August 31, 2017:

As of November 30, 2017 and August 31, 2017, the Company has a liability for contingent consideration related to its acquisition of the DILIsym Services, Inc. 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 the Company records in any given period. Changes in the value of the contingent consideration obligations are recorded in the Company’s Consolidated Statement of Operations. 

The following is a reconciliation of contingent consideration value.

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 experiment, and purchased software which was developed by other companies and incorporated into, or used in the development of, our final products.

Income Taxes

The Company accounts for income taxes in accordance with ASC 740-10,“Income Taxes” which requires the recognition of deferred tax assets and liabilities for 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

On February 28, 2012, we bought out the royalty agreement with Enslein Research of Rochester, New York. The cost of $75,000 is being amortized over 10 years under the straight-line method. Amortization expense for each of the three-month periods ended November 30, 2017 and 2016 was $1,875. Accumulated amortization as of November 30, 2017 and August 31, 2017 was $43,125 and $41,250, respectively.

On May 15, 2014, we entered into a termination and nonassertion agreement with TSRL, Inc., pursuant to which the parties agreed to terminate an exclusive software licensing agreement entered into between the parties in 1997. As a result, the company obtained a perpetual right to use certain source code and data, and TSRL relinquished any rights and claims to any GastroPlus products and to any claims to royalties or other payments under that 1997 agreement. We agreed to pay TSRL total consideration of $6,000,000, which is being amortized over 10 years under the straight-line method. Amortization expense for each of the three-month periods ended November 30, 2017 and 2016 was $150,000. Accumulated amortization as of November 30, 2017 and August 31, 2017 was $2,125,000 and $1,975,000, respectively.

On June 1, 2017, as part of the acquisition of DILIsym Services, Inc. the Company acquired certain developed technologies associated with the drug induced liver disease (DILI). These technologies were valued at $2,850,000 and are being amortized over 9 years under the straight-line method. Amortization expense for the three months ended November 30, 2017 was $79,176 and is included in cost of revenues. Accumulated amortization as of November 30, 2017 and August 31, 2017 was $158,333 and $79,176, respectively.

Total amortization expense for intellectual property agreements for the three months ended November 30, 2017 and 2016 was $320,417 and $188,750, respectively. Accumulated amortization as of November 30, 2017 was $2,326,458 and $2,095,417 as of August 31, 2017.

Intangible assets

The following table summarizes those intangible assets as of November 30, 2017:

Amortization expense for each of the three month periods ended November 30, 2017 and 2016 was $89,375 and $36,875, respectively. According to policy in addition to normal amortization, these assets are tested for impairment as needed.

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 available. Diluted earnings per share is computed similar 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 November 30, 2017 and 2016 were as follows:

Stock-Based Compensation

Compensation costs related to stock options are determined in accordance with FASB ASC 718-10,“Compensation-Stock Compensation”, using the modified prospective method. Under this method, 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 was $130,221 and $95,860 for the three months ended November 30, 2017 and 2016, respectively. This expense is included in the condensed consolidated statements of operations as Selling, General, and Administration (SG&A), and Research and Development expense.

Impairment of Long-lived Assets

The Company accounts 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 three months ended November 30, 2017 and 2016.

Recently Issued Accounting Pronouncements

In May 2014, the FranchiseFinancial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09 and its related amendments regarding Accounting Standards Codification Topic 606 (ASC Topic 606), Revenue from Contracts with Customers(ASU 2014-09). The standard will eliminateprovides principles for recognizing revenue for the transaction-transfer of promised goods or services to customers with the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard also provides guidance on the recognition of incremental costs related to obtaining customer contracts. We adopted ASC Topic 606, effective September 1, 2018, utilizing the modified retrospective method. This approach was applied to contracts that were in process as of September 1, 2018, and industry-specificthe corresponding incremental costs of obtaining those contracts, which resulted in a cumulative effect adjustment of $493,279 to the opening balance of retained earnings at the date of adoption. The adoption of this ASU primarily impacts the timing of our revenue recognition guidance under current generally accepted accounting principlesfor certain sales contracts, the capitalization and amortization of incremental costs of obtaining a contract, and related disclosures. The reported results for fiscal year 2019 reflect the application of ASC Topic 606.

