Simulations Plus, Inc. - Quarter Report: 2023 February (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q


x			Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended February 28, 2023

OR

o			Transmission Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ______ to ______

Commission file number: 001-32046

Simulations Plus, Inc.

(Name of registrant as specified in its charter)


California			95-4595609
(State or other jurisdiction of Incorporation or Organization)			(I.R.S. Employer identification No.)

42505 10th Street West

Lancaster, CA 93534-7059

(Address of principal executive offices including zip code)

(661) 723-7723

(Registrant’s telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:


Title of Each Class Common Stock, par value $0.001 per share			Trading Symbol SLP			Name of Each Exchange on Which Registered NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act (Check one):


x	Large accelerated Filer	o	Accelerated Filer
o	Non-accelerated Filer	o	Smaller reporting company
o	Emerging Growth Company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The number of shares outstanding of the registrant’s common stock, par value $0.001 per share, as of March 31, 2023, was 19,996,653.

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Simulations Plus, Inc.

FORM 10-Q

For the Quarterly Period Ended February 28, 2023

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	PART I. FINANCIAL INFORMATION
		Page
Item 1.	Condensed Consolidated Financial Statements

	Condensed Consolidated Balance Sheets at February 28, 2023 and August 31, 2022	4

	Condensed Consolidated Statements of Operations and Comprehensive Income for the three and six months ended February 28, 2023 and 2022	5

	Condensed Consolidated Statements of Shareholders’ Equity for the three and six months ended February 28, 2023 and 2022	6

	Condensed Consolidated Statements of Cash Flows for the six months ended February 28, 2023 and 2022	7

	Notes to Condensed Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	34

Item 4.	Controls and Procedures	34

	PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	34

Item 1A.	Risk Factors	35

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36

Item 3.	Defaults upon Senior Securities	36

Item 4.	Mine Safety Disclosures	36

Item 5.	Other Information	37

Item 6.	Exhibits	38

	Signatures	39

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PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

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SIMULATIONS PLUS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS


	(Unaudited)		(Audited)
(in thousands, except share and per share amounts)	February 28, 2023		August 31, 2022
ASSETS
Current assets
Cash and cash equivalents	$	39,292	$	51,567
Accounts receivable, net of allowance for doubtful accounts of $12 and $12	11,398		13,787
Prepaid income taxes	397		1,391
Prepaid expenses and other current assets	4,335		3,377
Short-term investments	76,052		76,668
Total current assets	131,474		146,790
Long-term assets
Capitalized computer software development costs, net of accumulated amortization of $16,455 and $15,672	10,501		9,563
Property and equipment, net	822		632
Operating lease right-of-use assets	1,190		1,420
Intellectual property, net of accumulated amortization of $8,552 and $7,928	8,358		9,057
Other intangible assets, net of accumulated amortization of $1,812 and $2,662	7,387		7,560
Goodwill	12,921		12,921
Other assets	548		439
Total assets	$	173,201	$	188,382

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable	$	350	$	225
Accrued compensation	2,635		3,254
Accrued expenses	535		931


Operating lease liability - current portion	432		461
Deferred revenue	2,050		2,864
Total current liabilities	6,002		7,735
Long-term liabilities
Deferred income taxes, net	1,859		1,456
Operating lease liability	747		943
Total liabilities	8,608		10,134
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; 19,930,623 and 20,260,070 shares issued and outstanding	137,821		138,512
Retained earnings	27,050		40,044
Accumulated other comprehensive loss	(278)		(308)
Total shareholders' equity	164,593		178,248
Total liabilities and shareholders' equity	$	173,201	$	188,382

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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SIMULATIONS PLUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

For the three and six months ended February 28, 2023 and 2022

(Unaudited)


	Three Months Ended				Six Months Ended
(in thousands, except per common share amounts)	2023		2022		2023		2022
Revenues
Software	$	10,487	$	9,758	$	16,561	$	17,120
Services	5,263		5,038		11,153		10,093
Total revenues	15,750		14,796		27,714		27,213
Cost of revenues
Software	843		780		1,728		1,515
Services	1,777		2,050		3,563		4,071
Total cost of revenues	2,620		2,830		5,291		5,586
Gross profit	13,130		11,966		22,423		21,627
Operating expenses
Research and development	1,317		902		2,483		1,784
Selling, general, and administrative	7,779		5,584		15,028		10,572
Total operating expenses	9,096		6,486		17,511		12,356

Income from operations	4,034		5,480		4,912		9,271

Other income, net	1,034		53		1,774		118

Income before income taxes	5,068		5,533		6,686		9,389
Provision for income taxes	(894)		(1,124)		(1,267)		(1,954)
Net income	$	4,174	$	4,409	$	5,419	$	7,435

Earnings per share
Basic	$	0.21	$	0.22	$	0.27	$	0.37
Diluted	$	0.20	$	0.21	$	0.26	$	0.36

Weighted-average common shares outstanding
Basic	20,112		20,177		20,200		20,164
Diluted	20,529		20,745		20,657		20,738

Other comprehensive (loss) income, net of tax
Foreign currency translation adjustments	(23)		(38)		30		(275)
Comprehensive income	$	4,151	$	4,371	$	5,449	$	7,160

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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SIMULATIONS PLUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

For the three and six months ended February 28, 2023 and 2022

(Unaudited)


	Three Months Ended				Six Months Ended
(in thousands, except per common share amounts)	2023		2022		2023		2022
Common stock and additional paid in capital
Balance, beginning of period	$	140,306	$	134,512	$	138,512	$	133,418
Exercise of stock options	205		169		963		541
Stock-based compensation	1,160		703		2,046		1,337
Shares issued to Directors for services	150		88		300		176


Repurchase and retirement of common shares	(4,000)		—		(4,000)		—

Balance, end of period	137,821		135,472		137,821		135,472

Retained earnings
Balance, beginning of period	40,071		34,224		40,044		32,407
Declaration of dividends	(1,195)		(1,211)		(2,413)		(2,420)
Repurchase and retirement of common shares	(16,000)		—		(16,000)		—
Net income	4,174		4,409		5,419		7,435
Balance, end of period	27,050		37,422		27,050		37,422

Accumulated other comprehensive (loss) income
Balance, beginning of period	(255)		(280)		(308)		(43)
Other comprehensive (loss) income	(23)		(38)		30		(275)
Balance, end of period	(278)		(318)		(278)		(318)
Total shareholders’ equity	$	164,593	$	172,576	$	164,593	$	172,576
Cash dividends declared per common share	$	0.06	$	0.06	$	0.12	$	0.12

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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SIMULATIONS PLUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Six Months Ended February 28,
(in thousands)	2023		2022
Cash flows from operating activities
Net income	$	5,419	$	7,435
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization	1,858		1,840
Change in value of contingent consideration	—		243
Amortization of investment (discounts) premiums	(379)		1,122
Stock-based compensation	2,300		1,513
Deferred income taxes	403		424
Currency translation adjustments	30		(275)
(Increase) decrease in
Accounts receivable	2,389		(5,188)
Prepaid income taxes	994		563
Prepaid expenses and other assets	(1,067)		1,274
Increase (decrease) in
Accounts payable	125		22
Other liabilities	(1,010)		(3,384)

Deferred revenue	(814)		590
Net cash provided by operating activities	10,248		6,179

Cash flows from investing activities
Purchases of property and equipment	(316)		(710)
Purchase of short-term investments	(47,156)		(25,504)
Proceeds from maturities of short-term investments	48,151		46,810
Purchased intangibles	(77)		—

Capitalized computer software development costs	(1,675)		(1,507)
Net cash (used in) provided by investing activities	(1,073)		19,089

Cash flows from financing activities
Payment of dividends	(2,413)		(2,420)

Proceeds from the exercise of stock options	963		541
Repurchase and retirement of common shares	(20,000)		—
Net cash used in financing activities	(21,450)		(1,879)

Net (decrease) increase in cash and cash equivalents	(12,275)		23,389
Cash and cash equivalents, beginning of year	$	51,567	$	36,984
Cash and cash equivalents, end of period	$	39,292	$	60,373

Supplemental disclosures of cash flow information
Income taxes paid	$	93	$	921

Non-Cash Investing and Financing Activities


Right of use assets capitalized	$	—	$	624

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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Simulations Plus, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

NOTE 1 – GENERAL

This Quarterly Report on Form 10-Q for the quarter ended February 28, 2023, should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended August 31, 2022, filed with the Securities and Exchange Commission (“SEC”) on October 28, 2022. As contemplated by the SEC under Article 8 of Regulation S-X, the accompanying consolidated financial statements and footnotes have been condensed and therefore do not contain all disclosures required by generally accepted accounting principles. The interim financial data are unaudited; however, in the opinion of Simulations Plus, Inc., the interim data include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the interim periods. Results for interim periods are not necessarily indicative of those to be expected for the full year.

