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, 2021, filed with the Securities and Exchange Commission ("SEC") on October 27, 2021, 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 modeling and simulation software for drug discovery and development, including the prediction of properties of molecules utilizing artificial-intelligence and machine-learning-based technologies. We also provide consulting services ranging from early drug discovery through preclinical and clinical trial development to regulatory submissions in support of product approval. Our software and consulting services are provided to major pharmaceutical, biotechnology, agrochemical, cosmetics, and food industry companies. They are also provided to academic agencies for use in the conduct of industry-based research and to regulatory agencies for product approval. The Company is headquartered in Southern California, with additional offices in Buffalo, NY, Durham, 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 generate revenue are a global leader, delivering relevant, cost-effective software and creative and insightful consulting services. Pharmaceutical and biotechnology companies 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 development of generic medicines after patent expiration, including using our software products and services to enhance their understanding of the properties of potential new medicines 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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Impacts of the COVID-19 Pandemic on our Business

For a discussion of the impacts on, and risks to, our business from COVID-19, please refer to "Our business is subject to risks arising from epidemic diseases, such as the recent outbreak of the COVID-19 illness" included in Item 1A Risk Factors in our Annual Report on Form 10-K for the fiscal year ended August 31, 2021, filed with the SEC on October 27, 2021.





RECENT DEVELOPMENTS



Short-Form Mergers

Effective September 1, 2021, the Company merged Cognigen Corporation and DILIsym, Services, Inc. (wholly owned subsidiaries of the Company) with and into Simulations Plus, Inc. through short-form mergers (the "Mergers"). To effectuate the Mergers, the Company filed Certificates of Ownership with the Secretaries of State of the states of Delaware (Cognigen's and DILIsym's state of incorporation) and California (the Company's state of incorporation). Consummation of the Mergers was not subject to approval of the Company's stockholders and did not impact the rights of the Company's stockholders.





Summary Results of Operations

Comparison of Three Months Ended November 30, 2021 and 2020:





(in thousands)                                      Three Months Ended November 30,
                                             2021         2020        $ Change      % Change
Revenue                                    $ 12,417     $ 10,701     $    1,716           16%
Cost of revenue                               2,756        2,433            323           13%
Gross profit                                  9,661        8,268          1,393           17%
Research and development                        882          809             73            9%
Selling, general and administrative           4,988        4,408            580           13%
Total operating expenses                      5,870        5,217            653           13%
Income from operations                        3,791        3,051            740           24%
Other income (expense), net                      65          (55 )          120        (218)%
Income before provision for income taxes      3,856        2,996            860           29%
Provision for income taxes                     (830 )       (517 )         (313 )         61%
Net income                                 $  3,026     $  2,479     $      547           22%




Revenue

Consolidated revenue increased by approximately $1.7 million or 16% to $12.4 million for the three months ended November 30, 2021, compared to consolidated revenue of approximately $10.7 million for the three months ended November 30, 2020. This increase is primarily due to a $1.2 million or 19% increase in software-related revenue, as well as a $566 thousand or 13% increase in service-related revenue when compared to the three months ended November 30, 2021 and 2020.





Cost of Revenue

Consolidated cost of revenue increased by approximately $323 thousand or 13%, to $2.8 million for the three months ended November 30, 2021, compared to approximately $2.4 million for the three months ended November 30, 2020. The increase is primarily due to higher labor-related cost of revenue of $367 thousand, partially offset by a decrease in technical support costs of $40 thousand.







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Gross Profit

Consolidated gross profit increased by approximately $1.4 million or 17% to $9.7 million for the three months ended November 30, 2021 compared to approximately $8.3 million for the three months ended November 30, 2020. The higher gross profit is primarily due to an increase in gross profit for our software business of approximately $1.2 million, or 23%, and an increase in gross profit for our services business of approximately $166 thousand or 6%.

Overall gross margin percentage increased by approximately 1% to 78% for the three months ended November 30, 2021 from 77% for the three months ended November 30, 2020.

Research and Development Costs

Total research and development costs increased by $221 thousand for the three months ended November 30, 2021 compared to the three months ended November 30, 2020. During the three months ended November 30, 2021, we incurred approximately $1.7 million of research and development costs; of this amount, $838 thousand was capitalized and $882 thousand was expensed. During the three months ended November 30, 2020, we incurred approximately $1.5 million of research and development costs; of this amount approximately $700 thousand was capitalized and $809 thousand was expensed.

Selling, General, and Administrative Expenses

Selling, general, and administrative expenses increased by approximately $580 thousand or 13% to approximately $5.0 million for the three months ended November 30, 2021, from $4.4 million for the three months ended November 30, 2020. The increase was primarily due to higher salary, bonus and other compensation costs of $237 thousand, an increase in payroll taxes of $131 thousand, a $103 thousand increase in insurance costs related to higher liability-related insurance, and a $93 thousand increase in commission costs.

As a percent of revenue, consolidated selling, general, and administrative expenses decreased from 41% to 40% for the same comparative periods.





Other Income/Expense, net

Total other income was $65 thousand for the three months ended November 30, 2021 compared to total other expense of $55 thousand for the three months ended November 30, 2020. The variance of $120 thousand was primarily due to increases in currency-exchange gains of $116 thousand.





Provision for Income Taxes

Provision for income taxes was $830 thousand for the three months ended November 30, 2021 compared to $517 thousand for the same period in the previous year. Our effective tax rate increased 4.2% to 21.5% for the three months ended November 30, 2021 from 17.3% during the same period of the previous year.

