biosimulation market.

Operating results

Comparison of fiscal year 2022 and fiscal year 2021

(in thousands)                                 Year ended August 31
                                                2022              2021        $ Change      % Change
Revenue                                   $    53,906          $ 46,466      $  7,440           16  %
Cost of revenue                                10,822            10,600           222            2  %
Gross profit                                   43,084            35,866         7,218           20  %
Research and development                        3,208             4,047          (839)         (21) %
Selling, general, and administrative           24,965            20,566         4,399           21  %
Total operating expenses                       28,173            24,613         3,560           14  %
Income from operations                         14,911            11,253         3,658           33  %
Other income (expense), net                       204              (168)          372         (221) %
Income before income taxes                     15,115            11,085         4,030           36  %
Provision for income taxes                     (2,632)           (1,303)       (1,329)         102  %
Net income                                $    12,483          $  9,782      $  2,701           28  %


Revenues

Revenues increased by $7.4 million or 16%, to $53.9 million for the year ended
August 31, 2022, compared to $46.5 million for the year ended August 31, 2021.
This increase is primarily due to a $5.0 million, or 18%, increase in
software-related revenue and $2.5 million, or 13%, increase in service-related
revenue when comparing the years ended August 31, 2022, and 2021.

Revenue cost

Cost of revenues remained relatively consistent with a slight increase of $0.2
million, or 2%, for the year ended August 31, 2022, compared to the year ended
August 31, 2021. The increase is primarily due to a $0.4 million, or 5%,
increase in service-related cost of revenue, partially offset by a decrease of
$0.2 million, or 5%, in software-related cost of revenue when compared to the
year ended August 31, 2021.
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Gross profit

Gross profit increased by $7.2 million, or 20%, to $43.1 million for the year
ended August 31, 2022, compared to $35.9 million, for the year ended August 31,
2021. The higher gross profit is due to an increase in gross profit for our
software business of $5.1 million, or 21%, and an increase in gross profit for
our services business of $2.1 million, or 18%.

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

Research and development

We incurred $6.4 million of research and development costs during the year ended
August 31, 2022. Of this amount, $3.2 million was capitalized as a part of
capitalized software development costs and $3.2 million was expensed. We
incurred $6.9 million of research and development costs during year ended
August 31, 2021. Of this amount, $2.9 million was capitalized and $4.0 million
was expensed.

Selling, general and administrative expenses

Selling, general, and administrative ("SG&A") expenses increased by $4.4
million, or 21%, to $25.0 million for the year ended August 31, 2022, compared
to $20.6 million for the year ended August 31, 2021. The increase was primarily
due to an increase in personnel costs of $2.9 million, an increase in insurance
costs of $0.6 million related to cyber and D&O premiums, and an increase in
travel costs of $0.4 million.

As a percentage of revenue, SG&A expenses were 46% for the year ended August 31, 2022compared to 44% for the year ended August 31, 2021.

Other income/expenses

Total other income was $0.2 million for the year ended August 31, 2022, compared
to total other expense of $0.2 million for the year ended August 31, 2021. The
increase of $0.4 million is primarily due to an increase in net interest income
of $0.5 million and a decrease in the value of contingent consideration of $0.2
million, partially offset by an increase in the loss on currency exchange of
$0.4 million.

Provision for income taxes

The provision for income taxes was $2.6 million for the year ended August 31,
2022, compared to $1.3 million for the year ended August 31, 2021. Our effective
tax rate increased by 5% to 17% for the year ended August 31, 2022, from 12% for
the year ended August 31, 2021. The effective rate differs from anticipated
combined statutory rates of 25% due to R&D credits, foreign-tax-related items
(tax credits and foreign-deemed intangible income deductions), and the tax
effect for stock compensation and disqualifying dispositions. During the year
ended August 31, 2021, as a result of an increase in the Company's stock price,
a number of employees exercised and sold ISOs granted to them under their
corporate incentive plans, creating corporate tax deductions that lowered the
effective tax rate, whereas disqualifying dispositions were not as prevalent
during the year ended August 31, 2022.
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Comparison of fiscal year 2021 and fiscal year 2020