Organization

Simulations Plus, Inc. (“Simulations Plus”) was incorporated on July 17, 1996. In September 2014, Simulations Plus acquired all of the outstanding equity interests of Cognigen Corporation ("Cognigen") and Cognigen became a wholly owned subsidiary of Simulations Plus, Inc. In June 2017, Simulations Plus acquired DILIsym Services, Inc. ("DILIsym") as a wholly owned subsidiary. In April 2020, Simulations Plus acquired Lixoft, a French société par actions simplifiée ("Lixoft"), as a wholly owned subsidiary pursuant to a stock purchase and contribution agreement. (Simulations Plus together with its subsidiaries, collectively, the "Company,” "we,” "us,” "our").

Effective September 1, 2021, the Company merged both Cognigen and DILIsym 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 (Simulation Plus’ 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-based and machine-learning-based technologies. We also provide consulting services ranging from early drug discovery through preclinical and clinical development 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 academic and regulatory agencies worldwide for use in the conduct of industry-based research.

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of Simulations Plus and its wholly owned subsidiary, 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.

Reclassifications

Certain numbers in the prior year have been reclassified to conform to the current year's presentation.

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Revenue Recognition

We generate revenue primarily from the sale of software licenses and by providing consulting services to the pharmaceutical industry for drug development.

In accordance with ASC 606, we determine revenue recognition through the following steps:

i.Identification of the contract, or contracts, with a customer

ii.Identification of the performance obligations in the contract

iii.Determination of the transaction price

iv.Allocation of the transaction price to the performance obligations in the contract

v.Recognition of revenue when, or as, we satisfy a performance obligation

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 standalone selling price for each performance obligation identified in the contract. Standalone 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.						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.

For certain software arrangements the Company hosts the licenses on servers maintained by the Company. Revenue for those arrangements is accounted as Software as a Service over the life of the contract. These arrangements account for a small portion of software revenues of the Company.

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 method 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.

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Remaining Performance Obligations

Transaction price allocated to remaining performance obligations represents contracted revenue that has not yet been recognized, which includes deferred revenue and unbilled amounts that will be recognized as revenue in future periods. As of February 28, 2023, remaining performance obligations were $10.4 million. Ninety-six percent of the remaining performance obligations are expected to be recognized over the next 12 months, with the remainder expected to be recognized thereafter. Remaining performance obligations estimates are subject to change and are affected by several factors, including contract terminations and changes in the scope of contracts.

Disaggregation of Revenues

The components of disaggregation of revenue for the three and six months ended February 28, 2023 and 2022 were as follows:


	Three Months Ended February 28,				Six Months Ended February 28,
(in thousands)	2023		2022		2023		2022
Software licenses
Point in time	$	10,191	$	9,493	$	15,993	$	16,600
Over time	296		265		568		520
Services
Over time	5,263		5,038		11,153		10,093
Total revenue	$	15,750	$	14,796	$	27,714	$	27,213

In addition, the Company allocates revenues to geographic areas based on the locations of its customers. Geographical revenues for the three and six months ended February 28, 2023, and 2022 were as follows:


(in thousands)	Three Months Ended February 28,
	2023				2022
	$		% of total		$		% of total
Americas	$	10,589	67	%	$	9,696	66	%
EMEA	3,618		23	%	3,706		25	%
Asia Pacific	1,543		10	%	1,394		9	%
Total	$	15,750	100	%	$	14,796	100	%


(in thousands)	Six Months Ended February 28,
	2023				2022
	$		% of total		$		% of total
Americas	$	19,089	69	%	$	18,155	67	%
EMEA	5,748		21	%	6,731		25	%
Asia Pacific	2,877		10	%	2,327		8	%
Total	$	27,714	100	%	$	27,213	100	%

Contract Balances

We receive payments from customers based upon contractual billing schedules, while we recognize revenue when, or as, we satisfy our performance obligations. This timing difference results in accounts receivable, contract assets, and contract liabilities. We record accounts receivable when the right to consideration becomes unconditional. We record a contract asset if the right to consideration is conditioned on something other than the passage of time, such as our future performance. Contract assets are included in prepaid expenses and other current assets on our condensed consolidated balance sheets. We record a contract liability when we have an obligation to transfer goods or services to a customer for which we have either received consideration or a payment is due from a customer. We refer to contract liabilities as deferred revenue on our condensed consolidated balance sheets.

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Contract asset balances as of February 28, 2023, and August 31, 2022, were $2.9 million and $1.7 million, respectively.

During the three and six months ended February 28, 2023, the Company recognized $0.4 million and $2.3 million, respectively, of revenue that was included in contract liabilities as of August 31, 2022, and during the three and six months ended February 28, 2022, the Company recognized $0.2 million and $0.5 million, respectively, of revenue that was included in contract liabilities as of August 31, 2021.

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. We apply the practical expedient as described in ASC 340-40-25-4 to expense costs as incurred for sales commissions, since the amortization period of the asset that we otherwise would have recognized is one year or less. This expense is included in the condensed consolidated statements of operations and comprehensive income as selling, general, and administrative expense.

Cash and Cash Equivalents

For purposes of the statements of cash flows, we consider all highly liquid investments purchased with original maturities of three months or less to be cash equivalents.

Accounts Receivable and Allowance for Credit Losses

The Company extends credit to its customers in the normal course of business. The Company evaluates its allowance for credit losses based on its estimate of the collectability of its trade accounts receivable. As part of this assessment, the Company considers various factors including the financial condition of the individual companies with which it does business, the aging of receivable balances, historical experience, changes in customer payment terms, current market conditions, and reasonable and supportable forecasts of future economic conditions. In times of economic turmoil, the Company’s estimates and judgments with respect to the collectability of its receivables is subject to greater uncertainty than in more stable periods. Accounts receivable balances will be charged off against the allowance for credit losses after all means of collection have been exhausted and the potential for recovery is considered remote.

Investments

The Company 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 within the parameters of our Investment Policy and Guidelines. The Company accounts for its investments in marketable securities in accordance with 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 measured at amortized cost and are presented at the net amount expected to be collected. Any change in the allowance for credit losses during the period is reflected in earnings. Discounts and premiums to par value of the debt securities are amortized to interest income/expense over the term of the security.

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. For available-for-sale debt securities in an unrealized loss position, we evaluate as of the balance sheet date whether the unrealized losses are attributable to a credit loss or other factors. The portion of unrealized losses related to a credit loss is recognized in earnings, and the portion of unrealized loss not related to a credit loss is recognized in other comprehensive income (loss).

We classify our investments in marketable debt securities based on the facts and circumstances present at the time of purchase of the securities. We subsequently reassess the appropriateness of that classification at each reporting date. During the quarter ended February 28, 2023, all of our investments were classified as held-to-maturity.

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Capitalized Computer Software Development Costs

Software development costs are capitalized in accordance with ASC 985-20. 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 revenue, estimated economic life, and changes in software and hardware technologies. Capitalized software development costs are comprised primarily of salaries and direct payroll-related costs and the purchase of existing software to be used in our software products.

Amortization of capitalized software development costs is calculated on a product-by-product basis on the straight-line method over the estimated economic life of the products (not to exceed five years). Amortization of software development costs amounted to $0.4 million and $0.3 million for the three months ended February 28, 2023, and 2022, respectively, and $0.8 million and $0.6 million for the six months ended February 28, 2023, and 2022, 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 calculated using the straight-line method over the estimated useful lives as follows:


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.

Internal-use Software

We have capitalized certain internal-use software costs in accordance with ASC 350-40, which are included in intangible assets. The amortization of such costs is classified as selling, general, and administrative expenses on the condensed consolidated statements of operations. Maintenance of and minor upgrades to internal-use software are also classified as selling, general, and administrative expenses as incurred.

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 condensed 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 the 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 the commencement date. The operating lease ROU asset also includes any lease payments made at or before the commencement date 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 is recognized on a straight-line basis over the lease term.

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Supplemental balance sheet information related to operating leases was as follows as of February 28, 2023:


(in thousands)
Right of use assets	$	1,190
Lease liabilities, current	$	432
Lease liabilities, long-term	$	747
Operating lease costs	$	252
Weighted-average remaining lease term	2.55 years
Weighted-average discount rate	3.41		%

Intangible Assets and Goodwill

We perform valuations of assets acquired and liabilities assumed on each acquisition accounted for as a business combination and recognize 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. Finite-lived 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. Finite-lived 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.

