Simulations Plus, Inc. (SLP) FY 2021 MD&A

ITEM 7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and
Analysis is intended to assist the reader in understanding our results of operations and financial condition. Management’s Discussion
and Analysis is provided as a supplement to, and should be read in conjunction with, our audited consolidated financial statements beginning
on page F-1 of this Annual Report on Form 10-K. This Annual Report on Form 10-K includes certain statements that may be deemed to be “forward-looking
statements” within the meaning of Section 27A of the Securities Act of 1933, as amended. All statements, other than statements of
historical fact, included in this Annual Report on Form 10-K that address activities, events or developments that we expect, project,
believe, or anticipate will or may occur in the future, including matters having to do with expected and future revenue, our ability to
fund our operations and repay debt, business strategies, expansion and growth of operations and other such matters, are forward-looking
statements. These statements are based on certain assumptions and analyses made by our management in light of its experience and its perception
of historical trends, current conditions, expected future developments, and other factors it believes are appropriate in the circumstances.
These statements are subject to a number of assumptions, risks and uncertainties, including general economic and business conditions,
the business opportunities (or lack thereof) that may be presented to and pursued by us, our performance on our current contracts and
our success in obtaining new contracts, our ability to attract and retain qualified employees, and other factors, many of which are beyond
our control. You are cautioned that these forward-looking statements are not guarantees of future performance and those actual results
or developments may differ materially from those projected in such statements.

Management Overview

Fiscal Year 2021 Financial Highlights:

Strategy Going Forward:

Fiscal year 2021 was yet another record year for the Company. We saw
good growth in the midst of the fiscal year that had to bear the brunt of the COVID-19 global pandemic. We believe the continued growth
of our pharmaceutical software and services business is the result of steadily increasing adoption and awareness of the value of simulation
and modeling software tools across the pharmaceutical industry, the continuing push by regulatory agencies for increased use of modeling
and simulation, and the expertise we offer as consultants to assist companies involved in the research and development of new medicines.
We continue to be a leader in the fast- growing $2 billion bio-simulation industry.

Results of Operations

A discussion regarding our financial condition
and results of operations for fiscal 2019 compared to fiscal 2018 can be found under Item 7 in our Annual Report on Form 10-K for the
fiscal year ended August 31, 2019, filed with the SEC on November 13, 2019, which is available free of charge on the SEC’s website
at www.sec.gov and our corporate website at https://www.simulations-plus.com/investorscorporate-profile/sec-filings/.

Comparison of fiscal year 2021 and fiscal
year 2020

Revenues

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

Cost of revenues

Cost of revenues remained relatively consistent
with a slight decrease of $49 thousand or approximately 1% for the year ended August 31, 2021, compared to the year ended August 31, 2020.
The decrease is primarily due to lower contract research organization fees of $204 thousand, lower tech-support costs of $135 thousand,
lower labor-related costs of $100 thousand, and lower training and travel costs of $97 thousand, partially offset by higher amortization
of software development costs of $455 thousand related to the purchase of Lixoft.

A significant portion of cost of revenues for
pharmaceutical software products is the systematic amortization of capitalized software development costs, which is a fixed cost rather
than a variable cost related to revenues. The amortization cost of $2.8 million for the year ended August 31, 2021, increased by approximately
$455 thousand compared to fiscal year 2020.

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

Gross profit

Gross profit increased by approximately $5.0 million
or 16% to $35.9 million for the year ended August 31, 2021, compared to approximately $30.9 million for the year ended August 31, 2020.
The increase is due to an increase in gross profit for the software business of $5.7 million or 31%, partially offset by a decrease in
gross profit for the consulting services business of $0.7 million or 7% over the same periods.

Overall gross margin percentage increased by 2.8%
to 77.2% for the year ended August 31, 2021, from 74.4% for the year ended August 31, 2020.

Research and development

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

Selling, general and administrative expenses

Selling, general, and administrative (“SG&A”)
expenses increased by $4.2 million, or 26% to $20.6 million for the year ended August 31, 2021, compared to $16.4 million for the year
ended August 31, 2020, primarily due to the following:

As a percent of revenues, SG&A expense was
44% for the year ended August 31, 2021, compared to 39% for the year ended August 31, 2020.

Other income/expense

Total other expense was $168 thousand for the
year ended August 31, 2021, compared to total other expense of $218 thousand for the year ended August 31, 2020. The variance of $50 thousand
is primarily due to an increase in currency exchange gain $184 thousand and an increase in interest income of $171 thousand, offset by
an increase in the change in the value of contingent consideration of $283 thousand.