(in thousands)                                 Year ended August 31
                                                2021              2020        $ Change      % Change
Revenue                                   $    46,466          $ 41,589      $  4,877           12  %
Cost of revenue                                10,600            10,649           (49)           -  %
Gross profit                                   35,866            30,940         4,926           16  %
Research and development                        4,047             2,975         1,072           36  %
Selling, general, and administrative           20,566            16,360         4,206           26  %
Total operating expenses                       24,613            19,335         5,278           27  %
Income from operations                         11,253            11,605          (352)          (3) %
Other income (expense), net                      (168)             (218)           50          (23) %
Income before income taxes                     11,085            11,387          (302)          (3) %
Provision for income taxes                     (1,303)           (2,055)          752          (37) %
Net income                                $     9,782          $  9,332      $    450            5  %


Revenues

Revenues increased by $4.9 million, or 12%, to $46.5 million for the year ended
August 31, 2021, compared to $41.6 million for the year ended August 31, 2020.
This increase is primarily due to a $6.1 million, or 28%, increase in
software-related revenue, offset by a $1.2 million, or 6%, decrease in
service-related revenue when comparing the years ended August 31, 2021, and
2020.

Revenue cost

Cost of revenues remained relatively consistent for the year ended August 31,
2021, and 2020. The decrease is primarily due to lower contract research
organization fees of $0.2 million, lower tech-support costs of $0.1 million,
lower labor-related costs of $0.1 million, and lower training and travel costs
of $0.1 million, partially offset by higher amortization of software development
costs of $0.5 million related to the purchase of Lixoft.

A significant portion of cost of revenues for pharmaceutical software products
is the systematic amortization of capitalized software development costs, which
is a fixed cost rather than a variable cost related to revenues. The
amortization cost of $2.8 million for the year ended August 31, 2021, increased
by $0.5 million compared to fiscal year 2020.

Cost of revenues as a percentage of revenue was 22.8% for the year ended August
31, 2021, compared to 25.6% for the year ended August 31, 2020, resulting in a
decrease of 2.8%.

Gross profit

Gross profit increased $4.9 million, or 16%, to $35.9 million for the year ended
August 31, 2021, compared to $30.9 million for the year ended August 31, 2020.
The increase is due to an increase in gross profit for the software business of
$5.7 million, or 31%, offset by a $0.8 million, or 7%, decrease in gross profit
for the services business.

The overall gross margin percentage was 77% and 74% for the year ended August 31, 2021and 2020, respectively.

Research and development

We incurred $6.9 million of research and development costs during year ended
August 31, 2021. Of this amount, $2.9 million was capitalized and $4.0 million
was expensed. We incurred $5.3 million of research and development costs during
year ended August 31, 2020. Of this amount, $2.3 million was capitalized and
$3.0 million was expensed. The year-over-year increase of $1.6 million, or 30%,
in research and development expenditures was primarily due to increased costs in
the Simulations Plus, DILIsym, and Lixoft divisions.
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Selling, general and administrative expenses

SG&A expenses increased by $4.2 million, or 26% to $20.6 million for the year
ended August 31, 2021, compared to $16.4 million for the year ended August 31,
2020. The increase was primarily due to a $4.0 million increase in personnel
costs.

As a percentage of revenue, selling, general and administrative expenses were 44% for the year ended August 31, 2021compared to 39% for the year ended
August 31, 2020.

Other income/expenses

The total of other expenses was $0.2 million for the year ended August 31, 2021compared to $0.2 million for the year ended August 31, 2020. There was an increase in the foreign exchange gain of $0.2 million and an increase in interest income of $0.2 millionoffset by an increase in the value of the contingent consideration of $0.3 million.

Provision for income taxes

The provision for income taxes was $1.3 million for the year ended August 31,
2021, compared to $2.1 million for the year ended August 31, 2020. Our effective
tax rate decreased by 6% to 12% from 18% for the same periods.

The effective rate differs from anticipated combined statutory rates of 25% due
to R&D credits, foreign-tax-related items (tax credits and foreign-deemed
intangible income deductions), and the tax effect of stock-compensation-related
items for stock compensation and disqualifying dispositions. During the years
ended August 31, 2021, and 2020, as a result of an increase in stock prices, a
number of employees exercised and sold incentive stock options granted to them
under their corporate incentive plans, creating corporate tax deductions that
lowered the effective tax rate

Operating results by business unit

Comparison of fiscal year 2022 and fiscal year 2021

Revenues

(in thousands)                         Twelve Months Ended August 31,
                            2022               2021        Change ($)       Change (%)
Software             $    32,642            $ 27,670      $     4,972             18  %
Services                  21,264              18,796            2,468             13  %
Total                $    53,906            $ 46,466      $     7,440             16  %