Goodwill represents the excess of the cost of an acquired entity over the fair value of the acquired net assets. Goodwill and indefinite-lived intangible assets are tested for impairment annually or when events or circumstances change that would indicate that they might be impaired. Events or circumstances that could trigger an impairment review include, but are not limited to, a significant adverse change in legal factors or in the business climate, an adverse action or assessment by a regulator, unanticipated competition, a loss of key personnel, significant changes in the manner of our use of the acquired assets or the strategy for our overall business, significant negative industry or economic trends, or significant underperformance relative to expected historical or projected future results of operations.

Goodwill and intangible assets are tested for impairment at the reporting unit level, which is one level below or the same as an operating segment. During the three and six months ended February 28, 2023 and 2022, there were no changes to our reporting units, and we did not recognize any impairment charges or additions to goodwill.

The following table summarizes other intangible assets as of February 28, 2023:


(in thousands)	Amortization Period	Acquisition Value		Accumulated Amortization		Net Book Value
Trade names	None	$	2,910	$	—	$	2,910
Covenants not to compete	Straight line 3 years	60		58		2
Other internal use software	Straight line 3 to 5 years	77		2		75
Customer relationships	Straight line 8 to 14 years	4,450		1,614		2,836
ERP	Straight line 15 years	1,702		138		1,564
		$	9,199	$	1,812	$	7,387

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The following table summarizes other intangible assets as of August 31, 2022:


(in thousands)	Amortization Period	Acquisition Value		Accumulated Amortization		Net Book Value
Trade names	None	$	2,910	$	—	$	2,910
Covenants not to compete	Straight line 3 years	60		48		12

Customer relationships	Straight line 8 to 14 years	5,550		2,534		3,016
ERP	Straight line 15 years	1,702		80		1,622
		$	10,222	$	2,662	$	7,560

Total amortization expense for the three months ended February 28, 2023, and 2022 was $0.1 million and $0.2 million, respectively, and amortization expense for the six months ended February 28, 2023, and 2022 was $0.3 million and $0.3 million, respectively.

Future amortization of finite-lived intangible assets for the next five years is as follows:


(in thousands)
Year Ending August 31,	Amount
Remainder of 2023	$	251
2024	$	489
2025	$	489
2026	$	489
2027	$	442

Fair Value of Financial Instruments

Assets and liabilities recorded at fair value in the condensed consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. The categories are as follows:


Level Input:						Input Definition:
Level I						Inputs that 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 compensation and other accrued expenses, the carrying amounts are representative of their fair value due to their short maturities.

We invest a portion of our excess cash balances in short-term debt securities. Investments at February 28, 2023, consisted of corporate bonds and term deposits with maturities remaining of less than 12 months. Under the fair value hierarchy, the fair market values of the Company's cash equivalents and investments are Level 1. We may also invest excess cash balances in certificates of deposit, money market accounts, government-sponsored enterprise securities, and/or commercial paper. We account for our investments in accordance with ASC 320, Investments – Debt and Equity Securities. As of February 28, 2023, all investments were classified as held-to-maturity securities, as we have the positive intent and ability to hold these securities until maturity. We believe unrealized losses on investments were primarily caused by rising interest rates rather than changes in credit quality, and, accordingly, we have not recorded an allowance for credit losses on our debt securities as of February 28, 2023, and August 31, 2022.

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The following tables summarize our short-term investments as of February 28, 2023, and August 31, 2022:


	February 28, 2023
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Commercial notes (due within one year)	$	71,552	$	—	$	(175)	$	71,377
Term deposits (due within one year)	4,500						4,500
Total	$	76,052	$	—	$	(175)	$	75,877


	August 31, 2022
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Commercial notes (due within one year)	$	72,168	$	—	$	(839)	$	71,329
Term deposits (due within one year)	4,500						4,500
Total	$	76,668	$	—	$	(839)	$	75,829

Research and Development Costs

Research and development costs are charged to expense as incurred until technological feasibility has been established. These costs include salaries, laboratory experiments, and purchased software that was developed by other companies and incorporated into, or used in the development of, our final products.

Income Taxes

We account for income taxes in accordance with ASC 740, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns.

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

Intellectual property

The following table summarizes intellectual property as of February 28, 2023:


(in thousands)	Amortization Period	Acquisition Value		Accumulated Amortization		Net Book Value

Termination/nonassertion agreement-TSRL Inc.	Straight line 10 years	6,000		5,275		725
Developed technologies–DILIsym acquisition	Straight line 9 years	2,850		1,821		1,029
Intellectual rights of Entelos Holding Company	Straight line 10 years	50		23		27
Developed technologies–Lixoft acquisition	Straight line 16 years	8,010		1,433		6,577
		$	16,910	$	8,552	$	8,358

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The following table summarizes intellectual property as of August 31, 2022:


(in thousands)	Amortization Period	Acquisition Value		Accumulated Amortization		Net Book Value
Royalty Agreement buy out-Enslein Research	Straight line 10 years	$	75	$	75	$	—
Termination/nonassertion agreement-TSRL Inc.	Straight line 10 years	6,000		4,975		1,025
Developed technologies–DILIsym acquisition	Straight line 9 years	2,850		1,662		1,188
Intellectual rights of Entelos Holding Company	Straight line 10 years	50		20		30
Developed technologies–Lixoft acquisition	Straight line 16 years	8,010		1,196		6,814
		$	16,985	$	7,928	$	9,057

Total amortization expense for intellectual property agreements for the three months ended February 28, 2023 and 2022 was $0.4 million and $0.4 million, respectively, and amortization expense for intellectual property agreements for the six months ended February 28, 2023 and 2022 was $0.7 million and $0.7 million, respectively.

Future amortization of intellectual property for the next five years is as follows:


(in thousands)
Year Ending August 31,	Amount
Remainder of 2023	$	694
2024	$	1,218
2025	$	793
2026	$	717
2027	$	477

Earnings per Share

We report earnings per share in accordance with ASC 260. Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding. 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 three and six months ended February 28, 2023, and 2022 were as follows:


	Three Months Ended February 28,				Six Months Ended February 28,

(in thousands)	2023		2022		2023		2022
Numerator
Net income attributable to common shareholders	$	4,174	$	4,409	$	5,419	$	7,435

Denominator
Weighted-average number of common shares outstanding during the year	20,112		20,177		20,200		20,164
Dilutive effect of stock options	417		568		457		574
Common stock and common stock equivalents used for diluted earnings per share	20,529		20,745		20,657		20,738

Stock-Based Compensation

Compensation costs related to stock options are determined in accordance with ASC 718. Compensation cost is calculated based on the grant-date fair value estimated using the Black-Scholes pricing model and then amortized on a straight-line basis over the requisite service period. Stock-based compensation expense related to stock options, not including shares issued to directors for services, was $1.2 million and $0.7 million for the three months ended February 28, 2023, and 2022, respectively, and $2.0 million and $1.3 million for the six months ended February 28, 2023, and 2022, respectively.

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Impairment of Long-lived Assets

We account for the impairment and disposition of long-lived assets in accordance with ASC 360. 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 three and six months ended February 28, 2023, and 2022.

Recently Issued Accounting Standards

None.

NOTE 3 – OTHER INCOME (EXPENSE), NET

The components of other income (expense), net for the three and six months ended February 28, 2023, and 2022, were as follows:


	Three Months Ended February 28,				Six Months Ended February 28,

(in thousands)	2023		2022		2023		2022
Interest income	$	985	$	75	$	1,756	$	139

Change in valuation of contingent consideration	—		(122)		—		(243)
Gain on sale of assets	—		—		—		1
Gain (loss) on currency exchange	49		100		18		221
Total other income, net	$	1,034	$	53	$	1,774	$	118

NOTE 4 – COMMITMENTS AND CONTINGENCIES

Leases

On February 17, 2023, we entered into an amendment, effective May 1, 2023, to the lease agreement for our office space in Lancaster, California, where our corporate headquarters are located. The amendment extends the lease term through April 30, 2028, reduces the leased square footage from 9,255 to approximately 4,200, and reduces the monthly base rent from $18 thousand per month to $8 thousand per month with an annual increase of 3%. The amended lease agreement gives the Company the right, upon 180 days’ prior notice, to opt out of all or part of the last three years of the lease term with no penalty.

We lease 4,317 square feet of office space in Buffalo, New York. The lease term extends to November 30, 2026, and the base rent is $7 thousand per month with an annual 2% increase. The lease agreement provides the Company with two five-year renewal options and the right to terminate the lease with one year's prior written notice with certain penalties.

We have a data center colocation space in Buffalo, New York, with a lease term through November 30, 2026, and rent of $4 thousand per month with an annual 3% increase.

We lease 3,386 square feet of office space in Durham, North Carolina. The lease term extends to September 30, 2023, and the base rent is $8 thousand per month with an annual 3% increase.

