10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

	☒	Quarterly Report Pursuant to Section 13 or 15(d) of the Security Exchange Act of 1934 for the quarterly period ended May 31, 2018
OR
	☐	Transmission Report Pursuant to Section 13 or 15(d) of the Security Exchange Act of 1937 for the transition period from ______ to ______

Commission file number: 001-32046

Simulations Plus, Inc.

(Name of registrant as specified in its charter)

California	95-4595609
(State or other jurisdiction of Incorporation or Organization)	(I.R.S. Employer identification No.)

42505 10^th Street West

Lancaster, CA 93534-7059

(Address of principal executive offices including zip code)

(661) 723-7723

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filings requirements for the past 90 days.     Yes ☒     No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒     No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act (Check one):

☐   Large accelerated filer	☒   Accelerated filer
☐   Non-accelerated filer (Do not check if a smaller reporting company)	☐   Smaller reporting company
☐   Emerging Growth Company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐   No ☒

The number of shares outstanding of the registrant’s common stock, par value $0.001 per share, as of July 10, 2018 was 17,365,084; no shares of preferred stock were outstanding.

Simulations Plus, Inc.

FORM 10-Q

For the Quarterly Period Ended May 31, 2018

Table of Contents

PART I. FINANCIAL INFORMATION
		Page
Item 1.	Condensed Consolidated Financial Statements
	Condensed Consolidated Balance Sheets at May 31, 2018 (unaudited) and August 31, 2017 (audited)	3
	Condensed Consolidated Statements of Operations for the three months and nine months ended May 31, 2018 and May 31, 2017 (unaudited)	4
	Condensed Consolidated Statements of Cash Flows for the nine months ended May 31, 2018 and May 31, 2017 (unaudited)	5
	Notes to Condensed Consolidated Financial Statements (unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Result of Operations	19
	General	19
	Result of Operations	30
	Liquidity and Capital Resources	34
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	35
Item 4.	Controls and Procedures	35
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	36
Item 1A.	Risk Factors	36
Item 2.	Changes in Securities	36
Item 3.	Defaults upon Senior Securities	36
Item 4.	Mine Safety Disclosures	36
Item 5.	Other Information	36
Item 6.	Exhibits	37
Signature		38

i

Part I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

SIMULATIONS PLUS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

As of

	(Unaudited)		(Audited)
	May 31,		August 31,
ASSETS
	2018		2017
Current assets
Cash and cash equivalents	$	7,223,115	$	6,215,718
Accounts receivable, net of allowance for doubtful accounts of $0		7,701,659		4,048,725
Revenues in excess of billings		2,018,419		1,481,082
Prepaid income taxes		–		462,443
Prepaid expenses and other current assets		383,655		459,902
Total current assets		17,326,848		12,667,870
Long-term assets
Capitalized computer software development costs, net of accumulated amortization of $10,748,363 and $9,795,469		4,986,428		4,307,600
Property and equipment, net (note 3)		279,105		291,135
Intellectual property, net of accumulated amortization of $2,788,543 and $2,095,417		6,136,458		6,829,583
Other intangible assets net of accumulated amortization of $763,125 and $495,000		3,726,875		3,995,000
Goodwill		10,387,198		10,387,198
Other assets		37,227		34,082
Total assets	$	42,880,139	$	38,512,468
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable		197,110	$	240,892
Accrued payroll and other expenses		1,106,195		983,293
Income taxes payable		169,452		–
Current portion - Contracts payable (note 4)		2,480,000		247,328
Billings in excess of revenues		434,804		216,958
Deferred revenue		821,243		353,962
Total current liabilities		5,208,804		2,042,433
Long-term liabilities
Deferred income taxes, net		3,189,761		4,926,960
Payments due under Contracts payable (note 4)		3,372,752		5,738,188
Total liabilities		11,771,317		12,707,581
Commitments and contingencies (note 5)
Shareholders' equity (note 6)
Preferred stock, $0.001 par value 10,000,000 shares authorized no shares issued and outstanding		–		–
Common stock, $0.001 par value 50,000,000 shares authorized 17,358,444 and 17,277,604 shares issued and outstanding		7,359		7,278
Additional paid-in capital		12,933,560		12,109,141
Retained earnings		18,167,903		13,688,468
Total shareholders' equity		31,108,822		25,804,887
Total liabilities and shareholders' equity	$	42,880,139	$	38,512,468

The accompanying notes are an integral part of these financial statements.

3

SIMULATIONS PLUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the three and nine months ended May 31, 2018 and May 31, 2017

	Three months ended						Nine months ended
	(Unaudited)						(Unaudited)
	2018			2017			2018			2017
Revenues	$	8,553,068		$	6,748,518		$	22,978,565		$	17,872,044
Cost of revenues		2,022,972			1,444,764			5,874,062			4,334,699
Gross margin		6,530,096			5,303,754			17,104,503			13,537,345
Operating expenses
Selling, general, and administrative		2,604,168			1,954,871			7,352,404			5,766,563
Research and development		508,356			253,799			1,353,503			952,635
Total operating expenses		3,112,524			2,208,670			8,705,907			6,719,198
Income from operations		3,417,572			3,095,084			8,398,596			6,818,147
Other income (expense)
Interest income		7,825			4,663			18,313			13,548
Interest expense		(38,188	)		–			(114,846	)		–
Gain(loss) on currency exchange		9,441			(14,913	)		(3,820	)		5,573
Total other income (expense)		(20,922	)		(10,250	)		(100,353	)		19,121
Income before provision for income taxes		3,396,650			3,084,834			8,298,243			6,837,268
Benefit (Provision) for income taxes		(990,613	)		(1,004,805	)		(701,415	)		(2,199,914	)
Net Income	$	2,406,037		$	2,080,029		$	7,596,828		$	4,637,354
Earnings per share
Basic	$	0.14		$	0.12		$	0.44		$	0.27
Diluted	$	0.13		$	0.12		$	0.43		$	0.27
Weighted-average common shares outstanding
Basic		17,339,937			17,241,891			17,308,414			17,233,470
Diluted		17,904,428			17,585,528			17,850,171			17,454,864

The accompanying notes are an integral part of these financial statements.

4

SIMULATIONS PLUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the nine months ended May 31, 2018 and May 31, 2017

(UNAUDITED)

	2018			2017
Cash flows from operating activities
Net income	$	7,596,828		$	4,637,354
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		2,015,825			1,547,041
Change in value of contingent consideration		114,564			–
Stock-based compensation		514,416			355,365
Deferred income taxes		(1,737,199	)		99,259
(Increase) decrease in
Accounts receivable		(3,652,934	)		(2,001,072	)
Revenues in excess of billings		(537,337	)		(436,023	)
Prepaid income taxes		462,443			313,946
Prepaid expenses and other assets		73,102			106,403
Increase (decrease) in
Accounts payable		(43,782	)		103,534
Accrued payroll and other expenses		122,902			90,343
Billings in excess of revenues		217,846			83,299
Accrued income taxes		169,452			–
Other liabilities		–			(8,274	)
Deferred revenue		467,281			(127,458	)
Net cash provided by operating activities		5,783,407			4,763,717
Cash flows used in investing activities
Purchases of property and equipment		(89,648	)		(117,519	)
Capitalized computer software development costs		(1,631,724	)		(928,460	)
Net cash used in investing activities		(1,721,372	)		(1,045,979	)
Cash flows used in financing activities
Payment of dividends		(3,117,393	)		(2,585,043	)
Payments on Contracts Payable		(247,328	)		(1,000,000	)
Proceeds from the exercise of stock options		310,083			85,218
Net cash used in financing activities		(3,054,638	)		(3,499,825	)
Net increase (decrease) in cash and cash equivalents		1,007,397			217,913
Cash and cash equivalents, beginning of year		6,215,718			8,030,284
Cash and cash equivalents, end of period	$	7,223,115		$	8,248,197
Supplemental disclosures of cash flow information
Income taxes paid	$	1,763,825		$	1,765,189

The accompanying notes are an integral part of these financial statements.

5

Simulations Plus, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

May 31, 2018

(Unaudited)

NOTE 1: GENERAL

This report on Form 10-Q for the quarter ended May 31, 2018, should be read in conjunction with the Company's annual report on Form 10-K for the year ended August 31, 2017, filed with the Securities and Exchange Commission (“SEC”) on November 14, 2017. As contemplated by the SEC under Article 3 of Regulation S-X, the accompanying consolidated financial statements and footnotes have been condensed and therefore do not contain all disclosures required by generally accepted accounting principles. The interim financial data are unaudited; however, in the opinion of Simulations Plus, Inc. ("we", "our", "us"), the interim data includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the interim periods. Results for interim periods are not necessarily indicative of those to be expected for the full year.

Organization

Simulations Plus, Inc. (“Simulations Plus”, “Lancaster”) was incorporated on July 17, 1996. On September 2, 2014, Simulations Plus, Inc. acquired all of the outstanding equity interests of Cognigen Corporation (“Cognigen”, “Buffalo”) and Cognigen became a wholly owned subsidiary of Simulations Plus, Inc. Simulations Plus, Inc., acquired DILIsym Services, Inc. (DILIsym) as a wholly owned subsidiary pursuant to a stock purchase agreement dated May 1, 2017. On June 1, 2017, the Company consummated the acquisition of all outstanding equity interests of DILIsym pursuant to the terms of the Stock Agreement, with DILIsym becoming a wholly owned subsidiary of the Company. (Collectively, “Company”, “we”, “us”, “our”)

Lines of Business

The Company designs and develops pharmaceutical simulation software to promote cost-effective solutions to a number of problems in pharmaceutical research and in the education of pharmacy and medical students, and it provides consulting services to the pharmaceutical and chemical industries. Recently, the Company has begun to explore developing software applications for defense and for health care outside of the pharmaceutical industry.

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 and June 1, 2017, respectively, its wholly owned subsidiaries, Cognigen Corporation and 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

We recognize revenues related to software licenses and software maintenance in accordance with the FASB Accounting Standards Codification (“ASC”) 985-605, “Software – Revenue Recognition”. Software product revenue is recorded when the following conditions are met: 1) evidence of arrangement exists; 2) delivery has been made; 3) the amount is fixed; and 4) collectability is probable. Post-contract customer support (“PCS”) obligations are insignificant; therefore, revenue for PCS is recognized at the same time as the licensing fee, and the costs of providing such support services are accrued and amortized over the obligation period.

6

As a byproduct of ongoing improvements and upgrades for the new programs and new modules of software, some modifications are provided to our customers who have already purchased software at no additional charge. Other software modifications result in new, additional-cost modules that expand the functionality of the software. These are licensed separately. We consider the modifications that are provided without charge to be minimal, as they do not significantly change the basic functionality or utility of the software, but rather add convenience, such as being able to plot some additional variable on a graph in addition to the numerous variables that had been available before, or adding some additional calculations to supplement the information provided from running the software. Such software modifications for any single product have typically occurred once or twice per year, sometimes more, sometimes less. Thus, they are infrequent. The Company provides, for a fee, additional training and service calls to its customers and recognizes revenue at the time the training or service call is provided.

Generally, we enter into one-year license agreements with customers for the use of our pharmaceutical software products. We recognize revenue on these contracts when all the criteria are met. Most license agreements have a term of one year; however, from time to time, we enter into multiyear license agreements. We generally unlock and invoice software one year at a time for multiyear licenses. Therefore, revenue is recognized one year at a time. Certain of the Company's software products are housed and supported on the Company's computer networks. Software revenues for those products are included in income over the life of the contract.

We recognize revenue on sales of our DILIsym subsidiary in accordance with ASC 605-25, “Revenue Recognition, Multiple-Element Arrangements”. Our multiple-deliverable arrangements consist of consulting arrangements at our DILIsym subsidiary. We determined all elements to be separate units of accounting as they have standalone value to the customers. We allocate the revenue derived from these arrangements among all the deliverables. We base such allocation on the relative selling price of each deliverable. We recognize the allocated revenue for each deliverable when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed and determinable, and collectability is reasonably assured.

We recognize revenue from collaboration research, revenue from grants, and consortium memberships over their terms. For contract revenues based on actual hours incurred, we recognize revenues when the work is performed. For fixed-price contracts, we recognize contract study and other contract revenues using the percentage-of-completion method, depending upon how the contract studies are engaged, in accordance with ASC 605-35, “Revenue Recognition – Construction-Type and Production-Type Contracts”. To recognize revenue using the percentage-of-completion method, we must determine whether we meet the following criteria: 1) there is a long-term, legally enforceable contract, 2) it is possible to reasonably estimate the total project costs, and 3) it is possible to reasonably estimate the extent of progress toward completion.

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 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”. 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 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.

7

Amortization of capitalized software development costs is calculated on a product-by-product basis using the straight-line method over the estimated economic life of the products (not to exceed five years). Amortization of software development costs amounted to $331,862 and $290,567 for the three months ended May 31, 2018 and 2017, respectively, and $952,894 and $864,443 for the nine months ended May 31, 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 noncompete 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 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, 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 May 31, 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-month periods ended May 31, 2018 and 2017.

8

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 May 31, 2018 and August 31, 2017 for assets and liabilities measured at fair value on a recurring basis:

May 31, 2018:

	Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	7,223,115	$	–	$	–	$	7,223,115
Acquisition-related contingent consideration obligations	$	–	$	–	$	4,852,752	$	4,852,752

August 31, 2017:

	Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	6,215,718	$	–	$	–	$	6,215,718
Acquisition-related contingent consideration obligations	$	–	$	–	$	4,738,188	$	4,738,188

As of May 31, 2018, and August 31, 2017, 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, 2017	$	4,738,188
Contingent consideration payments		–
Change in value of contingent consideration		114,564
Value at May 31, 2018	$	4,852,752

9

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 that 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” which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns.

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 a royalty agreement with Enslein Research of Rochester, New York. The cost of $75,000 is being amortized over 10 years under the straight-line method. Amortization expense for each of the three-month periods ended May 31, 2018 and 2017 was $1,875, and was $5,625 for each of the nine-month periods ended May 31, 2018, and 2017. Accumulated amortization as of May 31, 2018 and August 31, 2017 were $46,875 and $41,250, 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 May 31, 2018 and 2017 was $150,000, and $450,000 for each of the nine-month periods ended May 31, 2018 and 2017. Accumulated amortization as of May 31, 2018 and August 31, 2017 were $2,425,000 and $1,975,000, respectively.

On June 1, 2017, as part of the acquisition of DILIsym Services, Inc. the Company acquired certain developed technologies associated with 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 and nine months ended May 31, 2018 was $79,176 and $237,500, respectively, and is included in cost of revenues. Accumulated amortization as of May 31, 2018 and August 31, 2017 was $316,667 and $79,176, respectively.

Total amortization expense for intellectual property agreements for the three months and nine months ended May 31, 2018 and 2017 was $231,042 and $151,875, respectively, and total amortization expense for the nine months ended May 31, 2018 and 2017 was $693,125 and $455,625 respectively. Accumulated amortization as of May 31, 2018 was $2,788,542 and $2,095,417 as of August 31, 2017.

Intangible assets

The following table summarizes those intangible assets as of May 31, 2018:

	Amortization Period	Acquisition Value		Accumulated Amortization		Net book value
Customer relationships - Cognigen	Straight line 8 years	$	1,100,000	$	515,625	$	584,375
Trade Name - Cognigen	None		500,000		0		500,000
Covenants not to compete - Cognigen	Straight line 5 years		50,000		37,500		12,500
Covenants not to compete - DILIsym	Straight line 4 years		80,000		20,000		60,000
Trade Name - DILIsym	None		860,000		0		860,000
Customer relationships - DILIsym	Straight line 8 years		1,900,000		190,000		1,710,000
		$	4,490,000	$	763,125	$	3,726,875

10

Amortization expense for each of the three-month and nine-month periods ended May 31, 2018 and 2017 was $89,375 and $36,875, and $268,125 and $110,625, respectively. According to policy, in addition to normal amortization, these assets are tested for impairment as needed.

Earnings per Share

We report earnings per share in accordance with FASB ASC 260-10. Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of common shares available. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. The components of basic and diluted earnings per share for the three and nine months ended May 31, 2018 and 2017 were as follows:

	Three months ended				Nine months ended
		5/31/2018		5/31/2017		5/31/2018		5/31/2017
Numerator:
Net income attributable to common shareholders	$	2,406,927	$	2,080,029	$	7,596,828	$	4,637,354
Denominator:
Weighted-average number of common shares outstanding during the period		17,339,937		17,241,891		17,308,414		17,233,470
Dilutive effect of stock options		564,491		343,637		541,757		221,394
Common stock and common stock equivalents used for diluted earnings per share		17,904,428		17,585,528		17,850,171		17,454,864

Stock-Based Compensation

Compensation costs related to stock options are determined in accordance with FASB ASC 718-10, “Compensation-Stock Compensation”, using the modified prospective method. Under this method, compensation cost is calculated based on the grant-date fair value estimated in accordance with FASB ASC 718-10, amortized on a straight-line basis over the options’ vesting period. Stock-based compensation was $132,437 and $142,879 for the three months ended May 31, 2018 and 2017, respectively and $404,154 and $355,365 for the nine months ended May 31, 2018 and 2017, respectively. This expense is included in the condensed consolidated statements of operations as Selling, General, and Administration (SG&A), and Research and Development expense.

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” and ASC 360, “Property and Equipment”. Long-lived assets to be held and used are reviewed for events or changes in circumstances that indicate that their carrying value may not be recoverable. We measure recoverability by comparing the carrying amount of an asset to the expected future undiscounted net cash flows generated by the asset. If we determine that the asset may not be recoverable, or if the carrying amount of an asset exceeds its estimated future undiscounted cash flows, we recognize an impairment charge to the extent of the difference between the fair value and the asset's carrying amount. No impairment losses were recorded during the nine months ended May 31, 2018 and 2017.

Recently Issued Accounting Pronouncements

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.

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In May 2014, the Franchise Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09). The standard will eliminate the transaction- and industry-specific revenue recognition guidance under current generally accepted accounting principles in the U.S. (GAAP) and replace it with a principles-based approach for determining revenue recognition. ASU 2014-09 is effective for annual and interim periods beginning after December 15, 2017. Early adoption is permitted for years beginning after December 15, 2016. The revenue recognition standard is required to be applied retrospectively, including any combination of practical expedients as allowed in the standard. We are evaluating the impact, if any, of the adoption of ASU 2014-09 to our financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting. In 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 should be adopted concurrently with adoption of ASU 2014-09 which is effective for annual and interim periods beginning after December 15, 2017. The Company has commenced its assessment of these new standards, developed a project plan to guide the implementation, and is evaluating the impact these new standards will have on its consolidated financial statements. In the second and third quarters, the company executed a project to evaluate the impact of these changes, which included a review of existing contracts with customers, an evaluation of the specific terms of those contracts and the appropriate treatment under the new standards, and a comparison of that new treatment to the Company’s existing accounting policies, to identify differences. This project is well advanced and key findings and conclusions are currently being discussed. The standard can be applied either retrospectively to each period presented or as a cumulative effect adjustment as of the date of adoption. The Company has not yet determined if it plans to utilize the full retrospective or modified retrospective method of adoption. In the fourth quarter the Company will complete its analysis, draft disclosures, and calculate any transition adjustment, if required, once the analysis is complete. The Company believes that it is following an appropriate timeline to allow for proper adoption on the implementation date of September 1, 2018. The company will continue to monitor new customer contracts until the transition date.

NOTE 3: Property and Equipment

Property and equipment as of May 31, 2018 consisted of the following:

Equipment	$	674,145
Computer equipment		265,925
Furniture and fixtures		145,240
Leasehold improvements		107,572
Sub total		1,192,882
Less: Accumulated depreciation and amortization		(913,777	)
Net Book Value	$	279,105

NOTE 4: CONTRACTS PAYABLE

DILIsym Acquisition Liabilities:

On June 1, 2017, the Company acquired DILIsym Services, Inc. The agreement provided for a working capital adjustment, an eighteen-month $1,000,000 holdback provision against certain representations and warrantees, and an Earn-out agreement of up to an additional $5,000,000 in Earn-out payments based on earnings over the next three years. The Earn-out liability has been recorded at an estimated fair value. Payments under the Earn-out liability will be due starting in FY 2019. It is estimated that approximately 38% of the Earn-out liability as well as the holdback will be paid in 2019 and the majority of the remaining Earn-out will be paid in the following year.

As of May 31, 2018 and August 31, 2017 the following liabilities have been recorded:

	May 31, 2018		August 31, 2017
Working Capital Liability	$	–	$	247,328
Holdback Liability		1,000,000		1,000,000
Earn-out Liability		4,852,752		4,738,188
Sub Total	$	5,852,752	$	5,985,516
Less: Current Portion		2,480,000		247,328
Long-Term	$	3,372,752	$	5,738,188

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NOTE 5: COMMITMENTS AND CONTINGENCIES

Leases

We lease approximately 13,500 square feet of space in Lancaster, California. The original lease had a five-year term with two, three-year options to extend. The initial five-year term expired in February 2011, and we extended the lease to February 2, 2014. In June 2013, the lease was amended to extend the term to February 2, 2017. The amended lease also provides for an annual base rent increase of 3% per year and two, two-year options to extend. In May 2016 the Company exercised the two, two-year options extending the term of the lease through February 2, 2021 at a fixed rate of $25,000 per month. The new extension agreement allowed the Company with 90 days’ notice to opt out of the remaining lease in the last two years of the term upon payment of a recapture payment equal to the 3% base payment increase that would have been due under the original agreement.

Our Buffalo subsidiary leases approximately 12,623 square feet of space in Buffalo, New York. The initial five-year term expires in October 2018; the lease allows for a three-year option to extend to October 2021. The current base rent is $15,638 per month.

In September 2017 DILIsym signed a three-year lease for approximately 1,900 rentable square feet of space in Research Triangle Park, North Carolina. The initial three-year term expires in October 2020. The base rent is $5,021 per month with an annual 3% adjustment. Prior to this lease DILIsym was on a month-to-month rental.

Rent expense, including common area maintenance fees for the three months ended May 31, 2018, and 2017 was $144,589 and $128,011, respectively, and $424,077 and $375,564 for the nine months ended May 31, 2018 and 2017, respectively.

Employment Agreements

In the normal course of business, the Company has entered into employment agreements with certain of its key management personnel that may require compensation payments upon termination.

License Agreement

The Company executed a royalty agreement with Accelrys, Inc. (“Accelrys”) (the original agreement was entered into with Symyx Technologies in March 2010; Symyx Technologies later merged with Accelrys, Inc.) for access to their Metabolite Database for developing our Metabolite Module within ADMET Predictor™. The module was renamed the Metabolism Module when we released ADMET Predictor version 6 on April 19, 2012. Under this agreement, we pay a royalty of 25% of revenue derived from the sale of the Metabolism/Metabolite module to Accelrys. In 2014, Dassault Systemes of France acquired Accelrys and the Company now operates under the name BIOVIA. We incurred royalty expense of $44,835 and $35,494, respectively, and for the three months ended May 31, 2018 and 2017, respectively and $124,567 and $108,587 for the nine months ended May 31, 2018 and 2017, respectively.

Income Taxes

We follow guidance issued by the FASB with regard to our accounting for uncertainty in income taxes recognized in the financial statements. Such guidance prescribes a recognition threshold of more likely than not and a measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In making this assessment, a company must determine whether it is more likely than not that a tax position will be sustained upon examination, based solely on the technical merits of the position and must assume that the tax position will be examined by taxing authorities. Our policy is to include interest and penalties related to unrecognized tax benefits in income tax expense. Interest and penalties totaled $-0- for fiscal year 2018. We file income tax returns with the IRS and various state jurisdictions and India. Our federal income tax returns for fiscal year 2015 and 2017 are open for audit, and our state tax returns for fiscal year 2014 through 2017 remain open for audit.

Our review of prior year tax positions using the criteria and provisions presented in guidance issued by FASB did not result in a material impact on our financial position or results of operations.

Litigation

From time to time, we may be involved in routine legal proceedings, as well as demands, claims and threatened litigation, which arise in the normal course of our business. Litigation can be expensive and disruptive to normal business operations. Moreover, the results of legal proceedings, particularly complex legal proceedings, cannot be predicted with any certainty.

We are not a party to any legal proceedings and are not aware of any pending legal proceedings of any kind.

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NOTE 6: SHAREHOLDERS’ EQUITY

Dividend

The Company’s Board of Directors declared cash dividends during fiscal years 2018 and 2017. The details of the dividends paid are in the following tables:

FY2018
Record Date	Distribution Date	Number of Shares Outstanding on Record Date		Dividend per Share		Total Amount
11/13/2017	11/20/2017	17,284,792	$	0.06	$	1,037,088
1/26/2018	2/2/2018	17,317,752		0.06		1,039,065
4/25/2018	5/2/2018	17,354,005		0.06		1,041,240
Total					$	3,117,393

FY2017
Record Date	Distribution Date	Number of Shares Outstanding on Record Date		Dividend per Share		Total Amount
11/10/2016	11/17/2016	17,226,478	$	0.05	$	861,324
1/30/2017	2/6/2017	17,233,758		0.05		861,688
5/08/2017	5/15/2017	17,240,626		0.05		862,031
7/28/2017	8/4/2017	17,268,920		0.05		863,446
Total					$	3,448,489

Equity Incentive Plan

On February 23, 2007, the Board of Directors adopted and the shareholders approved the 2007 Stock Option Plan under which a total of 1,000,000 shares of common stock had been reserved for issuance. On February 25, 2014 the shareholders approved an additional 1,000,000 shares increasing the total number of shares that may be granted under the Option Plan to 2,000,000. This plan terminated in February 2017 by its term.