Cost of Revenues

(in thousands)                          Twelve Months Ended August 31,
                             2022                2021        Change ($)       Change (%)
Software             $      3,060             $  3,235      $      (175)            (5) %
Services                    7,762                7,365              397              5  %
Total                $     10,822             $ 10,600      $       222              2  %



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Gross Profit

(in thousands)                         Twelve Months Ended August 31,
                            2022               2021        Change ($)       Change (%)
Software             $    29,582            $ 24,435      $     5,147             21  %
Services                  13,502              11,431            2,071             18  %
Total                $    43,084            $ 35,866      $     7,218             20  %


Software Business

For the year ended August 31, 2022, the revenue increase of $5.0 million, or
18%, compared to the year ended August 31, 2021, was primarily due to higher
revenues from GastroPlus of $2.4 million and an increase in revenue from
MonolixSuite Software of $1.6 million. Cost of revenue decreased by $0.2 million
or 5% during the same periods, and gross profit increased by $5.1 million, or
21%, primarily due to the increase in revenue.

service company

For the year ended August 31, 2022, the revenue increase of $2.5 million, or
13%, compared to the year ended August 31, 2021, was primarily due to higher
revenues from PBPK of $1.4 million and an increase in revenues from QSP/QST of
$0.5 million. Cost of revenue increased by $0.4 million, or 5%. Gross profit
increased by $2.1 million, or 18%, for the same periods.

Comparison of fiscal year 2021 and fiscal year 2020

Revenues

(in thousands)                         Twelve Months Ended August 31,
                            2021              2020*        Change ($)       Change (%)
Software             $    27,670            $ 21,587      $     6,083             28  %
Services                  18,796              20,002           (1,206)            (6) %
Total                $    46,466            $ 41,589      $     4,877             12  %


*As Lixoft was acquired on April 1, 2020, five months of activity is reflected
for fiscal year 2020.

Cost of Revenues

(in thousands)                          Twelve Months Ended August 31,
                              2021               2020*        Change ($)      Change (%)
Software             $      3,235              $  2,883      $      352             12  %
Services                    7,365                 7,766            (401)            (5) %
Total                $     10,600              $ 10,649      $      (49)             -  %

*Lixoft having been acquired on April 1, 2020five months of activity are counted for the 2020 financial year.

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Gross Profit

(in thousands)                         Twelve Months Ended August 31,
                            2021              2020*        Change ($)       Change (%)
Software             $    24,435            $ 18,704      $     5,731             31  %
Services                  11,431              12,236             (805)            (7) %
Total                $    35,866            $ 30,940      $     4,926             16  %

*Lixoft having been acquired on April 1, 2020five months of activity are counted for the 2020 financial year.

Software Business

For the year ended August 31, 2021, the revenue increase of $6.1 million, or
28%, compared to the year ended August 31, 2020, was primarily due to increases
in revenue from MonolixSuite of $2.9 million, an increase from GastroPlus
revenue of $2.2 million and an increase from ADMET Predictor Software of $0.8
million. The cost of revenue increased by $0.4 million, or 12%. Gross profit
increased by $5.7 million, or 31%, primarily due to the increase in revenue.

service company

For the year ended August 31, 2021, the revenue decrease of $1.2 million, or 6%,
compared to the year ended August 31, 2020, was primarily due to a decrease from
other services revenue of $1.4 million, a decrease from QSP/QST revenue of $1.0
million, partially offset by an increase from PKPD revenue of $1.1 million. Cost
of revenue decreased by $0.4 million, or 5%. Gross profit decreased by $0.8
million, or 7%, for the same periods.

CASH AND CAPITAL RESOURCES

As of August 31, 2022, the Company had $51.6 million in cash and cash
equivalents, $76.7 million in short-term investments and working capital of
$139.1 million. Our principal sources of capital have been cash flows from our
operations. We have achieved continuous positive operating cash flow over the
last thirteen fiscal years.

On March 31, 2020, the Company entered into a Credit Agreement with Wells Fargo
Bank, N.A. The Credit Agreement provided us with a credit facility of $3.5
million through April 15, 2022 (the "Termination Date"), on which date the
Credit Agreement terminated in accordance with its terms. As a result, we can no
longer draw down against the line of credit. We chose not to renew or pursue an
alternative credit facility as we do not foresee a need to utilize such credit
facility within the next twelve months. As of the Termination Date, there were
no amounts drawn against the line of credit.

