| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | NOTE 2 - SUMMARY OF 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, as of June
1, 2017, the accounts of DILIsym Services, Inc., and as of April 1, 2020, Lixoft accounts. All significant intercompany accounts
and transactions are eliminated in consolidation. Use of 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, 2020. 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 our customers
have 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. Investments We may invest excess cash balances in short-term
and long-term marketable debt securities. Investments may consist of certificates of deposit, money market accounts, government-sponsored
enterprise securities, corporate bonds and/or commercial paper. The Company accounts for its investment in marketable securities
in accordance with FASB ASC 320, Investments – Debt and Equity Securities. This statement requires debt securities to be
classified into three categories: Held-to-maturity—Debt securities
that the entity has the positive intent and ability to hold to maturity are reported at amortized cost. Trading Securities—Debt securities
that are bought and held primarily for the purpose of selling in the near term are reported at fair value, with unrealized gains
and losses included in earnings. Available-for-Sale—Debt securities
not classified as either securities held-to-maturity or trading securities are reported at fair value with unrealized gains or
losses excluded from earnings and reported as a separate component of shareholders’ equity. The Company classifies its investments
in marketable debt securities based on the facts and circumstances present at the time of purchase of the securities. During the
years ended August 31, 2020, all of the Company’s investments were classified as held-to-maturity. Held-to-maturity investments are measured
and recorded at amortized cost on the Company’s Consolidated Balance Sheet. Discounts and premiums to par value of the debt
securities are amortized to interest income/expense over the term of the security. No gains or losses on investment securities
are realized until they are sold or a decline in fair value is determined to be other-than-temporary. 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 computer software development costs are
comprised primarily of salaries and direct payroll-related costs and the purchase of existing software to be used in the Company's
software products. Amortization of capitalized computer software
development costs is provided 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 $ 1,225,544 1,331,753 1,300,434 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, or fair market value for property and equipment acquired in business combinations, less accumulated depreciation and amortization.
Depreciation and amortization are provided using the straight-line method over the estimated useful lives as follows:
Property and Equipment estimated useful lives
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. 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. This ASU was effective for annual periods, including interim periods within
those annual periods, beginning after December 15, 2018. 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 of 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 using the prospective approach and did not retrospectively apply to prior 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 operating lease liabilities within current liabilities and long-term liabilities, respectively, on our consolidated
balance sheets. As part of the adoption of this standard we recorded the following assets and liabilities as of September 1, 2019:
Schedule of Operating assets and liabilities
Right of use assets $ 902,553
Lease Liabilities, Current $ 537,017
Lease Liabilities, Long-term $ 365,536 We have made certain assumptions and judgments
when applying ASC 842, the most significant of which are:
· We elected the package of practical expedients available for transition that allow us to not reassess whether expired or existing contracts contain leases under the new definition of a lease, lease classification for expired or existing leases and whether previously capitalized initial direct costs would qualify for capitalization under ASC 842.
· We did not elect to use hindsight when considering judgments and estimates such as assessments of lessee options to extend or terminate a lease or purchase the underlying asset.
· For all asset classes, we elected to not recognize a right-of-use asset and lease liability for short-term leases.
· The determination of the discount rate used in a lease is our estimated incremental borrowing rate that is based on what we would expect to pay to borrow over a similar term an amount equal to the lease payments. Supplemental balance sheet information
related to operating leases was as follows as of August 31, 2020:
Schedule of lease cost
Right of use assets $ 926,600
Lease Liabilities, Current $ 463,465
Lease Liabilities, Long-term $ 463,312
Operating lease costs $ 600,717
Weighted Average remaining lease term 2.27
Weighted Average Discount rate 4.25 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 August 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 August 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 has no Reconciliation of Goodwill for the period
ended August 31, 2020:
Schedule of reconciliation of goodwill
Cognigen DILIsym Lixoft Total
Balance, August 31, 2017 $ 4,789,248 $ 5,597,950 $ – $ 10,387,198
Addition – – – –
Impairments – – – –
Balance, August 31, 2018 4,789,248 5,597,950 – 10,387,198
Addition – – – –
Impairments – – – –
Balance, August 31, 2019 4,789,248 5,597,950 – 10,387,198
Addition – – 2,533,987 2,533,987
Impairments – – – –
