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Table of Contents

 

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

  Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended February 28, 2022
     
OR
     
  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 ☒     No ☐

 

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 ☒     No ☐

 

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):

 

☒   Large accelerated Filer ☐   Accelerated Filer
☐   Non-accelerated Filer    Smaller reporting company
   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. ☐

 

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

 

The number of shares outstanding of the registrant’s common stock, par value $0.001 per share, as of April 4, 2022, was 20,206,550.

 

 

   

 

 

Simulations Plus, Inc.

FORM 10-Q

For the Quarterly Period Ended February 28, 2022

 

Table of Contents

 

PART I. FINANCIAL INFORMATION
    Page
Item 1. Condensed Consolidated Financial Statements  
     
  Condensed Consolidated Balance Sheets at February 28, 2022 and August 31, 2021 3
     
  Condensed Consolidated Statements of Operations and Comprehensive Income for the three and six months ended February 28, 2022 and 2021 4
     
  Condensed Consolidated Statements of Shareholders’ Equity for the three and six months ended February 28, 2022 and 2021 5
     
  Condensed Consolidated Statements of Cash Flows for the six months ended February 28, 2022 and 2021 6
     
  Notes to Condensed Consolidated Financial Statements 7
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 25
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 33
     
Item 4. Controls and Procedures 33
     
PART II. OTHER INFORMATION
     
Item 1. Legal Proceedings 34
     
Item 1A. Risk Factors 34
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 35
     
Item 3. Defaults upon Senior Securities 35
     
Item 4. Mine Safety Disclosures 35
     
Item 5. Other Information 35
     
Item 6. Exhibits 36
     
  Signatures 37

 

 

 2 

 

 

Part I. FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated Financial Statements

 

SIMULATIONS PLUS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

         
   (Unaudited)   (Audited) 
   February 28,   August 31, 
(in thousands, except share and per share amounts)  2022   2021 
ASSETS          
Current assets          
Cash and cash equivalents  $60,373   $36,984 
Accounts receivable, net of allowance for doubtful accounts of $12 and $78   15,039    9,851 
Prepaid income taxes   449    1,012 
Prepaid expenses and other current assets   3,573    4,846 
Short-term investments   64,192    86,620 
Total current assets   143,626    139,313 
Long-term assets          
Capitalized computer software development costs, net of accumulated amortization of $15,062 and $14,438   8,529    7,646 
Property and equipment, net   634    1,838 
Operating lease right-of-use assets   1,653    1,276 
Intellectual property, net of accumulated amortization of $7,231 and $6,516   9,754    10,469 
Other intangible assets, net of accumulated amortization of $2,475 and $2,186   7,877    6,464 
Goodwill   12,921    12,921 
Other assets   50    51 
Total assets  $185,044   $179,978 
           
LIABILITIES AND SHAREHOLDERS' EQUITY          
Current liabilities          
Accounts payable  $414   $387 
Accrued payroll and other expenses   2,220    5,604 
Contracts payable - current portion   4,793    4,550 
Operating lease liability - current portion   336    382 
Deferred revenue   1,241    651 
Total current liabilities   9,004    11,574 
           
Long-term liabilities          
Deferred income taxes, net   2,150    1,726 
Operating lease liability   1,314    896 
Total liabilities   12,468    14,196 
           
Commitments and contingencies        
           
Shareholders' equity          
Preferred stock, $0.001 par value 10,000,000 shares authorized, no shares issued and outstanding        
Common stock, $0.001 par value and additional paid-in capital —50,000,000 shares authorized, 20,181,784 and 20,141,521 shares issued and outstanding   135,472    133,418 
Retained earnings   37,422    32,407 
Accumulated other comprehensive loss   (318)   (43)
Total shareholders' equity   172,576    165,782 
Total liabilities and shareholders' equity  $185,044   $179,978 

 

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

 

 

 3 

 

 

 

SIMULATIONS PLUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

For the three and six months ended February 28, 2022 and 2021

(Unaudited)

 

                     
(in thousands, except per common share amounts)  Three Months Ended   Six Months Ended 
   2022   2021   2022   2021 
Revenues                
Software  $9,758   $7,827   $17,120   $13,975 
Services   5,038    5,320    10,093    9,873 
Total revenues   14,796    13,147    27,213    23,848 
Cost of revenues                    
Software   780    836    1,515    1,647 
Services   2,050    2,075    4,071    3,697 
Total cost of revenues   2,830    2,911    5,586    5,344 
Gross profit   11,966    10,236    21,627    18,504 
Operating expenses                    
Research and development   902    1,292    1,784    2,101 
Selling, general, and administrative   5,584    5,458    10,572    9,866 
Total operating expenses   6,486    6,750    12,356    11,967 
                     