On March 31, 2020, we entered into a Share Purchase and Contribution Agreement
(the "SPCA") with Lixoft. Under the terms of the SPCA, we agreed to pay the
former shareholders of Lixoft total consideration of up to $16.5 million,
consisting of two-thirds cash and one-third newly issued, unregistered shares of
our common stock. At closing, we paid the former shareholders of Lixoft a total
of $10.8 million, comprised of cash in the amount of $9.5 million and the
issuance of 111,682 shares of our common stock valued at $3.7 million, net of
adjustments and a $2.0 million holdback for representations and warranties. In
addition, we paid $3.5 million of excess working capital based on the March 31,
2020, financial statements of Lixoft. In addition, the SPCA called for earnout
payments of up to an additional $5.5 million, payable in two-thirds cash and
one-third newly issued, unregistered shares of our common stock, based on a
revenue-growth formula each year for the two years subsequent to April 1, 2020.
The former shareholders could earn up to $2.0 million the first year and $3.5
million in year two. In June 2021, $2.0 million was paid out under the first
earnout payment, which was comprised of $1.3 million of cash and shares of our
common stock valued at $0.7 million. In April 2022, we released from escrow and
distributed the $2.0 million holdback consideration, consisting of $1.3 million
in cash and shares of our common stock valued at $0.7 million (amounting to an
aggregate of 20,326 unregistered shares of our common stock), to the former
shareholders of Lixoft. In May 2022, $3.5 million was paid out under the second
earnout payment, which was comprised of $2.3 million of cash and shares of our
common stock valued at $1.2 million (amounting to an aggregate of 23,825
unregistered shares of our common stock), to the former shareholders of Lixoft
in accordance with the SPCA.

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We believe that our existing capital and anticipated funds from operations will
be sufficient to meet our anticipated cash needs for working capital and capital
expenditures for the foreseeable future. Thereafter, if cash generated from
operations is insufficient to satisfy our capital requirements, we may have to
sell additional equity or debt securities or obtain a new credit facility. In
the event such financing is needed in the future, there can be no assurance that
such financing will be available to us, or, if available, that it will be in
amounts and on terms acceptable to us. If cash flows from operations became
insufficient to continue operations at the current level, and if no additional
financing was obtained, then management would restructure the Company in a way
to preserve its pharmaceutical business while maintaining expenses within
operating cash flows.

We continue to seek opportunities for strategic acquisitions. If one or more
such acquisitions is identified, a substantial portion of our cash reserves may
be required to complete it; however, we intend to maintain sufficient cash
reserves after any acquisition to provide reasonable assurance that outside
financing will not be necessary to continue operations. If we identify an
attractive acquisition that would require more cash to complete than we are
willing or able to use from our cash reserves, we will consider financing
options to complete the acquisition, including obtaining loans and issuing
additional securities.

Except as discussed elsewhere in this Report, we are not aware of any trends or
demands, commitments, events, or uncertainties that are reasonably likely to
result in a decrease in liquidity of our assets. The trend over the last ten
years has been increasing cash deposits from our operating cash flows, and we
expect that trend to continue for the foreseeable future.

Cash flow

Operational activities

Net cash provided by operating activities was $17.9 million for the year ended
August 31, 2022. Our operating cash flows resulted primarily from our net income
of $12.5 million, which was generated by cash received from our customers,
offset by cash payments we made to third parties for their services and employee
compensation. In addition, $2.6 million related to changes in balances of
operating assets and liabilities was subtracted from net income and $8.0 million
related to non-cash charges was added to net income to reconcile to cash flow
from operations.

Net cash provided by operating activities was $19.2 million for the year ended
August 31, 2021. Our operating cash flows resulted primarily from our net income
of $9.8 million, which was generated by cash received from our customers, offset
by cash payments we made to third parties for their services and employee
compensation. In addition, $1.0 million related to changes in balances of
operating assets and liabilities was added to net income and $8.4 million
related to non-cash charges was added to net income to reconcile to cash flow
from operations.

Investing Activities

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

Net cash used for investing activities during the year ended August 31, 2021,
was $26.7 million, primarily due to the purchase of short-term investments of
$122.4 million and computer software development costs of $2.9 million, offset
by proceeds from the sale of short-term investments totaling $100.2 million.

Fundraising activities

Net cash used in financing activities during the year ended August 31, 2022, was
$7.6 million, primarily due to dividend payments totaling $4.8 million and a
$3.7 million earnout payment to the former shareholders of Lixoft, partially
offset by proceeds from the exercise of stock options totaling $0.9 million.