We lease 2,300 square feet of office space in Paris, France. The lease term extends to November 30, 2024, and the rent is $5 thousand per month, which amount is subject to adjustment each December based on a consumer price index.

Rent expense, including common area maintenance fees for the three months ended February 28, 2023, and 2022 was $0.1 million and $0.1 million, respectively, and was $0.3 million and $0.3 million for the six months ended February 28, 2023, and 2022, respectively.

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Lease liability maturities as of February 28, 2023, were as follows:


(in thousands)	Year Ending August 31,	Amount
Remainder of 2023		$	255
2024		411
2025		346
2026		219
2027		8
Total undiscounted liabilities		1,239
Less: imputed interest		(60)
Total operating lease liabilities (including current portion)		$	1,179

Employment Agreements

In the normal course of business, the Company has entered into employment agreements with certain of its executive officers that may require compensation payments upon termination.

Income Taxes

We follow guidance issued by the FASB with regard to our accounting for uncertainty in income taxes recognized in the financial statements. Such guidance prescribes a recognition threshold of more likely than not and a measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In making this assessment, a company must determine whether it is more likely than not that a tax position will be sustained upon examination, based solely on the technical merits of the position, and must assume that the tax position will be examined by taxing authorities. Our policy is to include interest and penalties related to income tax expense. We file income tax returns with the IRS and various state jurisdictions as well as with the countries of India and France. Our federal income tax returns for fiscal years 2019 through 2021 are open for audit, and our state tax returns for fiscal years 2018 through 2021 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.

Litigation

We are not a party to any legal proceedings and are not aware of any pending or threatened legal proceedings of any kind.

NOTE 5 – SHAREHOLDERS' EQUITY

Shares Outstanding

Shares of Company common stock outstanding for the three and six months ended February 28, 2023 and 2022 were as follows:


	Three Months Ended February 28,		Six Months Ended February 28,
	2023	2022	2023	2022
Common stock outstanding, beginning of period	20,313,755	20,168,796	20,260,070	20,141,521
Common stock repurchased during the period *	(408,685)	—	(408,685)	—
Common stock issued during the period	25,553	12,988	79,238	40,263
Common stock outstanding, end of period	19,930,623	20,181,784	19,930,623	20,181,784

*Common stock repurchased per the ASR Agreement, as discussed in further detail in this footnote, below.

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Dividends

The Company’s Board of Directors declared cash dividends during the fiscal years 2023 and 2022. The details of dividends paid are in the following tables:


(in thousands, except dividend per share)	Fiscal Year 2023

Record Date	Distribution Date	Number of Shares Outstanding on Record Date	Dividend per Share		Total Amount
10/31/2022	11/07/2022	20,299	$	0.06	$	1,218
1/30/2023	2/06/2023	19,924	$	0.06	1,195


Total					$	2,413


(in thousands, except dividend per share)	Fiscal Year 2022

Record Date	Distribution Date	Number of Shares Outstanding on Record Date	Dividend per Share		Total Amount
10/25/2021	11/01/2021	20,148	$	0.06	$	1,209
1/31/2022	2/07/2022	20,178	$	0.06	1,211
4/25/2022	5/02/2022	20,207	$	0.06	1,212
7/25/2022	8/01/2022	20,239	$	0.06	1,214
Total					$	4,846

Stock Option Plans

On December 23, 2016, the Company's Board of Directors adopted, and on February 23, 2017, its shareholders approved, the Company's 2017 Equity Incentive Plan (the "2017 Plan"), under which a total of 1.0 million shares of common stock were reserved for issuance. The 2017 plan would have terminated in December 2026. The 2017 Plan was replaced by the Company’s 2021 Plan (as defined below), and as a result, no further issuances of shares may be made under the 2017 Plan.

On April 9, 2021, the Company's Board of Directors adopted, and on June 23, 2021, its shareholders approved, the Company's 2021 Equity Incentive Plan (the “2021 Plan,” and together with the 2017 Plan, the "Plans"), under which a total of 1.3 million shares of common stock were initially reserved for issuance. On October 20, 2022, the Company’s Board of Directors approved, and on February 9, 2023, its shareholders approved, an amendment to the 2021 Plan to increase the number of shares of common stock authorized for issuance thereunder from 1.3 million shares to 1.55 million shares of common stock of the Company. The 2021 Plan will terminate in 2031.

As of February 28, 2023, employees and directors held Qualified Incentive Stock Options ("ISOs") and Non-Qualified Stock Options ("NQSOs") to purchase an aggregate of 1.6 million shares of common stock at exercise prices ranging from $6.85 to $66.14 per share.

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The following tables summarize information about stock options:


(in thousands, except per share and weighted-average amounts)
Transactions During The Six Months Ended February 28, 2023	Number of Options	Weighted-Average Exercise Price Per Share		Weighted-Average Remaining Contractual Life
Outstanding, August 31, 2022	1,245	$	28.61	6.14 years
Granted	434	43.82
Exercised	(77)	14.94
Canceled/Forfeited	(26)	40.48
Outstanding, February 28, 2023	1,576	$	33.27	6.85 years
Vested and Exercisable, February 28, 2023	766	$	21.76	4.69 years
Vested and Expected to Vest, February 28, 2023	1,569	$	33.23	6.84 years

The total grant-date fair value of nonvested stock options as of February 28, 2023, was $16.2 million and is amortizable over a weighted-average period of 3.66 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 2023 and fiscal year 2022:


(in thousands, except prices)	Six Months Ended February 28, 2023			Fiscal Year 2022
Estimated fair value of awards granted	$	9,457		$	4,597
Unvested Forfeiture Rate	0.00		%	1.04		%
Weighted-average grant price	$	43.82		$	42.13
Weighted-average market price	$	43.82		$	42.13
Weighted-average volatility	46.26		%	42.80		%
Weighted-average risk-free rate	4.32		%	1.74		%
Weighted-average dividend yield	0.55		%	0.58		%
Weighted-average expected life	6.59 years			6.59 years

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The exercise prices for the options outstanding at February 28, 2023, ranged from $6.85 to $66.14, and the information relating to these options is as follows:

(in thousands except prices)


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	$	9.77	259	2.27 years	$	8.33	259	2.27 years	$	8.33
$	9.78	$	18.76	174	3.99 years	$	10.10	174	3.99 years	$	10.10
$	18.77	$	33.40	214	6.15 years	$	25.37	147	6.06 years	$	24.62
$	33.41	$	47.63	646	9.15 years	$	42.06	84	7.58 years	$	37.92
$	47.64	$	66.14	283	8.07 years	$	56.27	102	7.68 years	$	58.55
				1,576	6.85 years	$	33.27	766	4.69 years	$	21.76

During the three and six months ended February 28, 2023, we issued 3,645 and 7,160 shares of stock valued at $0.1 million and $0.3 million, respectively, to our nonmanagement directors as compensation for board-related duties.

The balances of our par-value common stock and additional paid-in capital as of February 28, 2023, were $11 thousand and $137.8 million, respectively.

Share Repurchases

On January 11, 2023, the Company entered into an accelerated share repurchase agreement (the “ASR Agreement”) with Morgan Stanley & Co. LLC (“Morgan Stanley”) to repurchase an aggregate of $20 million of the Company’s outstanding common shares. The ASR Agreement was executed as part of the Company’s existing $50 million share repurchase program.

Pursuant to the terms of the ASR Agreement, the Company made an initial payment, using available cash balances, of $20 million to Morgan Stanley and received an initial delivery of 408,685 shares of Company common stock. These 408,685 shares were retired and are treated as authorized, unissued shares. The final number of shares to be repurchased will be based on the volume-weighted average price of the Company’s common stock during the term of the ASR Agreement, less a discount and subject to adjustments. At final settlement, under certain circumstances, Morgan Stanley may be required to deliver to the Company additional shares of the Company’s common stock, or the Company may be required to deliver to Morgan Stanley additional shares of the Company’s common stock (or, at the Company’s election, to make a cash payment to Morgan Stanley). The final settlement is expected to be completed during the third quarter of fiscal 2023. The Company estimates that the final additional share delivery from Morgan Stanley to the Company pursuant to the ASR Agreement will be approximately 91,000 shares.

The ASR Agreement contains the principal terms and provisions governing the transaction, including, but not limited to, the mechanism used to determine the number of shares that will be delivered, the required timing of delivery of the shares, the circumstances under which Morgan Stanley is permitted to make adjustments to valuation and calculation periods and various acknowledgments, representations and warranties made by the Company and Morgan Stanley to one another.