Income from operations   5,480    3,486    9,271    6,537 
                     
Other income (expense), net   53    (63)   118    (118)
                     
Income before income taxes   5,533    3,423    9,389    6,419 
Provision for income taxes   (1,124)   (212)   (1,954)   (729)
Net income  $4,409   $3,211   $7,435   $5,690 
                     
Earnings per share                    
Basic  $0.22   $0.16   $0.37   $0.28 
Diluted  $0.21   $0.15   $0.36   $0.27 
                     
Weighted-average common shares outstanding                    
Basic   20,177    20,006    20,164    19,968 
Diluted   20,745    20,842    20,738    20,786 
                     
Other Comprehensive income, net of tax                    
Foreign currency translation adjustments   (38)   (4)   (275)   (4)
Comprehensive Income  $4,371   $3,207   $7,160   $5,686 

 

 

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

 

 

 4 

 

 

SIMULATIONS PLUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

For the three and six months ended February 28, 2022 and 2021

(Unaudited)

 

 

                     
(in thousands, except per common share amounts)  Three Months Ended   Six Months Ended 
   2022   2021   2022   2021 
Common stock and additional paid in capital                    
Balance, beginning of period  $134,512   $129,253   $133,418   $128,541 
Exercise of stock options   169    656    541    836 
Stock-based compensation   703    717    1,337    1,166 
Shares issued to Directors for services   88    87    176    170 
Balance, end of period  $135,472   $130,713   $135,472   $130,713 
                     
Retained earnings                    
Balance, beginning of period  $34,224   $28,720   $32,407   $27,436 
Declaration of dividend   (1,211)   (1,201)   (2,420)   (2,396)
Net income   4,409    3,211    7,435    5,690 
Balance, end of period  $37,422   $30,730   $37,422   $30,730 
                     
Accumulated other comprehensive income (loss)                    
Balance, beginning of period  $(280)  $58   $(43)  $58 
Other comprehensive loss   (38)   (4)   (275)   (4)
Balance, end of period  $(318)  $54   $(318)  $54 
Total shareholders’ equity                   
Net income                
Total shareholders’ equity  $172,576   $161,497   $172,576   $161,497 
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.

 

 

 5 

 

 

SIMULATIONS PLUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

         
   Six Months Ended February 28, 
(in thousands)  2022   2021 
Cash flows from operating activities          
Net income  $7,435   $5,690 
Adjustments to reconcile net income to net cash provided by operating activities          
Depreciation and amortization   1,840    1,776 
Change in value of contingent consideration   243    243 
Amortization of investment premiums   1,122    1,276 
Stock-based compensation   1,513    1,336 
Deferred income taxes   424    6 
Currency translation adjustments   (275)   (4)
(Increase) decrease in          
Accounts receivable   (5,188)   (3,884)
Prepaid income taxes   563    (280)
Prepaid expenses and other assets   1,274    (556)
Increase (decrease) in          
Accounts payable   22    51 
Accrued payroll and other expenses   (3,384)   640 
Deferred revenue   590    340 
Net cash provided by operating activities   6,179    6,634 
           
Cash flows provided by (used in) investing activities          
Purchases of property and equipment   (710)   (583)
Purchases of short-term investments   (25,504)   (40,789)
Proceeds from sale of short-term investments   46,810    30,950 
Capitalized computer software development costs   (1,507)   (1,474)
Net cash provided by (used in) investing activities   19,089    (11,896)
           
Cash flows used in financing activities          
Payment of dividends   (2,420)   (2,396)
Proceeds from the exercise of stock options   541    836 
Net cash used in financing activities   (1,879)   (1,560)
           
Net increase (decrease) in cash and cash equivalents   23,389    (6,822)
Cash and cash equivalents, beginning of year   36,984    49,207 
Cash and cash equivalents, end of period  $60,373   $42,385 
           
Supplemental disclosures of cash flow information          
Income taxes paid  $921   $878 
           
Non-cash investing and financing activities          
Right of use assets capitalized  $624   $905 

 

 

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

 

 

 6 

 

 

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, 2022 should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended August 31, 2021, filed with the Securities and Exchange Commission (“SEC”) on October 27, 2021. 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, Inc. 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 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 artificial intelligence (“AI”) and machine learning based technology. We also provide consulting services ranging from early drug discovery through preclinical and clinical trial data analysis and for submissions to regulatory agencies. Our software and consulting services are provided to major pharmaceutical, biotechnology, agrochemical, cosmetics, and food industry companies. They are also provided to academic agencies for use in the conduct of industry-based research and to regulatory agencies for product approval.

 

NOTE 2: SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

 

The accompanying consolidated financial statements include the accounts of Simulations Plus and its wholly owned subsidiary. All significant intercompany accounts and transactions have been eliminated upon consolidation.