Net cash used in financing activities during the year ended August 31, 2021, was
$4.7 million, primarily due to dividend payments totaling $4.8 million and a
$1.3 million earnout payment to the former shareholders of Lixoft, partially
offset by proceeds from the exercise of stock options totaling $1.5 million.
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DIVIDENDS

Refer to Note 8 – Equity of the Notes to the financial statements (Part II, Heading 8 of this Report) for further details regarding dividends.

KNOWN TRENDS OR UNCERTAINTIES

We have seen some consolidation in the pharmaceutical industry during economic
downturns, although these consolidations have not had a negative effect on our
total revenues to that industry. Should customer delays, holds, program
cancellations, or consolidations and downsizing in the industry continue to
occur, those events could adversely impact our revenues and earnings going
forward.

We believe that the need for improved productivity in the research and
development activities directed toward developing new medicines will continue to
result in increasing adoption of simulation and modeling tools such as those we
produce. New product developments in our pharmaceutical business segments could
result in increased revenues and earnings if they are accepted by our markets;
however, there can be no assurances that new products will result in significant
improvements to revenues or earnings. For competitive reasons, we do not
disclose all of our new product development activities.

Our continued search for acquisitions could result in a material change in revenues and earnings if one or more of these acquisitions are completed.

The potential for growth in new markets (e.g., healthcare) is uncertain. We will
continue to explore these opportunities until such time as we either generate
revenues or determine that resources would be more efficiently used elsewhere.

RECENTLY ISSUED OR NEWLY ADOPTED ACCOUNTING STANDARDS

In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic
805): Accounting for Contract Assets and Contract Liabilities from Contracts
with Customers ("ASU 2021-08"). The amendment requires contract assets and
contract liabilities acquired in a business combination to be recognized and
measured in accordance with ASC 606, Revenue from Contracts with Customers, as
if the acquirer had originated the contract. The amendment is intended to
improve the accounting for acquired revenue contracts with customers in a
business combination, related to the recognition of an acquired contract
liability, and to payment terms and their effect on subsequent revenue
recognized by the acquirer. The amendment also provides certain practical
expedients when applying the guidance. ASU 2021-08 is effective for interim and
annual periods beginning after December 15, 2022, on a prospective basis, with
early adoption permitted. The Company expects to adopt ASU 2021-08 in the first
quarter of fiscal year 2024. The Company is currently evaluating the potential
impact of ASU 2021-08 to its consolidated financial statements.

In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic
832), which requires business entities to disclose information about
transactions with a government that are accounted for by applying a grant or
contribution model by analogy (for example, IFRS guidance in IAS 20 or guidance
on contributions for not-for-profit entities in ASC 958-605). For transactions
within scope, the new standard requires the disclosure of information about the
nature of the transaction, including significant terms and conditions, as well
as the amounts and specific financial statement line items affected by the
transaction. The new guidance is effective for annual reporting periods
beginning after December 15, 2021. The Company does not expect that the adoption
of this standard will have a material impact on its consolidated financial
statements; however, the Company expects to increase its disclosures with
respect to government assistance beginning in the first quarter of fiscal year
2023.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Estimates

Our financial statements and accompanying notes are prepared in accordance with
GAAP. Preparing financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue,
and expenses. These estimates and assumptions are affected by management's
application of accounting policies. Actual results could differ from those
estimates. Significant accounting policies for us include revenue recognition,
accounting for capitalized software development costs, valuation of stock
options, and accounting for income taxes.
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Revenue recognition

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

The Company determines revenue recognition according to the following steps:

i.Identification of the contract, or contracts, with a customer
ii.Identification of the performance obligations in the contract
iii.Determination of the transaction price
iv.Allocation of the transaction price to the performance obligations in the
contract
v.Recognition of revenue when, or as, the Company satisfies a performance
obligation

The Company accounts for a contract when it has approval and commitment from
both parties, the rights of the parties are identified, payment terms are
identified, the contract has commercial substance, and collectability of
consideration is probable. Contracts generally have fixed pricing terms and are
not subject to variable pricing. The Company considers the nature and
significance of each specific performance obligation under a contract when
allocating the proceeds under each contract. Accounting for contracts includes
significant judgement in the estimation of estimated hours/cost to be incurred
on consulting contracts, and the di minimis nature of the post-sales costs
associated with software sales.