On December 23, 2016 the Board of Directors adopted, and on February 23, 2017 the shareholders approved, the 2017 Equity Incentive Plan under which a total of 1,000,000 shares of common stock has been reserved for issuance. This plan will terminate in December 2026.

As of May 31, 2018, employees and directors hold stock options to purchase 1,161,976 shares of common stock at exercise prices ranging from $1.00 to $17.71.

The following table summarizes information about stock options:

Transactions in FY18	Number of Options			Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Life
Outstanding, August 31, 2017		1,249,126		$	8.51		7.52
Granted		12,000		$	17.71
Exercised		(74,075	)	$	5.78
Cancelled/Forfeited		(19,075	)	$	8.89
Expired		(6,000	)	$	5.06
Outstanding, May 31, 2018		1,161,976		$	8.79		7.31
Exercisable, May 31, 2018		472,755		$	7.66		6.45

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The weighted-average remaining contractual life of options outstanding issued under the Plan was 7.31 years at May 31, 2018. The exercise prices for the options outstanding at May 31, 2018 ranged from $1.00 to $17.71, and the information relating to these options is as follows:

Exercise Price				Awards Outstanding						Awards Exercisable
Low		High		Quantity		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price		Quantity		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price
$	1.00	$	4.00		42,000		0.85 years	$	1.00		42,000		0.85 years	$	1.00
$	4.01	$	8.00		332,000		5.96 years	$	6.76		207,795		5.78 years	$	6.70
$	8.01	$	12.00		763,060		8.26 years	$	9.87		222,960		8.12 years	$	9.81
$	12.01	$	16.00		12,916		9.22 years	$	14.44		0		–	$	–
$	16.01	$	17.71		12,000		4.46 years	$	17.71		0		–	$	–
					1,161,976		7.31 years	$	8.79		472,755		6.45 years	$	7.66

During the three and nine-month periods ended May 31, 2018, the Company issued 2,232 and 6,765 shares of stock to non-management directors of the Company valued at $36,716 and $110,262, respectively as compensation for services rendered to the Company.

NOTE 7: CONCENTRATIONS AND UNCERTAINTIES

Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash, cash equivalents, and trade accounts receivable. The Company holds cash and cash equivalents at banks located in California and North Carolina with balances that often exceed FDIC insured limits. Historically, the Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents. However, considering the current banking environment, the Company is investigating alternative ways to minimize its exposure to such risks. While the Company may be exposed to credit losses due to the nonperformance of its counterparties, the Company does not expect the settlement of these transactions to have a material effect on its results of operations, cash flows, or financial condition. The Company maintains cash at financial institutions that may, at times, exceed federally insured limits. At May 31, 2018 the Company had cash and cash equivalents exceeding insured limits by $6,254,000.

Revenue concentration shows that international sales accounted for 41% and 34% of net sales for the nine months ended May 31, 2018 and 2017, respectively. Three customers accounted for 9% (a dealer account in Japan representing various customers), 7%, and 5% of net sales during the nine months ended May 31, 2018. Three customers accounted for 8%, 6% (a dealer account in Japan representing various customers), and 5% of sales for the nine months ended May 31, 2017.

Accounts receivable concentration shows that six customers comprised 13% (a dealer account in Japan representing various customers), 9%, 6%, 6%, 5%, and 5% of accounts receivable at May 31, 2018, compared to three customers comprising 14% and 12% (a dealer account in Japan representing various customers) and 8% of accounts receivable at May 31, 2017.

We operate in the computer software industry, which is highly competitive and changes rapidly. Our operating results could be significantly affected by our ability to develop new products and to find new distribution channels for new and existing products.

The majority of our customers are in the pharmaceutical industry. Consolidation and downsizing in the pharmaceutical industry could have an impact on our revenues and earnings going forward.

NOTE 8: SEGMENT AND Geographic Reporting

We account for segments and geographic revenues in accordance with guidance issued by the FASB. Our reportable segments are strategic business units that offer different products and services.

15

Results for each segment and consolidated results are as follows for the three-month periods ended May 31, 2018 and 2017 (in thousands, because of rounding numbers may not foot):

Three months ended May 31, 2018
	Lancaster		Buffalo		North Carolina*		Eliminations			Total
Net revenues	$	5,654	$	1,942	$	957	$	–		$	8,553
Income (loss) from operations		3,031		384		3		–			3,418
Total assets		35,009		11,180		14,393		(17,702	)		42,880
Capital expenditures		9		17		–		–			26
Capitalized software costs		318		165		–		–			484
Depreciation and amortization		437		105		146		–			688

*Acquired June 1, 2017

Three months ended May 31, 2017
	Lancaster		Buffalo		Eliminations			Total
Net revenues	$	4,948	$	1,801	$	–		$	6,749
Income (loss) from operations		2,681		414		–			3,095
Identifiable assets		27,428		9,358		(7,238	)		29,548
Capital expenditures		12		0		–			12
Capitalized software costs		278		66		–			344
Depreciation and amortization		422		92		–			514

Nine months ended May 31, 2018
	Lancaster		Buffalo		North Carolina*		Eliminations			Total
Net revenues	$	14,247	$	5,722	$	3,010	$	–		$	22,979
Income (loss) from operations		6,566		1,220		613		–			8,399
Total assets		35,009		11,180		14,393		(17,702	)		42,880
Capital expenditures		37		40		13		–			90
Capitalized software costs		1,011		466		155		–			1,632
Depreciation and amortization		1,295		295		426		–			2,016

*Acquired June 1, 2017

Nine months ended May 31, 2017
	Lancaster		Buffalo		Eliminations			Total
Net Revenues	$	12,685	$	5,187	$	–		$	17,872
Income (loss) from operations		5,739		1,079		–			6,818
Total assets		27,428		9,358		(7,238	)		29,548
Capital expenditures		37		80		–			117
Capitalized software costs		809		120		–			929
Depreciation and Amortization		1,261		286		–			1,547

16

In addition, the Company allocates revenues to geographic areas based on the locations of its customers. Geographical revenues for the three months and nine months ended May 31, 2018 and 2017 were as follows (in thousands, because of rounding numbers may not foot):

Three months ended May 31, 2018
	North America		Europe		Asia		South America		Total
Lancaster	$	2,595	$	1,367	$	1,692	$	–	$	5,654
Buffalo		1942		–		–		–		1,942
North Carolina*		715		150		92		–		957
Total	$	5,252	$	1,517	$	1,784	$	–	$	8,553

*Acquired June 1, 2017

Three months ended May 31, 2017
	North America		Europe		Asia		South America		Total
Lancaster	$	2,533	$	1,144	$	1,271	$	–	$	4,948
Buffalo		1,801		0		0		–		1,801
Total	$	4,334	$	1,144	$	1,271	$	1	$	6,749

Nine months ended May 31, 2018
	North America		Europe		Asia		South America		Total
Lancaster	$	6,126	$	4,201	$	3,905	$	15	$	14,247
Buffalo		5,722		–		–		–		5,722
North Carolina*		2,249		195		566		–		3,010
Total	$	14,097	$	4,396	$	4,471	$	15	$	22,979

*Acquired June 1, 2017

Nine months ended May 31, 2017*
	North America		Europe		Asia		South America		Total
Lancaster	$	6,261	$	3,201	$	3,222	$	1	$	12,685
Buffalo		5,187		–		–		–		5,187
Total	$	11,448	$	3,201	$	3,222	$	1	$	17,872

NOTE 9: EMPLOYEE BENEFIT PLAN

We maintain a 401(K) Plan for all eligible employees, and we make matching contributions equal to 100% of the employee’s elective deferral, not to exceed 4% of total employee compensation. We can also elect to make a profit-sharing contribution. Our contributions to this Plan amounted to $95,585 and $64,233 for the three months ended May 31, 2018 and 2017, respectively and $238,011 and $179,123 for the nine months ended May 31, 2018 and 2017 respectively.

NOTE 10: ACQUISITION/MERGER WITH SUBSIDIARIES

DILIsym Services, Inc.

On May 1, 2017, the Company entered into a Stock Purchase Agreement (the “Stock Agreement”) with DILIsym Services, Inc. (“DILIsym”). On June 1, 2016, the Company consummated the acquisition of all outstanding equity interests of DILIsym pursuant to the terms of the Stock Agreement, with DILIsym becoming a wholly owned subsidiary of the Company. We believe the combination of Simulations Plus and DILIsym provides substantial future potential based on the complementary strengths of each of the companies.

17

Under the terms of the Stock Agreement, as described below, the Company will pay the former shareholders of DILIsym total consideration of approximately $10,463,000.

On June 1, 2017, the Company paid the former shareholders of DILIsym a total of $4,515,982, which included a $4,000,000 initial payment and a preliminary working capital payment of $515,982. Additional working capital adjustments of $247,328 were due under the agreement and were paid subsequent to August 31, 2017.

Within three business days following the eighteen-month anniversary of the date of the Stock Agreement, May 1, 2017, and subject to any offsets, the Company will pay the former shareholders of DILIsym a total of $1,000,000. The agreement calls for Earn-out payments up to an additional $5,000,000 based on a formula of pretax earnings over the next three years. The Earn-out liability has been recorded at fair value.

Under the acquisition method of accounting, the total estimated purchase price is allocated to DILIsym’s tangible and intangible assets and liabilities based on their estimated fair values at the date of the completion of the acquisition (June 1, 2017). The following table summarizes the preliminary allocation of the purchase price for DILIsym:

Assets acquired, including accounts receivable of $255,000 and estimated Contracts receivable of $153,000	$	2,298,569
Developed Technologies Acquired		2,850,000
Estimated value of Intangibles acquired (Customer Lists, trade name etc.)		2,840,000
Current Liabilities assumed		(911,049	)
Goodwill		5,597,950
Estimated Deferred income taxes		(2,212,160	)
Total Consideration	$	10,463,310

Goodwill has been provided in the transaction based on estimates of future earnings of this subsidiary including anticipated synergies associated with the positioning of the combined company as a leader in model-based drug development. Based on the structure of the transaction, the Company does not anticipate benefiting from any tax deductions in future periods for recognized goodwill.

PROFORMA INFORMATION (UNAUDITED)

Consolidated supplemental Pro Forma information

The following consolidated supplemental pro forma information assumes that the acquisition of DILIsym took place on September 1, 2016 for the income statement for the three-month and nine-month periods ended May 31, 2017. These amounts have been calculated after applying the Company’s accounting policies and adjusting the results of DILIsym to reflect the same expenses in the three-month period ended May 31, 2017. The adjustments include costs of acquisition, and amortization of intangibles and other technologies acquired during the merger, assuming the fair-value adjustments applied on September 1, 2016, together with consequential tax effects.

	For the three-month period ended				For the nine-month period ended
	May 31, (in 1000’s) (Unaudited)				May 31, (in 1000’s) (Unaudited)
	(Actual)		(Pro forma)		(Actual)		(Pro forma)
	2018		2017		2018		2017
Net Sales	$	8,553	$	8,340	$	22,979	$	20,918
Net Income	$	2,406	$	2,563	$	7,597	$	5,090

NOTE 11 - SUBSEQUENT EVENTS:

On June 26, 2018, the Company announced the appointment of a new Chief Executive Officer(CEO), Shawn O’Connor, who replaces the founding CEO, Walter S. Woltosz. Mr. Woltosz will remain as Chairman of the Board of Directors.

On July 6, 2018, our Board of Directors declared a quarterly cash dividend of $0.06 per share to our shareholders. The dividend will be distributed on Thursday August 2, 2018, for shareholders of record as of Wednesday July 26, 2018.

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Item 2. Management's Discussion and Analysis or Plan of Operations

Forward-Looking Statements

This document and the documents incorporated in this document by reference contain forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact contained in this document and the materials accompanying this document are forward-looking statements.

The forward-looking statements are based on the beliefs of our management, as well as assumptions made by and information currently available to our management. Frequently, but not always, forward-looking statements are identified by the use of the future tense and by words such as “believes,” expects,” “anticipates,” “intends,” “will,” “may,” “could,” “would,” “projects,” “continues,” “estimates” or similar expressions. Forward-looking statements are not guarantees of future performance and actual results could differ materially from those indicated by the forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause our or our industry’s actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by the forward-looking statements.

The forward-looking statements contained or incorporated by reference in this document are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”) and are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. These statements include declarations regarding our plans, intentions, beliefs, or current expectations.

Among the important factors that could cause actual results to differ materially from those indicated by forward-looking statements are the risks and uncertainties described under “Risk Factors” in our Annual Report and elsewhere in this document and in our other filings with the SEC.

Forward-looking statements are expressly qualified in their entirety by this cautionary statement. The forward-looking statements included in this document are made as of the date of this document and we do not undertake any obligation to update forward-looking statements to reflect new information, subsequent events, or otherwise.

General

BUSINESS

OVERVIEW

Simulations Plus, Inc., incorporated in 1996, is a premier developer of groundbreaking drug discovery and development software for mechanistic modeling and simulation, and for machine-learning-based prediction of properties of molecules solely from their structure, and is exploring the application of its machine-learning technologies in other industries. Our pharmaceutical/chemistry software is licensed to major pharmaceutical, biotechnology, agrochemical, cosmetics, and food industry companies and to regulatory agencies worldwide for use in the conduct of industry-based research. We also provide consulting services ranging from early drug discovery through preclinical and clinical trial data analysis and for submissions to regulatory agencies. Simulations Plus is headquartered in Southern California, with offices in Buffalo, New York, and Research Triangle Park, North Carolina, and its common stock trades on the NASDAQ Capital Market under the symbol “SLP.”

We are a global leader focused on improving the ways scientists use knowledge and data to predict the properties and outcomes of pharmaceutical and biotechnology agents, and are one of only two global companies who provide a wide range of early discovery, preclinical, and clinical consulting services and software. Our innovations in integrating new and existing science in medicinal chemistry, computational chemistry, pharmaceutical science, biology, physiology, and machine learning into our software have made us the leading software provider for PBPK modeling and simulation, prediction of molecular properties from structure, and prediction of drugs to induce liver injury or to treat nonalcoholic fatty liver disease.

19

We generate revenue by delivering relevant, cost-effective software and creative and insightful consulting services. Pharmaceutical and biotechnology companies use our software programs and scientific knowledge to guide early drug discovery (molecule design and screening), preclinical, and clinical development programs. They also use it to enhance their understanding of the properties of potential new medicines and to use emerging data to improve formulations, select and justify dosing regimens, support the generics industry, optimize clinical trial designs, and simulate outcomes in special populations, such as the elderly and pediatric patients.

In September 2014, Simulations Plus acquired Cognigen Corporation (Cognigen) as a wholly owned subsidiary pursuant to that certain Agreement and Plan of Merger, dated as of July 23, 2014, by and between Simulations Plus and Cognigen (the “Merger Agreement”). Cognigen was originally incorporated in 1992. Through the integration of Cognigen into Simulations Plus, Simulations Plus became also a leading provider of population modeling and simulation contract research services for the pharmaceutical and biotechnology industries. Our clinical-pharmacology-based consulting services include pharmacokinetic and pharmacodynamic modeling, clinical trial simulations, data programming, and technical writing services in support of regulatory submissions. We have also developed software for harnessing cloud-based computing in support of modeling and simulation activities and secure data archiving, and we provide consulting services to improve interdisciplinary collaborations and research and development productivity.

In June 2017, Simulation Plus acquired DILIsym Services, Inc. (DILIsym) as a wholly owned subsidiary pursuant to a stock purchase agreement dated May 1, 2017. On June 1, 2017, the Company consummated the acquisition of all outstanding equity interests of DILIsym pursuant to the terms of the Stock Agreement, with DILIsym becoming a wholly owned subsidiary of the Company. We believe the combination of Simulations Plus and DILIsym provides substantial future potential based on the complementary strengths of each of the companies. The acquisition of DILIsym positions the Company as the leading provider of Drug Induced Liver Injury (DILI) modeling and simulation software and contract research services. In addition to the DILIsym® software for analysis of potential drug-induced liver injury, DILIsym Services, Inc. also has developed a simulation program for analyzing nonalcoholic fatty liver disease (NAFLD) called NAFLDsym™. The difference between DILIsym and NAFLDsym is that DILIsym estimates the potential for a particular drug molecule to induce liver injury (i.e., to cause damage), while NAFLDsym estimates the likelihood of new molecules to treat nonalcoholic fatty liver disease (i.e., to repair damage), and is unique to the mechanisms involved in such treatment. As such, DILIsym can be a single program that addresses a wide variety of molecules across various companies, while NAFLDsym requires customizing the software for each mechanism of action. Both the DILIsym and NAFLDsym software programs require outputs from physiologically based pharmacokinetics (PBPK) software as inputs. The GastroPlus™ PBPK software from Simulations Plus provides such information; thus, the integration of these technologies will provide a seamless capability for analyzing the potential for drug-induced liver injury for new drug compounds and for investigating the potential for new therapeutic agents to treat nonalcoholic fatty liver disease.

PRODUCTS

General

We currently offer ten software products for pharmaceutical research and development: five simulation programs that provide time-dependent results based on solving large sets of differential equations: GastroPlus™; DDDPlus™; MembranePlus™; DILIsym®; and NAFLDsym™; three programs that are based on predicting and analyzing static (not time-dependent) properties of chemicals: ADMET Predictor™; MedChem Designer™; and MedChem Studio™ (the combination of ADMET Predictor, MedChem Designer, and MedChem Studio is called our ADMET Design Suite™); our newest program which is designed for rapid clinical trial data analysis and regulatory submissions called PKPlus™; and a program called KIWI™ from our Cognigen division that provides an integrated platform for data analysis and reporting through our proprietary secure cloud.

GastroPlus™

Our flagship product, originally introduced in 1998, and currently our largest single source of software revenue, is GastroPlus. GastroPlus mechanistically simulates the absorption, pharmacokinetics, pharmacodynamics, and drug-drug interactions of compounds administered to humans and animals and is currently the most widely used commercial software of its type by pharmaceutical companies, the U.S. Food and Drug Administration (FDA), the U.S. National Institutes of Health (NIH), and other government agencies in the U.S. and other countries.

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Because of the widespread use of GastroPlus, we were the only non-European company invited to join the European Innovative Medicines Initiative (IMI) program for Oral Bioavailability Tools (OrBiTo). OrBiTo, begun in 2012 and completed in 2017, was an international collaboration among 27 industry, academic, and government organizations working in the area of oral absorption of pharmaceutical products. Because we are outside of the European Union, our participation in this project was at our own expense, while other members were compensated for their work; however, we were a full member with access to all of the data and discussions of all other members. We believe our investment to participate in this initiative enabled us to benefit from, and to contribute to, advancing the prediction of human oral bioavailability from preclinical data, and ensured that we are well-known to member pharmaceutical companies and regulatory agencies.

In September 2016, we announced that Simulations Plus had been invited to join the European SimInhale Consortium and had been admitted to this prestigious group focused on advancing the state of the art for simulation of inhaled dosage forms. As one of only two U.S. participants, Simulations Plus is participating in activities designed to advance particle designs for improved deposition and interaction with lung tissue; promote realistic computer simulations of particle aerosolization, delivery, and deposition; promote patient-tailored inhaled medicines; promote integration of device and formulation design; and promote critical assessment of toxicity issues and related risks.

In September 2014, we entered into a research collaboration agreement (RCA) with the FDA to enhance the Ocular Compartmental Absorption and Transit (OCAT™) model within the Additional Dosing Routes Module of GastroPlus. The objective of this agreement was to provide a tool for generic companies and the FDA to assess the likely bioequivalence of generic drug formulations dosed to the eye. Under this RCA, we received up to $200,000 per year. This RCA could be renewed for up to a total of three years based on the progress achieved during the project. After a successful second year, the RCA was extended for two additional years in September 2016 and will be completed in September 2018.

We were awarded another RCA by the FDA in September 2015; this one to expand the capabilities of GastroPlus to simulate the dosing of long-acting injectable microspheres for both small and large molecules (biologics). This type of dosage form is usually injected via subcutaneous or intramuscular routes. This RCA also provides up to $200,000 per year for up to three years. Under this agreement, we are developing simulation models to deal with the very slow dissolution/decomposition of the microsphere carrier material that gradually releases the active drug over periods as long as weeks or months. After a successful second year, the RCA was renewed for the third year in September 2017 and will be completed in September 2018 unless extended.

In addition to the two funded efforts with the FDA described above, we also have an unfunded RCA with the FDA’s Office of Generic Drugs (OGD) that began in 2014. The objective of this RCA, which has a five-year term, is directed toward the FDA’s evaluation of mechanistic IVIVCs (in vitro-in vivo correlations) to determine whether mechanistic absorption modeling (MAM) can relate laboratory (in vitro) dissolution experiment results to the behavior of dosage forms in humans and animals (in vivo) better than traditional empirical methods.

In May 2018, we released Version 9.6 of GastroPlus. Version 9.6 is the most feature-rich and user-friendly release in our history. New functionalities that we believe provide the most advanced decision-making tool for preclinical and early clinical trial simulation and modeling analysis available today include:

· New dynamic intestinal fluid options added to the #1-ranked ACAT™ oral absorption model

· New population physiologies for obesity and renal impairment disease states

· Expanded enzyme/transporter distribution information for easier extrapolation across species

· Additional compound model files for standard drug-drug interaction (DDI) substrates & inhibitors

· Upgraded capabilities to all major mechanistic absorption routes, including dermal, pulmonary, ocular, and subcutaneous/intramuscular injections

· Enhanced deconvolution methods for generation of mechanistic in vitro-in vivo correlations (IVIVCs)

· Improved output/reporting functions in all simulation modes to facilitate communication across departments and with regulatory agencies

· Significant simulation speed improvements

· Custom template generation for seamless use of GastroPlus to drive DILIsym® SimPops™ liver injury predictions

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Our goal with GastroPlus is to integrate the most advanced science into user-friendly software to enable researchers and regulators to perform sophisticated analyses of complex compound behaviors in humans and laboratory animals. Already the most widely used program in the world for physiologically based pharmacokinetics (PBPK), the addition of these new capabilities is expected to expand the user base in the early pharmaceutical research and development process, while also helping us to further penetrate biopharmaceuticals, food, cosmetics, and general toxicology markets.

Version 9.7 is now in development and release is expected in early 2019. This version will add a number of important new capabilities, including improvements to population simulations, dissolution, absorption, metabolism, and drug-drug interactions, among others.

DDDPlus™

DDDPlus mechanistically simulates in vitro (laboratory) experiments that measure the rate of dissolution of a drug as well as, if desired, the additives (excipients) in a particular dosage form (e.g., powder, tablet, capsule, or injectable solids) under a variety of experimental conditions. This unique software program is used by formulation scientists in industry and the FDA to (1) understand the physical mechanisms affecting the disintegration and dissolution rates of various formulations, (2) reduce the number of cut-and-try attempts to design new drug formulations, and (3) design in vitro dissolution experiments to better mimic in vivo (animal and human) conditions. Version 5.0 of DDDPlus, which added a number of significant enhancements, was released in April 2016. This version added new formulation types (controlled release bilayer tablet, delayed release coated tablet, and immediate release coated beads), expanded formulation specification options, biorelevant solubilities and surfactant effects on dissolution, tablet compression and disintegration models, links with GastroPlus, and updated licensing. Current improvements in development and testing include new capabilities to simulate in vitro dissolution experiments for long-acting injectable microspheres as part of our work under the FDA-funded grant mentioned above.

Version 6.0 of DDDPlus is in development testing and will offer a series of new capabilities, including:

· simulation of the in vitro dissolution of long-acting injectable dosage forms

· simulation of the in vitro dissolution of controlled release bead formulations

· improved simulation of artificial stomach-duodenum (ASD) experiments

· ability to fit models from precipitation experiments

· new dissolution apparatus models

· improved output reporting

MembranePlus™

MembranePlus was released in October 2014. Similar to DDDPlus, MembranePlus mechanistically simulates laboratory experiments, but in this case, the experiments are for measuring permeability of drug-like molecules through various membranes, including several different standard cell cultures (Caco-2, MDCK), as well as artificially formulated membranes (PAMPA). The value of such simulations derives from the fact that when the permeabilities of the same molecules are measured in different laboratories using (supposedly) the same experimental conditions, the results are often significantly different. These differences are caused by a complex interplay of factors in how the experiment was set up and run. MembranePlus simulates these experiments with their specific experimental details, and this enables scientists to better interpret how results from specific experimental protocols can be used to predict permeability in human and animals, which is the ultimate goal.

