| SIGNIFICANT ACCOUNTING POLICIES | NOTE 2: 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, and as of June 1, 2017, the accounts of DILIsym Services, Inc. All significant intercompany accounts and
transactions are eliminated in consolidation. Estimates Our 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 In
May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09 and its related amendments
regarding Accounting Standards Codification Topic 606 (ASC Topic 606), Revenue from Contracts with Customers 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:
i. Identification
of the contract, or contracts, with a customer
ii. Identification
of the performance obligations in the contract
iii. Determination
of the transaction price
iv. Allocation
of the transaction price to the performance obligations in the contract
v. Recognition
of revenue when, or as, the Company satisfies a performance obligation 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:
• Commission
Expense .
• Transaction
Price Allocated to Future Performance Obligations ASC
606 requires that the Company disclose the aggregate amount of transaction price that is allocated to performance obligations
that have not yet been satisfied as of August 31, 2018. ASC 606 provides certain practical expedients that limit the requirement
to disclose the aggregate amount of transaction price allocated to unsatisfied performance obligations. The
Company applied the practical expedient to not disclose the amount of transaction price allocated to unsatisfied performance
obligations when the performance obligation is part of a contract that has an original expected duration of one year or
less. 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 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). Amortization of software development costs amounted to $339,073 and
$285,310 for the three months ended November 30, 2018 and 2017, 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 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 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 November
30, 2018, the Company determined that it has three reporting units, Simulations Plus, Cognigen Corporation, and DILIsym
Services, Inc. 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 November
30, 2018, the entire balance of goodwill was attributed to two of the Company's reporting units, Cognigen Corporation and DILIsym
Services. 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. There were no changes to goodwill, nor has the Company recognized
any impairment charges, during the three months’ periods ended November 30, 2018 and 2017. Business
Acquisitions The Company
accounted for the acquisition of Cognigen and DILIsym Services, Inc., 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 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. The following
table summarizes fair value measurements at November 30, 2018 and August 31, 2018 for assets and liabilities measured at fair
value on a recurring basis: November 30, 2018:
Level
1 Level
2 Level
3 Total
Cash and cash equivalents $ 9,352,238 $ – $ – $ 9,352,238
Acquisition-related contingent consideration obligations $ – $ – $ 3,372,484 $ 3,372,484 August 31, 2018:
Level
1 Level
2 Level
3 Total
Cash and cash equivalents $ 9,400,701 $ – $ – $ 9,215,701
Acquisition-related contingent consideration obligations $ – $ – $ 4,890,940 $ 4,890,940 As of November
30, 2018 and August 31, 2018, 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.
Value at August 31, 2018 $ 4,890,940
Contingent consideration payments (1,556,644 )
Change in value of contingent consideration 38,188
Value at November 30, 2018 $ 3,372,484 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” 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, 2018
and 2017 was $1,875. Accumulated amortization as of November 30, 2018 and August 31, 2018 was $50,625 and $48,750, 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, 2018 and 2017 was $150,000. Accumulated amortization as of November 30, 2018 and August 31, 2018 was $2,725,000 and $2,575,000,
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, 2018 and 2017 was $79,167 and is included
in cost of revenues. Accumulated amortization as of November 30, 2018 and August 31, 2018 was $475,000 and $395,833, 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-month period ended November
30, 2018 was $1,250. Accumulated amortization as of November 30, 2018 was $1,250. Total amortization
expense for intellectual property agreements for the three months ended November 30, 2018 and 2017 was $321,667 and $320,417,
respectively. Accumulated amortization as of November 30, 2018 was $3,251,876 and $3,019,583 as of August 31, 2018. Intangible
assets The following
table summarizes those intangible assets as of November 30, 2018:
Amortization Period Acquisition Value Accumulated Amortization Net
book value
Customer relationships-Cognigen Straight line 8 years $ 1,100,000 $ 584,375 $ 515,625
Trade Name-Cognigen None 500,000 0 500,000
Covenants not to compete-Cognigen Straight line 5 years 50,000 42,500 7,500
Covenants not to compete-DILIsym Straight line 4 years 80,000 30,000 50,000
Trade Name-DILIsym None 860,000 0 860,000
Customer relationships-DILIsym Straight line 8 years 1,900,000 285,000 1,615,000
$ 4,490,000 $ 941,875 $ 3,548,125 Amortization
expense for each of the three month periods ended November 30, 2018 and 2017 was $89,375, 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, 2018 and 2017 were as follows:
Three months ended
11/30/2018 11/30/2017
Numerator:
Net income attributable
to common shareholders $ 1,535,947 1,716,005
Denominator:
Weighted-average number
of common shares outstanding during the period 17,421,838 17,282,132
Dilutive
effect of stock options 575,897 577,551
Common
stock and common stock equivalents used for diluted earnings per share 17,997,735 17,859,683 Stock-Based
Compensation Compensation
costs related to stock options are determined in accordance with FASB ASC 718-10, “Compensation-Stock Compensation”,
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 “Property and Equipment” Recently
Issued Accounting Pronouncements In May 2014,
the Franchise Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts
with Customers In November
2015, the FASB issued ASU No 2015-17, Income Taxes (Topic 740) 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 In April
2016, the FASB issued AS 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 be adopted concurrently with adoption
of ASU 2014-09 which is effective for annual and interim periods beginning after December 15, 2017. |