Provision for income taxes

The provision for income taxes was $1.3 million
for the year ended August 31, 2021, compared to $2.1 million for the year ended August 31, 2020. Our effective tax rate decreased by 6.2%
to 11.8% for the year ended August 31, 2021, from 18.0% for the year ended August 31, 2020.

The effective rate differs from anticipated combined
statutory rates of approximately 24.5% due to R&D credits, foreign-tax related items (tax credits and foreign-deemed intangible income
deductions), and the tax effect of stock-compensation related items for stock compensation and disqualifying dispositions. During the
years ended August 31, 2021, and 2020, as a result of an increase in stock prices, a number of employees exercised and sold incentive
stock options granted to them under their corporate incentive plans, creating corporate tax deductions that lowered the effective tax
rate.

Comparison of fiscal year 2020 and fiscal
year 2019

Revenues

Revenues increased by approximately $7.6 million
or 22% to $41.6 million for the year ended August 31, 2020 compared to $34.0 million for the year ended August 31, 2019. This increase
is primarily due to a $4.5 million or 29.1% increase in consulting services revenue. Software-related revenue increased $3.1 million or
16.8% when comparing the fiscal years ended August 31, 2020 and 2019.

Cost of Revenues

Cost of revenues increased by approximately $1.6
million or 18% to $10.6 million for the year ended August 31, 2020 compared to $9.0 million for the year ended August 31, 2019. The higher
cost is primarily due to an increase in consulting-related labor costs of $1.6 million.

A significant portion of cost of revenues for
pharmaceutical software products is the systematic amortization of capitalized software development costs, which is a fixed cost rather
than a variable cost related to revenues. The amortization cost for fiscal year 2020 was $2.4 million, an increase of $103 thousand compared
to fiscal year 2019.

Cost of revenues as a percentage of revenue decreased
to 25.6% in fiscal year 2020 from 26.6% in fiscal year 2019.

Gross profit

Gross profit increased $6.0 million or 24% to
$30.9 million for the year ended August 31, 2020, compared to $24.9 million for the year ended August 31, 2019. The increase is due to
an increase in gross profit for the software business of $3.2 million or 20%, as well as an increase in gross profit for the consulting
services business of $2.8 million or 30% over the same periods.

Overall gross margin percentage increased by 1%
to 74% for the year ended August 31, 2020, compared to the year ended August 31, 2019.

Research and Development

We incurred approximately $5.3 million of research
and development costs during year ended August 31, 2020. Of this amount, approximately $2.3 million was capitalized and $3.0 million was
expensed. We incurred approximately $4.3 million of research and development costs during year ended August 31, 2019. Of this amount,
$1.8 million was capitalized and $2.5 million was expensed. The increase of approximately $1.0 million in total research and development
expenditures in fiscal year 2020 compared to fiscal year 2019 was primarily due to increased costs in the Simulations Plus and DILIsym
divisions.

Selling, General and Administrative Expenses

SG&A expenses increased by $4.6 million, or
39% to $16.4 million for the year ended August 31, 2020 compared to $11.8 million for the year ended August 31, 2019. The increase was
primarily due to a $1.5 million increase in general and administrative salaries; $1.4 million in legal, accounting and consulting fees
associated with the Lixoft acquisition; an increase in payroll tax expense of $478 thousand; an increase in director compensation of $394
thousand due to additional paid directors and increases in compensation; an increase in insurance costs of $259 thousand due to higher
headcount and a $226 thousand increase in commission costs related to increased revenues domestically and in Asia.

As a percent of revenues, selling, general and
administrative expenses was 39.3% for fiscal year 2020, compared to 34.7% for fiscal year 2019.

Other income/expense

Total other expense was $218 thousand for the
year ended August 31, 2020 compared to $92 thousand for the year ended August 31, 2019. The variance of $126 thousand is primarily due
to a change in the valuation of contingent consideration.

Provision for Income Taxes

The provision for income taxes was approximately
$2.1 million for the year ended August 31, 2020, compared to $2.0 million for the year ended August 31, 2019. Our effective tax rate decreased
slightly to 18.0% from 18.7 % for the same periods.