Version 2.0 of MembranePlus was released in August 2017. This version added:

· simulation of sandwich hepatocyte assays

· simulation of suspended hepatocyte assays

· intracellular protein binding

· integration of ADMET Predictor metabolism predictions

· improved output reporting

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PKPlus™

On August 25, 2016, we announced the release of a new standalone software product called PKPlus, based on the internal PKPlus Module in GastroPlus that has been available since 2000. The PKPlus Module in GastroPlus provides quick and easy fitting of compartmental pharmacokinetic (PK) models as well as a simple noncompartmental analysis (NCA) for intravenous and extravascular (oral, dermal, ocular, pulmonary, etc.) doses; however, the PKPlus Module in GastroPlus was not designed to meet all of the requirements for performing these analyses for Phase 2 and 3 clinical trials, nor to produce report-quality output for regulatory submissions. The standalone PKPlus program provides the full level of functionality needed by pharmaceutical industry scientists to perform the analyses and generate the outputs needed to fully satisfy regulatory agency requirements for both more complex NCA as well as compartmental PK modeling. After receiving considerable feedback on version 1.0, we began modifying the program to include a number of additional features requested by our users and potential users for release in version 2.0. We believe the potential number of eventual users for PKPlus is in the thousands worldwide and that it has the potential to eventually become a significant revenue producer.

PKPlus version 2.0 was released in February 2018. This new version incorporates a wide variety of requested features from current users as well as evaluators of version 1.0, including:

· Ability to edit input data prior to incorporating it into a Project database

· 21 CFR Part 11 compliance for audit trail and validation

· Validation data sets included

· Compartmental multi-dose simulations

· Command-line capability for rapid validation after installation on customers’ computers and for batch processing

· Nonparametric superposition for analysis of multiple-dose pharmacokinetics

· New statistics graphical outputs

· Ability to save templates for various types of analyses – reduces time required when working with new datasets

ADMET Predictor™

ADMET (Absorption, Distribution, Metabolism, Excretion, and Toxicity) Predictor is a chemistry-based computer program that takes molecular structures (i.e., drawings of molecules represented in various formats) as inputs and predicts approximately 150 different properties for them at an average rate of over 100,000 compounds per hour on a modern laptop computer. This capability allows chemists to generate estimates for a large number of important molecular properties without the need to synthesize and test the molecules, as well as to generate estimates of unknown properties for molecules that have been synthesized, but for which only a limited number of experimental properties have been measured. Thus, a chemist can assess the likely success of a large number of existing molecules in a company’s chemical library, as well as molecules that have never been made, by providing only their molecular structures, either by drawing them using a tool such as our MedChem Designer software, or by automatically generating large numbers of molecules using various computer algorithms, including those embedded in our MedChem Studio software.

ADMET Predictor has enjoyed top-ranked for predictive accuracy in multiple peer-reviewed, independent comparison studies for many years, while generating its results at a very high throughput rate. Although the state of the art of this type of software does not enable identifying the best molecule in a series, it does allow early screening of molecules that are highly likely to fail as potential drug candidates (i.e., the worst molecules, which is typically the majority of a virtual chemical library) before synthesizing and testing them. Thus, millions of virtual compounds can be created and screened in a day, compared to potentially months or years of work to actually synthesize and test a much smaller number of actual compounds.

The optional ADMET Modeler Module™ in ADMET Predictor enables scientists to use their own experimental data to quickly create proprietary high-quality predictive models using the same powerful artificial intelligence (AI) engine we use to build our top-ranked property predictions. Pharmaceutical companies expend substantial time and money conducting a wide variety of experiments on new molecules each year, generating large databases of experimental data. Using this proprietary data to build predictive models can provide a second return on their investment; however, model building has traditionally been a difficult and tedious activity performed by specialists. The automation in ADMET Modeler makes it easy for a scientist to create very powerful machine-learning/AI models with minimal training.

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We released version 8.1 of ADMET Predictor in January 2017. This release included:

· both 64-bit and 32-bit executables, making it possible to handle larger data sets

· optimization of spreadsheet and model-building functions to improve efficiency

· streamlined and much more efficient model-building in ADMET Modeler using our proprietary machine-learning engine

· combinatorial substituent and scaffold replacement operations in the MedChem Studio Module

· new in silico Ames tests to produce reliable confidence predictions that are more broadly applicable

· our proprietary ADMET Risk™ scores accessible graphically in histograms

Version 8.5 was released in November 2017, adding:

· a new Simulation Module to predict absorption and bioavailability for libraries of molecules from their structure

· ability to optimize doses to achieve desired steady-state concentrations

· new property models for rat fraction unbound in plasma, blood/plasma concentration ratio, and metabolism by certain enzymes

· all MedChem Studio features now available through the same graphical user interface as ADMET Predictor

· new synthetic difficulty model

· improved visualization

· multithreading and other speed enhancements

Version 9.0 was released in June 2018, adding:

· Additional pharmacokinetic (PK) endpoint predictions included with the High-Throughput Pharmacokinetics (HTPK) Simulation Module

· New artificial intelligence (machine-learning) models to predict major clearance mechanisms

· Novel DELTA Model™ approach extends model coverage space adding client data through the ADMET Modeler Module

· Multi-class classification models can now be built using our advanced artificial neural network ensemble (ANNE) methodology

· Intuitive graphical display of Biopharmaceutical Classification System (BCS) and Developability Classification System (DCS)

· Rebuilt most classification models to improve their confidence estimates

· New functionality for easily generating and visualizing fingerprints within the MedChem Studio Module

We have made significant investments in two key areas with version 9: improving integration of our top-ranked ADMET Predictor and GastroPlus models to leverage our novel ‘Discovery PBPK’ approaches for chemists, and further enhancing our best-in-class AI engine to assist with drug discovery. Recent publications from a large pharmaceutical company describing how they have leveraged our ‘Discovery PBPK’ methods to guide lead optimization illustrate how our unique offerings provide substantial value in this space.

Potential new markets for artificial intelligence (machine learning)

We are currently investigating applications of our sophisticated artificial intelligence (machine-learning) engine outside of our normal pharmaceutical markets. To date, we have conducted several proof-of-concept studies including: (1) predicting missile aerodynamic force and moment coefficients as a function of missile geometry, Mach number, and angle of attack, (2) classifying/identifying missiles and other objects from radar tracking data, (3) mapping jet engine compressor performance to predict when maintenance might be required, and (4) classifying patients as healthy or experiencing some disease state or genetic disorder evidenced by magnetic resonance imaging (MRI) of the brain. Other potential applications for this modeling engine have also been identified; however, our focus to date has been primarily in these areas.

We believe our proprietary AI/machine-learning software engine has a wide variety of potential applications and we intend to pursue funding to develop customized tools to further monetize our investment in this technology by expanding our markets beyond the life sciences and chemistry. In addition, we are examining a variety of expanded capabilities to add to the basic modeling engine to accommodate even larger data sets (“big data analytics”) and new applications.

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MedChem Designer™

MedChem Designer was launched in 2011. It was initially a molecule-drawing program, or “sketcher”, but now has capabilities far exceeding those of other molecule-drawing programs because of its integration with both MedChem Studio and ADMET Predictor. We provide MedChem Designer for free because we believe that in the long run it will help to increase demand for ADMET Predictor and MedChem Studio, and because most other existing molecule-drawing programs are also provided for free. Our free version includes a small set of ADMET Predictor’s best-in-class property predictions, allowing the chemist to modify molecular structures and then see a few key properties very quickly. With a paid ADMET Predictor license, the chemist would see the entire approximately 150 predictions that are available. Over 26,000 copies of MedChem Designer have been downloaded by scientists around the world to date.

When used with a license for ADMET Predictor, MedChem Designer becomes a de novo molecule design tool. With it, a researcher can draw one or more molecular structures, then click on the ADMET Predictor icon and have approximately 150 properties for each structure calculated in seconds, including our proprietary ADMET Risk index. Researchers can also click on an icon to generate the likely metabolites of a molecule and then predict all of the properties of those metabolites from ADMET Predictor, including each of their ADMET Risk scores. This is important because a metabolite of a molecule can be therapeutically beneficial (or harmful) even though the parent molecule is not.

Our proprietary ADMET Risk score provides a single number that tells the chemist how many default threshold values for various predicted properties were crossed (or violated) by each structure. Thus, in a single number, the chemist can instantly compare the effects of different structural changes in many dimensions. The ideal score is zero; however, a low score greater than zero might be acceptable, depending on what property(s) caused the points to be assigned. If the number is too high (greater than 5 or 6), the molecule is not likely to be successful as a drug. The default rules can be modified and new rules can be added by the user to include any desired rule set based on any combination of calculated molecular descriptors, predicted properties, and user inputs. As chemists attempt to modify structures to improve one property, they often cause others to become unacceptable. Without ADMET Risk, the chemist would have to individually examine many key properties for each new molecule (and its metabolites) to determine whether any of them became unacceptable as a result of changing the structure.

MedChem Studio™

MedChem Studio has been integrated into the ADMET Predictor platform but can still be licensed separately without requiring a license for ADMET Predictor. MedChem Studio is a powerful software tool that is used both for data mining and for de novo design of new molecules. In its data-mining role, MedChem Studio facilitates searching large chemical libraries to find molecules that contain identified substructures, and it enables rapid identification of clusters (classes) of molecules that share common substructures. We have now merged MedChem Studio with ADMET Predictor so that either program can be entered through the same interface, and the communication between the two programs is enhanced through the seamless integration of both technologies. We believe this will enhance the attractiveness of both ADMET Predictor and MedChem Studio to medicinal and computational chemists.

While MedChem Designer can be used to refine a small number of molecules, MedChem Studio can be used to create and screen (with ADMET Predictor) very large numbers of molecules down to a few promising lead candidates. MedChem Studio has features that enable it to generate new molecular structures using a variety of de novo design methods. When MedChem Studio is used with ADMET Predictor and MedChem Designer (the combination of which we refer to as our ADMET Design Suite), we believe the programs provide an unmatched capability for chemists to search through large libraries of compounds that have undergone high-throughput screening experiments to find the most promising classes (groups of molecules with a large common part of their structures) and molecules that are active against a particular target. In addition, MedChem Studio can take an interesting (but not acceptable) molecule and, using a variety of design algorithms, quickly generate many thousands to millions of high quality analogs (similar new molecules). These molecules can then be screened using ADMET Predictor to find molecules that are predicted to be both active against the target and acceptable in a variety of ADMET properties. We demonstrated the power of the ADMET Design Suite during two NCE (new chemical entity) projects wherein we designed lead molecules to inhibit the growth of the plasmodium falciparum malaria parasite in one study, and lead molecules that were able to inhibit two targets at the same time: COX-1 and COX-2. In each case, we announced ahead of time that we were attempting to do this, and we reported the results when the projects were complete. Every molecule we designed and had synthesized hit their targets in both projects, clearly demonstrating the power of the ADMET Design Suite.

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KIWI™

Drug development programs rely increasingly on modeling and simulation analyses to support decision-making and submissions to regulatory agencies. To ensure high-quality analyses, organizations must not only apply high-quality science, but must also be able to support the science by being able to validate the results. KIWI is a cloud-based web application that was developed to efficiently organize, process, maintain, and communicate the volume of data and results generated by pharmacologists and scientists over the duration of a drug development program. The validated workflow and tools within KIWI promote traceability and reproducibility of results.

The pharmaceutical industry has been rapidly adopting cloud technology as a solution to ever-expanding computer processing needs. Leveraging our 20-plus years of experience in providing an architecture supporting modeling and simulation efforts, we have developed KIWI as a secure, validated, enterprise-scale environment, enabling global teams to collaborate on model-based decision making. KIWI has proven to be a valuable platform for encouraging interdisciplinary discussions about the model development process and interpretation of results. We continue to receive positive feedback about the functionality implemented in KIWI and the value of the approach we have taken to harness cloud technology. We continue to improve functionality and collaboration within the KIWI platform, and we expect the licensing fee will be a source of recurring revenue for further development and growth. KIWI Version 1.3 was released in May 2015. This version of KIWI provided our user community with access to new features that accelerated completion of modeling projects by decreasing run times and facilitating the comparison and exporting of results across models. These features included dynamic comparisons of model parameter estimates and diagnostic plots, export of model run records for regulatory submissions, and accelerated infrastructure with the upgrade to the latest versions of NONMEM® and Perl-speaks-NONMEM running in a 64-bit Linux environment.

KIWI Version 1.6 was released in September 2016. This version introduced major enhancements in the functionality of visualization tools offered by the platform. These enhancements include simplifying the creation of plots and comparing them across multiple models, thus accelerating the model refinement process. In addition, analysts could now conveniently copy visualization preferences across projects, improving consistency and facilitating collaboration and communication with clients and colleagues.

KIWI 2 was released in December 2017. This latest version introduces a repository within the KIWI Cloud service to facilitate the management and organization of data and documents used and produced to support the modeling and simulation analyses used, in part, to submit new drug applications. The user interface provides a predefined directory as a default that can be customized, allows file version control, and provides a comprehensive roles and permissions structure to enhance collaboration among a community of users. As part of this initiative, an enhanced authentication framework foundation was included to provide the ability for clients to customize authentication rules according to their internal regulatory policies and procedures. In addition, since it can take hundreds of models to create one final model, an automated diagnostics dashboard has been added that visually displays the results of over 10 diagnostics that are used by modelers to decide what direction to take their modeling with the potential to significantly reduce the amount of time it takes to arrive at a final model.

We continue enhancing KIWI as part of our five-year, almost-$5 million contract with the Bill and Melinda Gates Foundation.

DILIsym

The DILIsym software is a quantitative systems pharmacology (QSP) program that has been in development since 2011. QSP software models are based on the fundamental understanding of complex biological pathways, disease processes, and drug mechanisms of action, integrating information from experiments and forming hypotheses for the next experimental model. DILIsym deals with the propensity for some drug molecules to induce temporary or permanent changes in biological functions within liver cells (hepatocytes) that can result in damage to the liver. Some drugs cause temporary changes in liver function but the body soon compensates and liver function returns to normal. Other drugs cause liver function to permanently decline as they continue to be taken. The DILIsym software models a variety of interactions within the hepatocytes to determine whether a particular drug molecule interrupts normal signaling pathways in a manner to induce injury to the cells.

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Version 7A of the DILIsym software was released in January 2018. This version changes the software from an open-source platform to a secure executable that incorporates new proprietary code enabling tighter integration with our GastroPlus PBPK software. Securing the code is necessary to ensure that results are consistent across all users to assure regulatory agencies that the calculated results are from a validated version. Open source programs are subject to modification by the user and so each use could have a different set of calculations, so validation would not be assured. In addition, a number of important new capabilities were added:

· Additional validation compounds

· New optimization interface allowing complex fitting using genetic algorithms

· Clinical Monitoring feature allowing dynamic clinical trials with dose alterations based on specified thresholds

· Weight-adjusted dosing option

· Export enhancements providing better information on simulation setup within exported Excel® file

· MATLAB 2017b friendly – faster simulations

· Two new SimPops

o Combined ALT biomarker parameter variability with toxicity pathway parameters

o Mitochondrial biogenesis parameter variability

· Creation of custom cohorts from existing SimPops/SimCohorts

· Updated initial conditions infrastructure allowing importing custom SimPops in compiled version

· Update Output Table with more clinically important metrics built-in

NAFLDsym

Where DILIsym is used to investigate the likelihood that a known drug molecule would cause injury to the liver, NAFLDsym is concerned with a liver that is already diseased by excess fat and investigates the likelihood that various molecules might provide beneficial therapeutic benefits to treat or cure the disease. DILIsym can be considered a “shrink wrap” software product, usable across many companies and drug development projects. NAFLDsym, on the other hand, requires modification for each of a number of different mechanisms of action that potential new drug compounds could use to treat the disease, and so is a customized tool used in consulting projects for each new client project.

Contract Research and Consulting Services

Our scientists and engineers have expertise in drug absorption via various dosing routes (oral, intravenous, subcutaneous, intramuscular, ocular, nasal/pulmonary, and dermal), pharmacokinetics, pharmacodynamics, and drug-drug interactions. They have attended over 200 scientific meetings worldwide in the past four years, often speaking and presenting. We frequently conduct contracted consulting studies for large customers (including many of the top twenty pharmaceutical companies) who have particularly difficult problems and who recognize our expertise in solving them, as well as for smaller customers who prefer to have studies run by our scientists rather than to license our software and train someone to use it. The demand for our consulting services has been steadily increasing, and we have expanded our consulting teams to meet the increased workload.

We continue working on a five-year consulting agreement with the Bill and Melinda Gates Foundation to implement a platform for coordinating the data generated by global teams engaged in model-based drug development.

We currently are working with the FDA on three Research Collaboration Agreements (RCAs): the funded efforts for long-acting injectable microspheres/ocular dosing and the unfunded IVIVC effort, both described above under “GastroPlus”.

Pharmacometric Modeling

We have a reputation for high-quality analyses and regulatory reporting of data collected during preclinical experiments as well as clinical trials of new and existing pharmaceutical products, typically working on 30-40 drug projects per year. Traditionally, the model-based analysis of clinical trial data was different from the modeling analysis offered by GastroPlus; the former relied more on statistical and semi-mechanistic models, whereas the latter is based on very detailed mechanistic models. Statistical models rely on direct observation and mathematical equations that are used to fit data collected across multiple studies along with describing the variability within and between patients. Mechanistic models are based on a detailed understanding of the human body and the chemistry of the drug and involve deep mathematical and scientific representation of the phenomena involved in drug dissolution/precipitation, absorption, distribution, metabolism, and elimination. Collectively, the models guide drug formulation design and dose selection. Beginning in 2014, the U.S. F.D.A and other regulatory agencies began to emphasize the need to push mechanistic PBPK modeling and simulation into clinical pharmacology, and we have seen the benefit of having our clinical pharmacology team in the Cognigen division and our scientists in our Lancaster, California (Simulations Plus) division working together to achieve this goal.

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PRODUCT DEVELOPMENT

Development of our software is focused on expanding product lines, designing enhancements to our core technologies, and integrating existing and new products into our principal software architecture and platform technologies. We intend to continue to offer regular updates to our products and to continue to look for opportunities to expand our existing suite of products and services.

To date, we have developed products internally, sometimes also licensing or acquiring products, or portions of products, from third parties. These arrangements sometimes require that we pay royalties to third parties. We intend to continue to license or otherwise acquire technology or products from third parties when it makes business sense to do so. We currently have one license agreement, with BIOVIA (formerly known as Accelrys, Inc.), a San Diego division of Dassault Systemes in France, pursuant to which a small royalty is paid to BIOVIA from revenues on each license for the Metabolite module in ADMET Predictor. This license agreement continues in perpetuity and either party has the right to terminate it.

In 1997 we entered into an exclusive software licensing agreement with TSRL, Inc. (Therapeutic Systems Research Laboratories) pursuant to which TSRL licensed certain software technology and databases to us, and we paid royalties to TSRL. On May 15, 2014, we and TSRL entered into a termination and nonassertion agreement pursuant to which the parties agreed to terminate the 1997 exclusive software licensing agreement. 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 agreement, and we agreed to pay TSRL total consideration of $6,000,000. All payments were made as of April 2017. The total consideration is being amortized at a constant rate of $150,000 per quarter until it is completely amortized, after which no further expense will be incurred. To date, this has resulted in expense savings over $1,250,000 compared to the royalty payments that would have been paid to TSRL if paid consistent with past practices.

MARKETING AND DISTRIBUTION

We distribute our products and offer our services in North America, South America, Europe, Japan, Australia, New Zealand, India, Singapore, Taiwan, Korea, and the People’s Republic of China.

We market our pharmaceutical software and consulting services through attendance and presentations at scientific meetings, exhibits at trade shows, seminars at pharmaceutical companies and government agencies, through our website, and using various communication channels to our database of prospects and customers. At various scientific meetings around the world each year there are numerous presentations and posters presented in which the reported research was performed using our software. Many of these presentations are from industry and FDA scientists; some are from our staff. In addition, more than 50 peer-reviewed scientific journal articles, posters, and podium presentations are typically published each year using our software, mostly by our customers, further supporting its use in a wide range of preclinical and clinical studies.

Our sales and marketing efforts are handled primarily internally with our scientific team and several senior management staff assisting our marketing and sales staff with trade shows, seminars, and customer trainings both online and on-site. We believe that this is more effective than a completely separate sales team for several reasons: (1) customers appreciate talking directly with software developers and consulting scientists who can answer a wide range of in-depth technical questions about methods and features; (2) our scientists and engineers gain an appreciation for the customer’s environment and problems; and (3) we believe the relationships we build through scientist-to-scientist contact are stronger than relationships built through salesperson-to-scientist contacts. We also have independent distributors in Japan, China, India, and Korea who also sell and market our products with support from our scientists and engineers.

We provide support to the GastroPlus User Group in Japan, which was organized by Japanese researchers in 2009. In early 2013, a group of scientists in Europe and North America organized another GastroPlus User Group following the example set in Japan. Over 1,000 members have joined this group to date. We support this group through coordination of online meetings each month and managing the user group web site for exchange of information among members. These user groups provide us valuable feedback with respect to desired new features and suggested interface changes.

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PRODUCTION

Our pharmaceutical software products are designed and developed by our development teams in California (Lancaster, Guerneville, San Jose, and San Diego), North Carolina (Research Triangle Park), and New York (Buffalo); team members in most cases can work remotely using collaboration software. Our products and services are now delivered electronically – we no longer provide CD-ROMs and printed manuals or reports.

COMPETITION

In our pharmaceutical software and services business, we compete against a number of established companies that provide screening, testing and research services, and products that are not based on simulation software. There are also software companies whose products do not compete directly with, but are sometimes closely related to, ours. Our competitors in this field include some companies with financial, personnel, research, and marketing resources that are larger than ours. Our flagship product, GastroPlus, is the most widely used commercial PBPK modeling platform and has one significant competitor; others could be developed over time, but with the high barrier to entry, it would be difficult to validate new software to levels required to support regulatory submissions. Our new PKPlus software product will compete with one major and a few minor software programs; however, the capabilities and design features of PKPlus, along with more affordable licensing, are expected to generate significant interest. MedChem Studio, MedChem Designer, and ADMET Predictor/ADMET Modeler operate in a more competitive environment. Several other companies presently offer simulation or modeling software, or simulation-software-based services, to the pharmaceutical industry. We believe DILIsym and NAFLDsym enjoy a unique market position, with no significant competition.

Major pharmaceutical companies conduct drug discovery and development efforts through their internal development staffs and through outsourcing. Smaller companies generally need to outsource a greater percentage of this research. Thus, we compete not only with other software suppliers, but also with the in-house development teams at some of the larger pharmaceutical companies.

Although competitive products exist, both new licenses and license renewals for GastroPlus have continued to grow. We believe that we enjoy a dominant market share in this segment. We believe our ADMET Predictor/ADMET Modeler, MedChem Studio, MedChem Designer, DDDPlus, MembranePlus, PKPlus, KIWI, DILIsym, and NAFLDsym software offerings are each unique in their combination of capabilities and we intend to continue to market them aggressively.

We believe the key factors in our ability to successfully compete in this field are our ability to: (1) continue to invest in research and development, and develop and support industry-leading simulation and modeling software and related products and services to effectively predict activities and ADMET-related behaviors of new drug-like compounds, (2) design new molecules with acceptable activity and ADMET properties, (3) develop and maintain a proprietary database of results of physical experiments that serve as a basis for simulated studies and empirical models, (4) continue to attract and retain a highly skilled scientific and engineering team, (5) aggressively our products and services to our global market, and (6) develop and maintain relationships with research and development departments of pharmaceutical companies, universities, and government agencies.

In addition, we actively seek strategic acquisitions to expand the pharmaceutical software and services business and to explore opportunities in aerospace and general healthcare.

STRATEGY

Our business strategy is to do the things we need to do to promote growth both organically (i.e., by expanding our current products and services through in-house efforts) and by acquisition. We believe in the “Built to Last” approach - that the fundamental science and technologies that underlie our business units are the keys both to improving our existing products and to expanding the product line with new products that meet our various customers’ needs. We believe the continued growth of our pharmaceutical software and services business segment is the result of steadily increasing adoption of simulation and modeling software tools across the pharmaceutical industry, as well as the world-class expertise we offer as consultants to assist companies involved in the research and development of new medicines. We have received a continuing series of study contracts with pharmaceutical companies ranging from several of the largest in the world to a number of medium-sized and smaller companies in the U.S. and Europe.

On July 23, 2014, we signed a merger agreement with Cognigen Corporation of Buffalo, New York. The merger closed on September 2, 2014, and Cognigen became our wholly owned subsidiary. We believe the combination of Simulations Plus and Cognigen provides substantial future potential based on the complementary strengths of each of the companies.

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In June 2017, Simulation Plus acquired DILIsym Services, Inc. (DILIsym) as a wholly owned subsidiary pursuant to a stock purchase agreement dated May 1, 2017. On June 1, 2017, the Company consummated the acquisition of all outstanding equity interests of DILIsym pursuant to the terms of the Stock Agreement, with DILIsym becoming a wholly owned subsidiary of the Company. We believe the combination of Simulations Plus and DILIsym provides substantial future potential based on the complementary strengths of each of the companies. The acquisition of DILIsym positions the Company as the leading provider of Drug Induced Liver Injury (DILI) modeling and simulations software and contract research services. In addition to the DILIsym® software for analysis of potential drug-induced liver injury, DILIsym Services, Inc. also has developed a simulation program for analyzing nonalcoholic fatty liver disease (NAFLD) called NAFLDsym™.

It is our intent to continue to search for acquisition opportunities that are compatible with our current businesses and that are accretive, i.e., adding to both revenues and earnings.