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NOTE 6 – 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 with balances that exceed FDIC insured limits. Cash maintained in excess of these limits is on deposit with a large, national bank. Accordingly, the Company does not have depository exposure to regional banks. In addition, the Company holds cash at a bank in France that is not FDIC-insured. Historically, the Company has not experienced any losses in such accounts, and management believes that the financial institutions at which its cash is held are stable; however, no assurances can be provided. 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.

Revenue concentration shows that international sales accounted for 31% and 33% of revenue for the six months ended February 28, 2023, and 2022, respectively. Our four largest customers in terms of revenue accounted for 6%, 5%, 3%, and 3% of revenue for the six months ended February 28, 2023. Our four largest customers in terms of revenue accounted for 11%, 5%, 4%, and 4% of revenue for the six months ended February 28, 2022.

Accounts receivable concentrations show that our six largest customers in terms of accounts receivable each comprised between 5% and 13% of accounts receivable as of February 28, 2023; our three largest customers in terms of accounts receivable comprised between 4% and 19% of accounts receivable as of February 28, 2022.

We operate in the biosimulation market, 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.

NOTE 7 – SEGMENT REPORTING

The Company applies ASC 280, Segment Reporting, in determining reportable segments. The Company has two reportable segments: Software and Services. Segment information is presented in the same manner that the chief operating decision maker ("CODM") reviews certain financial information based on these reportable segments. The CODM reviews revenue and gross profit for both of the reportable segments. Gross profit is defined as revenue less cost of revenue incurred by the segment.

No operating segments have been aggregated to form the reportable segments. The Company does not allocate assets at the reportable segment level as these are managed on an entity-wide group basis and, accordingly, the Company does not report asset information by segment. The Company does not allocate operating expenses that are managed on an entity-wide group basis and, accordingly, the Company does not allocate and report operating expenses at a segment level. There are no internal revenue transactions between the Company’s segments.

The following tables summarize the results for each segment for the three months ended February 28, 2023, and 2022:


(in thousands)	Three Months Ended February 28, 2023
	Software			Services			Total
Revenues	$	10,487		$	5,263		$	15,750
Cost of revenues	843			1,777			2,620
Gross profit	$	9,644		$	3,486		$	13,130
Gross margin	92		%	66		%	83		%

Our software business and services business represented 67% and 33% of total revenue, respectively, for the three months ended February 28, 2023.

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(in thousands)	Three Months Ended February 28, 2022
	Software			Services			Total
Revenues	$	9,758		$	5,038		$	14,796
Cost of revenues	780			2,050			2,830
Gross profit	$	8,978		$	2,988		$	11,966
Gross margin	92		%	59		%	81		%

Our software business and services business represented 66% and 34% of total revenue, respectively, for the three months ended February 28, 2022.

The following tables summarize the results for each segment for the six months ended February 28, 2023, and 2022:


(in thousands)	Six Months Ended February 28, 2023
	Software			Services			Total
Revenues	$	16,561		$	11,153		$	27,714
Cost of revenues	1,728			3,563			5,291
Gross profit	$	14,833		$	7,590		$	22,423
Gross margin	90		%	68		%	81		%

Our software business and services business represented 60% and 40% of total revenue, respectively, for the six months ended February 28, 2023.


(in thousands)	Six Months Ended February 28, 2022
	Software			Services			Total
Revenues	$	17,120		$	10,093		$	27,213
Cost of revenues	1,515			4,071			5,586
Gross profit	$	15,605		$	6,022		$	21,627
Gross margin	91		%	60		%	79		%

Our software business and services business represented 63% and 37% of total revenue, respectively, for the six months ended February 28, 2022.

NOTE 8 – 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 employee's gross salary. We contributed $0.2 million and $0.2 million for the three months ended February 28, 2023 and 2022, respectively, and $0.3 million and $0.3 million for the six months ended February 28, 2023, and 2022, respectively.

NOTE 9 - SUBSEQUENT EVENTS

Dividend Declared

On Wednesday, April 5, 2023, our Board of Directors declared a quarterly cash dividend of $0.06 per share to our shareholders. The dividend in the amount of approximately $1.2 million will be distributed on Monday, May 1, 2023, for shareholders of record as of Monday, April 24, 2023.

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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Forward-Looking Statements

This document and the documents incorporated in this document by reference contain forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact contained in this document and the materials accompanying this document are forward-looking statements.

The forward-looking statements are based on the beliefs of our management, as well as assumptions made by and information currently available to our management. Frequently, but not always, forward-looking statements are identified by the use of the future tense and by words such as “believes,” expects,” “anticipates,” “intends,” “will,” “may,” “could,” “would,” “projects,” “continues,” “estimates” or similar expressions. Forward-looking statements are not guarantees of future performance and actual results could differ materially from those indicated by the forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause our or our industry’s actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by the forward-looking statements.

The forward-looking statements contained or incorporated by reference in this document are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”), and are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. These statements include declarations regarding our plans, intentions, beliefs, or current expectations.

Among the important factors that could cause actual results to differ materially from those indicated by forward-looking statements are the risks and uncertainties described under “Risk Factors” in our Annual Report on Form 10-K for the year ended August 31, 2022, filed with the Securities and Exchange Commission (“SEC”) on October 28, 2022, and elsewhere in this document and in our other filings with the SEC.

Forward-looking statements are expressly qualified in their entirety by this cautionary statement. The forward-looking statements included in this document are made as of the date of this document and we do not undertake any obligation to update forward-looking statements to reflect new information, subsequent events, or otherwise.

General

BUSINESS

OVERVIEW

Simulations Plus, Inc., incorporated in 1996, is a premier developer of drug discovery and development software for modeling and simulation, and for the prediction of molecular properties utilizing both artificial intelligence and machine-learning-based technology. We also provide consulting services ranging from early drug discovery through preclinical and clinical development 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 academic and regulatory agencies worldwide for use in the conduct of industry-based research. The Company is headquartered in Southern California, with offices in Buffalo, NY; Research Triangle Park, NC; and Paris, France. Our common stock has traded on the Nasdaq Global Select Market under the symbol “SLP” since May 13, 2021, prior to which it traded on the Nasdaq Capital Market under the same symbol.

We are a global leader, delivering relevant, cost-effective software and creative and insightful consulting services. Pharmaceutical and biotechnology companies and hospitals use our software programs and scientific consulting services to guide early drug discovery (molecule design screening and lead optimization), preclinical and clinical development programs, and the development of generic medicines after patent expiration, including using our software products and services to enhance their understanding of the properties of potential new therapies and to use emerging data to improve formulations, select and justify dosing regimens, support the generics industry, optimize clinical trial designs, and simulate outcomes in special populations, such as in elderly and pediatric patients.

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Results of Operations

Comparison of Three Months Ended February 28, 2023 and 2022


(in thousands)	Three Months Ended February 28,
	2023		2022		$ Change		% Change
Revenue	$	15,750	$	14,796	$	954	6	%
Cost of revenue	2,620		2,830		(210)		(7)	%
Gross profit	13,130		11,966		1,164		10	%
Research and development	1,317		902		415		46	%
Selling, general, and administrative	7,779		5,584		2,195		39	%
Total operating expenses	9,096		6,486		2,610		40	%
Income from operations	4,034		5,480		(1,446)		(26)	%
Other income, net	1,034		53		981		1,851	%
Income before income taxes	5,068		5,533		(465)		(8)	%
Provision for income taxes	(894)		(1,124)		230		(20)	%
Net income	$	4,174	$	4,409	$	(235)	(5)	%

Revenues

Revenues increased by $1.0 million, or 6%, to $15.8 million for the three months ended February 28, 2023, compared to $14.8 million for the three months ended February 28, 2022. This increase is primarily due to a $0.7 million, or 7%, increase in software-related revenue and $0.2 million, or 4%, increase in service-related revenue when compared to the three months ended February 28, 2022.

Cost of revenues

Cost of revenues remained relatively consistent with a slight decrease of $0.2 million, or 7%, for the three months ended February 28, 2023, compared to the three months ended February 28, 2022. The decrease is primarily due to a $0.3 million, or 13%, decrease in service-related cost of revenue, offset by an increase of $0.1 million, or 8%, in software-related cost of revenue when compared to the three months ended February 28, 2022.

Gross profit

Gross profit increased by $1.2 million, or 10%, to $13.1 million for the three months ended February 28, 2023, compared to $12.0 million for the three months ended February 28, 2022. The increase in gross profit is due to an increase in gross profit for our software business of $0.7 million, or 7%, and an increase in gross profit for our services business of $0.5 million, or 17%.

Overall gross margin percentage was 83% and 81% for the three months ended February 28, 2023, and 2022, respectively.