Segment Results of Operations by Business Unit

Comparison of Three Months Ended November 30, 2021 and 2020:





Revenue



(in thousands)               Three Months Ended November 30,
                   2021          2020        Change ($)       Change (%)
Software         $   7,362     $  6,212     $      1,150              19%
Services             5,055        4,489              566              13%
Total            $  12,417     $ 10,701     $      1,716              16%






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Cost of Revenue



(in thousands)               Three Months Ended  November 30,
                   2021            2020        Change ($)      Change (%)
Software         $     735       $    812     $        (77 )          (9)%
Services             2,021          1,621              400             25%
Total            $   2,756       $  2,433     $        323             13%




Gross Profit



(in thousands)               Three Months Ended November 30,
                   2021          2020        Change ($)       Change (%)
Software         $   6,627      $ 5,400     $      1,227              23%
Services             3,034        2,868              166               6%
Total            $   9,661      $ 8,268     $      1,393              17%




Software Business

For the three months ended November 30, 2021, the revenue increase of $1.2 million or 19%, compared to the three months ended November 30, 2020, was primarily due to higher sales from GastroPlus and MonolixSuite of $649 thousand and $405 thousand, respectively. Cost of revenue decreased $77 thousand or 9% during the same periods primarily due to lower technical support costs of $40 thousand and lower amortization costs of $29 thousand. Gross margin increased $1.2 million or 23% during the same periods, primarily due to the increase in revenue.





Services Business

For the three months ended November 30, 2021, the revenue increase of $566 thousand or 13%, compared to the three months ended November 30, 2020, was primarily due to an increase in revenue from QSP/QST consulting services and analytical studies of $436 thousand and $116 thousand, respectively. Cost of revenue increased $400 thousand or 25%, primarily due to an increase in salaries for analytical studies of $173 thousand, training costs of $93 thousand, salary contracts of $61 thousand, and subcontractor costs of $57 thousand. Gross margin increased $166 thousand or 6%.

Liquidity and Capital Resources

As of November 30, 2021, the Company had $41.7 million in cash and cash equivalents, $82.7 million in short-term investments, and $130.3 million in working capital. Our principal sources of capital have been cash flows from our operations and a public offering in 2020. We have achieved continuous positive operating cash flow over the last twelve fiscal years.

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

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







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





Cash Flows



Operating Activities

Net cash provided by operating activities was $3.6 million for the three months ended November 30, 2021. Our operating cash flows resulted primarily from our net income of $3.0 million, which was generated by cash received from our customers, offset by cash payments we made to third parties for their services and employee compensation. In addition, net cash outflow from changes in balances of operating assets and liabilities was $1.8 million, offset by non-cash charges of $2.4 million. The change in operating assets and liabilities was primarily a result of an increase in accounts receivable.

Net cash provided by operating activities was $5.3 million for the three months ended November 30, 2020. Our operating cash flows resulted primarily from our net income of $2.5 million, which was generated by cash received from our customers, offset by cash payments we made to third parties for their services and employee compensation. In addition, net cash inflow from changes in balance of operating assets and liabilities was $0.6 million, and non-cash charges were $2.2 million. The change in operating assets and liabilities was primarily a result of a decrease in prepaid incomes taxes and revenue in excess of billings.





Investing Activities

Net cash provided by investing activities during the three months ended November 30, 2021 of approximately $2.0 million was primarily due to the proceeds from the sale of short-term investments of 16.1 million, partially offset by the purchase of short-term investments of $12.7 million and the purchase of computer software development costs of $838 thousand.

Cash used for investing activities during the three months ended November 30, 2020 of $25.9 million was primarily due to the purchase of short-term investments of $31.0 and the purchase of computer software development costs of $728 thousand, partially offset by the proceeds from the sale of short-term investments of $6.0 million.





Financing Activities

For the three months ended November 30, 2021, net cash used in financing activities of $837 thousand was primarily due to dividend payments totaling $1.2 million, partially offset by proceeds from the exercise of stock options totaling $372 thousand.

Net cash used for financing activities for the three months ended November 30, 2020, of $1.0 million was primarily due to dividend payments totaling $1.2 million.

Cash and Working Capital

As of November 30, 2021, the Company had $41.7 million in cash and cash equivalents and $82.7 million in short-term investments.

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

At November 30, 2021, we had working capital of $130.3 million, a ratio of current assets to current liabilities of 14.6 and a ratio of debt to equity of 0.1. At August 31, 2021, we had working capital of $127.7 million, a ratio of current assets to current liabilities of 12.0 and a ratio of debt to equity of 0.1.







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Contractual Obligations

The following table provides aggregate information regarding our contractual obligations as of November 30, 2021:





(in thousands)                                 Payments due by period
                                                       2-3        4-5        More than
Contractual obligations:       Total      1 year      years      years        5 years

Operating lease obligations   $ 1,224     $   373     $  618     $  233     $         -
Contracts payable               4,671       4,671          -          -               -
Total                         $ 5,895     $ 5,044     $  618     $  233     $         -

Known Trends of Uncertainties

Although we have not seen any significant reduction in total revenue to date, we did see a reduction in PKPD services during the year ended August 31, 2021, primarily resulting from project disruptions due to customer delays, holds, and drug development program cancellations. We have also seen some consolidation in the pharmaceutical industry during economic downturns although these consolidations have not had a negative effect on our total revenue from that industry. Should consolidations and downsizing in the industry continue to occur, those events could adversely impact our revenue and earnings going forward.

The world has been affected by the COVID-19 pandemic. Although there has not been a substantial impact on our sales revenue to date, until the pandemic has passed, there remains uncertainty as to the effect on our business in both the short and long term.

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

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

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





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, including the COVID-19 pandemic, 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, 2021, filed with the SEC on October 27, 2021.

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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