In the fiscal year ended August 31, 2017 we distributed $0.20 per share in dividends to our shareholders. In November 2017, February 2018 and May 2018, we distributed a quarterly dividend of $0.06 per share. We anticipate future dividends to be $0.06 per share per quarter; however, there can be no assurances that such dividends will be distributed, or if so, whether the amounts will be more, less, or the same as expected. The Board of Directors must approve each quarterly dividend distribution and may decide to increase, decrease, or eliminate dividend distributions at any time.

Results of Operations

Comparison of Three Months Ended May 31, 2018 and 2017.

The following table sets forth our condensed statements of operations (in thousands) and the percentages that such items bear to net sales (because of rounding, numbers may not foot):

	Three Months Ended
		5/31/18					5/31/17
Net revenues	$	8,553		100.00%		$	6,749		100.0%
Cost of revenues		2,023		23.6			1,445		21.4
Gross profit		6,530		76.4			5,304		78.6
Selling, general and administrative		2,604		30.4			1,955		29.0
Research and development		508		5.9			254		3.7
Total operating expenses		3,112		36.4			2,209		32.7
Income from operations		3,418		40.0			3,095		45.9
Other income (expense)		(21	)	(0.2	)		(10	)	(0.2)
Income from operations before taxes		3,397		39.7			3,085		45.7
Benefit (Provision for) for income taxes		(991	)	(11.6	)		(1,005	)	(14.9)
Net income	$	2,406		28.1%		$	2,080		30.8%

Net Revenues

Consolidated net revenues increased by 26.7% or $1.80 million to $8.55 million in the third fiscal quarter of Fiscal Year 2018 (“3QFY18”) from $6.75 million in the third fiscal quarter of Fiscal Year 2017 (“3QFY17”). Changes by division are as follows:

· Lancaster: $706,000 increase, representing a 14.3% increase to $5.65 million

· Buffalo (Cognigen): $141,000 increase, representing a 7.8% increase to $1.94 million

· North Carolina (DILIsym): recorded revenues of $957,000. (Acquired June 1, 2017, they were not a part of the prior year numbers)

Consolidated software and software-related sales increased $830,000 or 17.4%, while consolidated consulting and analytical study revenues increased $974,000 or 49.1% over 3QFY17.

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Cost of Revenues

Consolidated cost of revenues increased by $578,000, or 40.0%, in 3QFY18 to $2.02 million from $1.44 million in 3QFY17. Labor-related cost accounted for $284,000 of this increase, a combination of increased labor count, salary increases, and bonuses at our subsidiaries based on increased earnings. Included in the increase was $167,000 of salary expense at DILIsym. Other significant increases in cost of revenues included $179,000 of direct contract expenses paid for testing at DILIsym, an increase of $41,000 of software amortization, as well as an additional $79,000 of amortization expense associated with acquired technologies associated with DILIsym’s drug-induced liver injury technologies.

Cost of Revenues as a percentage of revenue increase by 2.2% in 3QFY18 to 23.6% as compared to 21.4% in 3QFY17. This change comes from higher salaries and direct costs of contract studies in 3QFY18.

Gross Profit

Consolidated gross profit increased $1.23 million or 23.1%, to $6.53 million in 3QFY18 from $5.30 million in 3QFY17. $639,000 of this increase is from the California division, which showed an 86.6% gross margin. The Buffalo division gross profit increased $69,000 or 6.6% with gross margin of 57.5%, and DILIsym of North Carolina showed $519,000, a 54.2% gross margin.

Overall gross margin as a percentage of revenue decreased by 2.24% to 76.4% in 3QFY18 from 78.6% in 3QFY17.

Selling, General and Administrative Expenses

Selling, general, and administrative (SG&A) expenses increased $649,000, or 33.2% to $2.60 million in 3QFY18 from $1.95 million in 3QFY17. As a percent of revenues, SG&A was 30.4% for 3QFY18, compared to 29.0% in 3QFY17.

The major increases in SG&A expense were:

· Commission expense: $70,000 increased sales in international markets

· Contract labor: $53,000 made up of certain outsourced services and director fees paid

· G&A Salaries and Wages increased by $276,000; this increase is a combination of increased stock compensation costs, 401k, annual salary increases, increased head count in Lancaster and Buffalo, and first-time third-quarter salaries at DILIsym after acquisition

· Insurance Expense increased $68,000; mostly health-related medical costs due to cost increases and higher employee counts, of which $34,000 was first time costs associated with DILIsym

· Payroll tax expense increased $62,000, the effect of higher salary expense and first time costs of $31,000 associated with  DILIsym

· Professional Accounting and Audit increased $77,000; this year’s tax and internal compliance service started later in the fiscal year; as well as increased costs of a new subsidiary

· Trade show and Travel $57,000; increase in shows and trainings compared to prior year

· Amortization expense increased $53,000 due to new acquisition amortization for DILIsym intangibles

The major decreases in SG&A expense were:

· Legal fees decreased $105,000 due to a reduction in acquisition-related document review

· Recruitment & Hiring $31,000; lower hiring costs this year

Research and Development

Total research and development cost increased $522,000 in 3QFY18 compared to 3QFY17. In 3QFY18 we incurred approximately $993,000 of research and development cost. Of this amount, $485,000 was capitalized and $508,000 was expensed. In 3QFY17 we incurred approximately $598,000 of research and development costs. Of this amount, $344,000 was capitalized and $254,000 was expensed.

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Income from operations

Income from operations increased $323,000 or 34.7% in 3QFY18 compared to 3QFY17.

·	Lancaster	Increased $356,000 or 13.3%
·	Buffalo	Decreased $31,000 or 7.4%
·	No. Carolina	Recorded an operating profit of $3,000 for the quarter, their first third quarter reporting since being acquired on June 1, 2017.

Provision for Income Taxes

The provision for income taxes was $991,000 for 3QFY18 compared to $1,005,000 for 3QFY17.

The effective rate for the quarter was 29.1% compared to 32.2% in the prior year. The change is from the effect of the new tax rates under new Federal tax laws enacted as of January 1, 2018. Federal statutory tax rates decreased from 34% to 21% as of January 1, 2018. The Company has used a blended rate for the current period to calculate current income tax expense.

Net Income

Net income increased by $327,000, or 15.7%, in 3QFY18 to $2.41 million from $2.08 million in 3QFY17.

Comparison of Nine Months Ended May 31, 2018 and 2017

The following table sets forth our condensed statements of operations (in thousands) and the percentages that such items bear to net sales (because of rounding, numbers may not foot):

	Nine Months Ended
	5/31/18					5/31/17
Net revenues	$	22,979		100.00%		$	17,872		100.0%
Cost of revenues		5,874		25.6			4,335		24.2
Gross profit		17,105		74.4			13,537		75.8
Selling, general and administrative		7,352		32.0			5,767		32.3
Research and development		1,354		5.9			953		5.3
Total operating expenses		8,706		37.9			6,719		37.6
Income from operations		8,399		36.5			6,818		38.2
Other income		(100	)	(0.4	)		19		0.1
Income from operations before taxes		8,298		36.1			6,837		38.3
Benefit (Provision for) for income taxes		(701	)	(3.1	)		(2,200	)	(12.3	)
Net income	$	7,597		33.1%		$	4,637		25.9%

Net Revenues

Consolidated net revenues increased by 28.6% or $5.11 million to $22.98 million in the first nine months of Fiscal Year 2018 “9moFY18”) from $17.87 million in the first nine months of Fiscal Year 2017 (“9moFY17”). Changes by division are as follows:

· Lancaster: $1,562,000 increase, representing a 12.3% increase to $14.25 million

· Buffalo (Cognigen): $534,470 increase, representing a 10.3% increase to $5.72 million

· North Carolina (DILIsym): recorded revenues of $3.01 million. (Acquired June 1, 2017, they were not a part of the prior year third quarter numbers)

Consolidated software and software-related sales increased $1,594,000 or 13.3%, while consolidated consulting and analytical study revenues increased $3.51 million or 59.8% over 9moFY17.

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Cost of Revenues

Consolidated cost of revenues increased by $1.54 million, or 35.5%, in 9moFY18 to $5.87 million from $4.33 million in 9moFY17. Labor-related cost accounted for $835,000 of this increase, a combination of increased labor count, salary increases, and bonuses at our subsidiaries based on increased earnings. Included in the increase was $288,000 of salary expenses at DILIsym. Other significant increases in cost of revenues included $88,000 of software amortization, $458,000 of direct contract expenses paid for testing at DILIsym, as well as an additional $237,000 of amortization expense associated with acquired technologies associated with DILIsym’s drug-induced liver injury technologies. Training-related expenses were down $65,000 compared to the prior year.

Cost of Revenues as a percentage of revenue increased by 0.6% in 9moFY18 to 25.6% as compared to 24.2% in 9moFY17.

Gross Profit

Consolidated gross profit increased $3.57 million or 26.4%, to $17.10 million in 9moFY18 from $13.54 million in 9moFY17. $1,360,000 of this increase is from the Lancaster division, which showed an 83.8% gross margin. The Buffalo division gross profit increased $369,000 or 12.5% with a gross margin of 58.1%, and DILIsym of North Carolina showed $1.84 million, a 61.1% gross margin.

Overall gross margin as a percentage of revenue decreased by 1.4% to 74.4% in 9moFY18 from 75.8% in 9moFY17.

Selling, General and Administrative Expenses

Selling, general, and administrative (SG&A) expenses increased $1,586,000, or 27.5% to $7.35 million in 9moFY18 from $5.77 million in 9moFY17. As a percent of revenues, SG&A was 32.0% for 9moFY18, compared to 32.3% in 9moFY17.

The major increases in SG&A expense were:

· Commissions expense: $141,000 related mainly to increased international sales

· Market expenses: $174,000 related to trade show and conference attendance

· Contract labor: $174,000 made up of outsourced services and increased Director compensation program costs

· Employee 401k expense: $59,000

· G&A Salaries and Wages increased by $439,000; this increase is a combination of increased stock compensation costs of $59,000, first time salaries of $197,000 at DILIsym after acquisition, annual salary increases and increased head count in Lancaster and Buffalo

· Insurance Expense $221,000; mostly health-related medical costs due to cost increases and higher employee counts, of which $97,000 was associated with DILIsym

· Payroll tax expense increased $174,000, the effect of higher salary expense and first time costs of $81,000 associated with DILIsym

· Professional Accounting tax and audit increased $101,000; Increased costs associated with accounting initiatives, compliance and audit for new subsidiary

· Rent: $49,000 mostly due to first time costs associated with added facilities costs at DILIsym

· Software licenses: $46,000

o Amortization expense increased $158,000 due to new acquisition amortization for DILIsym intangibles

The major decreases in SG&A expense were:

· Legal expenses decreased $228,000 due to a reduction in document review

Research and Development

Total research and development cost increased $1,099,000 in 9moFY18 compared to 9moFY17. In 9moFY18 we incurred approximately $2,985,000 of research and development costs, of this amount, $1,632,000 related to the development of software and was capitalized and $1,353,000 was expensed. In 9moFY17 we incurred approximately $1,880,000 of research and development costs, of this amount, $928,000 related to the development of software and was capitalized and $952,000 was expensed.

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Income from operations

Income from operations increased $1,580,000 or 23.2% in 9moFY18 compared to 9moFY17.

·	Lancaster	Increased $833,000 or 14.5%
·	Buffalo	Increased $140,000 or 13.0%
·	No. Carolina	Recorded operating income of $607,000, their first 9moFY18 reporting since acquisition on June 1, 2017

Other income (expense)

Other income was an expense of $100,000 compared to income of $19,000 in 9moFY17, a decrease of $119,000. The majority of the change comes from an imputed interest expense of $114,000 associated with acquisition-related liabilities.

Provision for Income Taxes

The provision for income taxes was $701,000 for 9moFY18 compared to $2.20 million for 9moFY17.

The decrease comes mainly the completion of an assessment of deferred taxes based on the new tax rates enacted under the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act). Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic 740, Income Taxes (“ASC 740”) requires that the company recognize the effects of changes in tax laws or tax rates in the financial statements for the period in which such changes were enacted. Among other things, changes in tax laws or tax rates can affect the amount of taxes payable for the current period, as well as the amount and timing of deferred tax liabilities and deferred tax assets. Based on the assessment the Company posted a one-time tax benefit in the amount of $1,500,000 in the second fiscal quarter of 2018, the result of estimating future deferred liabilities at the lower tax rates under the newly enacted tax laws.

Federal statutory tax rates decreased from 34% to 21% as of January 1, 2018. The Company has used a blended rate for the current period to calculate current income tax expense since four months were in calendar year 2017 and five were in 2018 under the new tax law.

The effective rate for the nine months was 8.45%, compared to an expense of 32.2% in the prior year. The significant change is from the effect of the tax benefit due to the rate change applied to deferred tax liabilities.

Net Income

Net income increased by $2.96 million, or 60.2%, in 9moFY18 to $7.60 million from $4.64 million in 9moFY17. $1,500,000 of this increase, representing approximately 20% of the change, is from the effects of the reassessment of deferred taxes under the new rates enacted under the Tax Cuts and Jobs Act of 2017. Without the deferred tax benefit, net income increased by $1.46 million, or 31.5%.

Liquidity and Capital Resources

Our principal sources of capital have been cash flows from our operations. We have achieved continuous positive operating cash flow over the last ten fiscal years. We believe that our existing capital and anticipated funds from operations will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for the foreseeable future. Thereafter, if cash generated from operations is insufficient to satisfy our capital requirements, we may open a revolving line of credit with a bank, or we may have to sell additional equity or debt securities or obtain expanded credit facilities. In the event such financing is needed in the future, there can be no assurance that such financing will be available to us, or, if available, that it will be in amounts and on terms acceptable to us. If cash flows from operations became insufficient to continue operations at the current level, and if no additional financing was obtained, then management would restructure the Company in a way to preserve its pharmaceutical business while maintaining expenses within operating cash flows.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

As of May 31, 2018 and August 31, 2017, we had cash and cash equivalents of $7.22 million and $6.22 million, respectively. We do not hold any investments that are exposed to market risk related to changes in interest rates, which could adversely affect the value of our assets and liabilities, and we do not hold any instruments for trading purposes and investment. Some of our cash and cash equivalents are held in money market accounts; however, they are not exposed to market rate risk.

In the three and nine months ended May 31, 2018 and 2017, we sold $1,365,000 and $1,009,000, and $2,937,000 and $2,284,000, respectively, of software through representatives in certain Asian markets in local currencies. As a result, our financial position, results of operations, and cash flows can be affected by fluctuations in foreign currency exchange rates, particularly fluctuations in the yen and RMB exchange rates. These transactions give rise to receivables that are denominated in currencies other than the entity’s functional currency. The value of these receivables are subject to changes because the receivables may become worth more or less due to changes in currency exchange rates. The majority of our software license agreements are denominated in U.S. dollars. We record foreign gains and losses as they are realized. We mitigate our risk from foreign currency fluctuations by adjusting prices in our foreign markets on a periodic basis. We base these changes on market conditions while working closely with our representatives. We do not hedge currencies or enter into derivative contracts.

Item 4. Controls and Procedures

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of May 31, 2018. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well-designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, management concluded as of May 31, 2018, that our disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

No change in the Company’s internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are not a party to any legal proceedings and are not aware of any pending legal proceedings of any kind.

Item 1A. Risk Factors

Please carefully consider the information set forth in this Quarterly Report on Form 10-Q and the risk factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended August 31, 2017, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K, as well as other risks and uncertainties, could materially and adversely affect our business, results of operations and financial condition, which in turn could materially and adversely affect the trading price of shares of our Common Stock. Additional risks not currently known or currently material to us may also harm our business.

Item 2. Changes in Securities

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

N/A

Item 5. Other Information

N/A

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Item 6. Exhibits

EXHIBIT NUMBER	DESCRIPTION
2.1 (4)^	Agreement and Plan of Merger, dated July 23, 2014, by and among the Company, Cognigen Corporation and the other parties thereto.
3.1 (2)	Articles of Incorporation of the Company.
3.2 (2)	Amended and Restated Bylaws of the Company.
4.1 (1)	Form of Common Stock Certificate.
4.2 (1)	Share Exchange Agreement.
10.1 (1) (†)	The Company’s 1996 Stock Option Plan and forms of agreements relating thereto.
10.2 (3) (†)	The Company’s 2007 Stock Option Plan, as amended.
10.3 (10)	Second Amendment to Lease by and between the Company and Crest Development LLC, dated as of May 1, 2016.
10.4 (5) (†)	Employment Agreement by and between the Company and Walter S. Woltosz, dated as of August 8, 2016.
10.5 (6)	Form of Indemnification Agreement.
10.6 (8)	2017 Equity Incentive Plan.
10.7 (7)	Stock Purchase Agreement by and among Simulation Plus, Inc., DILIsym Services, Inc., The Shareholders’ Representative and The Shareholders of DILIsym Services, Inc., dated as of May 1, 2017.
10.8 (9)(†)	Employment Agreement by and between the Company and Walter S. Woltosz, dated as of September 1, 2017.
10.9 (9) (†)	Employment Agreement by and between the Company and John DiBella, dated as of September 1, 2017.
10.10 (9) (†)	Employment Agreement by and between the Company and Thaddeus H Grasela Jr., dated as of September 2, 2017.
10.10* (†)	Employment Agreement by and between the Company and Shawn O’Connor, dated as of June 25, 2018.
31.1	Section 302 – Certification of the Principal Executive Officer*
31.2	Section 302 – Certification of the Principal Financial Officer*
32	Section 906 – Certification of the Chief Executive Office and Chief Financial Officer**
101.INS	XBRL Instance Document.
101.SCH	XBRL Taxonomy Extension Schema Document.
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB	XBRL Taxonomy Extension Label Linkbase Document.
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.

 ________________________

^	Schedules and exhibits omitted pursuant to Item 601(b)(2) of Registration S-K. The registrant agrees to furnish supplementally a copy of any omitted schedule to the SEC upon request.
†	Those exhibits marked with a (†) refer to management contracts or compensatory plans or arrangements
*	Filed herewith
**	Furnished herewith
(1)	Incorporated by reference to the Company’s Registration Statement on Form SB-2 (Registration No. 333-6680) filed on March 25, 1997.
(2)	Incorporated by reference to an exhibit to the Company’s Form 10-K for the fiscal year ended August 31, 2010.
(3)	Incorporated by reference to an exhibit to the Company’s Form 10-Q filed April 9, 2014.
(4)	Incorporated by reference to an exhibit to the Company’s Form 8-K/A filed November 18, 2014.
(5)	Incorporated by reference to an exhibit to the Company’s Form 8-K filed August 11, 2016.
(6)	Incorporated by reference to an exhibit to the Company’s Form 8-K filed August 10, 2016.
(7)	Incorporated by reference to an exhibit to the Company’s Form 10-Q filed July 10, 2017.
(8)	Incorporated by reference to Appendix A to the Company’s Schedule 14A filed December 29. 2016.
(9)	Incorporated by reference to an exhibit to the Company’s Form 8-K filed September 6, 2017.
(10)	Incorporated by reference to an exhibit to the Company’s Form 10-K for the fiscal year ended August 31, 2016.

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SIGNATURE

In accordance with Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Lancaster, State of California, on July 10, 2018.

		Simulations Plus, Inc.
Date:	July 10, 2018	By: /s/ John R Kneisel
		John R. Kneisel

Chief Financial Officer

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EX-10.10

Exhibit 10.10

EMPLOYMENT AGREEMENT

This Employment Agreement (the “Agreement”) is made as of this 26 day of June, 2018 (the “Effective Date”), by Simulations Plus, Inc., a California corporation (the “Company”) and Shawn O’Connor, an individual (the “Employee”) with reference to the following facts:

A.The Company desires to secure the services of the Employee as Chief Executive Officer (“CEO”).

B.          The Employee agrees to perform such services for the Company under the terms and conditions set forth in this Agreement.

In consideration of the mutual promises, covenants, and conditions set forth herein and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, it is hereby agreed by and between the Company and the Employee as follows:

1.Representations and Warranties. The Company represents and warrants that it is empowered under its Articles or Certificate of Incorporation and Bylaws to enter into this Agreement. The Employee represents and warrants that he is under no employment contract, bond, confidentiality agreement, or any other obligation that would violate or be in conflict with the terms and conditions of this Agreement or encumber his performance of duties assigned to him by the Company. The Employee further represents and warrants that he has not signed or committed to any employment or consultant duties or other obligations that would divert his full attention from the duties assigned to him by this Agreement; provided, that the foregoing limitations shall not be construed as prohibiting Employee from making personal investments or participating in business activities or community affairs in such form or manner as will not prevent Employee from performing his duties and responsibilities hereunder or cause Employee to violate the terms of Section 6 hereof.

2.Employment and Duties. The Company hereby employs the Employee as Chief Executive Officer and the Employee hereby accepts such employment during the Term.

As CEO the Employee shall have such duties, authority and responsibility as shall be consistent with the Employee’s position and such other duties as assigned by the Board of Directors of the Company (the “Board of Directors”).

3.Term. Subject to the provisions of Section 5, the term of this Agreement shall commence on June 26, 2018 and end on August 31, 2021 (“Term”).

4.Compensation. In full and complete consideration for the employment of Employee hereunder, each and all of the services to be rendered to the Company by the Employee, and each and all of the representations, warranties, covenants, agreements and promises undertaken by the Employee pursuant to this Agreement, the Employee shall be entitled to receive compensation as follows:

4.1Base Salary. The Employee shall receive from the Company a base salary of three hundred twenty-five thousand dollars ($325,000) per year, payable in equal, bi-monthly installments. From each payment of Base Salary, the Company will withhold and pay to the proper governmental authorities any and all amounts required by law to be withheld for federal income tax, state income tax, federal Social Security tax, state disability insurance premiums, and any and all other amounts required by law to be withheld from the Employee's salary.

4.2Stock Options. Upon joining, the Employee will receive forty thousand stock options under the 2017 Equity Incentive Plan. Thereafter, the Employee shall be eligible to receive an annual grant of up to twenty-five thousand stock options under the 2017 Equity Incentive Plan, based on the employee’s and the Company’s performance, as determined by the Board of Directors. Performance Bonus.

4.3Performance Bonus.

(a)Initial Year. For the period commencing with the Employee’s start date until the ending of the 2019 fiscal year (ending August 31, 2019) the Employee shall be eligible to receive a performance bonus in an amount not to exceed the amount of $150,000, at the discretion of the Compensation Committee of the Board of Directors. Employee must be employed by the Company on the last date of the calendar year to be eligible for the bonus related to the previous fiscal year.

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(b)Subsequent Years. For each subsequent fiscal year during the Term, the Employee shall be eligible to receive:

(i)A performance bonus in an amount not to exceed $100,000 at the end of each calendar year. The specific amount of the performance bonus shall be determined by the Compensation Committee of the Board of Directors, based on the financial performance and achievements of the Company for the previous fiscal year. Payout of the bonus will be tied to the Corporate EBITDA performance. If the EBITDA yr/yr increase is less than or equal to 10%, there will be no bonus. If the increase in EBITDA is greater than or equal to 11%, then the bonus is paid out on a linear scale based on the increase from 11% to 40%. That is, for 100% of the bonus to be achieved, the yr/yr increase in EBITDA must be at least 40%. Employee must be employed by the Company on the last date of the calendar year to be eligible for the bonus related to the previous fiscal year.

(ii)In addition, the Board of Directors will have at its discretion the ability to award an additional bonus up to $50,000, based on the CEO’s and the Company’s performance. This could be tied to M&A or other activities (at the Board’s discretion). Employee must be employed by the Company on the last date of the calendar year to be eligible to receive this bonus.

4.4Benefits. The Company shall provide to the Employee at the sole cost to the Company, and the Employee shall be entitled to receive from the Company, such health insurance and other benefits which are appropriate to the office and position of Employee, adequate to the performance of his duties and not inconsistent with that which the Company customarily provides at the time to their other management employees. The Employee's right to vacation and sick leave shall be determined in accordance with the policies of the Company as may be in effect from time to time and as are approved by the Board of Directors. Employee shall have the right to reimbursement of customary, ordinary, and necessary business expenses, including travel, incurred in connection with the rendering of services and performance of the functions required hereunder in accordance with the policies of the Company as may be in effect from time to time and as are approved by the Company’s Board of Directors. Such expenses are reimbursable only upon presentation by Employee of appropriate documentation pursuant to the policies adopted by the Company’s Board of Directors. Employee will be based primarily at the Company’s main office in Lancaster, California, even though Employee has indicated that at present he wishes to retain his home in Danville, California for personal reasons. Employee understands and agrees that he is expected to spend at least 75% of his time working in the Lancaster office or on official travel. Employee further agrees that he will not be reimbursed by the Company for any expenses associated with commuting to and living in Lancaster.

5.Termination of Employment.

5.1Expiration of the Term of Agreement. This Agreement shall be automatically terminated upon the expiration of the Term, or as sooner agreed to by both the Employee and the Company in writing in the event this Agreement is superseded by a new agreement. Upon such termination, the Company shall have no further liability to the Employee for any payment, compensation or benefit whatsoever under this Agreement except with respect to (a) the Employee's salary and benefits through the effective date of the Employee's termination, and (b) such other compensation or benefits (if any) which, by the terms of the applicable plan or policy, is payable to the Employee after termination of employment.