The effective rate differs from anticipated combined
statutory rates of approximately 25.7% due to R&D credits, foreign-tax related items (tax credits and foreign-deemed intangible income
deductions), and the tax effect of stock-compensation related items for stock compensation and disqualifying dispositions. In the last
part of fiscal year 2020, as occurred also in fiscal year 2019, because of an increase in stock prices, a number of employees exercised
and sold incentive stock options granted to them under their corporate incentive plans, creating corporate tax deductions that lowered
the effective tax rate.

Segment Results of Operations

Comparison of fiscal year 2021 and fiscal
year 2020

Revenues

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

Cost of Revenues

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

Gross Profit

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

Simulations Plus

For the year ended August 31, 2021, the revenues increase of $3.2 million
or 14% compared to the year ended August 31, 2020, was primarily due to higher revenues from GastroPlus of $2.2 million and an increase
in revenues from ADMET Software of $831 thousand. Cost of revenue increased marginally during the same periods, and gross profit increased
by $3.1 million or 16%, primarily due to the increase in revenue.

Cognigen

For the year ended August 31, 2021, the revenue decrease of $559 thousand
or 5% compared to the year ended August 31, 2020, was primarily due to a decrease in grant revenue of $672 thousand, partially offset
by an increase in training revenue of $90 thousand. Cost of revenue decreased $365 thousand or 7%, primarily due to lower salary cost
related to employees working on service contracts of $726 thousand, partially offset by an increase in consulting related costs of $346
thousand. Gross profit decreased by approximately $194 thousand or 3% for the same periods.

DILIsym

For the year ended August 31, 2021, the revenue decrease of $833 thousand
or 12% compared to the year ended August 31, 2020, was primarily due to lower revenue from consulting services of $869 thousand. Cost
of revenue decreased by $235 thousand or 10% during the same periods, primarily due to lower contract research organization fees of $204
thousand. Gross profit decreased by $598 thousand or 13%.

Lixoft

For the year ended August 31, 2021, the revenue increase of $3.1 million
compared to the year ended August 31, 2020 was primarily due to an increase in revenues from MonolixSuite of $2.9 million; this increase
was primarily the result of the purchase of Lixoft on April 1, 2020. Software sales of the MonolixSuite generated 97% of total revenue
and consulting services generated 3% of total revenue. Cost of revenue increased by $471 thousand, and gross profit increased by $2.6
million also due to the purchase of Lixoft on April 1, 2020.

Comparison of fiscal year 2020 and fiscal
year 2019

Revenues

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

Cost of Revenues

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

Gross Profit

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

Simulations Plus

For the year ended August 31, 2020, the revenue
increase of $2.4 million or 12% compared to the year ended August 31, 2019 was primarily due to increases in revenue from GastroPlus of
$1.3 million, from ADMET Software of $630 thousand and from services revenue totaling $525 thousand. The cost of revenue decrease of $355
thousand or 11% during the same periods was primarily due to lower royalty expense of $222 thousand resulting from the renegotiation of
the agreement with Dassault Systemes Americas Corp. in June 2019 and a decrease in amortization expense of capitalized software of $98
thousand. Gross profit increased by $2.7 million or 17%, primarily due to the increase in revenue.

Cognigen

For the year ended August 31, 2020, the revenue
increase of $1.8 million or 19% compared to the year ended August 31, 2019 was primarily due to an increase in grant revenue. Cost of
revenue increased by $824 thousand or 19%, primarily due to an increase in salary contracts of $367 thousand and higher international
subcontractor costs of $335 thousand. Gross profit increased by approximately $960 thousand or 19% for the same periods.

DILIsym

For the year ended August 31, 2020, the revenue increase of $1.9 million
or 37% compared to the year ended August 31, 2019, was primarily due to higher revenue from consulting services of $2.1 million, partially
offset by lower licensing revenue of $114 thousand. Cost of revenue increased by $887 thousand or 64% during the same periods, primarily
due to higher salary cost of $277 thousand, higher contract research organization fees of $274 thousand, and higher bonus accrual of $160
thousand. Gross profit increased by approximately $1.0 million or 27% for the same periods.

Lixoft

For the year ended August 31, 2020, the revenue
increase of $1.6 million compared to the August 31, 2019 was due to the purchase of Lixoft on April 1, 2020. Software sales of the MonolixSuite
generated 98% of total revenue and 2% was generated from consulting services. Cost of revenue increased $267 thousand, and gross profit
increased $1.3 million primarily due to the purchase of Lixoft on April 1, 2020.

LIQUIDITY AND CAPITAL RESOURCES

As of August 31, 2021, the Company had $37.0 million
in cash and cash equivalents and $86.6 million in short-term investments. 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.