 

Use of Estimates

 

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

 

 

 7 

 

 

Reclassifications

 

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

  

Revenue Recognition

 

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

 

In accordance with Accounting Standards Codification Topic 606 (ASC Topic 606), “Revenue from Contracts with Customers”, 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

 

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, 2022, remaining performance obligations were approximately $7.3 million. Approximately 90% of the remaining performance obligations are expected to be recognized over the next 12 months, with the remainder 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 Revenue

 

The components of disaggregation of revenue for the three and six months ended February 28, 2022 and 2021 were as follows:

                    
(in thousands)  Three Months Ended
February 28,
   Six Months Ended
February 28,
 
   2022   2021   2022   2021 
Software licenses:                    
Point in time  $9,493   $7,536   $16,600   $13,472 
Over time   265    291    520    503 
                     
Consulting services:                    
Over time   5,038    5,320    10,093    9,873 
Total revenue  $14,796   $13,147   $27,213   $23,848 

 

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 received consideration from a customer. We refer to contract liabilities as deferred revenue on our condensed consolidated balance sheets.

 

 

 8 

 

 

Contract asset balances as of February 28, 2022 and August 31, 2021 were $2.1 million and $3.2 million, respectively.

 

During the three and six months ended February 28, 2022, we recognized $187 thousand and $540 thousand, respectively, of revenue that was included in contract liabilities as of August 31, 2021 and during the three and six months ended February 28, 2021, we recognized $104 thousand and $400 thousand, respectively, of revenue that was included in contract liabilities as of August 31, 2020.

 

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 Allowances 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 Financial Accounting Standards Board (“FASB”) ASC 320, Investments – Debt and Equity Securities. This statement requires debt securities to be classified into three categories:

 

Held-to-maturity—Debt securities that the entity has the positive intent and ability to hold to maturity are 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.

 

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, 2022, all of our investments were classified as held-to-maturity.

 

 

 9 

 

 

Capitalized Computer Software Development Costs

 

Software development costs are capitalized in accordance with FASB ASC 985-20, Costs of Software to Be Sold, Leased, or Marketed. Capitalization of software development costs begins upon the establishment of technological feasibility and is discontinued when the product is available for sale.

 

The establishment of technological feasibility and the ongoing assessment for recoverability of capitalized 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 $328 thousand and $365 thousand for the three months ended February 28, 2022 and 2021, respectively, and $624 thousand and $690 thousand for the six months ended February 28, 2022 and 2021, 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, 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

 

Internal-use Software

 

We have a service contract related to the implementation of internally used software. In accordance with ASC 350-40 “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract”, we have capitalized certain internal-use software which are included in long-term assets.

 

The amortization is classified as selling, general, and administrative expenses on the condensed consolidated statement of operations, and maintenance and minor upgrades are also charged to selling, general, and administrative expense as incurred.

 

Leases

 

Supplemental information related to operating leases was as follows as of February 28, 2022:  

     
(in thousands)    
Right-of-use assets  $1,653 
Lease liabilities, current  $336 
Lease liabilities, long-term  $1,314 
Operating lease costs  $256 
Weighted average remaining lease term   3.55 years 
Weighted average discount rate   3.41% 

  

 

 10 

 

 

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. Intangible assets are amortized over their estimated useful lives using the straight-line method, which approximates the pattern in which the majority of the economic benefits are expected to be consumed.

 

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

 

Goodwill is tested for impairment at the reporting unit level, which is one level below or the same as an operating segment. As of February 28, 2022, we determined that we have four reporting units: Simulations Plus, Cognigen, DILIsym, and Lixoft. When testing goodwill for impairment, we first perform a qualitative assessment to determine whether it is necessary to perform step one of a two-step annual goodwill impairment test for each reporting unit. We are required to perform step one only if it concludes that it is more likely than not that a reporting unit's fair value is less than its carrying value. Should this be the case, the first step of the two-step process is to identify whether a potential impairment exists by comparing the estimated fair values of our reporting units with their respective book values, including goodwill. If the estimated fair value of the reporting unit exceeds book value, goodwill is considered not to be impaired, and no additional steps are necessary. If, however, the fair value of the reporting unit is less than book value, then the second step is performed to determine if goodwill is impaired and to measure the amount of impairment loss, if any. The amount of the impairment loss is the excess of the carrying amount of the goodwill over its implied fair value. The estimate of implied fair value of goodwill is primarily based on an estimate of the discounted cash flows expected to result from that reporting unit but may require valuations of certain internally generated and unrecognized intangible assets such as our software, technology, patents, and trademarks. If the carrying amount of goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess.