5.2By Death. This Agreement shall be terminated upon the death of the Employee. The Company's total liability in such event shall be limited to payment of (a) the Employee's salary and benefits through the date of the Employee's death, and (b) such other compensation or benefits (if any) which, by the terms of the applicable plan or policy, is payable after the Employee's death.

5.3By Permanent Disability. Employee’s employment may be terminated due to his permanent disability. A permanent disability will exist when the Company has determined that Employee suffers from a condition of mind or body that indefinitely prevents him from further performance of his essential duties, with or without reasonable accommodation. The Company’s total liability in such event shall be limited to payment of the Employee’s salary and benefits through the effective date of termination upon permanent disability.

5.4For Cause. The Company reserves the right to terminate this Agreement immediately, at any time, by providing written notice to Employee that his employment is being terminated for “Cause”. The Company has “Cause” to terminate Employee’s employment if, in the reasonable opinion of the Company’s Board of Directors: the Employee fails or refuses to faithfully and diligently perform the usual and customary duties of his employment, which failure or refusal is not cured within thirty (30) days after written notice thereof is given to Employee; commits any material act of dishonesty, fraud, misrepresentation, or other act of moral turpitude; is guilty of gross carelessness or misconduct; fails to obey the lawful direction of the Company’s Board of Directors; fails or refuses to comply with the material policies, standards and/or rules of the Company which from time to time may be established; violates any term or condition of this Agreement; or acts in any way that has a direct, substantial, and adverse effect on the Company’s reputation. The Company’s total liability to the Employee in the event of termination of the Employee's employment under this paragraph shall be limited to the payment of the Employee's salary and benefits through the effective date of termination.

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5.5Without Cause. The Company reserves the right to terminate this Agreement without cause for any reason whatsoever upon thirty (30) days' written notice to the Employee. Upon termination under this subsection, Employee shall be paid his salary and benefits through the effective date of termination. In addition, the Employee shall receive payment of an amount equal to six (6) months of the Employee's base salary, so long as he signs a release of all claims against the Company on a release form provided by the Company to him at that time. Other than payment of the amount as described in this paragraph, the Company shall have no further obligation to pay the Employee any other compensation or benefits whatsoever. The Employee hereby agrees that the Company may dismiss him under this Section 5.5 without regard (i) to any general or specific policies (whether written or oral) of the Company relating to the employment or termination of its employees, or (ii) to any statements made to the Employee, whether made orally or contained in any document, pertaining to the Employee's relationship with the Company.

5.6Mutual Consent. This Agreement shall be terminated upon mutual written consent of the Company and the Employee. The Company’s total liability to the Employee in the event of termination of the Employee's employment under this Section 5.6 shall be limited to the payment of

(a)The Employee's salary and benefits through the effective date of termination; and

(b)Such other compensation or benefits (if any) which, by the terms of the applicable plan or policy, is payable to the Employee after termination of employment, except as otherwise agreed by the parties in writing.

5.7Termination of Offices and Board. Upon termination of employment for any reason whatsoever, the Employee shall be deemed to have resigned from all offices, including the Board of Directors then held with the Company, if any.

6.Restrictions on Use or Disclosure of Confidential Matters, Proprietary Information and Trade Secrets.

6.1During the Term of this Agreement, Employee will have access to confidential information of the Company and its customers. “Confidential Information” is information that is not generally known to the public and, as a result, is of economic benefit to the Company or its customers in the conduct of its business. The Company and Employee agree that Confidential Information shall include, but not be limited to, all information developed or maintained by the Company and/or its customers and comprising the following items, whether or not such items have been reduced to tangible form (e.g., physical writing): techniques, designs, drawings, processes, inventions, development, equipment, prototypes, methods, databases, consulting agreements, product research, sales, marketing and strategic plans, programming plans, advertising and promotion plans, products and “availability” information, existing and developing software products, source code, object code, technical documentation, flow charts, test results, models, data, research, formulas, ideas, trade names, service marks, slogans, forms, customer lists, client contacts, pricing structures, business forms, marketing programs and plans, business plans and strategies, layout and design, financial information, financial structure, operational methods and tactics, cost information, the identity of suppliers or customers of the Company, accounting procedures, details, and any document, record or other information of the Company relating to the above. Confidential Information includes not only information belonging to the Company or its customers which existed before the date of this Agreement, but also information developed by Employee for the Company or its customers during the term of this Agreement and thereafter. The Employee will not disclose to anyone, directly or indirectly, any of such Confidential Information or use any Confidential Information other than as necessary in the course of his duties with the Company. All documents that the Employee prepares, or Confidential Information that might be given to him or that Employee himself might create in the course of his employment by the Company, are the exclusive property of the Company. During the Term and at any time thereafter, the Employee shall not publish, communicate, divulge, disclose or use any of such Confidential Information which has been reasonably designated by the Company as proprietary or confidential or which from the surrounding circumstances the Employee knows, or has good reason to know, or should reasonably know, ought to be treated by the Employee as proprietary or confidential without the prior written consent of the Company, which consent may not be unreasonably withheld by the Company.

6.2In the course of his employment for the Company, Employee will develop a personal relationship with the Company’s customers and knowledge of those customers’ affairs and requirements, which may constitute the Company’s only contact with such customers. The Employee consequently agrees that it is reasonable and necessary for the protection of the goodwill and business of the Company that the Employee make the covenants contained herein. Accordingly, the Employee agrees that while he is in the Company’s employ, he will not directly or indirectly:

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(a)Attempt in any manner, to solicit from any customer (except on behalf of the Company) business of the type performed by the Company or to persuade any customer of the Company to cease to do business or reduce the amount of business which any such customer has customarily done or contemplates doing with the Company, whether or not the relationship with the Company and such customer was originally established in whole or in part through the Employee's efforts; or

(b)Engage in any business as, or own an interest in, directly or indirectly, any individual proprietorship, partnership, corporation, joint venture, trust, or any other form of business entity if such business form or entity is engaged in the business in which the Company is engaged;

(c)Render any services of the type rendered by the Company to or for any customer of the Company, except as an employee of the Company in the normal performance of his duties;

(d)Employ or attempt to employ or assist anyone else to employ any person who is then or at any time during the preceding year in the Company’s employ.

6.3For a one-(1-)year period after the termination of this Agreement for any reason, Employee shall not, directly or indirectly, ask or encourage any employee(s) of the Company to leave their employment with the Company or solicit any employee(s) of the Company for employment elsewhere. The Employee further agrees that he shall make any subsequent employer aware of this nonsolicitation obligation.

6.4Notice of Rights. Notwithstanding any provisions in this Agreement or Company policy applicable to the unauthorized use or disclosure of trade secrets or Confidential Information, Employee is hereby notified that Employee may not be held criminally or civilly liable, under any applicable federal or state trade secret law, for the disclosure of a trade secret that is made in confidence to a federal, state, or local government official, or to an attorney, solely for the purpose of reporting or investigating a suspected violation of law.  Employee also may not be held so liable for such disclosures made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal.  In addition, Employee is advised that individuals who file a lawsuit for retaliation by an employer for reporting a suspected violation of law may disclose the trade secret to the attorney of the individual and use the trade secret in the court proceeding, if the individual files any document containing the trade secret under seal and does not disclose the trade secret, except pursuant to court order.

6.5This entire Section 6 shall survive termination of this Agreement.

7.The Company’s Property.

7.1Any patents, inventions, discoveries, applications or processes, software, and computer programs devised, planned, applied, created, discovered or invented by the Employee in the course of his employment by the Company and which pertain to any aspect of the business of the Company, or their respective subsidiaries, affiliates or customers, shall be the sole and exclusive property of the Company, and the Employee shall make prompt report thereof to the Company and promptly execute any and all documents reasonably requested to assure the Company the full and complete ownership thereof.

7.2All records, files, lists, drawings, documents, equipment, and similar items relating to the Company’s business which the Employee shall prepare or receive from the Company in the course of his employment by the Company shall remain the Company’s sole and exclusive property. Upon termination of this Agreement, the Employee shall return promptly to the Company all property of the Company in his possession and the Employee represents and warrants that he will not copy, or cause to be copied, printed, summarized or compiled, any software, documents, or other materials originating with and/or belonging to the Company, including, without limitation, documents or other materials created by the Employee for, or on behalf of, the Company. The Employee further represents and warrants that he will not retain in his possession any such software, documents, or other materials in machine or human readable form.

7.3This Section 7 shall survive termination of this Agreement.

8.Outside Activities. During the Term, the Employee shall not, directly or indirectly, either as an officer, director, employee, representative, principal, partner, shareholder, employee, agent or in any other capacity, engage or assist any third party in engaging in any business competitive, or potentially competitive, with the business of the Company, or engage in any other gainful occupation which requires his personal attention, without the prior written consent of the Company, which consent may be withheld by the Company in its sole and absolute discretion. Following his employment with the Company, the Employee shall not engage in unfair competition with the Company, aid others in any unfair competition with the Company, in any way breach the confidence that the Company has placed in the Employee, or misappropriate any proprietary information of the Company.

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9.Reports. The Employee, when directed, shall provide written reports to the Company with respect to the services provided hereunder.

10.Strict Loyalty. The Employee hereby covenants and agrees to avoid all circumstances and actions that reasonably would place the Employee in a position of divided loyalty with respect to his obligations under this Agreement.

11.Assignment. This Agreement may not be assigned to another party by the Employee without the prior written consent of the Company, which consent may be withheld by the Company, in its sole and absolute discretion.

12.Arbitration. In the event of any dispute between the Company and the Employee concerning any aspect of the employment relationship, including any disputes relating to its termination, all such disputes shall be resolved by binding arbitration before a single neutral arbitrator pursuant to the following terms. This provision shall supersede any prior arbitration agreement, policy, or understanding between the parties. The parties intend to revoke any prior arbitration agreement.

12.1Claims Covered by the Agreement. The Employee and the Company mutually consent to the resolution by final and binding arbitration of all claims or controversies (“claims”) that the Company may have against the Employee or that the Employee may have against the Company or against its officers, directors, partners, employees, agents, pension or benefit plans, administrators, or fiduciaries, franchisors, or any parent, subsidiary or affiliated companies or corporation (collectively referred to for purposes of this Section 12 as “Company’s Parties”), relating to, resulting from, or in any way arising out of Employee’s employment relationship with Company and/or the termination of Employee’s employment relationship with Company, to the extent permitted by law. The claims covered by this Agreement include, but are not limited to, claims for wages or other compensation due; claims for breach of any contract or covenant (express or implied); tort claims; claims for discrimination and harassment (including, but not limited to, race, sex, religion, national origin, age, marital status or medical condition, disability, or sexual orientation); claims for benefits (except where an employee benefit or pension plan specifies claims procedures different from the ones described in this Section 12); claims for breach of any duties or obligations; and claims for violation of any public policy, federal, state or other governmental law, statute, regulation, or ordinance, except claims excluded in the following section.

12.2Claims Not Covered by the Agreement. Claims the Employee may have for workers’ compensation (excluding discrimination claims under workers’ compensation statutes), unemployment compensation benefits, or claims under the Private Attorney General Act of 2014 (“PAGA”), California Labor Code Sections 2699 et seq., are not covered by this Arbitration section.

12.3Required Notice of Claims and Statute of Limitations. Arbitration may be initiated by the Employee by serving or mailing a written notice to the Chairman of the Board of the Company. Arbitration may be initiated by the Company’s Parties by serving or mailing a written notice to the Employee at his last known address. The notice shall identify and describe the nature of all claims asserted and the facts upon which such claims are based. The written notice shall be served or mailed within the applicable statute of limitations period set forth by federal or state law.

12.4Arbitration Procedures.

(a)After demand for arbitration has been made by serving written notice under the terms of Section 12.3 of this Agreement, the party demanding arbitration shall file a demand for arbitration with the office of Judicial Arbitration and Mediation Services (“JAMS”) located in Los Angeles, California. The arbitrator shall be selected from the JAMS panel and the arbitration shall be conducted pursuant to JAMS policies and procedures. All rules governing the arbitration shall be the rules as set forth by JAMS. If the dispute is employment-related, the dispute shall be governed by JAMS’ then-current version of the national rules for the resolution of employment disputes. JAMS’ then-applicable rules governing the arbitration may be obtained from JAMS’ website which currently is www.jamsadr.com.

(b)The arbitrator shall apply the substantive law (and the law of remedies, if applicable) of California, or federal law, or both, as applicable to the claim(s) asserted. The arbitrator shall have exclusive authority to resolve any dispute relating to the interpretation, applicability, enforceability, or formation of this Agreement, including but not limited to any claim that all or any part of this Agreement is void or voidable.

(c)Either party may file a motion for summary judgment with the arbitrator. The arbitrator is entitled to resolve some or all of the asserted claims through such a motion. The standards to be applied by the arbitrator in ruling on a motion for summary judgment shall be the applicable laws as specified in Section 12.4(b) of this Agreement.

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(d)Discovery shall be allowed and conducted pursuant to the then-applicable arbitration rules of JAMS, provided that the parties shall be entitled to discovery sufficient to adequately arbitrate their claims and defenses. The arbitrator is authorized to rule on discovery motions brought under the applicable discovery rules.

12.5Arbitration Decision. The arbitrator’s decision will be final and binding. The arbitrator shall issue a written arbitration decision revealing the essential findings and conclusions upon which the decision and/or award is based. A party’s right to appeal the decision is limited to grounds provided under applicable federal or California law.

12.6Application for Emergency Injunctive and/or Other Equitable Relief. Claims by the Company or Employee for emergency injunctive and/or other equitable relief relating to unfair competition and/or the use and/or unauthorized disclosure of trade secrets or confidential information and/or a breach of the provisions of Sections 6, 7, and 8 of this Agreement shall be submitted to JAMS for emergency treatment. The parties agree that the JAMS administrator may select a neutral hearing officer (subject to conflicts) to hear the emergency request only. The hearing officer should be experienced in considering requests for emergency injunctive and/or other equitable relief. The hearing officer shall conform his or her consideration and ruling with the applicable legal standards as if this matter were heard in a court of law in the applicable jurisdiction for such a dispute.

12.7Place of Arbitration. The arbitration will be at a mutually convenient location in Los Angeles, California. If the parties cannot agree upon a location, then the arbitration will be held at a JAMS’ office in Los Angeles.

12.8Representation, Fees and Costs. Each party may be represented by an attorney or other representative selected by the party. Each party shall be responsible for its own attorneys’ or representatives’ fees. However, if any party prevails on a statutory claim that affords the prevailing party’s attorneys’ fees, or if there is a written agreement providing for fees, the arbitrator may award reasonable fees to the prevailing party. The Company shall be responsible for the arbitrator’s fees and costs to the extent they exceed any fee or cost that the Employee would be required to bear if the action were brought in court.

12.9Waiver Of Jury Trial/Exclusive Remedy. The Employee and the Company knowingly and voluntarily waive any constitutional right to have any dispute between them decided by a court of law and/or by a jury in court.

12.10Waiver of Representative/Class Action Proceedings. Employee and Company knowingly and voluntarily agree to bring any claims governed by this Agreement in his/its individual capacity and not as a plaintiff, class member, or representative in any purported class or representative action. They further agree to waive any right to participate in any representative or class action proceeding related to any claims governed by this Agreement. The Company and Employee also agree that the arbitrator may not consolidate more than one individual’s claims, and may not otherwise preside over any form of representative or class action proceeding, including, but not limited to, any representative action under California Business and Professions Code Sections 17200 et seq. For purposes of this Agreement, the term “representative” used in this section specifically excludes any claims, causes of action, or actions brought under PAGA (“PAGA claims”). Accordingly, any PAGA claims must be pursued in the appropriate court of law. However, if either Employee or the Company have other claims or actions against each other covered by this Agreement, then they agree that those non-PAGA claims must first be pursued in arbitration, regardless of which claims or actions were filed first. The pending court PAGA action shall be stayed pending full and final resolution of the arbitration pursuant to California Code of Civil Procedure Section 1281.2 and related law.

13.The Company’s Bylaws, Directions, Policies, Practices, Rules, Regulations, and Procedures. The Employee agrees to become and remain thoroughly familiar with each and all of the Company’s bylaws, directions, policies, practices, rules, regulations, and procedures that relate to the employment and/or to any of Employee's duties and/or responsibilities as an employee of the Company, and to abide fully and by each and all of such bylaws, directions, policies, practices, rules, regulations, and procedures. During the Term, the Employee shall be fully bound by and employed pursuant to each and all of the Company’s bylaws, directions, policies, practices, rules, regulations, and procedures as now in effect or as may be implemented, modified, or otherwise put into effect by the Company during the term of employment, regardless of whether such bylaws, directions, policies, practices, rules, regulations, and procedures are oral or are set forth in any manual, handbook, or other document, and it is solely the responsibility of Employee to become and remain fully aware of and familiar with each and all such directions, policies, practices, rules, regulations, and/or procedures. In the event of any conflict between any provision of this Agreement and any provision of the Company’s directions, policies, practices, rules, regulations, and/or procedures, the provisions of this Agreement govern for any and all purposes whatsoever.

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14.Indemnification. The Company shall indemnify and hold the Employee harmless from any and all claims, demands, judgments, liens, subrogation, or costs incurred by the Employee with respect to any shareholder derivative action or other claims or suits against the Company and/or their respective Boards of Directors by individuals, firms, or entities not a party to this Agreement to the maximum extent permitted under California law.

15.General.

15.1Further Documents. Each party shall execute and deliver all further instruments, documents, and papers, and shall perform any and all acts necessary reasonably requested by the other party, to give full force and effect to all of the terms and provisions of this Agreement.

15.2Successors and Assigns. Except where expressly provided to the contrary, this Agreement, and all provisions hereof, shall inure to the benefit of and be binding upon the parties hereto, their successors in interest, assigns, administrators, executors, heirs, and devises.

15.3Severability. Whenever possible, each provision of this Agreement shall be interpreted in such a manner as to be effective and valid under applicable law. If any provision of this Agreement, as applied to any party or to any circumstance, shall be found by a court or arbitrator to be invalid or unenforceable under applicable law, such provision will be ineffective only to the extent of such invalidity or unenforceability, without invalidating or rendering unenforceable the remainder of such provision, and any such invalidity or unenforceability shall in no way affect any other provision of this Agreement, the application of any provision in any other circumstance or the validity or enforceability of this Agreement.

15.4Notices. All notices or demands shall be in writing and shall be served personally, telegraphically, or by express or certified mail. Service shall be deemed conclusively made at the time of service if personally served, 24 hours after deposit thereof in the United States mail properly addressed and postage prepaid, return receipt requested, if served by express Mail, and five days after deposit thereof in the United States mail, properly addressed and postage prepaid, return receipt requested, if served by certified mail. Any notice or demand to the Company shall be given to:

Simulations Plus, Inc.

42505 10th Street West

Lancaster, CA 93534-7059

Attention: Compensation Committee

and any notice or demand to the Employee shall be given to:

Shawn O’Connor

PO Box 3360

San Ramon, CA 94583

Any party may, by virtue of a written notice in compliance with this Section, alter or change the address or the identity of the person to whom any notice, or copy thereof, is to be sent.

15.5Waiver. A waiver by any party of any of the terms and conditions of this Agreement in any one instance shall not be deemed or construed to be a waiver of the term or condition for the future, or of any subsequent breach thereof or of any other term or condition thereof. Any party may waive any term, provision or condition included for the benefit of that party. Any and all waivers shall be in writing.

15.6Construction. This Agreement shall be governed by and construed in accordance with the laws of the State of California applicable to contracts entered into and fully to be performed therein without regard to its principles of choice of law or conflicts of law. In all matters of interpretation, whenever necessary to give effect to any provision of this Agreement, each gender shall include the others, the singular shall include the plural, the plural shall include the singular and the terms “and” and “or” may be used interchangeably as the context so requires or implies. The title of the sections of this Agreement are for convenience only and shall not in any way affect the interpretation of any provision or condition of this Agreement. All remedies, rights, undertakings, obligations, and agreements contained in this Agreement shall be cumulative and none of them shall be in limitation of any other remedy, right, undertaking, obligation, or agreement of any party.

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15.7Entire Understanding. This Agreement contains the entire understanding of the parties hereto relating to the subject matter contained herein and supersedes all prior and collateral agreements, understandings, statements, and negotiation of the parties. Each party acknowledges that no representations, inducements, or promises, oral or written, with reference to the subject matter hereof have been made other than as expressly set forth herein. This Agreement cannot be changed, rescinded, or terminated orally.

15.8Third Party Rights. The parties hereto do not intend to confer any rights or remedies upon any person other than the parties hereto and those referred to in Section 15.2 hereof so long as any such assignment by Employee was approved by the Company as provided in Section 11 hereof.

15.9Attorneys' Fees. In the event of any litigation between the parties respecting or arising out of this Agreement, the prevailing party shall be entitled to recover reasonable legal fees and costs, whether or not the litigation proceeds to final judgment or determination.

15.10Place of Litigation. Any litigation between the parties shall occur in the County of Los Angeles, California.

15.11Counterparts. This Agreement may be executed in counterparts which, taken together, shall constitute the whole of the agreement between the parties.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

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IN WITNESS THEREOF, the parties have executed this Agreement as of the day and year first above written.

Company:   SIMULATIONS PLUS, INC.     By: /s/ Walter S. Woltosz Walter S. Woltosz, Chairman and CEO Date: June 25, 2018 Employee:   Shawn O’Connor     /s/ Shawn O’Connor Shawn O’Connor Date: June 25, 2018

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EX-31.1

Exhibit 31.1

RULE 13A-14(A) CERTIFICATION

SIMULATIONS PLUS, INC.

a California corporation

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Shawn O’Connor, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Simulations Plus, Inc., a California corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its condensed subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Dated: July 10, 2018

By: /s/ Shawn O’Connor                      

Shawn O’Connor

Chief Executive Officer

(Principal Executive Officer)

EX-31.2

Exhibit 31.2

RULE 13A-14(A) CERTIFICATION

SIMULATIONS PLUS, INC.

a California corporation

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, John R. Kneisel, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Simulations Plus, Inc., a California corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its condensed subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Dated: July 10, 2018

By: /s/ John R. Kneisel                      

John R. Kneisel

Chief Financial Officer

(Principal Financial Officer)

EX-32

Exhibit 32

CERTIFICATIONS PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

(18 U.S.C. SECTION 1350)

In connection with the Quarterly Report of Simulations Plus, Inc., a California corporation (the “Company”), on Form 10-Q for the quarter ended May 31, 2018, as filed with the Securities and Exchange Commission, Shawn O’Connor, Chief Executive Officer of the Company and John R. Kneisel, Chief Financial Officer of the Company, respectively, do each hereby certify, pursuant to 18 U.S.C. § 1350, that to his/her knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/  Shawn O’Connor                                  

Shawn O’Connor

Chief Executive Officer

(Principal Executive Officer)

July 10, 2018

/s/  John R. Kneisel                                    

John R. Kneisel

Chief Financial Officer

(Principal Financial Officer)

July 10, 2018

(A signed original of this written statement required by Section 906 has been provided to Simulations Plus, Inc. and will be retained by Simulations Plus, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.)

