| SIGNIFICANT ACCOUNTING POLICIES | Principles
of Consolidation The consolidated
financial statements include the accounts of Simulations Plus, Inc. and 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 management’s
application of accounting policies. Actual results could differ from those estimates. Significant accounting policies for us include
revenue recognition, accounting for capitalized computer software development costs, valuation of stock options, and accounting
for income taxes. 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 multiyear 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 Company’s 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 PKPlus™ program, and we do not foresee an end-of-life for any of them at this
point). Amortization of software development costs amounted to $290,567 and $241,042 for the three months ended May 31, 2017 and
2016 and $864,443 and $735,579 for the nine months ended May 31, 2017 and 2016, 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 management’s best estimate
of what market participants would use in pricing the asset or liability at the measurement date. For certain
of our financial instruments, including accounts receivable, accounts payable, accrued payroll and other expenses, 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. 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- and $-0- for fiscal
year 2017 and 2016, respectively. We file income tax returns with the IRS and various state jurisdictions and India. 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 May 31, 2017 and
2016 was $1,875, and was $3,750 for each of the nine-month periods ended May 31, 2017 and 2016. Accumulated amortization as of
May 31, 2017 and August 31, 2016 was $39,375 and $33,750, respectively. 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 paid 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, 2017 and
2016 was $150,000 and was $450,000 for each of the nine-month periods ended May 31, 2017 and 2016. Accumulated amortization as
of May 31, 2017 and August 31, 2016 was $1,825,000 and $1,375,000, respectively. Total amortization
expense for intellectual property agreements for the three months ended May 31, 2017 and 2016 was $151,875, and total amortization
expense for the nine months ended May 31, 2017 and 2016 was $455,625. Accumulated amortization as of May 31, 2017
was $1,864,375 and $1,408,750 as of August 31, 2016. 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 May 31, 2017:
Amortization Period Acquisition Value Accumulated Amortization Net book value
Customer relationships Straight line 8 years $ 1,100,000 $ 378,125 $ 721,875
Trade Name-Cognigen None 500,000 – 500,000
Covenants not to compete Straight line 5 years 50,000 27,500 22,500
$ 1,650,000 $ 405,625 $ 1,244,375 Amortization
expense for each of the three-and nine-month periods ended May 31, 2017 and 2016 was $36,875 and $110,625, 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 and nine months ended May 31, 2017 and 2016 were as follows:
Three months ended Nine months ended
5/31/2017 5/31/2016 5/31/2017 5/31/2016
Numerator:
Net income attributable to common shareholders $ 2,080,029 $ 1,909,339 $ 4,637,354 $ 4,161,161
Denominator:
Weighted-average number of
common shares outstanding during the period 17,241,891 17,028,634 17,233,470 17,000,228
Dilutive effect of stock options 343,637 198,906 221,394 219,607
Common stock and common stock
equivalents used for diluted earnings per share 17,585,528 17,227,540 17,454,864 17,219,835 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 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. In November
2015, the FASB issued ASU No 2015-17, Income Taxes (Topic 740). The amendments in ASU 2015-17 change the requirements for the
classification of deferred taxes on the balance sheet. Currently, GAAP requires an entity to separate deferred income tax liabilities
and assets into current and noncurrent amounts in a classified statement of financial position. To simplify the presentation of
deferred income taxes, the amendments in this ASU require that deferred tax liabilities and assets be classified as noncurrent
in a classified statement of financial position. The pronouncement is effective for fiscal years and interim periods within those
fiscal years beginning after December 15, 2016. Earlier application is permitted for all entities as of the beginning of an interim
or annual reporting period. The Company early adopted ASU No. 2015-17 because it reduced complexity while maintaining the usefulness
of the information. The retrospective application resulted in a reclassification of the current deferred tax asset at August 31,
2016 now being presented against the long term deferred tax liability. 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 March
2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. This ASU affects entities that issue
share-based payment awards to their employees. The ASU is designed to simplify several aspects of accounting for share-based payment
award transactions that include - the income tax consequences, classification of awards as either equity or liabilities, classification
on the statement of cash flows, and forfeiture rate calculations. ASU 2016-09 will become effective for the Company in the first
quarter of fiscal 2019. Early adoption is permitted in any interim or annual period. The Company early adopted ASU No. 2016-09.
The adoption had no material impact on the Company’s financial statements. |
