| 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. Reclassifications Certain numbers
in the prior year have been reclassified to conform to the current year's presentation. 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 purchased 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. 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 creditworthiness, 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 MedChem Designer program, and we do not foresee an end-of-life for any of them
at this point). Amortization of software development costs amounted to $494,537 and $490,051 for the six months ended February
29, 2016 and February 28, 2015, respectively, and amortization of software development costs was $247,269 and $276,761 for the
three months ended February 29, 2016 and February 28, 2015, 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:
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. Goodwill
and indefinite-lived assets Goodwill
and indefinite-lived assets are not amortized, but are evaluated for impairment annually or when indicators of a potential impairment
are present. Our impairment testing of goodwill is performed separately from our impairment testing of indefinite-lived intangibles.
The annual evaluation for impairment of goodwill and indefinite-lived intangibles is based on valuation models that incorporate
assumptions and internal projections of expected future cash flows and operating plans. 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 February 29, 2016 for assets and liabilities measured at fair value on a
recurring basis:
Level
I Level
II Level
III Total
Cash and cash equivalents $ 7,062,993 $ $ $ 7,062,993
Total $ 7,062,993 $ $ $ 7,062,993 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 which 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 six months periods ended February 29, 2016
and February 28, 2015 was $3,750 and was $1,875 for each three-month period ended February 29, 2016 and February 28, 2015. Accumulated
amortization as of February 29, 2016 was $30,000. On May 15,
2014, we bought out a royalty agreement with TSRL, Inc. of Ann Arbor, Michigan. The cost of $6,000,000 is being amortized over
10 years under the straight-line method. Amortization expense for each of the six months periods ended February 29, 2016 and February
28, 2015 was $300,000 and was $150,000 for each three-month period ended February 29, 2016 and February 28, 2015. Accumulated
amortization as of February 29, 2016 and August 31, 2015 was $1,075,000 and $775,000, respectively. (See Note 4.) Total amortization
expense for intellectual property agreements for the three months ended February 29, 2016 and February 28, 2015 was $151,875.
Accumulated amortization as of February 29, 2016 and August 31, 2015 was $1,105,000 and $801,250, respectively. Intangible
assets The Company
acquired certain intangible assets as part of the acquisition of Cognigen Corporation on September 2, 2014. The following table
summarizes those intangible assets as of February 29, 2016:
Amortization Period Acquisition Value Accumulated Amortization Net book value
Customer
relationships Straight line 8 years $ 1,100,000 $ 206,250 $ 893,750
Trade
Name-Cognigen None 500,000 0 500,000
Covenants
not to compete Straight line 5 years 50,000 15,000 35,000
$ 1,650,000 $ 221,250 $ 1,428,750 Amortization
expense for each of the six months periods ended February 29, 2016 and February 28, 2015 was $73,750 and was $36,875 for each
three-month periods ended February 29, 2016 and February 28, 2015. 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 and six months ended February 29, 2016 and February 28, 2015 were as follows:
Three months ended Six months ended
02/29/2016 02/28/2015 02/29/2016 02/28/2015
Numerator:
Net income attributable to common shareholders $ 1,145,349 $ 970,233 $ 2,251,822 $ 1,499,136
Denominator:
Weighted-average number
of common shares outstanding during the period 17,005,649 16,848,983 16,985,869 16,839,599
Dilutive effect of stock
options 262,495 256,429 244,230 256,758
Common stock and common
stock equivalents used for diluted earnings per share 17,268,144 17,105,412 17,230,099 17,096,357 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 ASU No. 2014-09, Revenue from Contracts with Customers |