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Document and Entity Information - shares	9 Months Ended
	May 31, 2018	Jul. 10, 2018
Document And Entity Information
Entity Registrant Name	SIMULATIONS PLUS INC
Entity Central Index Key	0001023459
Document Type	10-Q
Document Period End Date	May 31, 2018
Amendment Flag	false
Current Fiscal Year End Date	--08-31
Is Entity a Well-known Seasoned Issuer?	No
Is Entity a Voluntary Filer?	No
Is Entity's Reporting Status Current?	Yes
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		17,365,084
Document Fiscal Period Focus	Q3
Document Fiscal Year Focus	2018

XML

Condensed Consolidated Balance Sheets (unaudited) - USD ($)	May 31, 2018	Aug. 31, 2017
Current assets
Cash and cash equivalents	$ 7,223,115	$ 6,215,718
Accounts receivable, net of allowance for doubtful accounts of $0	7,701,659	4,048,725
Revenues in excess of billings	2,018,419	1,481,082
Prepaid income taxes	0	462,443
Prepaid expenses and other current assets	383,655	459,902
Total current assets	17,326,848	12,667,870
Long-term assets
Capitalized computer software development costs, net of accumulated amortization of $10,748,363 and $9,795,469	4,986,428	4,307,600
Property and equipment, net (note 3)	279,105	291,135
Intellectual property, net of accumulated amortization of $2,788,543 and $2,095,417	6,136,458	6,829,583
Other intangible assets net of accumulated amortization of $763,125 and $495,000	3,726,875	3,995,000
Goodwill	10,387,198	10,387,198
Other assets	37,227	34,082
Total assets	42,880,139	38,512,468
Current liabilities
Accounts payable	197,110	240,892
Accrued payroll and other expenses	1,106,195	983,293
Income taxes payable	169,452	0
Current portion - Contracts payable (note 4)	2,480,000	247,328
Billings in excess of revenues	434,804	216,958
Deferred revenue	821,243	353,962
Total current liabilities	5,208,804	2,042,433
Long-term liabilities
Deferred income taxes, net	3,189,761	4,926,960
Payments due under Contracts payable (note 4)	3,372,752	5,738,188
Total liabilities	11,771,317	12,707,581
Shareholders' equity (note 6)
Preferred stock, $0.001 par value 10,000,000 shares authorized no shares issued and outstanding	0	0
Common stock, $0.001 par value 50,000,000 shares authorized 17,358,444 and 17,277,604 shares issued and outstanding	7,359	7,278
Additional paid-in capital	12,933,560	12,109,141
Retained earnings	18,167,903	13,688,468
Total shareholders' equity	31,108,822	25,804,887
Total liabilities and shareholders' equity	$ 42,880,139	$ 38,512,468

XML

Condensed Consolidated Balance Sheets (unaudited) (Parenthetical) - USD ($)	May 31, 2018	Aug. 31, 2017
Allowance for doubtful accounts	$ 0	$ 0
Accumulated amortization of computer software development costs	$ 10,748,363	$ 9,795,469
Preferred stock par value	$ 0.001	$ .001
Preferred stock, shares authorized	10,000,000	10,000,000
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0
Common stock par value	$ 0.001	$ .001
Common stock shares authorized	50,000,000	50,000,000
Common stock shares issued	17,358,444	17,277,604
Common stock shares outstanding	17,358,444	17,277,604
Intellectual Property [Member]
Accumulated amortization on intangible assets	$ 2,788,543	$ 2,095,417
Other Intangible Assets [Member]
Accumulated amortization on intangible assets	$ 763,125	$ 495,000

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Condensed Consolidated Statements of Operations (unaudited) - USD ($)	3 Months Ended		9 Months Ended
	May 31, 2018	May 31, 2017	May 31, 2018	May 31, 2017
Income Statement [Abstract]
Net revenues	$ 8,553,068	$ 6,748,518	$ 22,978,565	$ 17,872,044
Cost of revenues	2,022,972	1,444,764	5,874,062	4,334,699
Gross margin	6,530,096	5,303,754	17,104,503	13,537,345
Operating expenses
Selling, general, and administrative	2,604,168	1,954,871	7,352,404	5,766,563
Research and development	508,356	253,799	1,353,503	952,635
Total operating expenses	3,112,524	2,208,670	8,705,907	6,719,198
Income from operations	3,417,572	3,095,084	8,398,596	6,818,147
Other income (expense)
Interest income	7,825	4,663	18,313	13,548
Interest expense	(38,188)	0	(114,846)	0
Gain (loss) on currency exchange	9,441	(14,913)	(3,820)	5,573
Total other income (expense)	(20,922)	(10,250)	(100,353)	19,121
Income before provision for income taxes	3,396,650	3,084,834	8,298,243	6,837,268
Benefit (Provision) for income taxes	(990,613)	(1,004,805)	(701,415)	(2,199,914)
Net Income	$ 2,406,037	$ 2,080,029	$ 7,596,828	$ 4,637,354
Earnings per share
Basic	$ 0.14	$ 0.12	$ 0.44	$ 0.27
Diluted	$ 0.13	$ 0.12	$ 0.43	$ 0.27
Weighted-average common shares outstanding
Basic	17,339,937	17,241,891	17,308,414	17,233,470
Diluted	17,904,428	17,585,528	17,850,171	17,454,864

XML

Condensed Consolidated Statements of Cash Flows (unaudited) - USD ($)	9 Months Ended
	May 31, 2018	May 31, 2017
Cash flows from operating activities
Net income	$ 7,596,828	$ 4,637,354
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization	2,015,825	1,547,041
Change in value of contingent consideration	114,564
Stock-based compensation	514,416	355,365
Deferred income taxes	(1,737,199)	99,259
(Increase) decrease in
Accounts receivable	(3,652,934)	(2,001,072)
Revenues in excess of billings	(537,337)	(436,023)
Prepaid income taxes	462,443	313,946
Prepaid expenses and other assets	73,102	106,403
Increase (decrease) in
Accounts payable	(43,782)	103,534
Accrued payroll and other expenses	122,902	90,343
Billings in excess of revenues	217,846	83,299
Accrued income taxes	169,452	0
Other liabilities	0	(8,274)
Deferred revenue	467,281	(127,458)
Net cash provided by operating activities	5,783,407	4,763,717
Cash flows used in investing activities
Purchases of property and equipment	(89,648)	(117,519)
Capitalized computer software development costs	(1,631,724)	(928,460)
Net cash used in investing activities	(1,721,372)	(1,045,979)
Cash flows used in financing activities
Payment of dividends	(3,117,393)	(2,585,043)
Payments on contracts payable	(247,328)	(1,000,000)
Proceeds from the exercise of stock options	310,083	85,218
Net cash used in financing activities	(3,054,638)	(3,499,825)
Net increase (decrease) in cash and cash equivalents	1,007,397	217,913
Cash and cash equivalents, beginning of year	6,215,718	8,030,284
Cash and cash equivalents, end of period	7,223,115	8,248,197
Supplemental disclosures of cash flow information
Income taxes paid	$ 1,763,825	$ 1,765,189

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1. GENERAL

9 Months Ended

May 31, 2018

Organization, Consolidation and Presentation of Financial Statements [Abstract]

ORGANIZATION AND LINES OF BUSINESS

NOTE 1: GENERAL

This report on Form 10-Q for the quarter ended May 31, 2018, should be read in conjunction with the Company's annual report on Form 10-K for the year ended August 31, 2017, filed with the Securities and Exchange Commission (“SEC”) on November 14, 2017. As contemplated by the SEC under Article 3 of Regulation S-X, the accompanying consolidated financial statements and footnotes have been condensed and therefore do not contain all disclosures required by generally accepted accounting principles. The interim financial data are unaudited; however, in the opinion of Simulations Plus, Inc. ("we", "our", "us"), the interim data includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the interim periods. Results for interim periods are not necessarily indicative of those to be expected for the full year.

Organization

Simulations Plus, Inc. (“Simulations Plus”, “Lancaster”) was incorporated on July 17, 1996. On September 2, 2014, Simulations Plus, Inc. acquired all of the outstanding equity interests of Cognigen Corporation (“Cognigen”, “Buffalo”) and Cognigen became a wholly owned subsidiary of Simulations Plus, Inc. Simulations Plus, Inc., acquired DILIsym Services, Inc. (DILIsym) as a wholly owned subsidiary pursuant to a stock purchase agreement dated May 1, 2017. On June 1, 2017, the Company consummated the acquisition of all outstanding equity interests of DILIsym pursuant to the terms of the Stock Agreement, with DILIsym becoming a wholly owned subsidiary of the Company. (Collectively, “Company”, “we”, “us”, “our”)

Lines of Business

The Company designs and develops pharmaceutical simulation software to promote cost-effective solutions to a number of problems in pharmaceutical research and in the education of pharmacy and medical students, and it provides consulting services to the pharmaceutical and chemical industries. Recently, the Company has begun to explore developing software applications for defense and for health care outside of the pharmaceutical industry.

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2. SIGNIFICANT ACCOUNTING POLICIES

9 Months Ended

May 31, 2018

Accounting Policies [Abstract]

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 and June 1, 2017, respectively, its wholly owned subsidiaries, Cognigen Corporation and 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

We recognize revenues related to software licenses and software maintenance in accordance with the FASB Accounting Standards Codification (“ASC”) 985-605, “Software – Revenue Recognition”. Software product revenue is recorded when the following conditions are met: 1) evidence of arrangement exists; 2) delivery has been made; 3) the amount is fixed; and 4) collectability is probable. Post-contract customer support (“PCS”) obligations are insignificant; therefore, revenue for PCS is recognized at the same time as the licensing fee, and the costs of providing such support services are accrued and amortized over the obligation period.

As a byproduct of ongoing improvements and upgrades for the new programs and new modules of software, some modifications are provided to our customers who have already purchased software at no additional charge. Other software modifications result in new, additional-cost modules that expand the functionality of the software. These are licensed separately. We consider the modifications that are provided without charge to be minimal, as they do not significantly change the basic functionality or utility of the software, but rather add convenience, such as being able to plot some additional variable on a graph in addition to the numerous variables that had been available before, or adding some additional calculations to supplement the information provided from running the software. Such software modifications for any single product have typically occurred once or twice per year, sometimes more, sometimes less. Thus, they are infrequent. The Company provides, for a fee, additional training and service calls to its customers and recognizes revenue at the time the training or service call is provided.

Generally, we enter into one-year license agreements with customers for the use of our pharmaceutical software products. We recognize revenue on these contracts when all the criteria are met. Most license agreements have a term of one year; however, from time to time, we enter into multiyear license agreements. We generally unlock and invoice software one year at a time for multiyear licenses. Therefore, revenue is recognized one year at a time. Certain of the Company's software products are housed and supported on the Company's computer networks. Software revenues for those products are included in income over the life of the contract.

We recognize revenue on sales of our DILIsym subsidiary in accordance with ASC 605-25, “Revenue Recognition, Multiple-Element Arrangements”. Our multiple-deliverable arrangements consist of consulting arrangements at our DILIsym subsidiary. We determined all elements to be separate units of accounting as they have standalone value to the customers. We allocate the revenue derived from these arrangements among all the deliverables. We base such allocation on the relative selling price of each deliverable. We recognize the allocated revenue for each deliverable when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed and determinable, and collectability is reasonably assured.

We recognize revenue from collaboration research, revenue from grants, and consortium memberships over their terms. For contract revenues based on actual hours incurred, we recognize revenues when the work is performed. For fixed-price contracts, we recognize contract study and other contract revenues using the percentage-of-completion method, depending upon how the contract studies are engaged, in accordance with ASC 605-35, “Revenue Recognition – Construction-Type and Production-Type Contracts”. To recognize revenue using the percentage-of-completion method, we must determine whether we meet the following criteria: 1) there is a long-term, legally enforceable contract, 2) it is possible to reasonably estimate the total project costs, and 3) it is possible to reasonably estimate the extent of progress toward completion.

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 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”. 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 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 using the straight-line method over the estimated economic life of the products (not to exceed five years). Amortization of software development costs amounted to $331,862 and $290,567 for the three months ended May 31, 2018 and 2017, respectively, and $952,894 and $864,443 for the nine months ended May 31, 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 noncompete 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 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, 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 May 31, 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-month periods ended May 31, 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 May 31, 2018 and August 31, 2017 for assets and liabilities measured at fair value on a recurring basis:

May 31, 2018:

	Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	7,223,115	$	–	$	–	$	7,223,115
Acquisition-related contingent consideration obligations	$	–	$	–	$	4,852,752	$	4,852,752

August 31, 2017:

	Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	6,215,718	$	–	$	–	$	6,215,718
Acquisition-related contingent consideration obligations	$	–	$	–	$	4,738,188	$	4,738,188

As of May 31, 2018, and August 31, 2017, 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, 2017	$	4,738,188
Contingent consideration payments		–
Change in value of contingent consideration		114,564
Value at May 31, 2018	$	4,852,752

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 that 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” which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns.

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 a royalty agreement with Enslein Research of Rochester, New York. The cost of $75,000 is being amortized over 10 years under the straight-line method. Amortization expense for each of the three-month periods ended May 31, 2018 and 2017 was $1,875, and was $5,625 for each of the nine-month periods ended May 31, 2018, and 2017. Accumulated amortization as of May 31, 2018 and August 31, 2017 were $46,875 and $41,250, 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 May 31, 2018 and 2017 was $150,000, and $450,000 for each of the nine-month periods ended May 31, 2018 and 2017. Accumulated amortization as of May 31, 2018 and August 31, 2017 were $2,425,000 and $1,975,000, respectively.

On June 1, 2017, as part of the acquisition of DILIsym Services, Inc. the Company acquired certain developed technologies associated with 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 and nine months ended May 31, 2018 was $79,176 and $237,500, respectively, and is included in cost of revenues. Accumulated amortization as of May 31, 2018 and August 31, 2017 was $316,667 and $79,176, respectively.

Total amortization expense for intellectual property agreements for the three months and nine months ended May 31, 2018 and 2017 was $231,042 and $151,875, respectively, and total amortization expense for the nine months ended May 31, 2018 and 2017 was $693,125 and $455,625 respectively. Accumulated amortization as of May 31, 2018 was $2,788,542 and $2,095,417 as of August 31, 2017.

Intangible assets

The following table summarizes those intangible assets as of May 31, 2018:

	Amortization Period	Acquisition Value		Accumulated Amortization		Net book value
Customer relationships - Cognigen	Straight line 8 years	$	1,100,000	$	515,625	$	584,375
Trade Name - Cognigen	None		500,000		0		500,000
Covenants not to compete - Cognigen	Straight line 5 years		50,000		37,500		12,500
Covenants not to compete - DILIsym	Straight line 4 years		80,000		20,000		60,000
Trade Name - DILIsym	None		860,000		0		860,000
Customer relationships - DILIsym	Straight line 8 years		1,900,000		190,000		1,710,000
		$	4,490,000	$	763,125	$	3,726,875

Amortization expense for each of the three-month and nine-month periods ended May 31, 2018 and 2017 was $89,375 and $36,875, and $268,125 and $110,625, respectively. According to policy, in addition to normal amortization, these assets are tested for impairment as needed.

Earnings per Share

We report earnings per share in accordance with FASB ASC 260-10. Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of common shares available. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. The components of basic and diluted earnings per share for the three and nine months ended May 31, 2018 and 2017 were as follows:

	Three months ended				Nine months ended
		5/31/2018		5/31/2017		5/31/2018		5/31/2017
Numerator:
Net income attributable to common shareholders	$	2,406,927	$	2,080,029	$	7,596,828	$	4,637,354
Denominator:
Weighted-average number of common shares outstanding during the period		17,339,937		17,241,891		17,308,414		17,233,470
Dilutive effect of stock options		564,491		343,637		541,757		221,394
Common stock and common stock equivalents used for diluted earnings per share		17,904,428		17,585,528		17,850,171		17,454,864

Stock-Based Compensation

Compensation costs related to stock options are determined in accordance with FASB ASC 718-10, “Compensation-Stock Compensation”, using the modified prospective method. Under this method, compensation cost is calculated based on the grant-date fair value estimated in accordance with FASB ASC 718-10, amortized on a straight-line basis over the options’ vesting period. Stock-based compensation was $132,437 and $142,879 for the three months ended May 31, 2018 and 2017, respectively and $404,154 and $355,365 for the nine months ended May 31, 2018 and 2017, respectively. This expense is included in the condensed consolidated statements of operations as Selling, General, and Administration (SG&A), and Research and Development expense.

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” and ASC 360, “Property and Equipment”. Long-lived assets to be held and used are reviewed for events or changes in circumstances that indicate that their carrying value may not be recoverable. We measure recoverability by comparing the carrying amount of an asset to the expected future undiscounted net cash flows generated by the asset. If we determine that the asset may not be recoverable, or if the carrying amount of an asset exceeds its estimated future undiscounted cash flows, we recognize an impairment charge to the extent of the difference between the fair value and the asset's carrying amount. No impairment losses were recorded during the nine months ended May 31, 2018 and 2017.

Recently Issued Accounting Pronouncements

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 May 2014, the Franchise Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09). The standard will eliminate the transaction- and industry-specific revenue recognition guidance under current generally accepted accounting principles in the U.S. (GAAP) and replace it with a principles-based approach for determining revenue recognition. ASU 2014-09 is effective for annual and interim periods beginning after December 15, 2017. Early adoption is permitted for years beginning after December 15, 2016. The revenue recognition standard is required to be applied retrospectively, including any combination of practical expedients as allowed in the standard. We are evaluating the impact, if any, of the adoption of ASU 2014-09 to our financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting. In 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 should be adopted concurrently with adoption of ASU 2014-09 which is effective for annual and interim periods beginning after December 15, 2017. The Company has commenced its assessment of these new standards, developed a project plan to guide the implementation, and is evaluating the impact these new standards will have on its consolidated financial statements. In the second and third quarters, the company executed a project to evaluate the impact of these changes, which included a review of existing contracts with customers, an evaluation of the specific terms of those contracts and the appropriate treatment under the new standards, and a comparison of that new treatment to the Company’s existing accounting policies, to identify differences. This project is well advanced and key findings and conclusions are currently being discussed. The standard can be applied either retrospectively to each period presented or as a cumulative effect adjustment as of the date of adoption. The Company has not yet determined if it plans to utilize the full retrospective or modified retrospective method of adoption. In the fourth quarter the Company will complete its analysis, draft disclosures, and calculate any transition adjustment, if required, once the analysis is complete. The Company believes that it is following an appropriate timeline to allow for proper adoption on the implementation date of September 1, 2018. The company will continue to monitor new customer contracts until the transition date.

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3. PROPERTY AND EQUIPMENT

9 Months Ended

May 31, 2018

Property, Plant and Equipment [Abstract]

PROPERTY AND EQUIPMENT

NOTE 3: Property and Equipment

Property and equipment as of May 31, 2018 consisted of the following:

Equipment	$	674,145
Computer equipment		265,925
Furniture and fixtures		145,240
Leasehold improvements		107,572
Sub total		1,192,882
Less: Accumulated depreciation and amortization		(913,777	)
Net Book Value	$	279,105

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4. CONTRACTS PAYABLE

9 Months Ended

May 31, 2018

Other Liabilities Disclosure [Abstract]

CONTRACTS PAYABLE

NOTE 4: CONTRACTS PAYABLE

DILIsym Acquisition Liabilities:

On June 1, 2017, the Company acquired DILIsym Services, Inc. The agreement provided for a working capital adjustment, an eighteen-month $1,000,000 holdback provision against certain representations and warrantees, and an Earn-out agreement of up to an additional $5,000,000 in Earn-out payments based on earnings over the next three years. The Earn-out liability has been recorded at an estimated fair value. Payments under the Earn-out liability will be due starting in FY 2019. It is estimated that approximately 38% of the Earn-out liability as well as the holdback will be paid in 2019 and the majority of the remaining Earn-out will be paid in the following year.

As of May 31, 2018 and August 31, 2017 the following liabilities have been recorded:

	May 31, 2018		August 31, 2017
Working Capital Liability	$	–	$	247,328
Holdback Liability		1,000,000		1,000,000
Earn-out Liability		4,852,752		4,738,188
Sub Total	$	5,852,752	$	5,985,516
Less: Current Portion		2,480,000		247,328
Long-Term	$	3,372,752	$	5,738,188

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5. COMMITMENTS AND CONTINGENCIES

9 Months Ended

May 31, 2018

Commitments and Contingencies Disclosure [Abstract]

COMMITMENTS AND CONTINGENCIES

NOTE 5: COMMITMENTS AND CONTINGENCIES

Leases

We lease approximately 13,500 square feet of space in Lancaster, California. The original lease had a five-year term with two, three-year options to extend. The initial five-year term expired in February 2011, and we extended the lease to February 2, 2014. In June 2013, the lease was amended to extend the term to February 2, 2017. The amended lease also provides for an annual base rent increase of 3% per year and two, two-year options to extend. In May 2016 the Company exercised the two, two-year options extending the term of the lease through February 2, 2021 at a fixed rate of $25,000 per month. The new extension agreement allowed the Company with 90 days’ notice to opt out of the remaining lease in the last two years of the term upon payment of a recapture payment equal to the 3% base payment increase that would have been due under the original agreement.

Our Buffalo subsidiary leases approximately 12,623 square feet of space in Buffalo, New York. The initial five-year term expires in October 2018; the lease allows for a three-year option to extend to October 2021. The current base rent is $15,638 per month.

In September 2017 DILIsym signed a three-year lease for approximately 1,900 rentable square feet of space in Research Triangle Park, North Carolina. The initial three-year term expires in October 2020. The base rent is $5,021 per month with an annual 3% adjustment. Prior to this lease DILIsym was on a month-to-month rental.

Rent expense, including common area maintenance fees for the three months ended May 31, 2018, and 2017 was $144,589 and $128,011, respectively, and $424,077 and $375,564 for the nine months ended May 31, 2018 and 2017, respectively.

Employment Agreements

In the normal course of business, the Company has entered into employment agreements with certain of its key management personnel that may require compensation payments upon termination.

License Agreement

The Company executed a royalty agreement with Accelrys, Inc. (“Accelrys”) (the original agreement was entered into with Symyx Technologies in March 2010; Symyx Technologies later merged with Accelrys, Inc.) for access to their Metabolite Database for developing our Metabolite Module within ADMET Predictor™. The module was renamed the Metabolism Module when we released ADMET Predictor version 6 on April 19, 2012. Under this agreement, we pay a royalty of 25% of revenue derived from the sale of the Metabolism/Metabolite module to Accelrys. In 2014, Dassault Systemes of France acquired Accelrys and the Company now operates under the name BIOVIA. We incurred royalty expense of $44,835 and $35,494, respectively, and for the three months ended May 31, 2018 and 2017, respectively and $124,567 and $108,587 for the nine months ended May 31, 2018 and 2017, respectively.

Income Taxes

We follow guidance issued by the FASB with regard to our accounting for uncertainty in income taxes recognized in the financial statements. Such guidance prescribes a recognition threshold of more likely than not and a measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In making this assessment, a company must determine whether it is more likely than not that a tax position will be sustained upon examination, based solely on the technical merits of the position and must assume that the tax position will be examined by taxing authorities. Our policy is to include interest and penalties related to unrecognized tax benefits in income tax expense. Interest and penalties totaled $-0- for fiscal year 2018. We file income tax returns with the IRS and various state jurisdictions and India. Our federal income tax returns for fiscal year 2015 and 2017 are open for audit, and our state tax returns for fiscal year 2014 through 2017 remain open for audit.

Our review of prior year tax positions using the criteria and provisions presented in guidance issued by FASB did not result in a material impact on our financial position or results of operations.

Litigation

From time to time, we may be involved in routine legal proceedings, as well as demands, claims and threatened litigation, which arise in the normal course of our business. Litigation can be expensive and disruptive to normal business operations. Moreover, the results of legal proceedings, particularly complex legal proceedings, cannot be predicted with any certainty.

We are not a party to any legal proceedings and are not aware of any pending legal proceedings of any kind.

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6. SHAREHOLDERS' EQUITY

9 Months Ended

May 31, 2018

Equity [Abstract]

SHAREHOLDERS' EQUITY

NOTE 6: SHAREHOLDERS’ EQUITY

Dividend

The Company’s Board of Directors declared cash dividends during fiscal years 2018 and 2017. The details of the dividends paid are in the following tables:

FY2018
Record Date	Distribution Date	Number of Shares Outstanding on Record Date		Dividend per Share		Total Amount
11/13/2017	11/20/2017	17,284,792	$	0.06	$	1,037,088
1/26/2018	2/2/2018	17,317,752		0.06		1,039,065
4/25/2018	5/2/2018	17,354,005		0.06		1,041,240
Total					$	3,117,393

FY2017
Record Date	Distribution Date	Number of Shares Outstanding on Record Date		Dividend per Share		Total Amount
11/10/2016	11/17/2016	17,226,478	$	0.05	$	861,324
1/30/2017	2/6/2017	17,233,758		0.05		861,688
5/08/2017	5/15/2017	17,240,626		0.05		862,031
7/28/2017	8/4/2017	17,268,920		0.05		863,446
Total					$	3,448,489

Equity Incentive Plan

On February 23, 2007, the Board of Directors adopted and the shareholders approved the 2007 Stock Option Plan under which a total of 1,000,000 shares of common stock had been reserved for issuance. On February 25, 2014 the shareholders approved an additional 1,000,000 shares increasing the total number of shares that may be granted under the Option Plan to 2,000,000. This plan terminated in February 2017 by its term.

On December 23, 2016 the Board of Directors adopted, and on February 23, 2017 the shareholders approved, the 2017 Equity Incentive Plan under which a total of 1,000,000 shares of common stock has been reserved for issuance. This plan will terminate in December 2026.

As of May 31, 2018, employees and directors hold stock options to purchase 1,161,976 shares of common stock at exercise prices ranging from $1.00 to $17.71.

The following table summarizes information about stock options:

Transactions in FY18	Number of Options			Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Life
Outstanding, August 31, 2017		1,249,126		$	8.51		7.52
Granted		12,000		$	17.71
Exercised		(74,075	)	$	5.78
Cancelled/Forfeited		(19,075	)	$	8.89
Expired		(6,000	)	$	5.06
Outstanding, May 31, 2018		1,161,976		$	8.79		7.31
Exercisable, May 31, 2018		472,755		$	7.66		6.45

The weighted-average remaining contractual life of options outstanding issued under the Plan was 7.31 years at May 31, 2018. The exercise prices for the options outstanding at May 31, 2018 ranged from $1.00 to $17.71, and the information relating to these options is as follows:

Exercise Price				Awards Outstanding						Awards Exercisable
Low		High		Quantity		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price		Quantity		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price
$	1.00	$	4.00		42,000		0.85 years	$	1.00		42,000		0.85 years	$	1.00
$	4.01	$	8.00		332,000		5.96 years	$	6.76		207,795		5.78 years	$	6.70
$	8.01	$	12.00		763,060		8.26 years	$	9.87		222,960		8.12 years	$	9.81
$	12.01	$	16.00		12,916		9.22 years	$	14.44		0		–	$	–
$	16.01	$	17.71		12,000		4.46 years	$	17.71		0		–	$	–
					1,161,976		7.31 years	$	8.79		472,755		6.45 years	$	7.66

During the three and nine-month periods ended May 31, 2018, the Company issued 2,232 and 6,765 shares of stock to non-management directors of the Company valued at $36,716 and $110,262, respectively as compensation for services rendered to the Company.