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Research and development

We incurred $2.1 million of research and development costs during the three months ended February 28, 2023. Of this amount, $0.8 million was capitalized as a part of capitalized software development costs and $1.3 million was expensed. We incurred $1.6 million of research and development costs during the three months ended February 28, 2022. Of this amount, $0.7 million was capitalized and $0.9 million was expensed. The overall increase in research and development costs is primarily due to the development of the newest version of our MonolixSuite product, version 2023R1, which was released on February 28, 2023, as well as an increase in personnel costs from market compensation adjustments following the Company's engagement during fiscal year 2022 of an external consulting firm, Arthur J. Gallagher & Co., to complete a full market study on the compensation payable to our employees compared to those of our peers. The Company rebuilt its career grading system based on the results of the compensation study to ensure competitive and equitable pay for all our employees across the organization in base salary, cash bonus, and stock option grants. We believe that the market study and resulting compensation adjustments were necessary in light of the highly competitive employment market to attract and retain superior talent.

Selling, general, and administrative expenses

Selling, general, and administrative ("SG&A") expenses increased by $2.2 million, or 39%, to $7.8 million for the three months ended February 28, 2023, compared to $5.6 million for the three months ended February 28, 2022. This increase was primarily due to a $1.7 million increase in employee and labor-related expenses from a 14% headcount increase to meet the robust and growing demand for our services as well as market compensation adjustments following the Company's engagement during fiscal year 2022 of an external consulting firm, Arthur J. Gallagher & Co., to complete a full market study on the compensation payable to our employees compared to those of our peers. The Company rebuilt its career grading system based on the results of the compensation study to ensure competitive and equitable pay for all our employees across the organization in base salary, cash bonus, and stock option grants. We believe that the market study and resulting compensation adjustments were necessary in light of the highly competitive employment market to attract and retain superior talent. The $1.9 million increase in personnel costs includes an increase in stock compensation expense of $0.5 million, an increase in accrued bonuses of $0.6 million, and an increase in base salaries of $0.3 million.

As a percent of revenues, SG&A expense was 49% for the three months ended February 28, 2023, compared to 38% for the three months ended February 28, 2022.

Other income

Total other income was $1.0 million for the three months ended February 28, 2023, compared to total other income of $0.1 million for the three months ended February 28, 2022. The increase is primarily due to an increase in interest income of $0.9 million driven by an increase in interest rates.

Provision for income taxes

The provision for income taxes was $0.9 million for the three months ended February 28, 2023, compared to $1.1 million for the three months ended February 28, 2022. Our effective tax rate decreased to 18% for the three months ended February 28, 2023, from 20% for the three months ended February 28, 2022.

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Comparison of Six Months Ended February 28, 2023 and 2022


(in thousands)	Six Months Ended February 28,
	2023		2022		$ Change		% Change
Revenue	$	27,714	$	27,213	$	501	2	%
Cost of revenue	5,291		5,586		(295)		(5)	%
Gross profit	22,423		21,627		796		4	%
Research and development	2,483		1,784		699		39	%
Selling, general, and administrative	15,028		10,572		4,456		42	%
Total operating expenses	17,511		12,356		5,155		42	%
Income from operations	4,912		9,271		(4,359)		(47)	%
Other income, net	1,774		118		1,656		1,403	%
Income before income taxes	6,686		9,389		(2,703)		(29)	%
Provision for income taxes	(1,267)		(1,954)		687		(35)	%
Net income	$	5,419	$	7,435	$	(2,016)	(27)	%

Revenues

Revenues increased by $0.5 million, or 2%, to $27.7 million for the six months ended February 28, 2023, compared to $27.2 million for the six months ended February 28, 2022. This increase is primarily due to an increase of $1.1 million, or 11%, in service-related revenue, partially offset by a $0.6 million, or 3%, decrease in software-related revenue, driven by timing of the software license renewals and foreign currency exchange rate fluctuations when comparing the six months ended February 28, 2023, and 2022.

Cost of revenues

Cost of revenues remained relatively consistent with a slight decrease of $0.3 million, or 5%, for the six months ended February 28, 2023, compared to the six months ended February 28, 2022. The decrease is primarily due to a $0.5 million, or 12%, decrease in service-related cost of revenue, offset by an increase of $0.2 million, or 14%, in software-related cost of revenue when compared to the six months ended February 28, 2022.

Gross profit

Gross profit increased by $0.8 million, or 4%, to $22.4 million for the six months ended February 28, 2023, compared to $21.6 million, for the six months ended February 28, 2022. The increase in gross profit is due to an increase in gross profit for our services business of $1.6 million, or 26%, partially offset by a decrease in gross profit for our software business of $0.8 million, or 5%.

Overall gross margin percentage was 81% and 79% for the six months ended February 28, 2023, and 2022, respectively.

Research and development

We incurred $4.2 million of research and development costs during the six months ended February 28, 2023. Of this amount, $1.7 million was capitalized as a part of capitalized software development costs and $2.5 million was expensed. We incurred $3.3 million of research and development costs during the six months ended February 28, 2022. Of this amount, $1.5 million was capitalized and $1.8 million was expensed. The overall increase in research and development costs is primarily due to the development of the newest version of our MonolixSuite product, version 2023R1, which was released on February 28, 2023 as well as an increase in personnel costs from market compensation adjustments following the Company's engagement during fiscal year 2022 of an external consulting firm, Arthur J. Gallagher & Co., to complete a full market study on the compensation payable to our employees compared to those of our peers. The Company rebuilt its career grading system based on the results of the compensation study to ensure competitive and equitable pay for all our employees across the organization in base salary, cash bonus, and stock option grants. We believe that the market study and resulting compensation adjustments were necessary in light of the highly competitive employment market to attract and retain superior talent.

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Selling, general, and administrative expenses

Selling, general, and administrative (“SG&A”) expenses increased by $4.5 million, or 42%, to $15.0 million for the six months ended February 28, 2023, compared to $10.6 million for the six months ended February 28, 2022. This increase was primarily due to a $3.2 million increase in employee and labor related expenses from a 14% headcount increase to meet the robust and growing demand for our services as well as market compensation adjustments following the Company's engagement during fiscal year 2022 of an external consulting firm, Arthur J. Gallagher & Co., to complete a full market study on the compensation payable to our employees compared to those of our peers. The Company rebuilt its career grading system based on the results of the compensation study to ensure competitive and equitable pay for all our employees across the organization in base salary, cash bonus, and stock option grants. We believe that the market study and resulting compensation adjustments were necessary in light of the highly competitive employment market to attract and retain superior talent. The $3.2 million increase in personnel costs includes an increase in accrued bonuses of $1.0 million, an increase in stock compensation of $0.9 million, and an increase in base salaries of $1.0 million.

Additionally, the overall increase in SG&A is due to an increase in merger and acquisition costs of $0.4 million, an increase in commissions to distributors of $0.1 million, and an increase in travel costs of $0.2 million.

As a percent of revenues, SG&A expense was 54% for the six months ended February 28, 2023, compared to 39% for the six months ended February 28, 2022.

Other income

Total other income was $1.8 million for the six months ended February 28, 2023, compared to total other income of $0.1 million for the six months ended February 28, 2022. The increase is primarily due to an increase in interest income of $1.6 million driven by an increase in interest rates.

Provision for income taxes

The provision for income taxes was $1.3 million for the six months ended February 28, 2023, compared to $2.0 million for the six months ended February 28, 2022. Our effective tax rate decreased to 19% for the six months ended February 28, 2023, from 21% for the six months ended February 28, 2022.

Results of Operations by Business Unit

Comparison of Three Months Ended February 28, 2023 and 2022

Revenues


(in thousands)	Three Months Ended February 28,
	2023		2022		Change ($)		Change (%)
Software	$	10,487	$	9,758	$	729	7	%
Services	5,263		5,038		225		4	%
Total	$	15,750	$	14,796	$	954	6	%

Cost of Revenues


(in thousands)	Three Months Ended February 28,
	2023		2022		Change ($)		Change (%)
Software	$	843	$	780	$	63	8	%
Services	1,777		2,050		(273)		(13)	%
Total	$	2,620	$	2,830	$	(210)	(7)	%

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Gross Profit


(in thousands)	Three Months Ended February 28,
	2023		2022		Change ($)		Change (%)
Software	$	9,644	$	8,978	$	666	7	%
Services	3,486		2,988		498		17	%
Total	$	13,130	$	11,966	$	1,164	10	%

Software Business

For the three months ended February 28, 2023, the revenue increase of $0.7 million, or 7%, compared to the three months ended February 28, 2022, was primarily due to higher revenues from GastroPlus® of $0.9 million, partially offset by lower revenues from MonolixSuite of $0.2 million. Cost of revenues remained relatively consistent, with a slight increase of $0.1 million, or 8%, during the same periods, and gross profit increased by $0.7 million, or 7%, primarily due to the increase in revenues.

