| SIGNIFICANT ACCOUNTING POLICIES | NOTE 2: SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The accompanying consolidated financial statements
include the accounts of Simulations Plus, Inc. and its wholly owned subsidiaries. All significant intercompany accounts and transactions
have been eliminated upon 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 We generate revenue primarily from the sale of
software licenses and by providing consulting services to the pharmaceutical industry for drug development. In accordance with Accounting Standards Codification
Topic 606 (ASC Topic 606), “ Revenue from Contracts with Customers”,
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, we satisfy 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 determine 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, while few, if any of the longer-term contracts have commissions associated with them. Practical Expedients and Exemptions We have elected the following additional
practical expedients in applying Topic 606:
· Commission Expense
·
Transaction Price Allocated to Future Performance
Obligations We 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,
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 our
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 reasonable
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 deposits, money market funds, U.S. government-sponsored
agency securities, corporate bonds, floating rate securities, municipal securities and/or commercial paper within the parameters of our
Investment Policy and Guidelines. We account for our investments in marketable securities in accordance with Financial Accounting Standards
Board (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. 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. 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. We classify our investments in marketable debt
securities based on the facts and circumstances present at the time of purchase of the securities. During the quarter ended May 31, 2021,
all of our investments were classified as held-to-maturity. 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 $ 344 310 1.0 938 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:
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 Internal-use Software We have a service contract related to the implementation
of internally used software. In accordance with ASC 350-40 “Customer’s Accounting for Implementation Costs Incurred in
a Cloud Computing Arrangement That Is a Service Contract” The amortization will be classified as Selling,
general, and administrative expenses on the condensed consolidated statement of operations and maintenance and minor upgrades are charged
to expense as incurred. Gains and losses on disposals are included in the results of operations. No amortization has been expensed for
the project as it is still in progress. Leases Supplemental balance sheet information related
to operating leases was as follows as of May 31, 2021:
(in thousands)
Right-of-use assets $ 1,405
Lease liabilities, current $ 426
Lease liabilities, long-term $ 980
Operating lease costs $ 455
Weighted average remaining lease term 2.8
Weighted average discount rate 3.79 Intangible Assets and Goodwill We perform valuations of assets acquired and liabilities
assumed on each acquisition accounted for as a business combination and recognize the assets acquired and liabilities assumed at their
acquisition-date fair value. Acquired intangible assets include customer relationships, software, trade names, and noncompete agreements.
We determine 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 our use
of the acquired assets or the strategy for our overall business, significant negative industry or economic trends, or significant underperformance
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, 2021, we determined that we have
four reporting units: Simulations Plus, Cognigen, DILIsym and Lixoft. When testing goodwill for impairment, we first perform 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. We are 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 our 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 our 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, 2021, the entire balance of goodwill
was attributed to three of our reporting units: Cognigen, DILIsym, 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. We did not recognize
any impairment charges during the three months and nine months ended May 31, 2021 and 2020. Reconciliation of Goodwill as of May 31, 2021:
Schedule of reconciliation of goodwill
(in thousands) Cognigen DILIsym Lixoft Total
Balance, August 31, 2020 $ 4,789 $ 5,598 $ 2,534 $ 12,921
Addition – – – –
Impairments – – – –
Balance, May 31, 2021 $ 4,789 $ 5,598 $ 2,534 $ 12,921 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 bonuses to officers, and accrued warranty and service
costs, the amounts approximate fair value due to their short maturities. The following table summarizes fair value measurements
at May 31, 2021 and August 31, 2020 for assets and liabilities measured at fair value on a recurring basis:
May 31, 2021:
Schedule of fair value measurements