 

As of February 28, 2022, the entire balance of goodwill was attributed to three of our reporting units: Cognigen, DILIsym, and Lixoft. Intangible assets subject to amortization are reviewed for impairment whenever events or circumstances indicate that the carrying amount of these assets may not be recoverable. We did not recognize any impairment charges during the three and six months ended February 28, 2022 and 2021.

 

Reconciliation of Goodwill as of February 28, 2022: 

                
(in thousands)  Cognigen   DILIsym   Lixoft   Total 
Balance, August 31, 2021  $4,789   $5,598   $2,534   $12,921 
Addition                
Impairments                
Balance, February 28, 2022  $4,789   $5,598   $2,534   $12,921 

 

 

 

 11 

 

 

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, as defined by the standard are as follows:

 

Level Input:   Input Definition:
Level I   Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date.
Level II   Inputs, other than quoted prices included in Level I, that are observable for the asset or liability through corroboration with market data at the measurement date.
Level III   Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.

  

For certain of our financial instruments, including accounts receivable, accounts payable, accrued payroll and other expenses, and the amounts approximate fair value due to their short maturities.

 

The following table summarizes fair value measurements at February 28, 2022 and August 31, 2021 for assets and liabilities measured at fair value on a recurring basis: 

                    
February 28, 2022:                
                 
(in thousands)  Level 1   Level 2   Level 3   Total 
Cash and cash equivalents  $60,373   $   $   $60,373 
Short-term investments  $63,922   $   $   $63,922 
Acquisition-related contingent consideration obligations  $   $   $3,460   $3,460 

 

August 31, 2021:

 

(in thousands)  Level 1   Level 2   Level 3   Total 
Cash and cash equivalents  $36,984   $   $   $36,984 
Short-term investments  $86,484   $   $   $86,484 
Acquisition-related contingent consideration obligations  $   $   $3,217   $3,217 

 

As of February 28, 2022 and August 31, 2021, we had a liability for contingent consideration related to our acquisition of Lixoft. The fair value measurement of the contingent consideration obligations is determined using Level 3 inputs. The fair value of contingent consideration obligations is based on a discounted cash flow model using a probability-weighted income approach. These fair value measurements represent Level 3 measurements as they are based on significant inputs not observable in the market. Significant judgment is employed in determining the appropriateness of these assumptions as of the acquisition date and for each subsequent period. Accordingly, changes in assumptions could have a material impact on the amount of contingent consideration expense we record in any given period. The liability is recorded as contracts payable on the condensed consolidated balance sheet, and changes in the value of the contingent consideration obligations are recorded other income (expense), net in our Condensed Consolidated Statement of Operations and Comprehensive Income.

 

The following is a reconciliation of contingent consideration value:  

     
(in thousands)    
Value at August 31, 2021  $3,217 
Contingent consideration payments    
Change in value of contingent consideration   243 
Value at February 28, 2022  $3,460 

  

 

 12 

 

 

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 740-10, “Income Taxes” which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns.

 

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

 

Intellectual property

 

The following table summarizes intellectual property as of February 28, 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    4,675    1,325 
Developed technologies–DILIsym acquisition  Straight line 9 years   2,850    1,504    1,346 
Intellectual rights of Entelos Holding Corp.  Straight line 10 years   50    18    32 
Developed technologies–Lixoft acquisition  Straight line 16 years   8,010    959    7,051 
      $16,985   $7,231   $9,754 

 

The following table summarizes intellectual property as of August 31, 2021:

 

(in thousands)  Amortization
Period
  Acquisition
Value
   Accumulated
Amortization
   Net Book
Value
 
Royalty Agreement buy out-Enslein Research  Straight line 10 years  $75   $71   $4 
Termination/nonassertion agreement-TSRL Inc.  Straight line 10 years   6,000    4,375    1,625 
Developed technologies–DILIsym acquisition  Straight line 9 years   2,850    1,346    1,504 
Intellectual rights of Entelos Holding Corp.  Straight line 10 years   50    15    35 
Developed technologies–Lixoft acquisition  Straight line 16 years   8,010    709    7,301 
      $16,985   $6,516   $10,469 

 

Amortization expense for intellectual property agreements for the three months ended February 28, 2022 and 2021 was $358 thousand and $357 thousand, respectively, and amortization expense for intellectual property agreements for the six months ended February 28, 2022 and 2021 was $715 thousand and $714 thousand, respectively.