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

The Company determines revenue recognition through the following steps:

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. Sales commissions for new contracts are deferred and then amortized on a straight-line basis over a period of benefit. We determined the period of benefit by taking into consideration our customer contracts, our technology and other factors. Sales commissions for renewal contracts are deferred and then amortized on a straight-line basis over the related contractual renewal period. Amortization expense is included in sales and marketing expenses on the condensed consolidated statements of operations.

We apply the practical expedient in ASC Topic 606 to expense costs as incurred for sales commissions when the period of benefit would have been one year or less. Most of our contracts are of a duration of one year or less, few, if any of the longer-term contracts have commissions associated with them.

Practical Expedients and Exemptions

The Company has elected the following additional practical expedients in applying Topic 606:

Cash and Cash Equivalents

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

Accounts Receivable

We analyze the age of customer balances, historical bad-debt experience, customer creditworthiness, and changes in customer payment terms when making estimates of the collectability of the Company’s trade accounts receivable balances. If we determine that the financial conditions of any of our customers deteriorated, whether due to customer-specific or general economic issues, an increase in the allowance may be made. Accounts receivable are written off when all collection attempts have failed.

Capitalized Computer Software Development Costs

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

The establishment of technological feasibility and the ongoing assessment for recoverability of capitalized software development costs require considerable judgment by management with respect to certain external factors including, but not limited to, technological feasibility, anticipated future gross revenues, estimated economic life, and changes in software and hardware technologies. Capitalized software development costs are comprised primarily of salaries and direct payroll-related costs and the purchase of existing software to be used in our software products.

Amortization of capitalized software development costs is calculated on a product-by-product basis using the straight-line method over the estimated economic life of the products (not to exceed five years). Amortization of software development costs amounted to $310,218 and $322,552 for the three months ended May 31, 2020 and 2019, respectively, and $937,888 and $1,006,339 for the nine months ended May 31, 2020 and 2019, 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 provided using the straight-line method over the estimated useful lives as follows:

Maintenance and minor replacements are charged to expense as incurred. Gains and losses on disposals are included in the results of operations.

Leases

In February 2016, the FASB issued ASU No. 2016-02—Leases, to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessor have not significantly changed from previous U.S. (GAAP) and replace it with a principles-based approach for determining revenue recognition.GAAP. This ASU 2014-09 iswas effective for annual andperiods, including interim periods within those annual periods, beginning after December 15, 2017. Early2018. We adopted this ASU on September 1, 2019.

We lease various production, administrative and sales offices under operating leases. We evaluate our contracts to determine if an arrangement is a lease at inception and classify it as a finance or operating lease. Currently, all our leases are classified as operating leases. Leased assets and corresponding liabilities are recognized based on the present value of the lease payments over the lease term. Our lease terms may include options to extend when it is reasonably certain that we will exercise that option. Costs associated with operating leases are recognized on a straight-line basis within operating expenses over the term of the lease. With the adoption is permitted for years beginning after December 15, 2016. The revenue recognitionof ASC 842 on September 1, 2019, we recognized all leases with terms greater than 12 months in duration on our consolidated balance sheets as right-of-use assets and lease liabilities. We adopted the standard is requiredusing the prospective approach and did not retrospectively apply to be applied retrospectively, including any combination of practical expedientsprior periods. Right-of-use assets are recorded in long-term assets on our consolidated balance sheets. Current and non-current lease liabilities are recorded as allowed in the standard. We are evaluating the impact, if any,operating lease liabilities within current liabilities and long-term liabilities, respectively, on our consolidated balance sheets. As part of the adoption of ASU 2014-09this standard we recorded the following assets and liabilities as of September 1, 2019:

We have made certain assumptions and judgments when applying ASC 842, the most significant of which are:

Supplemental balance sheet information related to operating leases was as follows as of May 31, 2020:

Goodwill and indefinite-lived assets

The Company performs valuations of assets acquired and liabilities assumed on each acquisition accounted for as a business combination and recognizes the assets acquired and liabilities assumed at their acquisition date fair value. Acquired intangible assets include customer relationships, software, trade names, and non-compete agreements. The Company determines the appropriate useful life by performing an analysis of expected cash flows based on historical experience of the acquired businesses. Intangible assets are amortized over their estimated useful lives using the straight-line method, which approximates the pattern in which the majority of the economic benefits are expected to be consumed.