Services Business

For the three months ended February 28, 2023, the revenue increase of $0.2 million, or 4%, compared to the three months ended February 28, 2022, was primarily due to higher revenues from pharmacokinetic and pharmacodynamic (“PKPD”) services of $0.4 million and higher revenues from physiologically based pharmacokinetics (“PBPK”) services of $0.3 million, partially offset by a decrease in revenues from quantitative systems pharmacology/quantitative systems toxicology (“QSP/QST”) services of $0.5 million. Cost of revenues decreased by $0.3 million, or 13%. Gross profit increased by $0.5 million, or 17%, for the same periods.

Comparison of Six Months Ended February 28, 2023 and 2022

Revenues


(in thousands)	Six Months Ended February 28,
	2023		2022		Change ($)		Change (%)
Software	$	16,561	$	17,120	$	(559)	(3)	%
Services	11,153		10,093		1,060		11	%
Total	$	27,714	$	27,213	$	501	2	%

Cost of Revenues


(in thousands)	Six Months Ended February 28,
	2023		2022		Change ($)		Change (%)
Software	$	1,728	$	1,515	$	213	14	%
Services	3,563		4,071		(508)		(12)	%
Total	$	5,291	$	5,586	$	(295)	(5)	%

Gross Profit


(in thousands)	Six Months Ended February 28,
	2023		2022		Change ($)		Change (%)
Software	$	14,833	$	15,605	$	(772)	(5)	%
Services	7,590		6,022		1,568		26	%
Total	$	22,423	$	21,627	$	796	4	%

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Software Business

For the six months ended February 28, 2023, the revenue decrease of $0.6 million, or 3%, compared to the six months ended February 28, 2022, was primarily due to lower revenues from Absorption, Distribution, Metabolism, Excretion, and Toxicity Predictor (“ADMET Predictor®”) of $0.4 million and from MonolixSuite of $0.2 million. Cost of revenues increased by $0.2 million, or 14%, during the same periods, and gross profit decreased by $0.8 million, or 5%, primarily due to the decrease in revenues.

Services Business

For the six months ended February 28, 2023, the revenue increase of $1.1 million, or 11%, compared to the six months ended February 28, 2022, was primarily due to higher revenues from PKPD services of $1.0 million and an increase in revenues from PBPK services of $0.9 million, partially offset by a decrease in revenues from QSP/QST services of $0.9 million. Cost of revenues decreased by $0.5 million, or 12%. Gross profit increased by $1.6 million, or 26%, for the same periods.

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Liquidity and Capital Resources

As of February 28, 2023, the Company had $39.3 million in cash and cash equivalents, $76.1 million in short-term investments, and working capital of $125.5 million. Our principal sources of capital have been a follow-on public offering in August 2020 for $107.7 million and cash flows from our operations. We have achieved continuous positive operating cash flow over the last thirteen fiscal years.

On December 29, 2022, our Board of Directors authorized and approved a share repurchase program for up to $50 million of the outstanding shares of our common stock, including the repurchase of up to $20 million of our outstanding shares through an accelerated share repurchase transaction. Under the repurchase program, shares may be repurchased at our discretion based on ongoing assessment of the capital needs of our business, the market price of shares of our common stock, and general market conditions. Repurchases may be made under certain SEC regulations, which would permit common shares to be repurchased when we would otherwise be prohibited from doing so under insider trading laws. There is no time limit in place for the completion of our share repurchase program, and the program may be suspended or discontinued at any time. Except as required by the ASR Agreement (as defined below), we are not obligated to repurchase any shares under the repurchase program. We funded share repurchases, if any, through cash on hand and cash generated from operations.

The ASR Agreement contains the principal terms and provisions governing the transaction, including, but not limited to, the mechanism used to determine the number of shares that will be delivered, the required timing of delivery of the shares, the circumstances under which Morgan Stanley is permitted to make adjustments to valuation and calculation periods, and various acknowledgments, representations, and warranties made by the Company and Morgan Stanley to one another.

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, including to complete our share repurchase program, if we so choose. Thereafter, if cash generated from operations is insufficient to satisfy our capital requirements, we may have to sell additional equity or debt securities. In the event that additional 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.

We continue to seek opportunities for strategic acquisitions, investments, and partnerships. If one or more such strategic opportunities are identified, a substantial portion of our cash reserves may be required to complete it; however, we intend to maintain sufficient cash reserves to provide reasonable assurance that outside financing will not be necessary to continue operations. If we identify an attractive strategic opportunity 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 transaction, including obtaining loans and issuing additional securities.

Except as discussed elsewhere in this Quarterly Report on Form 10-Q, 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.

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Cash Flows

Operating Activities

Net cash provided by operating activities was $10.2 million for the six months ended February 28, 2023. Our operating cash flows resulted in part from our net income of $5.4 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, $0.6 million related to changes in balances of operating assets and liabilities was added to net income and $4.2 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 $6.2 million for the six months ended February 28, 2022. Our operating cash flows resulted primarily from our net income of $7.4 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, $6.1 million related to changes in balances of operating assets and liabilities was subtracted from net income and $4.9 million related to non-cash charges was added to net income to reconcile to cash flow from operations.

Investing Activities

Net cash used in investing activities during the six months ended February 28, 2023, was $1.1 million, primarily due to the purchase of short-term investments of $47.2 million and computer software development costs of $1.7 million, offset by proceeds from maturities of short-term investments of $48.2 million.

Net cash provided by investing activities during the six months ended February 28, 2022, was $19.1 million, primarily due to the proceeds from maturities of short-term investments of $46.8 million, offset by purchase of short-term investments of $25.5 million and computer software development costs of $1.5 million.

Financing Activities

Net cash used in financing activities during the six months ended February 28, 2023, was $21.5 million, primarily due to share repurchases of $20.0 million and dividend payments totaling $2.4 million, partially offset by proceeds from the exercise of stock options totaling $1.0 million.

Net cash used in financing activities during the six months ended February 28, 2022, was $1.9 million, primarily due to dividend payments totaling $2.4 million, partially offset by proceeds from the exercise of stock options totaling $0.5 million.

Working Capital

At February 28, 2023, we had working capital of $125.5 million, a ratio of current assets to current liabilities of 21.9 and a ratio of debt to equity of 0.1. At August 31, 2022, we had working capital of $139.1 million, a ratio of current assets to current liabilities of 19.0 and a ratio of debt to equity of 0.1.

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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 from 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.

The world has been affected by the ongoing conflict between Russia and Ukraine and economic uncertainty, amongst other things. Inflation has risen, Federal Reserve interest rates have increased recently, and the general consensus among economists suggests that we should expect a higher recession risk to continue over the next year. These factors, amongst other things, could result in further economic uncertainty and volatility in the capital markets in the near term, and could negatively affect our operations.

Additionally, in March 2023, Silicon Valley Bank and Signature Bank were closed and taken over by the FDIC, which created significant market disruption and uncertainty for those who bank with those institutions, and which raised significant concern regarding the stability of the banking system in the United States, and in particular with respect to regional banks. Although we do not hold our cash in regional banks, if the banks and financial institutions at which we hold our cash enter receivership or become insolvent in the future in response to financial conditions affecting the banking system and financial markets, our ability to access our cash and cash equivalents may be threatened and such events could have a material adverse effect on our business and financial condition.

Historically, we have paid cash dividends of $0.06 per share to holders of shares of our common stock on a quarterly basis. The declaration of any future dividends will be determined by our Board of Directors each quarter and will depend on earnings, financial condition, capital requirements, and other factors.

Our continued quest for acquisitions could result in a significant change to revenues and earnings if one or more such acquisitions are completed.

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

Critical Accounting Estimates

Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of the condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements, and the reported amounts of expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including those related to recoverability and useful lives of long-lived assets, stock compensation, valuation of derivative instruments, allowances, contingent consideration, contingent value rights, fixed payment arrangements, and going concern. Management bases its estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The methods, estimates, and judgments used by us in applying these critical accounting policies have a significant impact on the results we report in our condensed consolidated financial statements. Our significant accounting policies and estimates are included in our Annual Report on Form 10-K for the fiscal year ended August 31, 2022 (the “Annual Report”), filed with the SEC on October 28, 2022.

Information regarding our significant accounting policies and estimates can also be found in Note 2, Significant Accounting Policies, to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

As of February 28, 2023, there has been no material change in our exposure to market risk from that described in Item 7A of our Annual Report.

Item 4. Controls and Procedures

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of February 28, 2023. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well-designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, management concluded as of February 28, 2023 that our disclosure controls and procedures were effective.