 

 

 13 

 

 

Other intangible assets

 

The following table summarizes our other intangible assets as of February 28, 2022: 

                  
(in thousands)  Amortization
Period
  Acquisition
Value
   Accumulated
Amortization
   Net Book
Value
 
Simulations Plus                  
ERP  Straight line 15 years  $1,702   $24   $1,678 
Cognigen                  
Customer relationships  Straight line 8 years   1,100    1,031    69 
Trade name  None   500        500 
Covenants not to compete  Straight line 5 years   50    50     
DILIsym                  
Customer relationships  Straight line 10 years   1,900    903    997 
Trade name  None   860        860 
Covenants not to compete  Straight line 4 years   80    80     
Lixoft                  
Customer relationships  Straight line 14 years   2,550    349    2,201 
Trade name  None   1,550        1,550 
Covenants not to compete  Straight line 3 years   60    38    22 
      $10,352   $2,475   $7,877 

 

The following table summarizes our other intangible assets as of August 31, 2021:

 

(in thousands)  Amortization
Period
  Acquisition
Value
   Accumulated
Amortization
   Net Book
Value
 
Cognigen                  
Customer relationships  Straight line 8 years  $1,100   $963   $137 
Trade name  None   500        500 
Covenants not to compete  Straight line 5 years   50    50     
DILIsym                  
Customer relationships  Straight line 10 years   1,900    807    1,093 
Trade name  None   860        860 
Covenants not to compete  Straight line 4 years   80    80     
Lixoft                  
Customer relationships  Straight line 14 years   2,550    258    2,292 
Trade name  None   1,550        1,550 
Covenants not to compete  Straight line 3 years   60    28    32 
      $8,650   $2,186   $6,464 

 

Amortization expense for other intangible assets for the three months ended February 28, 2022 and 2021 was $156 thousand and $138 thousand, respectively and amortization expense for other intangible assets for the six months ended February 28, 2022 and 2021 was $289 thousand and $275 thousand, respectively. In addition to normal amortization, these assets are tested for impairment as needed.

  

 

 14 

 

 

Earnings per Share

 

We report earnings per share in accordance with FASB ASC 260-10. 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 months ended February 28, 2022 and 2021 were as follows:

                 
(in thousands)  Three Months Ended
February 28,
   Six Months Ended
February 28,
 
   2022   2021   2021   2020 
Numerator:                
Net income attributable to common shareholders  $4,409   $3,211   $7,435   $5,690 
                     
Denominator:                    
Weighted-average number of common shares outstanding during the period   20,177    20,006    20,164    19,968 
Dilutive effect of stock options   568    836    574    818 
Common stock and common stock equivalents used for diluted earnings per share   20,745    20,842    20,738    20,786 

 

 

Stock-Based Compensation

 

Compensation costs related to stock options are determined in accordance with FASB ASC 718-10, “Compensation-Stock Compensation”. Compensation cost is calculated based on the grant-date fair value estimated in accordance with FASB ASC 718-10, amortized on a straight-line basis over the options’ vesting period. Stock-based compensation expense related to stock options, not including shares issued to directors for services, was $703 thousand and $717 thousand for the three months ended February 28, 2022 and 2021, respectively, and $1.3 million and $1.2 million for the six months ended February 28, 2022 and 2021, respectively. This expense is included in the condensed consolidated statements of operations as selling, general, and administration and research and development expense.

  

Impairment of Long-lived Assets

 

We account for the impairment and disposition of long-lived assets in accordance with ASC 350, “Intangibles – Goodwill and Other” and ASC 360, “Property and Equipment”. Long-lived assets to be held and used are reviewed for events or changes in circumstances that indicate that their carrying value may not be recoverable. We measure recoverability by comparing the carrying amount of an asset to the expected future undiscounted net cash flows generated by the asset. If we determine that the asset may not be recoverable, or if the carrying amount of an asset exceeds its estimated future undiscounted cash flows, we recognize an impairment charge to the extent of the difference between the fair value and the asset's carrying amount. No impairment losses were recorded during the six months ended February 28, 2022 and 2021.

 

Recently Issued Accounting Pronouncements

 

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). The amendments in ASU 2020-04 provide temporary optional expedients and exceptions for applying GAAP to contract modifications, hedging relationships, and other transactions to ease the potential accounting and financial reporting burden associated with transitioning away from reference rates that are expected to be discontinued, including the London Interbank Offered Rate (“LIBOR”). This ASU is effective as of March 12, 2020, through December 31, 2022. The adoption of the new standard has not had and is not expected to have, a material impact on our consolidated financial statements or related disclosures.

 

 

 15 

 

 

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

 

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

 

NOTE 3: OTHER INCOME (EXPENSE), NET

 

The components of other income (expense), net for the three and six months ended February 28, 2022 and 2021 were as follows: 

                    
(in thousands)  Three Months Ended
February 28,
   Six Months Ended
February 28,
 
   2022   2021   2022   2021 
Interest income  $75   $58   $139   $119 
Interest expense       (22)       (22)
Change in valuation of contingent consideration   (122)   (122)   (243)   (243)
Gain on sale of assets            1     
Gain (loss) on currency exchange   100    23    221    28 
Total other income (expense), net  $53   $(63)  $118   $(118)

 

NOTE 4: INVESTMENTS

 

We invest a portion of our excess cash balances in short-term debt securities within the parameters of our Investment Policy and Guidelines. Investments as of February 28, 2022, consisted of corporate bonds with maturities remaining of less than twelve months. We may also invest excess cash balances in certificates of deposit, money market accounts, government-sponsored enterprise securities, corporate bonds, and/or commercial paper. We account for investments in accordance with FASB ASC 320, Investments – Debt and Equity Securities. As of February 28, 2022, all investments were classified as held-to-maturity securities. 

