| SIGNIFICANT ACCOUNTING POLICIES | Principles
of Consolidation The
consolidated financial statements include the accounts of Simulations Plus, Inc. and, as of September 2, 2014, its wholly owned
subsidiary, Cognigen Corporation. All significant intercompany accounts and transactions are eliminated in consolidation. Estimates Our
condensed consolidated 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
managements 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. Revenue
Recognition We
recognize revenues related to software licenses and software maintenance in accordance with Financial Accounting Standard Board
(FASB) Accounting Standard Codification (ASC) 985-605, Software - Revenue Recognition As
a byproduct of ongoing improvements and upgrades for the new programs and new modules of software, some modifications are provided
to customers who have already licensed software at no additional charge. Other software modifications result in new, additional
cost modules that expand the functionality of the software. These are licensed separately. We consider the modifications that
are provided without charge to be minimal, as they do not significantly change the basic functionality or utility of the software,
but rather add convenience, such as being able to plot some additional variable on a graph in addition to the numerous variables
that had been available before, or adding some additional calculations to supplement the information provided from running the
software. Such software modifications for any single product have typically occurred once or twice per year, sometimes more, sometimes
less. Thus, they are infrequent. The Company provides, for a fee, additional training and service calls to its customers and recognizes
revenue at the time the training or service call is provided. Generally,
we enter into one-year license agreements with customers for the use of our pharmaceutical software products. We recognize revenue
on these contracts when all the criteria are met. Most license agreements have a term of one year; however, from time to time,
we enter into multi-year license agreements. We generally unlock and invoice software one year at a time for multi-year licenses.
Therefore, revenue is recognized one year at a time. Certain of the Company's software products are housed and supported on the
Company's computer networks. Software revenues for those products are including in income over the life of the contract. We
recognize revenue from collaboration research and revenue from grants equally over their terms. For contract revenues based on
actual hours incurred we recognize revenues when the work is performed. For fixed price contracts, we recognize contract study
and other contract revenues using the percentage-of-completion method, depending upon how the contract studies are engaged, in
accordance with ASC 605-35, Revenue Recognition Construction-Type and Production-Type Contracts 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 We
analyze the age of customer balances, historical bad debt experience, customer credit worthiness, and changes in customer payment
terms when making estimates of the collectability of the Companys trade accounts receivable balances. If we determine that
the financial conditions of any of its 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 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 on the straight-line method over the estimated
economic life of the products (not to exceed five years, although all of our current software products have already been on the
market for 7-15 years except for our newest programs MedChem Designer and MembranePlus TM 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:
Equipment 5
years
Computer equipment 3
to 7 years
Furniture and fixtures 5
to 7 years
Leasehold improvements Shorter
of life of asset or lease Maintenance
and minor replacements are charged to expense as incurred. Gains and losses on disposals are included in the results of operations. Intangible
Assets and Goodwill 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 name, 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 under-performance 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, 2015, the Company determined that it has two reporting units, Simulations Plus and Cognigen Corporation. 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, 2015, the entire balance of goodwill was attributed to the Company's Cognigen Corporation reporting unit. 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 has not recognized any impairment charges during the periods ended May 31,
2015 and 2014. Reconciliation
of Goodwill for the period ended May 31, 2015:
Balance, August
31, 2014 $
Addition 4,789,248
Impairments
Balance,
May 31, 2015 $ 4,789,248 Other Intangible
Assets The
following table summarizes other intangible assets as of May 31, 2015:
Amortization
Period Acquisition
Value Accumulated
Amortization Net
book value
Customer
relationships Straight
line 8 years $ 1,100,000 $ 103,125 $ 996,875
Trade Name-Cognigen None 500,000 0 500,000
Covenants
not to compete Straight