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7. CONCENTRATIONS AND UNCERTAINTIES

9 Months Ended

May 31, 2018

Risks and Uncertainties [Abstract]

CONCENTRATIONS AND UNCERTAINTIES

NOTE 7: CONCENTRATIONS AND UNCERTAINTIES

Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash, cash equivalents, and trade accounts receivable. The Company holds cash and cash equivalents at banks located in California and North Carolina with balances that often exceed FDIC insured limits. Historically, the Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents. However, considering the current banking environment, the Company is investigating alternative ways to minimize its exposure to such risks. While the Company may be exposed to credit losses due to the nonperformance of its counterparties, the Company does not expect the settlement of these transactions to have a material effect on its results of operations, cash flows, or financial condition. The Company maintains cash at financial institutions that may, at times, exceed federally insured limits. At May 31, 2018 the Company had cash and cash equivalents exceeding insured limits by $6,254,000.

Revenue concentration shows that international sales accounted for 41% and 34% of net sales for the nine months ended May 31, 2018 and 2017, respectively. Three customers accounted for 9% (a dealer account in Japan representing various customers), 7%, and 5% of net sales during the nine months ended May 31, 2018. Three customers accounted for 8%, 6% (a dealer account in Japan representing various customers), and 5% of sales for the nine months ended May 31, 2017.

Accounts receivable concentration shows that six customers comprised 13% (a dealer account in Japan representing various customers), 9%, 6%, 6%, 5%, and 5% of accounts receivable at May 31, 2018, compared to three customers comprising 14% and 12% (a dealer account in Japan representing various customers) and 8% of accounts receivable at May 31, 2017.

We operate in the computer software industry, which is highly competitive and changes rapidly. Our operating results could be significantly affected by our ability to develop new products and to find new distribution channels for new and existing products.

The majority of our customers are in the pharmaceutical industry. Consolidation and downsizing in the pharmaceutical industry could have an impact on our revenues and earnings going forward.

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8. SEGMENT AND GEOGRAPHIC REPORTING

9 Months Ended

May 31, 2018

Segment Reporting [Abstract]

SEGMENT AND GEOGRAPHIC REPORTING

NOTE 8: SEGMENT AND Geographic Reporting

We account for segments and geographic revenues in accordance with guidance issued by the FASB. Our reportable segments are strategic business units that offer different products and services.

Results for each segment and consolidated results are as follows for the three-month periods ended May 31, 2018 and 2017 (in thousands, because of rounding numbers may not foot):

Three months ended May 31, 2018
	Lancaster		Buffalo		North Carolina*		Eliminations			Total
Net revenues	$	5,654	$	1,942	$	957	$	–		$	8,553
Income (loss) from operations		3,031		384		3		–			3,418
Total assets		35,009		11,180		14,393		(17,702	)		42,880
Capital expenditures		9		17		–		–			26
Capitalized software costs		318		165		–		–			484
Depreciation and amortization		437		105		146		–			688

*Acquired June 1, 2017

Three months ended May 31, 2017
	Lancaster		Buffalo		Eliminations			Total
Net revenues	$	4,948	$	1,801	$	–		$	6,749
Income (loss) from operations		2,681		414		–			3,095
Identifiable assets		27,428		9,358		(7,238	)		29,548
Capital expenditures		12		0		–			12
Capitalized software costs		278		66		–			344
Depreciation and amortization		422		92		–			514

Nine months ended May 31, 2018
	Lancaster		Buffalo		North Carolina*		Eliminations			Total
Net revenues	$	14,247	$	5,722	$	3,010	$	–		$	22,979
Income (loss) from operations		6,566		1,220		613		–			8,399
Total assets		35,009		11,180		14,393		(17,702	)		42,880
Capital expenditures		37		40		13		–			90
Capitalized software costs		1,011		466		155		–			1,632
Depreciation and amortization		1,295		295		426		–			2,016

*Acquired June 1, 2017

Nine months ended May 31, 2017
	Lancaster		Buffalo		Eliminations			Total
Net Revenues	$	12,685	$	5,187	$	–		$	17,872
Income (loss) from operations		5,739		1,079		–			6,818
Total assets		27,428		9,358		(7,238	)		29,548
Capital expenditures		37		80		–			117
Capitalized software costs		809		120		–			929
Depreciation and Amortization		1,261		286		–			1,547

In addition, the Company allocates revenues to geographic areas based on the locations of its customers. Geographical revenues for the three months and nine months ended May 31, 2018 and 2017 were as follows (in thousands, because of rounding numbers may not foot):

Three months ended May 31, 2018
	North America		Europe		Asia		South America		Total
Lancaster	$	2,595	$	1,367	$	1,692	$	–	$	5,654
Buffalo		1942		–		–		–		1,942
North Carolina*		715		150		92		–		957
Total	$	5,252	$	1,517	$	1,784	$	–	$	8,553

*Acquired June 1, 2017

Three months ended May 31, 2017
	North America		Europe		Asia		South America		Total
Lancaster	$	2,533	$	1,144	$	1,271	$	–	$	4,948
Buffalo		1,801		0		0		–		1,801
Total	$	4,334	$	1,144	$	1,271	$	1	$	6,749

Nine months ended May 31, 2018
	North America		Europe		Asia		South America		Total
Lancaster	$	6,126	$	4,201	$	3,905	$	15	$	14,247
Buffalo		5,722		–		–		–		5,722
North Carolina*		2,249		195		566		–		3,010
Total	$	14,097	$	4,396	$	4,471	$	15	$	22,979

*Acquired June 1, 2017

Nine months ended May 31, 2017*
	North America		Europe		Asia		South America		Total
Lancaster	$	6,261	$	3,201	$	3,222	$	1	$	12,685
Buffalo		5,187		–		–		–		5,187
Total	$	11,448	$	3,201	$	3,222	$	1	$	17,872

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9. EMPLOYEE BENEFIT PLAN

9 Months Ended

May 31, 2018

Retirement Benefits [Abstract]

EMPLOYEE BENEFIT PLAN

NOTE 9: EMPLOYEE BENEFIT PLAN

We maintain a 401(K) Plan for all eligible employees, and we make matching contributions equal to 100% of the employee’s elective deferral, not to exceed 4% of total employee compensation. We can also elect to make a profit-sharing contribution. Our contributions to this Plan amounted to $95,585 and $64,233 for the three months ended May 31, 2018 and 2017, respectively and $238,011 and $179,123 for the nine months ended May 31, 2018 and 2017 respectively.

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10. ACQUISITION/MERGER WITH SUBSIDIARIES

9 Months Ended

May 31, 2018

Business Combinations [Abstract]

ACQUISITION/MERGER WITH SUBSIDIARIES

NOTE 10: ACQUISITION/MERGER WITH SUBSIDIARIES

DILIsym Services, Inc.

On May 1, 2017, the Company entered into a Stock Purchase Agreement (the “Stock Agreement”) with DILIsym Services, Inc. (“DILIsym”). On June 1, 2016, the Company consummated the acquisition of all outstanding equity interests of DILIsym pursuant to the terms of the Stock Agreement, with DILIsym becoming a wholly owned subsidiary of the Company. We believe the combination of Simulations Plus and DILIsym provides substantial future potential based on the complementary strengths of each of the companies.

Under the terms of the Stock Agreement, as described below, the Company will pay the former shareholders of DILIsym total consideration of approximately $10,463,000.

On June 1, 2017, the Company paid the former shareholders of DILIsym a total of $4,515,982, which included a $4,000,000 initial payment and a preliminary working capital payment of $515,982. Additional working capital adjustments of $247,328 were due under the agreement and were paid subsequent to August 31, 2017.

Within three business days following the eighteen-month anniversary of the date of the Stock Agreement, May 1, 2017, and subject to any offsets, the Company will pay the former shareholders of DILIsym a total of $1,000,000. The agreement calls for Earn-out payments up to an additional $5,000,000 based on a formula of pretax earnings over the next three years. The Earn-out liability has been recorded at fair value.

Under the acquisition method of accounting, the total estimated purchase price is allocated to DILIsym’s tangible and intangible assets and liabilities based on their estimated fair values at the date of the completion of the acquisition (June 1, 2017). The following table summarizes the preliminary allocation of the purchase price for DILIsym:

Assets acquired, including accounts receivable of $255,000 and estimated Contracts receivable of $153,000	$	2,298,569
Developed Technologies Acquired		2,850,000
Estimated value of Intangibles acquired (Customer Lists, trade name etc.)		2,840,000
Current Liabilities assumed		(911,049	)
Goodwill		5,597,950
Estimated Deferred income taxes		(2,212,160	)
Total Consideration	$	10,463,310

Goodwill has been provided in the transaction based on estimates of future earnings of this subsidiary including anticipated synergies associated with the positioning of the combined company as a leader in model-based drug development. Based on the structure of the transaction, the Company does not anticipate benefiting from any tax deductions in future periods for recognized goodwill.

PROFORMA INFORMATION (UNAUDITED)

Consolidated supplemental Pro Forma information

The following consolidated supplemental pro forma information assumes that the acquisition of DILIsym took place on September 1, 2016 for the income statement for the three-month and nine-month periods ended May 31, 2017. These amounts have been calculated after applying the Company’s accounting policies and adjusting the results of DILIsym to reflect the same expenses in the three-month period ended May 31, 2017. The adjustments include costs of acquisition, and amortization of intangibles and other technologies acquired during the merger, assuming the fair-value adjustments applied on September 1, 2016, together with consequential tax effects.

	For the three-month period ended				For the nine-month period ended
	May 31, (in 1000’s) (Unaudited)				May 31, (in 1000’s) (Unaudited)
	(Actual)		(Pro forma)		(Actual)		(Pro forma)
	2018		2017		2018		2017
Net Sales	$	8,553	$	8,340	$	22,979	$	20,918
Net Income	$	2,406	$	2,563	$	7,597	$	5,090

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11. SUBSEQUENT EVENTS

9 Months Ended

May 31, 2018

Subsequent Events [Abstract]

SUBSEQUENT EVENTS

NOTE 11 - SUBSEQUENT EVENTS:

On June 26, 2018, the Company announced the appointment of a new Chief Executive Officer(CEO), Shawn O’Connor, who replaces the founding CEO, Walter S. Woltosz. Mr. Woltosz will remain as Chairman of the Board of Directors.

On July 6, 2018, our Board of Directors declared a quarterly cash dividend of $0.06 per share to our shareholders. The dividend will be distributed on Thursday August 2, 2018, for shareholders of record as of Wednesday July 26, 2018.

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2. SIGNIFICANT ACCOUNTING POLICIES (Policies)

9 Months Ended

May 31, 2018

Accounting Policies [Abstract]

Principles of Consolidation

Principles of Consolidation

The consolidated financial statements include the accounts of Simulations Plus, Inc. and, as of September 2, 2014 and June 1, 2017, respectively, its wholly owned subsidiaries, Cognigen Corporation and DILIsym Services, Inc. All significant intercompany accounts and transactions are eliminated in consolidation.

Estimates

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

Reclassifications

Certain numbers in the prior year have been reclassified to conform to the current year's presentation.

Revenue Recognition

Revenue Recognition

We recognize revenues related to software licenses and software maintenance in accordance with the FASB Accounting Standards Codification (“ASC”) 985-605, “Software – Revenue Recognition”. Software product revenue is recorded when the following conditions are met: 1) evidence of arrangement exists; 2) delivery has been made; 3) the amount is fixed; and 4) collectability is probable. Post-contract customer support (“PCS”) obligations are insignificant; therefore, revenue for PCS is recognized at the same time as the licensing fee, and the costs of providing such support services are accrued and amortized over the obligation period.

As a byproduct of ongoing improvements and upgrades for the new programs and new modules of software, some modifications are provided to our customers who have already purchased software at no additional charge. Other software modifications result in new, additional-cost modules that expand the functionality of the software. These are licensed separately. We consider the modifications that are provided without charge to be minimal, as they do not significantly change the basic functionality or utility of the software, but rather add convenience, such as being able to plot some additional variable on a graph in addition to the numerous variables that had been available before, or adding some additional calculations to supplement the information provided from running the software. Such software modifications for any single product have typically occurred once or twice per year, sometimes more, sometimes less. Thus, they are infrequent. The Company provides, for a fee, additional training and service calls to its customers and recognizes revenue at the time the training or service call is provided.

Generally, we enter into one-year license agreements with customers for the use of our pharmaceutical software products. We recognize revenue on these contracts when all the criteria are met. Most license agreements have a term of one year; however, from time to time, we enter into multiyear license agreements. We generally unlock and invoice software one year at a time for multiyear licenses. Therefore, revenue is recognized one year at a time. Certain of the Company's software products are housed and supported on the Company's computer networks. Software revenues for those products are included in income over the life of the contract.

We recognize revenue on sales of our DILIsym subsidiary in accordance with ASC 605-25, “Revenue Recognition, Multiple-Element Arrangements”. Our multiple-deliverable arrangements consist of consulting arrangements at our DILIsym subsidiary. We determined all elements to be separate units of accounting as they have standalone value to the customers. We allocate the revenue derived from these arrangements among all the deliverables. We base such allocation on the relative selling price of each deliverable. We recognize the allocated revenue for each deliverable when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed and determinable, and collectability is reasonably assured.

We recognize revenue from collaboration research, revenue from grants, and consortium memberships over their terms. For contract revenues based on actual hours incurred, we recognize revenues when the work is performed. For fixed-price contracts, we recognize contract study and other contract revenues using the percentage-of-completion method, depending upon how the contract studies are engaged, in accordance with ASC 605-35, “Revenue Recognition – Construction-Type and Production-Type Contracts”. To recognize revenue using the percentage-of-completion method, we must determine whether we meet the following criteria: 1) there is a long-term, legally enforceable contract, 2) it is possible to reasonably estimate the total project costs, and 3) it is possible to reasonably estimate the extent of progress toward completion.

Cash and Cash Equivalents

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

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 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

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”. 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 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 using the straight-line method over the estimated economic life of the products (not to exceed five years). Amortization of software development costs amounted to $331,862 and $290,567 for the three months ended May 31, 2018 and 2017, respectively, and $952,894 and $864,443 for the nine months ended May 31, 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

Property and equipment are recorded at cost, less accumulated depreciation and amortization. Depreciation and amortization are provided using the straight-line method over the estimated useful lives as follows:

Equipment	5 years
Computer equipment	3 to 7 years
Furniture and fixtures	5 to 7 years
Leasehold improvements	Shorter of life of asset or lease

Maintenance and minor replacements are charged to expense as incurred. Gains and losses on disposals are included in the results of operations.

Goodwill and indefinite-lived assets

Goodwill and indefinite-lived assets

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 noncompete 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 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, 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 May 31, 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-month periods ended May 31, 2018 and 2017.

Business Acquisitions

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

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 May 31, 2018 and August 31, 2017 for assets and liabilities measured at fair value on a recurring basis:

May 31, 2018:

	Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	7,223,115	$	–	$	–	$	7,223,115
Acquisition-related contingent consideration obligations	$	–	$	–	$	4,852,752	$	4,852,752

August 31, 2017:

	Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	6,215,718	$	–	$	–	$	6,215,718
Acquisition-related contingent consideration obligations	$	–	$	–	$	4,738,188	$	4,738,188

As of May 31, 2018, and August 31, 2017, 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, 2017	$	4,738,188
Contingent consideration payments		–
Change in value of contingent consideration		114,564
Value at May 31, 2018	$	4,852,752

Research and Development Costs

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 that was developed by other companies and incorporated into, or used in the development of, our final products.

Income Taxes

Income Taxes

The Company accounts for income taxes in accordance with ASC 740-10, “Income Taxes” which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns.

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

Intellectual property

On February 28, 2012, we bought out a royalty agreement with Enslein Research of Rochester, New York. The cost of $75,000 is being amortized over 10 years under the straight-line method. Amortization expense for each of the three-month periods ended May 31, 2018 and 2017 was $1,875, and was $5,625 for each of the nine-month periods ended May 31, 2018, and 2017. Accumulated amortization as of May 31, 2018 and August 31, 2017 were $46,875 and $41,250, 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 May 31, 2018 and 2017 was $150,000, and $450,000 for each of the nine-month periods ended May 31, 2018 and 2017. Accumulated amortization as of May 31, 2018 and August 31, 2017 were $2,425,000 and $1,975,000, respectively.

On June 1, 2017, as part of the acquisition of DILIsym Services, Inc. the Company acquired certain developed technologies associated with 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 and nine months ended May 31, 2018 was $79,176 and $237,500, respectively, and is included in cost of revenues. Accumulated amortization as of May 31, 2018 and August 31, 2017 was $316,667 and $79,176, respectively.

Total amortization expense for intellectual property agreements for the three months and nine months ended May 31, 2018 and 2017 was $231,042 and $151,875, respectively, and total amortization expense for the nine months ended May 31, 2018 and 2017 was $693,125 and $455,625 respectively. Accumulated amortization as of May 31, 2018 was $2,788,542 and $2,095,417 as of August 31, 2017.

Intangible Assets

Intangible assets

The following table summarizes those intangible assets as of May 31, 2018:

	Amortization Period	Acquisition Value		Accumulated Amortization		Net book value
Customer relationships - Cognigen	Straight line 8 years	$	1,100,000	$	515,625	$	584,375
Trade Name - Cognigen	None		500,000		0		500,000
Covenants not to compete - Cognigen	Straight line 5 years		50,000		37,500		12,500
Covenants not to compete - DILIsym	Straight line 4 years		80,000		20,000		60,000
Trade Name - DILIsym	None		860,000		0		860,000
Customer relationships - DILIsym	Straight line 8 years		1,900,000		190,000		1,710,000
		$	4,490,000	$	763,125	$	3,726,875

Amortization expense for each of the three-month and nine-month periods ended May 31, 2018 and 2017 was $89,375 and $36,875, and $268,125 and $110,625, respectively. According to policy, in addition to normal amortization, these assets are tested for impairment as needed.

Earnings per Share

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, 2018 and 2017 were as follows:

	Three months ended				Nine months ended
		5/31/2018		5/31/2017		5/31/2018		5/31/2017
Numerator:
Net income attributable to common shareholders	$	2,406,927	$	2,080,029	$	7,596,828	$	4,637,354
Denominator:
Weighted-average number of common shares outstanding during the period		17,339,937		17,241,891		17,308,414		17,233,470
Dilutive effect of stock options		564,491		343,637		541,757		221,394
Common stock and common stock equivalents used for diluted earnings per share		17,904,428		17,585,528		17,850,171		17,454,864

Stock-Based Compensation

Stock-Based Compensation

Compensation costs related to stock options are determined in accordance with FASB ASC 718-10, “Compensation-Stock Compensation”, using the modified prospective method. Under this method, compensation cost is calculated based on the grant-date fair value estimated in accordance with FASB ASC 718-10, amortized on a straight-line basis over the options’ vesting period. Stock-based compensation was $132,437 and $142,879 for the three months ended May 31, 2018 and 2017, respectively and $404,154 and $355,365 for the nine months ended May 31, 2018 and 2017, respectively. This expense is included in the condensed consolidated statements of operations as Selling, General, and Administration (SG&A), and Research and Development expense.

Impairment of Long-lived assets

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” and ASC 360, “Property and Equipment”. Long-lived assets to be held and used are reviewed for events or changes in circumstances that indicate that their carrying value may not be recoverable. We measure recoverability by comparing the carrying amount of an asset to the expected future undiscounted net cash flows generated by the asset. If we determine that the asset may not be recoverable, or if the carrying amount of an asset exceeds its estimated future undiscounted cash flows, we recognize an impairment charge to the extent of the difference between the fair value and the asset's carrying amount. No impairment losses were recorded during the nine months ended May 31, 2018 and 2017.

Recently Issued Accounting Pronouncements

Recently Issued Accounting Pronouncements

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 May 2014, the Franchise Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09). The standard will eliminate the transaction- and industry-specific revenue recognition guidance under current generally accepted accounting principles in the U.S. (GAAP) and replace it with a principles-based approach for determining revenue recognition. ASU 2014-09 is effective for annual and interim periods beginning after December 15, 2017. Early adoption is permitted for years beginning after December 15, 2016. The revenue recognition standard is required to be applied retrospectively, including any combination of practical expedients as allowed in the standard. We are evaluating the impact, if any, of the adoption of ASU 2014-09 to our financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting. In 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 should be adopted concurrently with adoption of ASU 2014-09 which is effective for annual and interim periods beginning after December 15, 2017. The Company has commenced its assessment of these new standards, developed a project plan to guide the implementation, and is evaluating the impact these new standards will have on its consolidated financial statements. In the second and third quarters, the company executed a project to evaluate the impact of these changes, which included a review of existing contracts with customers, an evaluation of the specific terms of those contracts and the appropriate treatment under the new standards, and a comparison of that new treatment to the Company’s existing accounting policies, to identify differences. This project is well advanced and key findings and conclusions are currently being discussed. The standard can be applied either retrospectively to each period presented or as a cumulative effect adjustment as of the date of adoption. The Company has not yet determined if it plans to utilize the full retrospective or modified retrospective method of adoption. In the fourth quarter the Company will complete its analysis, draft disclosures, and calculate any transition adjustment, if required, once the analysis is complete. The Company believes that it is following an appropriate timeline to allow for proper adoption on the implementation date of September 1, 2018. The company will continue to monitor new customer contracts until the transition date.

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2. SIGNIFICANT ACCOUNTING POLICIES (Tables)

9 Months Ended

May 31, 2018

Accounting Policies [Abstract]

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

Summarizes fair value measurements

The following table summarizes fair value measurements at May 31, 2018 and August 31, 2017 for assets and liabilities measured at fair value on a recurring basis:

May 31, 2018:

	Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	7,223,115	$	–	$	–	$	7,223,115
Acquisition-related contingent consideration obligations	$	–	$	–	$	4,852,752	$	4,852,752

August 31, 2017:

	Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	6,215,718	$	–	$	–	$	6,215,718
Acquisition-related contingent consideration obligations	$	–	$	–	$	4,738,188	$	4,738,188

Reconciliation of contingent consideration value

The following is a reconciliation of contingent consideration value.