In August 2020, the Company closed an underwritten
public offering of 2,090,909 shares of its common stock to the public at $55.00 per share, which included the full exercise of the underwriters’
option to purchase 272,727 additional shares of common stock. The aggregate gross proceeds to the Company from this offering were approximately
$115.0 million, before deducting underwriting discounts and commissions; net proceeds were approximately $107.7 million. The Company has
used, and intends to continue to use the net proceeds from the offering for strategic mergers and acquisitions (although the Company has
no present commitments or agreements to enter into any such mergers or acquisitions), working capital requirements, and other general
corporate purposes, including investing in enhanced information and accounting systems, and personnel in support of corporate growth.
The offering was made pursuant to our automatic shelf registration statement on Form S-3 filed with the SEC on July 9, 2020.

On March 31, 2020, the Company entered into a
Stock Purchase and Contribution Agreement (the “Lixoft Agreement”) with Lixoft, a French société par actions
simplifiée (“Lixoft”). On April 1, 2020, the Company consummated the acquisition of all outstanding equity interests
of Lixoft pursuant to the terms of the Lixoft Agreement, with Lixoft becoming a wholly owned subsidiary of the Company. Under the terms
of the Agreement, the Company will pay the former shareholders of Lixoft total consideration of up to $16.5 million, consisting of two-thirds
cash and one-third newly issued, unregistered shares of the Company’s common stock. In addition, the Company paid approximately
$3.5 million of excess working capital based on the March 31, 2020 financial statements of Lixoft. As part of the total consideration,
the agreement calls for earnout payments up to an additional $5.5 million, two-thirds cash and one-third newly issued, unregistered shares
of the Company’s common stock based on a revenue growth formula each year for the two years subsequent to April 1, 2020. The former
shareholders earned $2.0 million in the first year and can earn up to $3.5 million in year two. See Note 14 for a further description
of the Lixoft Agreement.

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.

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 $19.2 million for the year ended August 31, 2021. Our operating cash flows resulted primarily
from our net income of $9.8 million, which was generated by cash received from our customers, offset by cash payments we made to third
parties for their services and employee compensation. In addition, net cash inflow from changes in balances of operating assets and liabilities
was $1.0 million, and non-cash charges were $8.4 million. The change in operating assets and liabilities was primarily the result of an
increase in accrued payroll and other expenses, partially offset by an increase in accounts receivable.

Net cash
provided by operating activities was $10.9 million for the year ended August 31, 2020. Our operating cash flows resulted primarily
from our net income of $9.3 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 $2.8 million, offset by non-cash charges of $4.4 million. The change in operating assets and liabilities was primarily the result
of an increase in accounts receivable and a decrease in billings in excess of revenues.

Investing Activities

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

Cash used for investing activities during the
year ended August 31, 2020 of $75.5 million was primarily due to the purchase of $67.2 million of short-term investments and costs associated
with the acquisition of a subsidiary totaling $9.5 million.

Financing Activities

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

Net cash provided by financing activities during
the year ended August 31, 2020 of $102.4 million was primarily due to the net proceeds from a public offering of $107.7 million, partially
offset by dividend payments totaling $4.3 million for the period.

DIVIDENDS

Refer to Note 8 – Shareholders’ Equity
of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K) for details regarding dividends.

KNOWN TRENDS OR UNCERTAINTIES

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

As discussed in the Risk Factor section of this
Annual Report on Form 10-K, the world has been affected due to the COVID-19 pandemic. Although there has not been a substantial impact
on revenues 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 revenues and earnings if they are accepted by our markets; however, there can be no assurances that new products will result
in significant improvements to revenues or earnings. For competitive reasons, we do not disclose all of our new product development activities.

Our continued 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 or determine
that resources would be more efficiently used elsewhere.

OFF-BALANCE SHEET ARRANGEMENTS

As of August 31, 2021, we did not have any relationships
with unconsolidated entities or financial partnerships, such as entities often referred to as structured-finance or special-purpose entities,
which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited
purposes. As such, we are not materially exposed to any financing, liquidity, market, or credit risk that could arise if we had engaged
in such relationships.

We do not have relationships or transactions with
persons or entities that derive benefits from their non-independent relationship with us or our related parties.

CONTRACTUAL OBLIGATIONS

The following table provides aggregate information
regarding our contractual obligations as of August 31, 2021:

[table omitted - see filing]