 

 

 

 16 

 l

 

The following tables summarize our short-term investments as of February 28, 2022 and August 31, 2021:

 

February 28, 2022

                
(in thousands)  Amortized Cost  

Gross

Unrealized

Gains

  

Gross

Unrealized

Losses

   Fair Value 
                 
Commercial notes (due within one year)  $64,192   $   $(270)  $63,922 
Total  $64,192   $   $(270)  $63,922 

 

August 31, 2021

 

(in thousands)  Amortized Cost  

Gross

Unrealized

Gains

  

Gross

Unrealized

Losses

   Fair Value 
                 
Commercial notes (due within one year)  $86,620   $   $(136)  $86,484 
Total  $86,620   $   $(136)  $86,484 

 

NOTE 5: CONTRACTS PAYABLE

 

Lixoft Acquisition Liabilities:

 

On April 1, 2020, we acquired Lixoft. The agreement provided for a 24-month, $2.0 million holdback provision against certain representations and warrantees, comprised of $1.3 million of cash and shares of common stock valued at $667 thousand issued at the date of the agreement. In addition, based on a revenue-growth formula for the two years subsequent to April 1, 2020, the agreement calls for earnout payments of up to $5.5 million (two-thirds cash and one-third newly issued, unregistered shares of our common stock). The former shareholders of Lixoft can earn up to $2.0 million the first year and $3.5 million in year two. In June 2021, $2.0 million was paid out under the first earnout payment, which was comprised of $1.3 million of cash and $0.7 million worth of common stock.

 

As of February 28, 2022 and August 31, 2021, the following liabilities have been recorded: 

        
(in thousands)  February 28,
2022
   August 31,
2021
 
Holdback liability  $1,333   $1,333 
Earnout liability   3,460    3,217 
Sub total  $4,793   $4,550 
Less: current portion   4,793    4,550 
Long-term portion  $   $ 

 

NOTE 6: COMMITMENTS AND CONTINGENCIES

 

Leases

 

We lease approximately 9,255 square feet of office space in Lancaster, California, where our corporate headquarters are located. The lease term extends to January 31, 2026, and the base rent is approximately $17 thousand per month. The lease agreement gives the Company the right, upon 180 days’ prior notice, to opt out of all or part of the last four years of the term, with no penalty.

 

 

 17 

 

 

We lease approximately 4,317 square feet of office space in Buffalo, New York. The lease term extends to November 30, 2026, and the base rent is approximately $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 previously leased approximately 12,623 square feet of office space at a different location in Buffalo, New York. That lease term extended to November 2021 and the base rent was approximately $16 thousand per month.

 

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

 

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

 

Rent expense, including common area maintenance fees for the three months ended February 28 2022 and 2021 was $120 thousand and $147 thousand, respectively and $276 thousand and $332 thousand for the six months ended February 28, 2022 and 2021, respectively.

 

The following table presents maturities of operating lease liabilities on an undiscounted basis as of February 28, 2022:

     
(in thousands)
Years Ending February 28,
    
2023  $509 
2024   465 
2025   379 
2026   319 
2027   101 
Total undiscounted liabilities   1,773 
Less: imputed interest   (123)
Total operating lease liabilities (including current portion)  $1,650 

 

Line of Credit

 

On March 31, 2020, we entered into a Credit Agreement with Wells Fargo Bank, N.A. The Credit Agreement provides us with a credit facility of $3.5 million through April 15, 2022 (the “Termination Date”). As of February 28, 2022, there were no amounts drawn against the line of credit. We do not currently intend to extend the term of the Credit Agreement beyond the Termination Date or to replace the credit facility with a new one in the near term.

 

Employment Agreements

 

In the normal course of business, we have entered into employment agreements with certain of our key management personnel 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 2018 through 2020 are open for audit, and our state tax returns for fiscal years 2017 through 2020 remain open for audit.

 

Our review of prior year tax positions using the criteria and provisions presented in guidance issued by FASB did not result in a material impact on our financial position or results of operations.

