| 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. 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 The Company 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 within the parameters of our Investment Policy and Guidelines. The Company
accounts for its 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 November 30,
2021, all of our investments were classified as held-to-maturity. Capitalized Computer Software Development Costs Software development costs are capitalized in
accordance with FASB ASC 985-20, Costs of Software to Be Sold, Leased, or Marketed. Capitalization of software development costs begins
upon the establishment of technological feasibility and is discontinued when the product is available for sale. 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 revenue, 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 $ 296 325 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 calculated 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 November 30, 2021:
Balance sheet information related to operating leases
(in thousands)
Right-of-use assets $ 1,146
Lease liabilities, current $ 338
Lease liabilities, long-term $ 810
Operating lease costs $ 141
Weighted average remaining lease term 2.25
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 November 30, 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 November 30, 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 no Reconciliation of Goodwill as of November 30,
2021:
Schedule of reconciliation of goodwill
(in thousands) Cognigen DILIsym Lixoft Total
Balance, August 31, 2021 $ 4,789 $ 5,598 $ 2,534 $ 12,921
Addition – – – –
Impairments – – – –
Balance, November 30, 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 November 30, 2021 and August 31, 2021 for assets and liabilities measured at fair value on a recurring basis: November
30, 2021:
Schedule of fair value measurements
(in thousands) Level 1 Level 2 Level 3 Total
Cash and cash equivalents $ 41,680 $ – $ – $ 41,680
Short-term investments $ 82,364 $ – $ – $ 82,364
Acquisition-related contingent consideration obligations $ – $ – $ 3,338 $ 3,338 August 31, 2021:
(in thousands) Level 1 Level 2 Level 3 Total
Cash and cash equivalents $ 36,984 $ – $ – $ 36,984
Short-term investments $ 86,484 $ – $ – $ 86,484
Acquisition-related contingent consideration obligations $ – $ – $ 3,217 $ 3,217 As of November 30, 2021 and August 31, 2021, 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, 2021 $ 3,217
Contingent consideration payments –
Change in value of contingent consideration 121
Value at November 30, 2021 $ 3,338 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 November 30, 2021:
Schedule of intellectual property
(in thousands) Amortization Acquisition Accumulated Net Book
Royalty Agreement buy out-Enslein Research Straight line 10 years $ 75 $ 73 $ 2
Termination/nonassertion agreement-TSRL Inc. Straight line 10 years 6,000 4,525 1,475
Developed technologies–DILIsym acquisition Straight line 9 years 2,850 1,425 1,425
Intellectual rights of Entelos Holding Corp. Straight line 10 years 50 16 34
Developed technologies–Lixoft acquisition Straight line 16 years 8,010 834 7,176
$ 16,985 $ 6,873 $ 10,112 The following table summarizes intellectual property
as of August 31, 2021:
(in thousands) Amortization Acquisition Accumulated Net Book
Royalty Agreement buy out-Enslein Research Straight line 10 years $ 75 $ 71 $ 4
Termination/nonassertion agreement-TSRL Inc. Straight line 10 years 6,000 4,375 1,625
Developed technologies–DILIsym acquisition Straight line 9 years 2,850 1,346 1,504
Intellectual rights of Entelos Holding Corp. Straight line 10 years 50 15 35
Developed technologies–Lixoft acquisition Straight line 16 years 8,010 709 7,301
$ 16,985 $ 6,516 $ 10,469 Amortization expense for intellectual property
agreements for the three months ended November 30, 2021 and 2020 was $ 357 357 Other intangible assets The following table summarizes our other intangible
assets as of November 30, 2021:
Schedule of other intangible assets
(in thousands) Amortization Acquisition Accumulated Net Book
Cognigen
Customer relationships Straight line 8 years $ 1,100 $ 997 $ 103
Trade name None 500 – 500
Covenants not to compete Straight line 5 years 50 50 –
DILIsym
Customer relationships Straight line 10 years 1,900 855 1,045
Trade name None 860 – 860
Covenants not to compete Straight line 4 years 80 80 –
Lixoft
Customer relationships Straight line 14 years 2,550 304 2,246
Trade name None 1,550 – 1,550
Covenants not to compete Straight line 3 years 60 33 27
$ 8,650 $ 2,319 $ 6,331 The following table summarizes our other intangible
assets as of August 31, 2021:
(in thousands) Amortization Acquisition Accumulated Net Book
Cognigen
Customer relationships Straight line 8 years $ 1,100 $ 963 $ 137
Trade name None 500 – 500
Covenants not to compete Straight line 5 years 50 50 –
DILIsym
Customer relationships Straight line 10 years 1,900 807 1,093
Trade name None 860 – 860
Covenants not to compete Straight line 4 years 80 80 –
Lixoft
Customer relationships Straight line 14 years 2,550 258 2,292
Trade name None 1,550 – 1,550
Covenants not to compete Straight line 3 years 60 28 32
$ 8,650 $ 2,186 $ 6,464 Amortization expense for other intangible assets
for the three months ended November 30, 2021 and 2020 was $ 133 137 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 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 three months
ended November 30, 2021 and 2020 were as follows:
Schedule of earnings per share
Three months ended November 30,
(in thousands) 2021 2020
Numerator:
Net income attributable to common shareholders $ 3,026 $ 2,479
Denominator:
Weighted-average number of common shares outstanding during the period 20,150 19,930
Dilutive effect of stock options 596 869
Common stock and common stock equivalents used for diluted earnings per share 20,746 20,799 Stock-Based Compensation Compensation costs related to stock options are
determined in accordance with FASB ASC 718-10, “Compensation-Stock Compensation”, 634 449 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” Recently Issued Accounting Pronouncements In December 2019, the FASB issued ASU 2019-12 ,
Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes In March 2020, the FASB issued ASU 2020-04 , Reference
Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting In October 2021, the
FASB issued Accounting Standards Update No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities
from Contracts with Customers (“ASU 2021-08”). The amendment requires contract assets and contract liabilities acquired in
a business combination to be recognized and measured in accordance with ASC 606, Revenue from Contracts with Customers, as if the acquirer
had originated the contract. The Update is intended to improve the accounting for acquired revenue contracts with customers in a business
combination, related to the recognition of an acquired contract liability, and to payment terms and their effect on subsequent revenue
recognized by the acquirer. The amendment also provides certain practical expedients when applying the guidance. ASU 2021-08 is effective
for interim and annual periods beginning after December 15, 2022, on a prospective basis, with early adoption permitted. The Company expects
to adopt ASU 2021-08 in the first quarter of fiscal year 2024. The Company is currently evaluating the potential impact of ASU 2021-08
to its consolidated financial statements. In November 2021, the FASB issued ASU 2021-10,
“Government Assistance (Topic 832),” which requires business entities to disclose information about transactions with a government
that are accounted for by applying a grant or contribution model by analogy (for example, IFRS guidance in IAS 20 or guidance on contributions
for not-for-profit entities in ASC 958-605). For transactions within scope, the new standard requires the disclosure of information about
the nature of the transaction, including significant terms and conditions, as well as the amounts and specific financial statement line
items affected by the transaction. The new guidance is effective for annual reporting periods beginning after December 15, 2021. The Company
does not expect that the adoption of this standard will have a material impact on its condensed consolidated financial statements; however,
the Company expects to increase its disclosures with respect to government assistance beginning in the first quarter of fiscal year 2023. |