Value at August 31, 2017	$	4,738,188
Contingent consideration payments		–
Change in value of contingent consideration		114,564
Value at May 31, 2018	$	4,852,752

Schedule of intangible assets

	Amortization Period	Acquisition Value		Accumulated Amortization		Net book value
Customer relationships - Cognigen	Straight line 8 years	$	1,100,000	$	515,625	$	584,375
Trade Name - Cognigen	None		500,000		0		500,000
Covenants not to compete - Cognigen	Straight line 5 years		50,000		37,500		12,500
Covenants not to compete - DILIsym	Straight line 4 years		80,000		20,000		60,000
Trade Name - DILIsym	None		860,000		0		860,000
Customer relationships - DILIsym	Straight line 8 years		1,900,000		190,000		1,710,000
		$	4,490,000	$	763,125	$	3,726,875

Earnings per share

	Three months ended				Nine months ended
		5/31/2018		5/31/2017		5/31/2018		5/31/2017
Numerator:
Net income attributable to common shareholders	$	2,406,927	$	2,080,029	$	7,596,828	$	4,637,354
Denominator:
Weighted-average number of common shares outstanding during the period		17,339,937		17,241,891		17,308,414		17,233,470
Dilutive effect of stock options		564,491		343,637		541,757		221,394
Common stock and common stock equivalents used for diluted earnings per share		17,904,428		17,585,528		17,850,171		17,454,864

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3. PROPERTY AND EQUIPMENT (Tables)

9 Months Ended

May 31, 2018

Property, Plant and Equipment [Abstract]

Property and equipment

Equipment	$	674,145
Computer equipment		265,925
Furniture and fixtures		145,240
Leasehold improvements		107,572
Sub total		1,192,882
Less: Accumulated depreciation and amortization		(913,777	)
Net Book Value	$	279,105

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4. CONTRACTS PAYABLE (Tables)

9 Months Ended

May 31, 2018

Other Liabilities Disclosure [Abstract]

Schedule of Liabilities

	May 31, 2018		August 31, 2017
Working Capital Liability	$	–	$	247,328
Holdback Liability		1,000,000		1,000,000
Earn-out Liability		4,852,752		4,738,188
Sub Total	$	5,852,752	$	5,985,516
Less: Current Portion		2,480,000		247,328
Long-Term	$	3,372,752	$	5,738,188

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6. SHAREHOLDERS' EQUITY (Tables)

9 Months Ended

May 31, 2018

Equity [Abstract]

Schedule of dividends declared and paid

FY2018
Record Date	Distribution Date	Number of Shares Outstanding on Record Date		Dividend per Share		Total Amount
11/13/2017	11/20/2017	17,284,792	$	0.06	$	1,037,088
1/26/2018	2/2/2018	17,317,752		0.06		1,039,065
4/25/2018	5/2/2018	17,354,005		0.06		1,041,240
Total					$	3,117,393

FY2017
Record Date	Distribution Date	Number of Shares Outstanding on Record Date		Dividend per Share		Total Amount
11/10/2016	11/17/2016	17,226,478	$	0.05	$	861,324
1/30/2017	2/6/2017	17,233,758		0.05		861,688
5/08/2017	5/15/2017	17,240,626		0.05		862,031
7/28/2017	8/4/2017	17,268,920		0.05		863,446
Total					$	3,448,489

Schedule of stock option activity

Transactions in FY18	Number of Options			Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Life
Outstanding, August 31, 2017		1,249,126		$	8.51		7.52
Granted		12,000		$	17.71
Exercised		(74,075	)	$	5.78
Cancelled/Forfeited		(19,075	)	$	8.89
Expired		(6,000	)	$	5.06
Outstanding, May 31, 2018		1,161,976		$	8.79		7.31
Exercisable, May 31, 2018		472,755		$	7.66		6.45

Schedule of options by exercise price range

Exercise Price				Awards Outstanding						Awards Exercisable
Low		High		Quantity		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price		Quantity		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price
$	1.00	$	4.00		42,000		0.85 years	$	1.00		42,000		0.85 years	$	1.00
$	4.01	$	8.00		332,000		5.96 years	$	6.76		207,795		5.78 years	$	6.70
$	8.01	$	12.00		763,060		8.26 years	$	9.87		222,960		8.12 years	$	9.81
$	12.01	$	16.00		12,916		9.22 years	$	14.44		0		–	$	–
$	16.01	$	17.71		12,000		4.46 years	$	17.71		0		–	$	–
					1,161,976		7.31 years	$	8.79		472,755		6.45 years	$	7.66

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8. SEGMENT AND GEOGRAPHIC REPORTING (Tables)

9 Months Ended

May 31, 2018

Segment Reporting [Abstract]

Schedule of consolidated results from reportable segments

Three months ended May 31, 2018
	Lancaster		Buffalo		North Carolina*		Eliminations			Total
Net revenues	$	5,654	$	1,942	$	957	$	–		$	8,553
Income (loss) from operations		3,031		384		3		–			3,418
Total assets		35,009		11,180		14,393		(17,702	)		42,880
Capital expenditures		9		17		–		–			26
Capitalized software costs		318		165		–		–			484
Depreciation and amortization		437		105		146		–			688

*Acquired June 1, 2017

Three months ended May 31, 2017
	Lancaster		Buffalo		Eliminations			Total
Net revenues	$	4,948	$	1,801	$	–		$	6,749
Income (loss) from operations		2,681		414		–			3,095
Identifiable assets		27,428		9,358		(7,238	)		29,548
Capital expenditures		12		0		–			12
Capitalized software costs		278		66		–			344
Depreciation and amortization		422		92		–			514

Nine months ended May 31, 2018
	Lancaster		Buffalo		North Carolina*		Eliminations			Total
Net revenues	$	14,247	$	5,722	$	3,010	$	–		$	22,979
Income (loss) from operations		6,566		1,220		613		–			8,399
Total assets		35,009		11,180		14,393		(17,702	)		42,880
Capital expenditures		37		40		13		–			90
Capitalized software costs		1,011		466		155		–			1,632
Depreciation and amortization		1,295		295		426		–			2,016

*Acquired June 1, 2017

Nine months ended May 31, 2017
	Lancaster		Buffalo		Eliminations			Total
Net Revenues	$	12,685	$	5,187	$	–		$	17,872
Income (loss) from operations		5,739		1,079		–			6,818
Total assets		27,428		9,358		(7,238	)		29,548
Capital expenditures		37		80		–			117
Capitalized software costs		809		120		–			929
Depreciation and Amortization		1,261		286		–			1,547

Schedule of geographical revenues

In addition, the Company allocates revenues to geographic areas based on the locations of its customers. Geographical revenues for the three months and nine months ended May 31, 2018 and 2017 were as follows (in thousands, because of rounding numbers may not foot):

Three months ended May 31, 2018
	North America		Europe		Asia		South America		Total
Lancaster	$	2,595	$	1,367	$	1,692	$	–	$	5,654
Buffalo		1942		–		–		–		1,942
North Carolina*		715		150		92		–		957
Total	$	5,252	$	1,517	$	1,784	$	–	$	8,553

*Acquired June 1, 2017

Three months ended May 31, 2017
	North America		Europe		Asia		South America		Total
Lancaster	$	2,533	$	1,144	$	1,271	$	–	$	4,948
Buffalo		1,801		0		0		–		1,801
Total	$	4,334	$	1,144	$	1,271	$	1	$	6,749

Nine months ended May 31, 2018
	North America		Europe		Asia		South America		Total
Lancaster	$	6,126	$	4,201	$	3,905	$	15	$	14,247
Buffalo		5,722		–		–		–		5,722
North Carolina*		2,249		195		566		–		3,010
Total	$	14,097	$	4,396	$	4,471	$	15	$	22,979

*Acquired June 1, 2017

Nine months ended May 31, 2017*
	North America		Europe		Asia		South America		Total
Lancaster	$	6,261	$	3,201	$	3,222	$	1	$	12,685
Buffalo		5,187		–		–		–		5,187
Total	$	11,448	$	3,201	$	3,222	$	1	$	17,872

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10. ACQUISITION/MERGER WITH SUBSIDIARIES (Tables)

9 Months Ended

May 31, 2018

Business Combinations [Abstract]

Allocation of purchase price

Assets acquired, including accounts receivable of $255,000 and estimated Contracts receivable of $153,000	$	2,298,569
Developed Technologies Acquired		2,850,000
Estimated value of Intangibles acquired (Customer Lists, trade name etc.)		2,840,000
Current Liabilities assumed		(911,049	)
Goodwill		5,597,950
Estimated Deferred income taxes		(2,212,160	)
Total Consideration	$	10,463,310

Schedule of statement of income

	For the three-month period ended				For the nine-month period ended
	May 31, (in 1000’s) (Unaudited)				May 31, (in 1000’s) (Unaudited)
	(Actual)		(Pro forma)		(Actual)		(Pro forma)
	2018		2017		2018		2017
Net Sales	$	8,553	$	8,340	$	22,979	$	20,918
Net Income	$	2,406	$	2,563	$	7,597	$	5,090

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2. SIGNIFICANT ACCOUNTING POLICIES (Details - Estimated useful lives)	9 Months Ended
	May 31, 2018
Equipment [Member]
Estimated useful lives	5 years
Computer equipment [Member]
Estimated useful lives	3 to 7 years
Furniture and fixtures [Member]
Estimated useful lives	5 to 7 years
Leasehold improvements [Member]
Estimated useful lives	Shorter of life of asset or lease

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details - Fair value measurements) - USD ($)	May 31, 2018	Aug. 31, 2017	May 31, 2017	Aug. 31, 2016
Cash and cash equivalents	$ 7,223,115	$ 6,215,718	$ 8,248,197	$ 8,030,284
Acquisition-related contingent consideration obligations	4,852,752	4,738,188
Fair Value, Inputs, Level 1 [Member]
Cash and cash equivalents	7,223,115	6,215,718
Acquisition-related contingent consideration obligations	0	0
Fair Value, Inputs, Level 2 [Member]
Cash and cash equivalents	0	0
Acquisition-related contingent consideration obligations	0	0
Fair Value, Inputs, Level 3 [Member]
Cash and cash equivalents	0	0
Acquisition-related contingent consideration obligations	$ 4,852,752	$ 4,738,188

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details - Reconciliation of contingent consideration) - USD ($)	9 Months Ended
	May 31, 2018	May 31, 2017
Accounting Policies [Abstract]
Value at beginning	$ 4,738,188
Contingent consideration payments	0
Change in value of contingent consideration	114,564
Value at end	$ 4,852,752

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details Other Intangible Assets) - USD ($)	9 Months Ended
	May 31, 2018	Aug. 31, 2017
Net book value	$ 3,726,875	$ 3,995,000
Customer Relationships [Member] | Cognigen
Amortization period	Straight line 8 years
Acquisition value	$ 1,100,000
Accumulated amortization	515,625
Net book value	$ 584,375
Customer Relationships [Member] | DILIsym
Amortization period	Straight line 8 years
Acquisition value	$ 1,900,000
Accumulated amortization	190,000
Net book value	$ 1,710,000
Trade name | Cognigen
Amortization period	None
Acquisition value	$ 500,000
Accumulated amortization	0
Net book value	$ 500,000
Trade name | DILIsym
Amortization period	None
Acquisition value	$ 860,000
Accumulated amortization	0
Net book value	$ 860,000
Covenants not to compete | Cognigen
Amortization period	Straight line 5 years
Acquisition value	$ 50,000
Accumulated amortization	37,500
Net book value	$ 12,500
Covenants not to compete | DILIsym
Amortization period	Straight line 4 years
Acquisition value	$ 80,000
Accumulated amortization	20,000
Net book value	60,000
Other Intangible Assets [Member]
Acquisition value	4,490,000
Accumulated amortization	763,125	$ 495,000
Net book value	$ 3,726,875

XML

2. SIGNIFICANT ACCOUNTING POLICIES (Details - Earnings per share) - USD ($)	3 Months Ended		9 Months Ended
	May 31, 2018	May 31, 2017	May 31, 2018	May 31, 2017
Numerator
Net income attributable to common shareholders	$ 2,406,037	$ 2,080,029	$ 7,596,828	$ 4,637,354
Denominator
Weighted-average number of common shares outstanding during the period	17,339,937	17,241,891	17,308,414	17,233,470
Dilutive effect of stock options	564,491	343,637	541,757	221,394
Common stock and common stock equivalents used for diluted earnings per share	17,904,428	17,585,528	17,850,171	17,454,864

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2. SIGNIFICANT ACCOUNTING POLICIES (Details Narrative) - USD ($)	3 Months Ended		9 Months Ended
	May 31, 2018	May 31, 2017	May 31, 2018	May 31, 2017	Aug. 31, 2017
Amortization of software development	$ 331,862	$ 290,567	$ 952,894	$ 864,443
Stock-based compensation	132,437	142,879	514,416	355,365
Impairment of long-lived assets			0	0
Intellectual Property [Member]
Amortization of intangible assets	231,042	151,875	693,125	455,625
Accumulated amortization of intangible assets	2,788,543		2,788,543		$ 2,095,417
Other Intangible Assets [Member]
Amortization of intangible assets	89,375	36,875	268,125	110,625
Accumulated amortization of intangible assets	763,125		763,125		495,000
Enslein Research | Intellectual Property [Member]
Amortization of intangible assets	1,875	1,875	5,625	5,625
Accumulated amortization of intangible assets	46,875		46,875		41,250
TSRL [Member] | Intellectual Property [Member]
Amortization of intangible assets	150,000	$ 150,000	450,000	$ 450,000
Accumulated amortization of intangible assets	2,425,000		2,425,000		1,975,000
DILIsym | Finite-Lived Intangible Assets [Member]
Amortization of intangible assets	79,176		237,500
Accumulated amortization of intangible assets	$ 316,667		$ 316,667		$ 79,176

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3. PROPERTY AND EQUIPMENT (Details) - USD ($)	May 31, 2018	Aug. 31, 2017
Property and equipment, gross	$ 1,192,882
Less accumulated depreciation and amortization	(913,777)
Net Book Value	279,105	$ 291,135
Equipment [Member]
Property and equipment, gross	674,145
Computer equipment [Member]
Property and equipment, gross	265,925
Furniture and fixtures [Member]
Property and equipment, gross	145,240
Leasehold improvements [Member]
Property and equipment, gross	$ 107,572

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4. CONTRACTS PAYABLE (Details) - USD ($)	May 31, 2018	Aug. 31, 2017
Other Liabilities Disclosure [Abstract]
Working Capital Liability	$ 0	$ 247,328
Holdback Liability	1,000,000	1,000,000
Earn-out Liability	4,852,752	4,738,188
Sub Total	5,852,752	5,985,516
Less: Current Portion	2,480,000	247,328
Long-Term	$ 3,372,752	$ 5,738,188

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5. COMMITMENTS AND CONTINGENCIES (Details Narrative) - USD ($)	3 Months Ended		9 Months Ended
	May 31, 2018	May 31, 2017	May 31, 2018	May 31, 2017
Rent expense	$ 144,589	$ 128,011	$ 424,077	$ 375,564
Accelrys [Member]
Royalty expense	$ 44,835	$ 35,494	$ 124,567	$ 108,587

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6. SHAREHOLDERS EQUITY (Details - Dividends) - USD ($)	9 Months Ended		12 Months Ended
	May 31, 2018	May 31, 2017	Aug. 31, 2017
Total dividends paid amount	$ 3,117,393	$ 2,585,043	$ 3,448,489
FY 2018 1st Qtr [Member]
Record Date	Nov. 13, 2017
Distribution Date	Nov. 20, 2017
Number of Shares Outstanding on Record Date	17,284,792
Dividend per Share	$ 0.06
Total dividends paid amount	$ 1,037,088
FY 2018 2nd Qtr [Member]
Record Date	Jan. 26, 2018
Distribution Date	Feb. 02, 2018
Number of Shares Outstanding on Record Date	17,317,752
Dividend per Share	$ 0.06
Total dividends paid amount	$ 1,039,065
FY 2018 3rd Qtr [Member]
Record Date	Apr. 25, 2018
Distribution Date	May 02, 2018
Number of Shares Outstanding on Record Date	17,354,005
Dividend per Share	$ 0.06
Total dividends paid amount	$ 1,041,240
FY 2017 1st Qtr [Member]
Record Date			Nov. 10, 2016
Distribution Date			Nov. 17, 2016
Number of Shares Outstanding on Record Date			17,226,478
Dividend per Share			$ 0.05
Total dividends paid amount			$ 861,324
FY 2017 2nd Qtr [Member]
Record Date			Jan. 30, 2017
Distribution Date			Feb. 06, 2017
Number of Shares Outstanding on Record Date			17,233,758
Dividend per Share			$ 0.05
Total dividends paid amount			$ 861,688
FY 2017 3rd Qtr [Member]
Record Date			May 08, 2017
Distribution Date			May 15, 2017
Number of Shares Outstanding on Record Date			17,240,626
Dividend per Share			$ 0.05
Total dividends paid amount			$ 862,031
FY 2017 4th Qtr [Member]
Record Date			Jul. 28, 2017
Distribution Date			Aug. 04, 2017
Number of Shares Outstanding on Record Date			17,268,920
Dividend per Share			$ 0.05
Total dividends paid amount			$ 863,446

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6. SHAREHOLDERS EQUITY (Details - Option activity)	9 Months Ended
	May 31, 2018 $ / shares shares
Number of Options
Awards Outstanding, ending balance | shares	1,161,976
Exercisable, end of period | shares	472,755
Weighted-Average Exercise Price Per Share
Outstanding | $ / shares	$ 8.79
Exercisable, end of period | $ / shares	$ 7.66
Equity Incentive Plan [Member]
Number of Options
Awards Outstanding, beginning balance | shares	1,249,126
Granted | shares	12,000
Exercised | shares	(74,075)
Canceled/Forfeited | shares	(19,075)
Expired | shares	(6,000)
Awards Outstanding, ending balance | shares	1,161,976
Exercisable, end of period | shares	472,755
Weighted-Average Exercise Price Per Share
Outstanding | $ / shares	$ 8.51
Granted | $ / shares	17.71
Exercised | $ / shares	5.78
Canceled/Forfeited | $ / shares	8.89
Expired | $ / shares	5.06
Outstanding | $ / shares	8.79
Exercisable, end of period | $ / shares	$ 7.66
Weighted-Average Remaining Contractual Life
Outstanding, beginning of period	7 years 6 months 7 days
Outstanding, end of period	7 years 3 months 22 days
Exercisable	6 years 5 months 12 days

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6. SHAREHOLDERS EQUITY (Details - Options outstanding and exercisable)	9 Months Ended
	May 31, 2018 $ / shares shares
Awards outstanding | shares	1,161,976
Awards outstanding weighted average remaining contractual life	7 years 3 months 22 days
Awards outstanding weighted average exercise price	$ 8.79
Awards exercisable | shares	472,755
Awards exercisable weighted average remaining contractual life	6 years 5 months 12 days
Awards exercisable weighted average exercise price	$ 7.66
$1.00 to $4.00 [Member]
Exercise price low	1.00
Exercise price high	$ 4.00
Awards outstanding | shares	42,000
Awards outstanding weighted average remaining contractual life	10 months 6 days
Awards outstanding weighted average exercise price	$ 1.00
Awards exercisable | shares	42,000
Awards exercisable weighted average remaining contractual life	10 months 6 days
Awards exercisable weighted average exercise price	$ 1.00
$4.01 to $8.00 [Member]
Exercise price low	4.01
Exercise price high	$ 8.00
Awards outstanding | shares	332,000
Awards outstanding weighted average remaining contractual life	5 years 11 months 15 days
Awards outstanding weighted average exercise price	$ 6.76
Awards exercisable | shares	207,795
Awards exercisable weighted average remaining contractual life	5 years 9 months 11 days
Awards exercisable weighted average exercise price	$ 6.70
$8.01 to $12.00 [Member]
Exercise price low	8.01
Exercise price high	$ 12.00
Awards outstanding | shares	763,060
Awards outstanding weighted average remaining contractual life	8 years 3 months 4 days
Awards outstanding weighted average exercise price	$ 9.87
Awards exercisable | shares	222,960
Awards exercisable weighted average remaining contractual life	8 years 1 month 13 days
Awards exercisable weighted average exercise price	$ 9.81
$12.01 to $16.00 [Member]
Exercise price low	12.01
Exercise price high	$ 16.00
Awards outstanding | shares	12,916
Awards outstanding weighted average remaining contractual life	9 years 2 months 19 days
Awards outstanding weighted average exercise price	$ 14.44
Awards exercisable | shares	0
Awards exercisable weighted average exercise price	$ 0.00
$16.01 to $17.71 [Member]
Exercise price low	16.01
Exercise price high	$ 17.71
Awards outstanding | shares	12,000
Awards outstanding weighted average remaining contractual life	4 years 7 months 28 days
Awards outstanding weighted average exercise price	$ 17.71
Awards exercisable | shares	0
Awards exercisable weighted average exercise price	$ 0.00

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6. SHAREHOLDERS' EQUITY (Details Narrative) - USD ($)	3 Months Ended	9 Months Ended
	May 31, 2018	May 31, 2018
Equity [Abstract]
Stock issued for compensation of services, shares	2,232	6,765
Stock issued for compensation of services, value	$ 36,716	$ 110,262

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7. CONCENTRATIONS AND UNCERTAINTIES (Details Narrative) - USD ($)	9 Months Ended
	May 31, 2018	May 31, 2017
Cash and cash equivalents exceeding insured limits	$ 6,254,000
Net Sales [Member] | Customer 1 [Member]
Net sales concentration percentage	9.00%	8.00%
Net Sales [Member] | Customer 2 [Member]
Net sales concentration percentage	7.00%	6.00%
Net Sales [Member] | Customer 3 [Member]
Net sales concentration percentage	5.00%	5.00%
Net Sales [Member] | International Sales [Member]
Net sales concentration percentage	41.00%	34.00%
Accounts Receivable [Member] | Customer 1 [Member]
Net sales concentration percentage	13.00%	14.00%
Accounts Receivable [Member] | Customer 2 [Member]
Net sales concentration percentage	9.00%	12.00%
Accounts Receivable [Member] | Customer 3 [Member]
Net sales concentration percentage	6.00%	8.00%
Accounts Receivable [Member] | Customer 4 [Member]
Net sales concentration percentage	6.00%
Accounts Receivable [Member] | Customer 5 [Member]
Net sales concentration percentage	5.00%
Accounts Receivable [Member] | Customer 6 [Member]
Net sales concentration percentage	5.00%

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8. SEGMENT AND GEOGRAPHIC REPORTING (Details - Segment reporting) - USD ($)	3 Months Ended		9 Months Ended
	May 31, 2018	May 31, 2017	May 31, 2018	May 31, 2017	Aug. 31, 2017
Net revenues	$ 8,553,068	$ 6,748,518	$ 22,978,565	$ 17,872,044
Income (loss) from operations	3,417,572	3,095,084	8,398,596	6,818,147
Total assets	42,880,139	29,548,000	42,880,139	29,548,000	$ 38,512,468
Capital expenditures	26,000	12,000	90,000	117,000
Capitalized software costs	484,000	344,000	1,631,724	928,460
Depreciation and amortization	688,000	514,000	2,015,825	1,547,041
Lancaster [Member]
Net revenues	5,654,000	4,948,000	14,247,000	12,685,000
Income (loss) from operations	3,031,000	2,681,000	6,566,000	5,739,000
Total assets	35,009,000	27,428,000	35,009,000	27,428,000
Capital expenditures	9,000	12,000	37,000	37,000
Capitalized software costs	318,000	278,000	1,011,000	809,000
Depreciation and amortization	437,000	422,000	1,295,000	1,261,000
Buffalo [Member]
Net revenues	1,942,000	1,801,000	5,722,000	5,187,000
Income (loss) from operations	384,000	414,000	1,220,000	1,079,000
Total assets	11,180,000	9,358,000	11,180,000	9,358,000
Capital expenditures	17,000	0	40,000	80,000
Capitalized software costs	165,000	66,000	466,000	120,000
Depreciation and amortization	105,000	92,000	295,000	286,000
North Carolina [Member]
Net revenues	957,000		3,010,000
Income (loss) from operations	3,000		613,000
Total assets	14,393,000		14,393,000
Capital expenditures	0		13,000
Capitalized software costs	0		155,000
Depreciation and amortization	146,000		426,000
Eliminations [Member]
Total assets	$ (17,702,000)	$ (7,238,000)	$ (17,702,000)	$ (7,238,000)

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8. SEGMENT AND GEOGRAPHIC REPORTING (Details - geographic) - USD ($)	3 Months Ended		9 Months Ended
	May 31, 2018	May 31, 2017	May 31, 2018	May 31, 2017
Net revenues	$ 8,553,068	$ 6,748,518	$ 22,978,565	$ 17,872,044
North America [Member]
Net revenues	5,252,000	4,334,000	14,097,000	11,448,000
Europe [Member]
Net revenues	1,517,000	1,144,000	4,396,000	3,201,000
Asia [Member]
Net revenues	1,784,000	1,271,000	4,471,000	3,222,000
South America [Member]
Net revenues	0	1,000	15,000	1,000
Lancaster [Member]
Net revenues	5,654,000	4,948,000	14,247,000	12,685,000
Lancaster [Member] | North America [Member]
Net revenues	2,595,000	2,533,000	6,126,000	6,261,000
Lancaster [Member] | Europe [Member]
Net revenues	1,367,000	1,144,000	4,201,000	3,201,000
Lancaster [Member] | Asia [Member]
Net revenues	1,692,000	1,271,000	3,905,000	3,222,000
Lancaster [Member] | South America [Member]
Net revenues	0	0	15,000	1,000
Buffalo [Member]
Net revenues	1,942,000	1,801,000	5,722,000	5,187,000
Buffalo [Member] | North America [Member]
Net revenues	1,942,000	1,801,000	5,722,000	5,187,000
Buffalo [Member] | Europe [Member]
Net revenues	0	0	0	0
Buffalo [Member] | Asia [Member]
Net revenues	0	0	0	0
Buffalo [Member] | South America [Member]
Net revenues	0	$ 0	0	$ 0
North Carolina [Member]
Net revenues	957,000		3,010,000
North Carolina [Member] | North America [Member]
Net revenues	715,000		2,249,000
North Carolina [Member] | Europe [Member]
Net revenues	150,000		195,000
North Carolina [Member] | Asia [Member]
Net revenues	92,000		566,000
North Carolina [Member] | South America [Member]
Net revenues	$ 0		$ 0

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9. EMPLOYEE BENEFIT PLAN (Details Narrative) - USD ($)	3 Months Ended		9 Months Ended
	May 31, 2018	May 31, 2017	May 31, 2018	May 31, 2017
Retirement Benefits [Abstract]
Plan contributions by company	$ 95,585	$ 64,233	$ 238,011	$ 179,123

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10. ACQUISITION/MERGER WITH SUBSIDIARIES (Details - purchase price allocation) - USD ($)	Jun. 01, 2017	May 31, 2018	Aug. 31, 2017
Goodwill		$ 10,387,198	$ 10,387,198
DILIsym
Assets acquired	$ 2,298,569
Developed Technologies Acquired	2,850,000
Estimated value of Intangibles acquired (Customer Lists, trade name etc.)	2,840,000
Current Liabilities assumed	(911,049)
Goodwill	5,597,950
Estimated Deferred income taxes	(2,212,160)
Total Consideration	$ 10,463,310

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10. ACQUISITION/MERGER WITH SUBSIDIARIES (Details - Proforma Information) - USD ($)	3 Months Ended		9 Months Ended
	May 31, 2018	May 31, 2017	May 31, 2018	May 31, 2017
Business Combinations [Abstract]
Net sales - actual	$ 8,553,068	$ 6,748,518	$ 22,978,565	$ 17,872,044
Net Sales - pro forma		8,340,000		20,918,000
Net Income - actual	$ 2,406,037	2,080,029	$ 7,596,828	4,637,354
Net Income - pro forma		$ 2,563,000		$ 5,090,000

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10. ACQUISITION/MERGER WITH SUBSIDIARIES (Details Narrative)	Jun. 01, 2017 USD ($)
DILIsym
Cash paid for acquisition	$ 4,515,982