Capitalized 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 computer software development costs require
considerable judgment by management with respect to certain external factors
including, but not limited to, technological feasibility, anticipated future
gross revenues, estimated economic life, and changes in software and hardware
technologies. Capitalized software development costs are comprised primarily of
salaries and direct payroll-related costs and the purchase of existing software
to be used in the Company's software products. Total capitalized computer
software development costs were $3.2 million, $2.9 million, and $2.4 million for
the fiscal years ending August 31, 2022, 2021, and 2020, respectively.

Amortization of capitalized computer software development costs is calculated on
a product-by-product basis on the straight-line method over the estimated
economic life of the products, not to exceed five years. Amortization of
software development costs amounted to $1.2 million, $1.4 million, and $1.2
million for the fiscal years ending August 31, 2022, 2021, and 2020,
respectively. We expect future amortization expense to vary due to increases in
capitalized computer software development costs.

We test the recoverability of capitalized software development costs whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

Intangible assets and Good will

The Company performs valuations of assets acquired and liabilities assumed on
each acquisition accounted for as a business combination and recognizes the
assets acquired and liabilities assumed at their acquisition date fair value.
Acquired intangible assets include customer relationships, software, trade name,
and noncompete agreements. The Company determines the appropriate useful life by
performing an analysis of expected cash flows based on historical experience of
the acquired businesses. Intangible assets are amortized over their estimated
useful lives using the straight-line method, which approximates the pattern in
which the majority of the economic benefits are expected to be consumed.
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Goodwill represents the excess of the cost of an acquired entity over the fair
value of the acquired net assets. Goodwill is not amortized, instead it is
tested for impairment annually or when events or circumstances change that would
indicate that goodwill might be impaired. Events or circumstances that could
trigger an impairment review include, but are not limited to, a significant
adverse change in legal factors or in the business climate, an adverse action or
assessment by a regulator, unanticipated competition, a loss of key personnel,
significant changes in the manner of the Company's use of the acquired assets or
the strategy for the Company's overall business, significant negative industry
or economic trends, or significant under-performance relative to expected
historical or projected future results of operations.

Good will is tested for impairment at the reporting unit level, which is a level less than or equal to an operating segment. From August 31, 2022the Company has determined that it has four business units, Simulation MoreCognigen, DILIsym and Lixoft.

As of August 31, 2022, the entire balance of goodwill was attributed to three of
the Company's reporting units, Cognigen, DILIsym, and Lixoft. Intangible assets
subject to amortization are reviewed for impairment whenever events or
circumstances indicate that the carrying amount of these assets may not be
recoverable. The Company did not recognize any impairment charges during the
periods ended August 31, 2022, 2021, or 2020.

Business acquisitions

The Company accounted for the acquisition of Cognigen, DILIsym, and Lixoft using
the acquisition method of accounting where the assets acquired and liabilities
assumed are recognized based on their respective estimated fair values. The
excess of the purchase price over the estimated fair values of the net assets
acquired is recorded as goodwill. Determining the fair value of certain acquired
assets and liabilities is subjective in nature and often involves the use of
significant estimates and assumptions, including, but not limited to, the
selection of appropriate valuation methodology, projected revenue, expenses, and
cash flows, weighted average cost of capital, discount rates, and estimates of
terminal values. Business acquisitions are included in the Company's
consolidated financial statements as of the date of the acquisition.

Research and Development Costs
Research and development costs are charged to expense as incurred until
technological feasibility has been established, or when the costs are for
maintenance and minor modification of existing software products that do not add
significant new capabilities to the products. These costs include salaries,
laboratory experiment, and purchased software that was developed by other
companies and incorporated into, or used in the development of, our final
products.

Income taxes

The Company accounts for income taxes in accordance with ASC 740-10, "Income
Taxes", which requires the recognition of deferred tax assets and liabilities
for expected future tax consequences of events that have been included in the
financial statements or tax returns.

Under this method, deferred income taxes are recognized for the tax consequences
in future years of differences between the tax bases of assets and liabilities
and their financial reporting amounts at each year end based on enacted tax laws
and statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be realized.
The provision for income taxes represents the tax payable for the period and the
change during the period in deferred tax assets and liabilities.

Stock-based compensation

The Company accounts for stock options in accordance with ASC 718-10,
"Compensation-Stock Compensation". Under this method, compensation costs include
the estimated grant-date fair value of awards amortized over the options'
vesting period. Stock-based compensation expense, not including shares issued to
Directors for services, was $2.7 million, $2.4 million and $1.3 million for the
years ended August 31, 2022, 2021, and 2020, respectively, and is included in
the statements of operations as Consulting, Salaries, and Research and
Development expense.
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