(in thousands) Level 1 Level 2 Level 3 Total
Cash and cash equivalents $ 58,811 $ – $ – $ 58,811
Short-term investments $ 60,948 $ – $ – $ 60,948
Acquisition-related contingent consideration obligations $ – $ – $ 5,095 $ 5,095 August 31, 2020:
(in thousands) Level 1 Level 2 Level 3 Total
Cash and cash equivalents $ 49,207 $ – $ – $ 49,207
Short-term investments $ 66,804 $ – $ – $ 66,804
Acquisition-related contingent consideration obligations $ – $ – $ 4,731 $ 4,731 As of May 31, 2021 and August 31, 2020, we had
a liability for contingent consideration related to our acquisition of Lixoft. 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 we record in any given period. Changes in the value of the contingent consideration obligations are
recorded in our Consolidated Statement of Operations. The following is a reconciliation of contingent
consideration value: Reconciliation of contingent
consideration
(in thousands)
Value at August 31, 2020 $ 4,731
Contingent consideration payments –
Change in value of contingent consideration 364
Value at May 31, 2021 $ 5,095 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 experiments, and purchased
software that was developed by other companies and incorporated into, or used in the development of, our final products. Income Taxes We account 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
The following table summarizes intellectual property as of May 31, 2021:
Schedule of Finite-Lived Intangible Assets
(in thousands) Amortization Acquisition Accumulated Net Book
Royalty Agreement buy out-Enslein Research Straight line 10 years $ 75 $ 69 $ 6
Termination/nonassertion agreement-TSRL Inc. Straight line 10 years 6,000 4,225 1,775
Developed technologies–DILIsym acquisition Straight line 9 years 2,850 1,267 1,583
Intellectual rights of Entelos Holding Corp. Straight line 10 years 50 14 36
Developed technologies–Lixoft acquisition Straight line 16 years 8,010 584 7,426
$ 16,985 $ 6,159 $ 10,826 The following table summarizes intellectual property
as of August 31, 2020:
(in thousands) Amortization Acquisition Accumulated Net Book
Royalty Agreement buy out-Enslein Research Straight line 10 years $ 75 $ 64 $ 11
Termination/nonassertion agreement-TSRL Inc. Straight line 10 years 6,000 3,775 2,225
Developed technologies–DILIsym acquisition Straight line 9 years 2,850 1,029 1,821
Intellectual rights of Entelos Holding Corp. Straight line 10 years 50 10 40
Developed technologies–Lixoft acquisition Straight line 16 years 8,010 209 7,801
$ 16,985 $ 5,087 $ 11,898 Total amortization expense for intellectual property
agreements for the three months ended May 31, 2021 and 2020 was $ 358 316 1.1 781 Other
intangible assets
The following table summarizes our other intangible assets as of May 31, 2021:
Schedule of other intangible assets
(in thousands) Amortization Acquisition Accumulated Net Book
Cognigen
Customer relationships Straight line 8 years $ 1,100 $ 928 $ 172
Trade name None 500 – 500
Covenants not to compete Straight line 5 years 50 50 –
DILIsym
Customer relationships Straight line 10 years 1,900 760 1,140
Trade name None 860 – 860
Covenants not to compete Straight line 4 years 80 80 –
Lixoft
Customer relationships Straight line 14 years 2,550 213 2,337
Trade name None 1,550 – 1,550
Covenants not to compete Straight line 3 years 60 23 37
$ 8,650 $ 2,054 $ 6,596 The following table summarizes our other intangible
assets as of August 31, 2020:
(in thousands) Amortization Acquisition Accumulated Net Book
Cognigen
Customer relationships Straight line 8 years $ 1,100 $ 825 $ 275
Trade name None 500 – 500
Covenants not to compete Straight line 5 years 50 50 –
DILIsym
Customer relationships Straight line 10 years 1,900 618 1,282
Trade name None 860 – 860
Covenants not to compete Straight line 4 years 80 65 15
Lixoft
Customer relationships Straight line 14 years 2,550 76 2,474
Trade name None 1,550 – 1,550
Covenants not to compete Straight line 3 years 60 8 52
$ 8,650 $ 1,642 $ 7,008 Total amortization expense for other intangible
assets for the three months ended May 31, 2021 and 2020 was $ 137 120 412 293 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, 2021 and 2020 were as follows:
Schedule of earnings per share
(in thousands) Three Months ended May 31, Nine Months Ended May 31,
2021 2020 2021 2020
Numerator:
Net income attributable to common shareholders $ 3,787 $ 2,936 $ 9,477 $ 7,144
Denominator:
Weighted-average number of common shares outstanding during the period 20,105 17,735 20,014 17,661
Dilutive effect of stock options 697 692 736 673
Common stock and common stock equivalents used for diluted earnings per share 20,802 18,427 20,750 18,334 Stock-Based Compensation Compensation costs related to stock options are
determined in accordance with FASB ASC 718-10, “Compensation-Stock Compensation”, 705 287 2.0 927 Impairment of Long-lived Assets We account 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 Pronouncements In March 2020, the FASB issued Accounting Standards Update (“ASU”)
2020-04 , Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting 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. We adopted this ASU on September 1, 2019. |