 

 

 18 

 

 

Litigation

 

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

   

NOTE 7: SHAREHOLDERS’ EQUITY

 

Shares Outstanding

 

Shares of common stock outstanding for the three and six months ended February 28, 2022 and 2021 were as follows: 

                    
  

Three Months Ended

February 28,

  

Six Months Ended

February 28,

 
   2022   2021   2022   2021 
Common stock outstanding, beginning of the period   20,168,796    19,958,760    20,141,521    19,923,277 
Common stock issued during the period   12,988    100,768    40,263    136,251 
Common stock outstanding, end of the period   20,181,784    20,059,528    20,181,784    20,059,528 

 

Dividends

 

Our Board of Directors declared cash dividends during fiscal years 2022 and 2021. The details of the dividends paid are in the following tables:  

                           
(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  
Total                       $ 2,420  

 

(in thousands, except dividend per share)   Fiscal Year 2021              
Record Date   Distribution Date   Number of Shares
Outstanding on
Record Date
    Dividend per
Share
    Total Amount  
10/26/2020   11/02/2020     19,924     $ 0.06     $ 1,195  
1/25/2021   2/01/2021     20,010     $ 0.06       1,201  
4/26/2021   5/03/2021     20,115     $ 0.06       1,207  
7/26/2021   8/02/2021     20,139     $ 0.06       1,208  
Total                       $ 4,811  

 

Stock Option Plans

 

On February 23, 2007, the Company’s Board of Directors adopted, and its shareholders approved, the 2007 Stock Option Plan (the “2007 Plan”), under which a total of 1.0 million shares of common stock were reserved for issuance. On February 25, 2014, the shareholders approved an additional 1.0 million shares, increasing the total number of shares available to be granted under the 2007 Plan to 2.0 million. This plan terminated in February 2017 by its terms.

 

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 will terminate 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.

 

 

 19 

 

 

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 2007 Plan and 2017 Plan, the “Plans”), under which 1.3 million shares of common stock were reserved for issuance. The 2021 Plan became effective as of April 9, 2021, and the Company may issue equity awards to permitted recipients thereunder. The maximum contractual life of the plan is ten years.

 

As of February 28, 2022, employees and directors hold Incentive Stock Options (“ISOs”) and Non-Qualified Stock Options (“NQSOs”) to purchase approximately 1.3 million shares of common stock at exercise prices ranging from $6.85 to $66.14.

 

The following table summarizes information about stock options:  

               
(in thousands, except per share and weighted-average amounts)
Transactions during the six months ended February 28, 2022
  Number of
Options
   Weighted-
Average
Exercise
Price
Per Share
   Weighted-
Average
Remaining
Contractual
Life (Years)
 
Outstanding, August 31, 2021   1,184   $25.63    6.47 
Granted   189   $39.22      
Exercised   (44)  $17.48      
Cancelled/Forfeited   (41)  $39.72      
Outstanding, February 28, 2022   1,288   $27.45    6.47 
Exercisable, February 28, 2022   751   $16.81    4.93 

 

The total fair value of nonvested stock options as of February 28, 2022 was $7.6 million and is amortizable over a weighted average period of 3.36 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 six months ended February 28, 2022 and fiscal year 2021:  

          
(in thousands except pricing) 

Six Months Ended

February 28, 2022

   Fiscal Year 2021 
Estimated fair value of awards granted  $3,042   $5,092 
Unvested forfeiture rate   0%    0% 
Weighted average grant price  $39.22   $57.60 
Weighted average market price  $39.22   $57.60 
Weighted average volatility   41.91%    40.49% 
Weighted average risk-free rate   1.44%    0.64% 
Weighted average dividend yield   0.61%    0.42% 
Weighted average expected life   6.60 years    6.63 years 

 

 

 20 

 

 

The exercise prices for the options outstanding at February 28, 2022 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    304    3.29 years   $8.37    304    3.29 years   $8.37 
$9.78   $18.76    224    4.85 years   $10.35    223    4.84 years   $10.33 
$18.77   $33.40    268    6.91 years   $25.12    135    6.54 years   $24.16 
$33.41   $47.63    246    9.13 years   $38.35    31    7.53 years   $35.56 
$47.64   $66.14    246    8.73 years   $58.23    58    8.64 years   $58.88 
           1,288    6.47 years   $27.45    751    4.93 years   $16.81 

 

During the three and six months ended February 28, 2022 the Company issued 1,716 and 3,451 shares of stock valued at $88 thousand and $176 thousand, respectively, to our non-management directors as compensation for board-related duties.

 

The balance of par value common stock and additional paid-in capital as of February 28, 2022, was $10 thousand and $135.5 million, respectively.