Goodwill represents the excess of the cost of an acquired entity over the fair value of the acquired net assets. Goodwill is not amortized, instead it is tested for impairment annually or when events or circumstances change that would indicate that goodwill might be impaired. Events or circumstances that could trigger an impairment review include, but are not limited to, a significant adverse change in legal factors or in the business climate, an adverse action or assessment by a regulator, unanticipated competition, a loss of key personnel, significant changes in the manner of the Company's use of the acquired assets or the strategy for the Company's overall business, significant negative industry or economic trends, or significant 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 May 31, 2020, the Company determined that it has four reporting units, Simulations Plus, Cognigen Corporation, DILIsym Services, Inc. and Lixoft. When testing goodwill for impairment, the Company first performs 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. The Company is 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 the Company's 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 the Company's 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 May 31, 2020, the entire balance of goodwill was attributed to three of the Company's reporting units, Cognigen Corporation, DILIsym Services, and Lixoft. Intangible assets subject to amortization are reviewed for impairment whenever events or circumstances indicate that the carrying amount of these assets may not be recoverable. The Company did not recognize any impairment charges, during the three-month and nine-month periods ended May 31, 2020 and 2019.

Reconciliation of Goodwill for the period ended May 31, 2020:

Fair Value of Financial Instruments

Assets and liabilities recorded at fair value in the Condensed 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:

For certain of our financial statementsinstruments, including accounts receivable, accounts payable, accrued payroll and other expenses, accrued bonus to officer, and accrued warranty and service costs, the amounts approximate fair value due to their short maturities.

The following table summarizes fair value measurements at May 31, 2020 and August 31, 2019 for assets and liabilities measured at fair value on a recurring basis:

May 31, 2020:

August 31, 2019:

As of May 31, 2020, and August 31, 2019, the Company has a liability for contingent consideration related disclosures. to its acquisitions of the DILIsym Services, Inc. and 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 the Company records in any given period. Changes in the value of the contingent consideration obligations are recorded in the Company’s Consolidated Statement of Operations.

As of May 31, 2020, the Company has a liability for contingent consideration related to its acquisitions of DILIsym Services, Inc. and Lixoft:

The following is a reconciliation of contingent consideration value.

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 experiment, and purchased software that was developed by other companies and incorporated into, or used in the development of, our final products.

Income Taxes

The Company has not yet selectedaccounts 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

On February 28, 2012, we bought out a transition method nor has it determinedroyalty agreement with Enslein Research of Rochester, New York. The cost of $75,000 is being amortized over 10 years under the effectstraight-line method. Amortization expense for each of the standardthree-month periods ended May 31, 2020 and 2019 was $1,875 and was $5,625 for each of the nine-month periods ended May 31, 2020, and 2019. Accumulated amortization as of May 31, 2020 and August 31, 2019 were $61,875 and $56,250, respectively.

On May 15, 2014, we entered into a termination and nonassertion agreement with TSRL, Inc., pursuant to which the parties agreed to terminate an exclusive software licensing agreement entered into between the parties in 1997. As a result, the company obtained a perpetual right to use certain source code and data, and TSRL relinquished any rights and claims to any GastroPlus products and to any claims to royalties or other payments under that 1997 agreement. We agreed to pay TSRL total consideration of $6,000,000, which is being amortized over 10 years under the straight-line method. Amortization expense for each of the three-month periods ended May 31, 2020 and 2019 was $150,000, and $450,000 for each of the nine-month periods ended May 31, 2020 and 2019. Accumulated amortization as of May 31, 2020 and August 31, 2019 were $3,625,000 and $3,175,000, respectively.

On June 1, 2017, as part of the acquisition of DILIsym Services, Inc. the Company acquired certain developed technologies associated with the drug induced liver disease (DILI). These technologies were valued at $2,850,000 and are being amortized over 9 years under the straight-line method. Amortization expense for the three months and nine months ended May 31, 2020 and May 31, 2019 was $79,167 and $237,501, respectively, and is included in cost of revenues. Accumulated amortization as of May 31, 2020 and August 31, 2019 were $950,000 and $712,513, respectively.