Changes in Internal Controls over Financial Reporting

No change in our internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

For a description of our material pending legal proceedings, please see Note 5, Commitments and Contingencies, to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

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Item 1A. Risk Factors

Please carefully consider the information set forth in this Quarterly Report on Form 10-Q and the risk factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended August 31, 2022, which could materially affect our business, financial condition, or future results. The risks described in our Annual Report, as well as other risks and uncertainties, could materially and adversely affect our business, results of operations, and financial condition, which in turn could materially and adversely affect the trading price of shares of our common stock. Except as set forth below, there have been no material updates or changes to the risk factors previously disclosed in our Annual Report; provided, however, additional risks not currently known or currently material to us may also harm our business.

We cannot guarantee that our share repurchase program will be fully consummated or that it will enhance long-term stockholder value, and share repurchases could increase the volatility of the price of our common stock.

Pursuant to the new share repurchase program authorized by our Board of Directors on December 29, 2022, we are authorized to repurchase up to $50 million of outstanding shares of our common stock from time to time through a combination of open market repurchases, privately negotiated transactions, 10b5-1 trading plans, accelerated stock repurchase transactions, and/or other transactions, in accordance with federal securities laws. Such program may be suspended or discontinued at any time. Except for the $20 million of shares we are obligated to repurchase pursuant to the ASR Agreement we entered into on January 11, 2023, we are not obligated to repurchase any shares, and the timing, manner, price, and actual amount of share repurchases will depend on a variety of factors, including stock price, market conditions, other capital management needs and opportunities, and corporate and regulatory considerations. As of February 28, 2023, we had repurchased an aggregate of 408,685 common shares pursuant to the ASR Agreement, and we currently expect that the final additional share delivery from Morgan Stanley to us pursuant to the ASR Agreement will be approximately 91,000 shares. The timing of additional repurchases pursuant to our share repurchase program could affect our stock price and increase its volatility. We cannot guarantee that we will repurchase any additional shares, and there can be no assurance that any share repurchases will enhance shareholder value because the stock price of our common stock may decline below the levels at which we effected repurchases.

Adverse developments affecting the financial services industry, such as actual events or concerns involving liquidity, defaults, or non-performance by financial institutions or transactional counterparties, could adversely affect our current and projected business operations and our financial condition and results of operations.

Actual events involving reduced or limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions or other companies in the financial services industry or the financial services industry generally, or concerns or rumors about any events of these kinds, have in the past and may in the future lead to market-wide liquidity problems. For example, in March 2023, Silicon Valley Bank and Signature Bank were closed and taken over by the Federal Deposit Insurance Corporation (“FDIC”) as receiver. Although we did not have any cash or cash equivalent balances on deposit with Silicon Valley Bank or Signature Bank, or any other regional banks, investor concerns regarding the U.S. or international financial systems could result in less favorable commercial financing terms, including higher interest rates or costs and tighter financial and operating covenants, or systemic limitations on access to credit and liquidity sources, thereby making it more difficult for us to acquire financing on acceptable terms or at all. Any decline in available funding or access to our cash and liquidity resources could, among other risks, adversely impact our ability to meet our operating expenses, financial obligations or fulfill our other obligations. Any of these impacts, or any other impacts resulting from the factors described above or other related or similar factors not described above, could have material adverse impacts on our liquidity and our current and/or projected business operations and financial condition and results of operations.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

During the quarter ended February 28, 2023, there were no unregistered sales of our securities that were not reported in a Current Report on Form 8-K.

Issuer Purchases of Equity Securities

As discussed elsewhere in this Quarterly Report on Form 10-Q, on December 29, 2022, our Board of Directors authorized and approved a share repurchase program for up to $50 million of the outstanding shares of our common stock, and on January 11, 2023, we entered into the ASR Agreement with Morgan Stanley to repurchase an aggregate of $20 million of our outstanding common shares as part of the share repurchase program. The program has no expiration date but may be terminated at any time at our Board of Directors’ discretion.

In January 2023, we received an initial delivery of an aggregate of 408,685 shares of our common stock from Morgan Stanley pursuant to the ASR Agreement, in exchange for which we made an initial payment of $20 million to Morgan Stanley. These 408,685 shares were retired and are treated as authorized, unissued shares. The final number of shares to be repurchased pursuant to the ASR Agreement will be based on the volume-weighted average price of the Company’s common stock during the term of the ASR Agreement, less a discount and subject to adjustments. At final settlement, under certain circumstances, Morgan Stanley may be required to deliver to us additional shares of our common stock, or we may be required to deliver to Morgan Stanley additional shares of our common stock (or, at our election, to make a cash payment to Morgan Stanley). The final settlement is expected to be completed during the third quarter of fiscal 2023. We currently estimate that the final additional share delivery from Morgan Stanley to us pursuant to the ASR Agreement will be approximately 91,000 shares.

After completion of the repurchases under the ASR Agreement, $30 million will remain available for additional repurchases under the authorized repurchase program.


	Total Number of Shares Purchased	Average Price Paid Per Share	Total Number of Shares Purchased as Part of Publicly Announced Program	Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program
12/01/2022 - 12/31/2022	—	$—	—	$	—
01/01/2023 - 01/31/2023	408,685	(1)	408,685	$	30,000,000
02/01/2023 - 02/28/2023	—	$—	—	$	—
Total	408,685	(1)	408,685	$	30,000,000

(1) On January 11, 2023, we entered into the ASR Agreement with Morgan Stanley to repurchase an aggregate of $20 million of our outstanding common shares and received an initial delivery of an aggregate of 408,685 shares of our common stock. The final number of shares to be repurchased pursuant to the ASR Agreement will be based on the volume-weighted average price of the Company's common stock during the term of the ASR Agreement, less a discount and subject to adjustments. The final settlement is expected to be completed during the third quarter of fiscal 2023, and we currently estimate that the final additional share delivery from Morgan Stanley to us pursuant to the ASR Agreement will be approximately 91,000 shares. Assuming 91,000 shares are ultimately delivered at settlement, our average price paid per share would be approximately $40.03; this is just an estimate that remains subject to change, and the total number of shares to be delivered in the final delivery will be determined as of the date of the final settlement.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

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Item 5. Other Information

None.

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Item 6. Exhibits


EXHIBIT NUMBER						DESCRIPTION
2.1^						Agreement and Plan of Merger, dated July 23, 2014, by and among the Company, Cognigen Corporation and the other parties thereto, incorporated by reference to an exhibit to the Company’s Form 8-K/A filed November 18, 2014.
2.2^						Share Purchase and Contribution Agreement, dated March 31, 2020, incorporated by reference to an exhibit to the Company’s Form 8-K filed April 2, 2020.
2.3^						Stock Purchase Agreement by and among Simulation Plus, Inc., DILIsym Services, Inc., The Shareholders’ Representative and The Shareholders of DILIsym Services, Inc., incorporated by reference to an exhibit to the Company’s Form 10-Q filed July 10, 2017.
3.1						Articles of Incorporation of the Company, incorporated by reference to an exhibit to the Company’s Form 10-K, filed November 29, 2010.
3.2						Amended and Restated Bylaws of the Company, incorporated by reference to an exhibit to the Company’s Form 10-K, filed November 29, 2010.
3.3						Certificate of Amendment to the Amended and Restated Bylaws of Simulations Plus, Inc., incorporated by reference to Appendix A to the Company’s Definitive Schedule 14A filed December 31, 2018.
4.1						Form of Common Stock Certificate, incorporated by reference to the Company’s Registration Statement on Form SB-2 (Registration No. 333-6680) filed on March 25, 1997.
4.2						Share Exchange Agreement, incorporated by reference to the Company’s Registration Statement on Form SB-2 (Registration No. 333-6680) filed on March 25, 1997.
















10.1^						Confirmation for Fixed Dollar Accelerated Share Repurchase Transaction, dated as of January 11, 2023, by and between Simulations Plus, Inc. and Morgan Stanley & Co. LLC, incorporated by reference to an exhibit to the Company’s Form 8-K, filed January 11, 2023.
10.2						First Amendment to 2021 Equity Incentive Plan, of Simulations Plus, Inc., dated February 9, 2023, incorporated by reference to an exhibit to the Company’s Form 8-K, filed February 9, 2023.
10.3*						Fourth Amendment to Lease by and between the Company and Crest Development LLC, dated as of February 17, 2023.
31.1 *						Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 *						Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 **						Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS***						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

_____________________________


^						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.
**						Furnished 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.

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SIGNATURE

In accordance with Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Lancaster, State of California, on April 7, 2023


		SIMULATIONS PLUS, INC.

Date:	April 7, 2023	By:	/s/ Will Frederick
			Will Fredrick Chief Financial Officer (Principal financial officer)