 

NOTE 8: CONCENTRATIONS AND UNCERTAINTIES

 

Financial instruments that potentially subject us to concentration of credit risk consist principally of cash, cash equivalents, trade accounts receivable, and short-term investments. In addition, we hold cash at a bank in France that is not FDIC-insured. Historically, we have not experienced any losses in such accounts. However, we are investigating alternative ways to minimize our exposure to such risks. While we may be exposed to credit losses due to the nonperformance of our counterparties, we do not expect the settlement of these transactions to have a material effect on our results of operations, cash flows, or financial condition. We maintain cash and cash equivalents at financial institutions that may, at times, exceed federally insured limits.

  

Revenue concentration shows that international sales accounted for 33% and 34% of net sales for the six months ended February 28, 2022 and 2021, respectively. Four customers accounted for 11%, 5%, 4%, and 4% of net sales during the six months ended February 28, 2022. Two customers accounted for 13% and 5% of net sales during the six months ended February 28, 2021.

 

Accounts receivable concentration shows that three customers each comprised between 19% and 4% of accounts receivable as of February 28, 2022 compared to four customers each comprising between 15% and 5% of accounts receivable as of February 28, 2021.

 

We operate in the computer software industry, which is highly competitive and changes rapidly. Our operating results could be significantly affected by our ability to develop new products and find new distribution channels for new and existing products.

 

The majority of our customers are in the pharmaceutical industry. During economic downturns, we have seen consolidations in the pharmaceutical industry. The extent to which the COVID-19 pandemic continues to impact our business going forward will depend on numerous factors we cannot reliably predict, including the duration and scope of the pandemic; businesses and individuals' actions in response to the pandemic; and the impact on economic activity, including the possibility of recession or financial market instability. These factors may adversely impact consumer, business, and government spending as well as customers ability to pay for our products and services on an ongoing basis. As a result, our growth rate could be affected by consolidation and downsizing in the pharmaceutical industry.

 

 

 21 

 

 

NOTE 9: SEGMENT AND GEOGRAPHIC REPORTING

 

We account for segments and geographic revenue in accordance with guidance issued by the FASB. Our reportable segments are strategic business units that offer different products and services.

 

Results for each business unit segment and consolidated results for the three and six months ended February 28, 2022 and 2021 were as follows: 

               
(in thousands)  Three Months Ended February 28, 2022 
   Software   Services   Total 
Revenue  $9,758   $5,038   $14,796 
Cost of revenue   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.

 

(in thousands)  Three Months Ended February 28, 2021 
   Software   Services   Total 
Revenue  $7,827   $5,320   $13,147 
Cost of revenue   836    2,075    2,911 
Gross profit  $6,991   $3,245   $10,236 
Gross margin   89%    61%    78% 

 

Our software business and services business represented 60% and 40% of total revenue, respectively, for the three months ended February 28, 2021.

 

(in thousands)  Six Months Ended February 28, 2022 
   Software   Services   Total 
Revenue  $17,120   $10,093   $27,213 
Cost of revenue   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.

 

(in thousands)  Six Months Ended February 28, 2021 
   Software   Services   Total 
Revenue  $13,975   $9,873   $23,848 
Cost of revenue   1,647    3,697    5,344 
Gross profit  $12,328   $6,176   $18,504 
Gross margin   88%    63%    78% 

 

Our software business and services business represented 59% and 41% of total revenue, respectively, for the six months ended February 28, 2021.

 

 

 22 

 

 

Revenue by product and consolidated revenue for the three and six months ended February 28, 2022 and 2021 were as follows: 

        
(in thousands)  Three Months Ended February 28, 
   2022   2021 
Software revenue                    
GastroPlus  $5,450    56%   $4,483    57% 
MonolixSuite   2,222    23    1,551    20 
ADMET Predictor   1,367    14    1,212    15 
Other   719    7    581    8 
Total software revenue  $9,758    100%   $7,827    100% 
                     
Services revenue                    
PKPD  $2,222    44%   $2,585    49% 
QSP/QST   1,527    30    1,745    33 
PBPK   948    19    945    17 
Other   341    7    45    1 
Total services revenue  $5,038    100%   $5,320    100% 
Total consolidated revenue  $14,796        $13,147      

 

 

(in thousands)  Six Months Ended February 28, 
   2022   2021 
Software revenue                    
GastroPlus  $9,435    55%   $7,819    56% 
MonolixSuite   3,792    22    2,716    19 
ADMET Predictor   2,826    17    2,384    17 
Other   1,067    6    1,056    8 
Total software revenue  $17,120    100%   $13,975    100% 
                     
Services revenue                    
PKPD  $4,548    45%   $4,830    49% 
QSP/QST   2,993    30    2,867    29 
PBPK   1,807    18    1,573    16 
Other   745    7    603    6 
Total services revenue  $10,093    100%   $9,873    100% 
Total consolidated revenue  $27,213        $23,848      

 

Revenue by division and consolidated revenue for the three and six months ended February 28, 2022 and 2021 were as follows:

Schedule of revenue by division

(in thousands)