In September 2018, we purchased certain intellectual property rights of Entelos Holding Company, a Delaware Corporation. The cost of $50,000 is being amortized over 10 years under the straight-line method. Amortization expense for the three months and nine months period ended May 31, 2020 and May 31, 2019 was $1,250 and $3,750, respectively. Accumulated amortization as of May 31, 2020 and August 31, 2019 was $8,750 and $5,000 respectively.

On April 1, 2020, as part of the acquisition of Lixoft the Company acquired certain developed technologies associated with the non-linear mixed effed models, population analysis, pharmacometrics and pre-clinical and clinical trial modeling and simulation algorithms. These technologies were valued at $8,030,000 and are being amortized over 16 years under the straight-line method. Amortization expense for the two months from acquisition to May 31, 2020 was $83,644, and is included in cost of revenues. Accumulated amortization as of May 31, 2020 was $83,644.

Total amortization expense for intellectual property agreements for the three months ended May 31, 2020 and 2019 was $315,936 and $232,292, respectively, and total amortization expense for the nine months ended May 31, 2020 and 2019 was $780,520 and $696,876 respectively. Accumulated amortization as of May 31, 2020 was $4,729,270 and $3,948,750 as of August 31, 2019.

Intangible assets

The following table summarizes intangible assets as of May 31, 2020:

Amortization expense for each of the three-month and nine-month periods ended May 31, 2020 and May 31, 2019 was $119,731 and $293,481 as compared to $89,375 and $268,125, respectively. According to policy, in addition to normal amortization, these assets are tested for impairment as needed.

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 available. Diluted earnings per share computation is similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. The components of basic and diluted earnings per share for the three and nine months ended May 31, 2020 and 2019 were as follows:

Stock-Based Compensation

Compensation costs related to stock options are determined in accordance with FASB ASC 718-10, “Compensation-Stock Compensation”, using the modified prospective method. Under this method, compensation cost is calculated based on its ongoing financial reporting. 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 was $287,115 and $224,654 for the three months ended May 31, 2020 and 2019, respectively and $926,747 and $633,398 for the nine months ended May 31, 2020 and 2019, respectively. This expense is included in the condensed consolidated statements of operations as Selling, General, and Administration (SG&A), and Research and Development expense.

Impairment of Long-lived Assets

The Company accounts 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 nine months ended May 31, 2020 and 2019.

Recently Issued Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes existing guidance on accounting for leases in "Leases (Topic 840)" and generally requires all leases to be recognized in the consolidated balance sheet. ASU 2016-02 is effective for annual and interim reporting periods beginning after December 15, 2018; early adoption is permitted. The provisions of ASU 2016-02 are to be applied using a modified retrospective approach. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.

In April 2016, the FASB issued ASASU 2016-10, Revenue from Contracts with Customers (Topic 606), which amends certain aspects of the Board's new revenue standard, ASU 2014-09, Revenue from Contracts with Customers. The standard should bewas adopted concurrently with the adoption of ASU 2014-09 which is effective for annual and interim periods beginning after December 15, 2017.

NOTE 3. REVENUE RECOGNITION

The Company has not yet selected a transitionadopted Topic 606 effective September 1, 2018 using the modified retrospective method nor has it determinedapplying this guidance to all open contracts at the date of initial application, which resulted in an adjustment to retained earnings for the cumulative effect of applying this guidance. The most significant impact of Topic 606 on revenue to the standardCompany relates to the timing of revenue recognition for one of its payment contracts. Under 606 the revenues under the contract are being recognized as time is expended and costs are being expensed as incurred. Under ASC 605 revenues were recognized as invoiced and certain costs were capitalized as development.

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

The Company determines revenue recognition through the following steps:

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

Components of revenue

The following is a description of principal activities from which the Company generates revenue. As part of the accounting for these arrangements, the Company must develop assumptions that require judgment to determine the stand-alone selling price for each performance obligation identified in the contract. Stand-alone selling prices are determined based on the prices at which the Company separately sells its ongoing financial reporting.services or goods.

Remaining performance obligations that do not fall under the expedients require the Company to perform various consulting and software development services and consortium memberships of approximately $2,700,000. It is anticipated these revenues will be recognized within the next two and ½ years.