Balance, August 31, 2020 $ 4,789,248 $ 5,597,950 $ 2,533,987 $ 12,921,185 Other Intangible Assets The following table summarizes other intangible
assets as of August 31, 2020:
Schedule of other intangible assets
Amortization Acquisition Accumulated Net book
Customer relationships-Cognigen Straight line 8 years $ 1,100,000 $ 825,000 $ 275,000
Trade Name-Cognigen None 500,000 – 500,000
Covenants not to compete-Cognigen Straight line 5 years 50,000 50,000 –
Covenants not to compete-DILIsym Straight line 4 years 80,000 65,000 15,000
Trade Name-DILIsym None 860,000 – 860,000
Customer relationships-DILIsym Straight line 10 years 1,900,000 617,500 1,282,500
Customer relationships-Lixoft Straight line 14 years 2,550,000 75,892 2,474,108
Trade Name-Lixoft None 1,550,000 – 1,550,000
Covenants not to compete-Lixoft Straight line 3 years 60,000 8,333 51,667
$ 8,650,000 $ 1,641,725 $ 7,008,275 Amortization expense for the year ended
August 31, 2020, 2019 and 2018 was $ 431,725 357,500 357,500 Future amortization for the next five years is as follows:
Schedule of future amortization
Year ending August 31, Amount
2021 $ 545,000
2022 $ 530,000
2023 $ 384,000
2024 $ 372,000
2025 $ 372,000 Business Acquisitions The Company accounted for the acquisition
of Cognigen, DILIsym Services, Inc. and Lixoft 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 Consolidated 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, and accrued bonuses to officers the carrying
amounts approximate fair value due to their short-term nature. The following table summarizes fair value
measurements at August 31, 2020 and August 31, 2019 for assets and liabilities measured at fair value on a recurring basis: August 31, 2020:
Summarizes fair value measurements
Level 1 Level 2 Level 3 Total
Cash and cash equivalents $ 49,207,314 $ – $ – $ 49,207,314
Short-term investments $ 66,803,595 $ – $ – $ 66,803,595
Acquisition-related contingent consideration obligations $ – $ – $ 4,730,500 $ 4,730,500 August 31, 2019:
Level 1 Level 2 Level 3 Total
Cash and cash equivalents $ 11,435,499 $ – $ – $ 11,435,499
Short-term investments $ – $ – $ – $ –
Acquisition-related contingent consideration obligations $ – $ – $ 1,761,028 $ 1,761,028 As of August 31, 2020 and 2019, the Company
has a liability for contingent consideration related to its acquisition of Lixoft and 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.
Reconciliation of contingent consideration value
Value at August 31, 2019 $ 1,761,028
Purchase price contingent consideration 4,528,000
Contingent consideration payments (1,761,028 )
Change in value of contingent consideration 202,500
Value at August 31, 2020 $ 4,730,500 Advertising The Company expenses advertising costs
as incurred. Advertising costs for the years ended August 31, 2020, 2019 and 2018 were approximately $ 63,944 83,213 67,848 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. The cost of $ 75,000 10 years under the straight-line method 7,500 63,750 56,250 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 10 years under
the straight-line method 600,000 3,775,000 3,175,000 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 9 years under the straight-line method 316,667 316,667 1,029,167 712,500 In September 2018, we purchased certain
intellectual property rights of Entelos Holding Company, a Delaware Corporation. The cost of $ 50,000 10
years under the straight-line method 5,000 5,000 10,000 5,000 On April 1, 2020, as part of the acquisition
of Lixoft, the Company acquired certain developed technologies associated with the Lixoft scientific software. These technologies
were valued at $ 8,010,000 16 years under the straight-line method 208,594 208,594 Total amortization expense for intellectual
property agreements for the years ended August 31, 2020, 2019 and 2018 was $ 1,138,280 929,167 924,167 5,087,031 3,948,750 Future amortization for the next five years
is as follows:
Schedule of future amortization expenses
Years ending TSRL Enslein DILI-Acquired Lixoft-Acquired Entelos Total
2021 $ 600,000 $ 7,500 $ 316,667 $ 500,625 $ 5,000 $ 1,429,792
2022 $ 600,000 $ 3,750 $ 316,667 $ 500,625 $ 5,000 $ 1,426,042
2023 $ 600,000 $ – $ 316,667 $ 500,625 $ 5,000 $ 1,422,292
2024 $ 425,000 $ – $ 316,667 $ 500,625 $ 5,000 $ 1,247,292
2025 $ – $ – $ 316,667 $ 500,625 $ 5,000 $ 822,292 Earnings per Share The Company reports earnings per share
in accordance with FASB ACS 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 similarly 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 years ended August 31, 2020, 2019 and 2018 were as follows:
Schedule of earnings per share
2020 2019 2018
Numerator
Net income attributable to common shareholders $ 9,332,060 $ 8,583,329 $ 8,934,812
Denominator
Weighted-average number of common shares outstanding during the year 17,819,064 17,492,258 17,328,707
Dilutive effect of stock options 719,309 565,173 531,685
Common stock and common stock equivalents used for diluted earnings per share 18,538,373 18,057,431 17,860,392 Stock-Based Compensation The Company accounts for stock options
using the modified prospective method in accordance with FASB ASC 718-10, “Compensation-Stock Compensation” 1,286,625 865,848 562,078 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” No Recently Issued Accounting Standards 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. The standard provides principles for recognizing revenue for
the 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 the 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 for 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. 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. The Company adopted this ASU on September 1, 2019. In April 2016, the FASB issued ASU 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 was adopted concurrently with the adoption of ASU 2014-09 which is effective
for annual and interim periods beginning after December 15, 2017. |