line 5 years 50,000 7,500 42,500
$ 1,650,000 $ 110,625 $ 1,539,375 Amortization
expense for the three and nine months ended May 31, 2015 was $36,875 and $110,625, respectively. Business
Acquisitions The
Company accounted for the acquisition of Cognigen using the purchase method of accounting where the assets acquired and liabilities
assumed are recognized based on their respective estimated fair values. The excess of the purchase price over the estimated fair
values of the net assets acquired is recorded as goodwill. Determining the fair value of certain acquired assets and liabilities
is subjective in nature and often involves the use of significant estimates and assumptions, including, but not limited to, the
selection of appropriate valuation methodology, projected revenue, expenses and cash flows, weighted average cost of capital,
discount rates, estimates of advertiser and publisher turnover rates and estimates of terminal values. Business acquisitions are
included in the Company's consolidated financial statements as of the date of the acquisition. 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:
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 managements best estimate of what market participants would use in pricing the asset or liability at the
measurement date. The
following table summarizes fair value measurements by level at May 31, 2015 for assets and liabilities measured at fair value
on a recurring basis:
Level
I Level
II Level
III Total
Cash
and cash equivalents $ 6,428,596 $ $ $ 6,428,596
Total $ 6,428,596 $ $ $ 6,428,596 For
certain of our financial instruments, 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. Research
and Development Costs Research
and development costs are charged to expense as incurred until technological feasibility has been established. These costs consist
primarily of salaries and direct payroll-related costs. It also includes purchased software and databases that were developed
by other companies and incorporated into, or used in the development of, our final products. Income
Taxes We
utilize FASB ASC 740-10, Income Taxes, 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 nine months periods ended May 31,
2015 and 2014 was $5,625 and was $1,875 for each three-month period ended May 31, 2015 and 2014. Accumulated amortization as of
May 31, 2015 was $24,375. On
May 15, 2014, we entered into a termination and non-assertion 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 the nine months ended May 31,
2015 and 2014 was $450,000 and $25,000 respectively. Amortization expense for the three months ended May 31, 2015 and 2014 was
$150,000 and $25,000 respectively. Accumulated amortization as of May 31, 2015 was $625,000. (See Note 4). Total
amortization expense for intellectual property agreements for the nine months ended May 31, 2015 and 2014 was $455,625 and $30,625,
respectively. Total amortization expense for intellectual property agreements for the three months ended May 31, 2015 and 2014
was $151,875 and $26,875, respectively. Accumulated amortization as of May 31, 2015 was $649,375. Earnings
per Share We report
earnings per share (EPS) in accordance with FASB ASC 260-10. Basic EPS is computed by dividing income available to common shareholders
by the weighted-average number of common shares available. Diluted EPS is computed similar to basic EPS, 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 EPS for the three and nine
months ended May 31, 2015 and 2014 were as follows:
Three
month ended Nine
month ended
05/31/2015 05/31/2014 05/31/2015 05/31/2014
Numerator:
Net
income attributable to common shareholders $ 1,852,422 $ 1,307,549 $ 3,351,558 $ 2,802,568
Denominator:
Weighted-average
number of common shares outstanding during the period 16,862,128 16,193,976 16,847,191 16,117,198
Dilutive
effect of stock options 211,027 261,102 223,143 244,497
Common
stock and common stock equivalents used for diluted EPS 17,073,155 16,455,078 17,070,334 16,361,695 Stock-Based
Compensation Compensation
costs related to stock options are determined in accordance with FASB ASC 718-10, Compensation-Stock Compensation,
Recently
Issued Accounting Pronouncements In
July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating
Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists In May 2014,
FASB issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. The standard will eliminate
the transaction- and industry-specific revenue recognition guidance under current U.S. GAAP and replace it with a principles-based
approach for determining revenue recognition. ASU 2014-09 is effective for annual and interim periods beginning after December
15, 2017. Early adoption is permitted for years beginning after December 15, 2016. The revenue recognition standard is required
to be applied retrospectively, including any combination of practical expedients as allowed in the standard. We are evaluating
the impact, if any, of the adoption of ASU 2014-09 to our financial statements and related disclosures. The Company has not yet
selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting. |