Contract liabilities

During the three months and nine months period ended May 31, 2020 the Company recognized $109,000 and $882,000 of revenue that was included in contract liabilities as of August 31, 2019.

Disaggregation of Revenues

NOTE 3:4: Property and Equipment

Property and equipment as of November 30, 2017May 31, 2020 consisted of the following:

NOTE 4:5: CONTRACTS PAYABLE

DILIsym Acquisition Liabilities:

On June 1, 2017, the Company acquired DILIsym Services, Inc. The agreement provided for a working capital adjustment, an eighteen-month $1,000,000 holdback provision against certain representations and warrantees, and an Earn-out agreement of up to an additional $5,000,000 in Earn-out payments based on earnings over the next three years. The Earn-out liability has been recorded at an estimated fair value. Payments under the Earn-out liability will be due startingstarted in FY 2019. In September 2018, $1,556,644 was paid out under the first earn-out payment, a second earn-out payment was made in August 2019 itin the amount of $1,682,329. It is estimated that a final payment of approximately 43% of the Earn-out liability and well as the holdback$1,761,028 will be paid in 2019August 2020.

Lixoft Acquisition Liabilities:

On April 1, 2020, the Company acquired Lixoft. The agreement provided for a twenty-four month $2,000,000 holdback provision against certain representations and warrantees, comprised of $1,333,333 of cash and the majorityrelease from an escrow shares of stock valued at $666,337 issued at the date of the remaining Earn-out will be paidAgreement. In addition, based on a revenue growth formula for the two years subsequent to April 1, 2020, the agreement calls for earn-out payments up to $5,500,000 (two thirds cash and one-third newly issued, unregistered shares of the Company’s common stock). The former shareholders can earn up to $2,000,000 the first year and $3,500,000 in the following year.year two.

As of November 30, 2017May 31, 2020 and August 31, 20172019 the following liabilities have been recorded:

NOTE 5:6: COMMITMENTS AND CONTINGENCIES

Leases

We lease approximately 13,500 square feet of space in Lancaster, California. The original lease had a five-year term with two, three-year options to extend. The initial five-year term expired in February 2011, and we extended the lease to February 2, 2014. In June 2013, the lease was amended to extend the term to February 2, 2017. The amended lease also provides for an annual base rent increase of 3% per year and two, two-year options to extend. In May 2016 the Company exercised the two, two-year options extending the term of the lease through February 2, 2021 at a fixed rate of $25,000 per month. The new extension agreement allowed the Company with 90 days’ notice to opt out of the remaining lease in the last two years of the term upon payment of a recapture payment equal to the 3% base payment increase that would have been due under the original agreement.

Our Buffalo subsidiary leases approximately 12,623 square feet of space in Buffalo, New York. The initial five-year term expiresexpired in October 2018; the lease allowsand was renewed for a three-year option to extendextending it to October 2021. The currentnew base rent is $15,638$16,147 per month.

In September 2017 DILIsym service signed a three-year lease forleases approximately 1,900 rentable2,700 square feet of space in Research Triangle Park, North Carolina. The initial three-year term expires inwas due to expire October 2020. An amendment to the initial lease became effective April 1, 2020. This amendment added 686 square feet and extended the term of the lease to September 30, 2023. The initialnew base rent is $3,975$7,500 per month with an annual 3% adjustment. Prior

In Paris, France Lixoft leases approximately 2,300 square feet of office space, which as of April 1, 2020, had minimum payments equaling $229,843. The lease is for a 9-year term, with an option to this lease DILIsym wasterminate every 3 years, and expires in November of 2024. The rent is $16,555 per quarter and can be adjusted each December based on a month-to-month rental.consumer price index.

Rent expense, including common area maintenance fees for the three months ended November 30, 2017,May 31, 2020, and 20162019 was $135,877,$168,381 and $122,949,$147,581, respectively, and $463,074 and $436,357 for the nine months ended May 31, 2020 and 2019, respectively.

Future minimum lease payments under non-cancelable operating leases with remaining terms of one year or more at May 31, 2020 were as follows:

Line of Credit

On March 31, 2020, Simulations Plus, Inc. entered into a Credit Agreement with Wells Fargo Bank, N.A. The Credit Agreement, has provided Simulations Plus, Inc. with a credit facility of $3,500,000 through April 15, 2022. As of May 31, 2020, there were no amounts drawn against the line of credit.

Employment Agreements

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

License Agreement

The Company executedhad a royalty agreement with Accelrys, Inc. (“Accelrys”) (the original agreement was entered into with Symyx Technologies in March 2010; Symyx Technologies later merged with Accelrys, Inc.)Dassault Systèmes Americas Corp. for access to their Metabolite Database for developing our Metabolite Module within ADMET Predictor™. The module was renamed the Metabolism Module when we released ADMET Predictor version 6 on April 19, 2012. Under this agreement, we paypaid a royalty of 25% of revenue derived from the sale of the Metabolism/Metabolite module to Accelrys. In 2014, Dassault Systemes of France acquired Accelrysmodule. This agreement was recently renegotiated, and the Company now operates underdoes not bear any royalty obligations towards Dassault Systèmes Americas Corp. effective as of June 30, 2019. In addition, the name BIOVIA.license agreement will terminate on September 5, 2020. We incurred royalty expense (benefit) of $35,897($137,496) and $31,069,$55,924, respectively, for the three months ended November 30, 2017May 31, 2020 and 2016,2019, respectively and ($26,055) and $147,495 for the nine months ended May 31, 2020 and 2019, respectively.

Income taxesTaxes

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 unrecognized tax benefits in income tax expense. Interest and penalties totaled $-0- for fiscal year 20182019. We file income tax returns with the IRS and various state jurisdictions, India and India.France for our Paris division. Our federal income tax returns for fiscal year 2012 thru 2013 and 2015years 2016 through 2018 are open for audit, and our state tax returns for fiscal year 20112015 through 20152018 remain open for audit. In addition, our Californiacertain elements of prior tax return for the fiscal year 2007 and fiscal year 2008 remains open with regard toyears, such as R&D tax credits, as a result of a previous audit for which we received a letter from the California Franchise Tax Board stating that an audit will not be conducted for those years at this time; however itmay remain open and may be subject to future audit.

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

Litigation

From time to time, we may be involved in routine legal proceedings, as well as demands, claims and threatened litigation, which arise in the normal course of our business. Litigation can be expensive and disruptive to normal business operations. Moreover, the results of legal proceedings, particularly complex legal proceedings, cannot be predicted with any certainty.

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

NOTE 6:7: SHAREHOLDERS’ EQUITY

Dividend

The Company’s Board of Directors declared cash dividends during fiscal years 20182020 and 2017.2019. The details of the dividends paid are in the following tables:

Equity Incentive Plan

In September 1996, the Board of Directors adopted, and the shareholders approved, the 1996 Stock Option Plan (the "Option Plan") under which a total of 1,000,000 shares of common stock had been reserved for issuance. In March 1999, the shareholders approved an increase in the number of shares that may be granted under the Option Plan to 2,000,000. In February 2000, the shareholders approved an increase in the number of shares that may be granted under the Option Plan to 4,000,000. In December 2000, the shareholders approved an increase in the number of shares that may be granted under the Option Plan to 5,000,000. Furthermore, in February 2005, the shareholders approved an additional 1,000,000 shares, resulting in the total number of shares that may be granted under the Option Plan to 6,000,000. The 1996 Stock Option Plan terminated in September 2006 by its term.

On February 23, 2007, the Board of Directors adopted, and the shareholders approved the 2007 Stock Option Plan under which a total of 1,000,000 shares of common stock had been reserved for issuance. On February 25, 2014, the shareholders approved an additional 1,000,000 shares increasing the total number of shares that may be granted under the Option Plan to 2,000,000. This plan terminated in February 2017 by its term.

On December 23, 2016 the Board of Directors adopted, and on February 23, 2017 the shareholders approved, the 2017 Equity Incentive Plan under which a total of 1,000,000 shares of common stock has been reserved for issuance. This plan will terminate in December 2026.

As of November 30, 2017,May 31, 2020, employees and directors hold Qualified Incentive Stock Options and Non-Qualified Stock Optionsstock options to purchase 1,243,6061,231,491 shares of common stock at exercise prices ranging from $1.00$6.75 to $17.71.$38.81.

The following table summarizes information about stock options: