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 February 29, 2020
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)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.001 per share	SLP	The NASDAQ Stock Market LLC

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, every Interactive Data File required to be submitted 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 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 April 9, 2020 was 17,768,034; no shares of preferred stock were outstanding.

Simulations Plus, Inc.

FORM 10-Q

For the Quarterly Period Ended February 29, 2020

Table of Contents

PART I. FINANCIAL INFORMATION
		Page
Item 1.	Condensed Consolidated Financial Statements
	Condensed Consolidated Balance Sheets at February 29, 2020 (unaudited) and August 31, 2019 (audited)	3
	Condensed Consolidated Statements of Operations for the three months and six months ended February 29, 2020 and February 28, 2019 (unaudited)	4
	Condensed Consolidated Statements of Shareholders Equity for the six months ended February 29, 2020 and the year ended August 31, 2019 (unaudited)	5
	Condensed Consolidated Statements of Cash Flows for the six months ended February 29, 2020 and February 28, 2019 (unaudited)	6
	Notes to Condensed Consolidated Financial Statements (unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Result of Operations	23
	General	23
	Result of Operations	33
	Liquidity and Capital Resources	37
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	37
Item 4.	Controls and Procedures	37
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	38
Item 1A.	Risk Factors	38
Item 2.	Changes in Securities	38
Item 3.	Defaults upon Senior Securities	38
Item 4.	Mine Safety Disclosures	38
Item 5.	Other Information	38
Item 6.	Exhibits	39
Signature		40

2

Part I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

SIMULATIONS PLUS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	(Unaudited)		(Audited)
	February 29,		August 31,
	2020		2019
ASSETS
Current assets
Cash and cash equivalents	$	12,248,652	$	11,435,499
Accounts receivable, net of allowance for doubtful accounts of $0		7,244,344		5,026,558
Revenues in excess of billings		4,113,185		3,233,659
Prepaid income taxes		457,232		765,110
Prepaid expenses and other current assets		612,505		704,316
Total current assets		24,675,918		21,165,142
Long-term assets
Capitalized computer software development costs,
net of accumulated amortization of $12,983,725 and $12,356,055		5,458,837		4,959,736
Property and equipment, net (note 4)		335,298		341,145
Operating lease right of use asset		637,509		–
Intellectual property, net of accumulated amortization of $4,413,334 and $3,948,750		4,561,666		5,026,249
Other intangible assets net of accumulated amortization of $1,383,750 and $1,210,000		3,106,250		3,280,000
Goodwill		10,387,198		10,387,198
Other assets		37,227		37,227
Total assets	$	49,199,903	$	45,196,697
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable	$	624,645	$	204,075
Accrued payroll and other expenses		1,526,891		1,639,038
Income taxes payable		–		–
Current portion - Contracts payable (note 5)		1,761,028		1,761,028
Billings in excess of revenues		891,905		798,549
Operating lease liability, current portion		493,257		–
Deferred revenue		183,310		380,787
Total current liabilities		5,481,036		4,783,477
Long-term liabilities
Deferred income taxes, net		2,714,398		2,731,616
Operating Lease Liability		142,343		–
Total liabilities		8,337,777		7,515,093
Commitments and contingencies (note 6)
Shareholders' equity (note 7)
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 17,648,646 and 17,591,834 shares issued and outstanding		7,651		7,595
Additional paid-in capital		16,406,702		15,319,474
Retained earnings		24,447,773		22,354,535
Total shareholders' equity	$	40,862,126	$	37,681,604
Total liabilities and shareholders' equity	$	49,199,903	$	45,196,697

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

3

SIMULATIONS PLUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the three and six months ended February 29, 2020 and February 28, 2019

	Three months ended						Six months ended
	(Unaudited)						(Unaudited)
	2020			2019			2020			2019
Revenues	$	10,349,863		$	8,471,720		$	19,750,968		$	16,007,623
Cost of revenues		2,666,388			2,207,831			5,309,297			4,406,952
Gross margin		7,683,475			6,263,889			14,441,671			11,600,671
Operating expenses
Selling, general, and administrative		4,110,018			2,809,691			7,623,381			5,530,093
Research and development		747,612			724,034			1,273,965			1,253,670
Total operating expenses		4,857,630			3,533,725			8,897,346			6,783,763
Income from operations		2,825,845			2,730,164			5,544,325			4,816,908
Other income (expense)
Interest income		12,073			5,573			23,349			9,245
Interest expense		–			(38,188	)		–			(76,376	)
(Loss) income on currency exchange		(1,825	)		(1,916	)		1,886			(32,526	)
Total other income (expense)		10,248			(34,531	)		25,235			(99,657	)
Income before provision for income taxes		2,836,093			2,695,633			5,569,560			4,717,251
Provision for income taxes		(686,013	)		(596,184	)		(1,361,203	)		(1,081,855	)
Net Income	$	2,150,080		$	2,099,449		$	4,208,357		$	3,635,396
Earnings per share
Basic	$	0.12		$	0.12		$	0.24		$	0.21
Diluted	$	0.12		$	0.12		$	0.23		$	0.20
Weighted-average common shares outstanding
Basic		17,638,406			17,476,603			17,623,699			17,449,069
Diluted		18,315,824			18,002,741			18,305,645			17,984,078

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

4

SIMULATIONS PLUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

For the six months ended February 29, 2020 and the year ended August 31, 2019

(Unaudited)

					Additional
	Common Stock				Paid-In
	Shares		Amount		Capital		Retained Earnings			Total
Balance, August 31, 2018		17,416,445	$	7,417	$	13,453,668	$	18,461,540		$	31,922,625
Exercise of stock options		41,103		42		357,410		–			357,452
Stock-based Compensation		–		–		200,029		–			200,029
Shares issued to Directors for services		2,222		2		44,904		–			44,906
Adjustment for 606		–		–		–		(493,279	)		(493,279	)
Declaration of Dividend		–		–		–		(1,045,073	)		(1,045,073	)
Net income		–		–		–		1,535,947			1,535,947
Balance, November 30, 2018		17,459,770		7,461		14,056,011		18,459,135			32,522,607
Exercise of stock options		37,680		38		121,912		–			121,950
Stock-based Compensation		–		–		208,715		–			208,715
Shares issued to Directors for services		2,508		4		48,954		–			48,958
Declaration of Dividend		–		–		–		(1,048,887	)		(1,048,887	)
Net income		–		–		–		2,099,449			2,099,449
Balance, February 28, 2019		17,499,958		7,503		14,435,592		19,509,697			33,952,792
Exercise of stock options		25,849		26		103,747		–			103,773
Stock-based Compensation		–		–		224,654		–			224,654
Shares issued to Directors for services		2,176		2		49,023		–			49,025
Declaration of Dividend		–		–		–		(1,050,914	)		(1,050,914	)
Net income		–		–		–		2,888,706			2,888,706
Balance, May 31, 2019		17,527,983		7,531		14,813,016		21,347,489			36,168,036
Exercise of stock options		62,071		62		204,910					204,972
Stock-based Compensation						232,450					232,450
Shares issued to Directors for services		1,780		2		69,098					69,100
Declaration of Dividend								(1,052,181	)		(1,052,181	)
Net income								2,059,227			2,059,227
Balance, August 31, 2019		17,591,834		7,595		15,319,474		22,354,535			37,681,604
Exercise of stock options		29,445		29		135,529		–			135,558
Stock-based Compensation		–		–		294,704		–			294,704
Shares issued to Directors for services		2,045		2		72,411		–			72,413
Declaration of Dividend		–		–		–		(1,056,379	)		(1,056,379	)
Net income		–		–		–		2,058,277			2,058,277
Balance November 30, 2019		17,623,324		7,626		15,822,118		23,356,433			39,186,177
Exercise of stock options		22,915		23		167,168		–			167,191
Stock-based Compensation		–		–		344,928		–			344,928
Shares issued to Directors for services		2,225		2		72,488		–			72,490
Declaration of Dividend		–		–		–		(1,058,740	)		(1,058,740	)
Net income		–		–		–		2,150,080			2,150,080
Balance February 29, 2020		17,648,464	$	7,651	$	16,406,702	$	24,447,773		$	40,862,126

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

5

SIMULATIONS PLUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the six months ended February 29, 2020 and February 28, 2019

(UNAUDITED)

	2020			2019
Cash flows from operating activities
Net income	$	4,208,357		$	3,635,396
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		1,345,313			1,392,763
Change in value of contingent consideration		–			76,376
Stock-based compensation		784,535			502,605
Deferred income taxes		(17,218	)		(149,623	)
(Increase) decrease in
Accounts receivable		(2,217,786	)		(713,027	)
Revenues in excess of billings		(879,526	)		(278,922	)
Prepaid income taxes		307,878			312,593
Prepaid expenses and other assets		91,811			91,927
Increase (decrease) in
Accounts payable		420,570			(61,861	)
Accrued payroll and other expenses		(114,056	)		(16,597	)
Billings in excess of revenues		93,356			574,345
Accrued income taxes		–			106,845
Deferred revenue		(197,477	)		214,897
Net cash provided by operating activities		3,825,757			5,687,717
Cash flows used in investing activities
Purchases of property and equipment		(73,462	)		(33,394	)
Purchases of intellectual property		–			(50,000	)
Capitalized computer software development costs		(1,126,772	)		(939,869	)
Net cash used in investing activities		(1,200,234	)		(1,023,263	)
Cash flows used in financing activities
Payment of dividends		(2,115,119	)		(2,093,960	)
Payments on Contracts Payable		–			(2,556,644	)
Proceeds from the exercise of stock options		302,749			479,402
Net cash used in financing activities		(1,812,370	)		(4,171,202	)
Net increase (decrease) in cash and cash equivalents		813,153			493,252
Cash and cash equivalents, beginning of year		11,435,499			9,400,701
Cash and cash equivalents, end of period	$	12,248,652		$	9,893,953
Supplemental disclosures of cash flow information
Income taxes paid	$	1,066,000		$	781,838
Non-Cash Investing and Financing Activities
Right of use assets acquired	$	902,553		$	–

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

6

Simulations Plus, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

February 29, 2020

(Unaudited)

NOTE 1: GENERAL

This report on Form 10-Q for the quarter ended February 29, 2020 should be read in conjunction with the Company's annual report on Form 10-K for the year ended August 31, 2019, filed with the Securities and Exchange Commission (“SEC”) on November 13, 2019. As contemplated by the SEC under Article 8 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, its wholly owned subsidiary, Cognigen Corporation, and as of June 1, 2017, the accounts of DILIsym Services, Inc. All significant intercompany accounts and transactions are eliminated in consolidation.

Estimates

Our financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management’s application of accounting policies. Actual results could differ from those estimates. Significant accounting policies for us include revenue recognition, accounting for capitalized computer software development costs, valuation of stock options, and accounting for income taxes.

Reclassifications

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

Revenue Recognition

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09 and its related amendments regarding Accounting Standards Codification Topic 606 (ASC Topic 606), Revenue from Contracts with Customers. The standard provides principles for recognizing revenue for the transfer of promised goods or services to customers with the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard also provides guidance on the recognition of incremental costs related to obtaining customer contracts. We adopted ASC Topic 606, effective September 1, 2018, utilizing the modified retrospective method. This approach was applied to contracts that were in process as of September 1, 2018, and the corresponding incremental costs of obtaining those contracts, which resulted in a cumulative effect adjustment of $493,279 to the opening balance of retained earnings at the date of adoption. The adoption of this ASU primarily impacts the timing of our revenue recognition for certain sales contracts, the capitalization and amortization of incremental costs of obtaining a contract, and related disclosures. The reported results for fiscal year 2019 reflect the application of ASC Topic 606.

7

We generate revenue primarily from the sale of software licenses and providing consulting services to the pharmaceutical industry for drug development.

The Company determines revenue recognition through the following steps:

i.	Identification of the contract, or contracts, with a customer
ii.	Identification of the performance obligations in the contract
iii.	Determination of the transaction price
iv.	Allocation of the transaction price to the performance obligations in the contract
v.	Recognition of revenue when, or as, the Company satisfies a performance obligation

Deferred Commissions

Sales commissions earned by our sales force and our commissioned sales representatives are considered incremental and recoverable costs of obtaining a contract with a customer. Sales commissions for new contracts are deferred and then amortized on a straight-line basis over a period of benefit. We determined the period of benefit by taking into consideration our customer contracts, our technology and other factors. Sales commissions for renewal contracts are deferred and then amortized on a straight-line basis over the related contractual renewal period. Amortization expense is included in sales and marketing expenses on the condensed consolidated statements of operations.

We apply the practical expedient in ASC Topic 606 to expense costs as incurred for sales commissions when the period of benefit would have been one year or less. Most of our contracts are of a duration of one year or less, few, if any of the longer-term contracts have commissions associated with them.

Practical Expedients and Exemptions

The Company has elected the following additional practical expedients in applying Topic 606:

• Commission Expense: We apply the practical expedient in ASC Topic 606 to expense costs as incurred for sales commissions when the period of benefit is one year or less. Most of our contracts are of a duration of one year or less, few, if any of the longer term contracts have commissions associated with them.

• Transaction Price Allocated to Future Performance Obligations   ASC 606 requires that the Company disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied as of February 29, 2020. ASC 606 provides certain practical expedients that limit the requirement to disclose the aggregate amount of transaction price allocated to unsatisfied performance obligations.   The Company applied the practical expedient to not disclose the amount of transaction price allocated to unsatisfied performance obligations when the performance obligation is part of a contract that has an original expected duration of one year or less.

Cash and Cash Equivalents

For purposes of the statements of cash flows, the Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents.

Accounts Receivable

We analyze the age of customer balances, historical bad-debt experience, customer creditworthiness, and changes in customer payment terms when making estimates of the collectability of the Company’s trade accounts receivable balances. If we determine that the financial conditions of any of our customers 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.

8

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 $314,003 and $344,714 for the three months ended February 29, 2020 and February 28, 2019, respectively, and $627,671 and $683,787 for the six months ended February 29, 2020 and February 28, 2019, 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.

Leases

In February 2016, the FASB issued ASU No. 2016-02—Leases, to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessor have not significantly changed from previous U.S. GAAP. This ASU was effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2018. We adopted this ASU on September 1, 2019.

We lease various production, administrative and sales offices under operating leases. We evaluate our contracts to determine if an arrangement is a lease at inception and classify it as a finance or operating lease. Currently, all our leases are classified as operating leases. Leased assets and corresponding liabilities are recognized based on the present value of the lease payments over the lease term. Our lease terms may include options to extend when it is reasonably certain that we will exercise that option. Costs associated with operating leases are recognized on a straight-line basis within operating expenses over the term of the lease. With the adoption of ASC 842 on September 1, 2019, we recognized all leases with terms greater than 12 months in duration on our consolidated balance sheets as right-of-use assets and lease liabilities. We adopted the standard using the prospective approach and did not retrospectively apply to prior periods. Right-of-use assets are recorded in long-term assets on our consolidated balance sheets. Current and non-current lease liabilities are recorded as operating lease liabilities within current liabilities and long-term liabilities, respectively, on our consolidated balance sheets. As part of the adoption of this standard we recorded the following assets and liabilities as of September 1, 2019:

9

Right of use assets	$	902,553
Lease Liabilities, Current	$	537,017
Lease Liabilities, Long-term	$	365,536

We have made certain assumptions and judgments when applying ASC 842, the most significant of which are:

· We elected the package of practical expedients available for transition that allow us to not reassess whether expired or existing contracts contain leases under the new definition of a lease, lease classification for expired or existing leases and whether previously capitalized initial direct costs would qualify for capitalization under ASC 842.

· We did not elect to use hindsight when considering judgments and estimates such as assessments of lessee options   to extend or terminate a lease or purchase the underlying asset.

· For all asset classes, we elected to not recognize a right-of-use asset and lease liability for short-term leases.

· The determination of the discount rate used in a lease is our estimated incremental borrowing rate that is based on what we would expect to pay to borrow over a similar term an amount equal to the lease payments.

Supplemental balance sheet information related to operating leases was as follows as of February 29, 2020:

Right of use asset	$	637,509
Lease Liabilities, Current	$	493,257
Lease Liabilities, Long-term	$	142,343
Operating lease costs	$	282,951
Weighted Average remaining lease term		1.08 years
Weighted Average Discount rate		5%

Goodwill and indefinite-lived assets

The Company performs valuations of assets acquired and liabilities assumed on each acquisition accounted for as a business combination and recognizes the assets acquired and liabilities assumed at their acquisition date fair value. Acquired intangible assets include customer relationships, software, trade names, and non-compete agreements. The Company determines the appropriate useful life by performing an analysis of expected cash flows based on historical experience of the acquired businesses. Intangible assets are amortized over their estimated useful lives using the straight-line method, which approximates the pattern in which the majority of the economic benefits are expected to be consumed.

Goodwill represents the excess of the cost of an acquired entity over the fair value of the acquired net assets. Goodwill is not amortized, instead it is tested for impairment annually or when events or circumstances change that would indicate that goodwill might be impaired. Events or circumstances that could trigger an impairment review include, but are not limited to, a significant adverse change in legal factors or in the business climate, an adverse action or assessment by a regulator, unanticipated competition, a loss of key personnel, significant changes in the manner of the Company's use of the acquired assets or the strategy for the Company's overall business, significant negative industry or economic trends, or significant 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 February 29, 2020, 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.

10

As of February 29, 2020, 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 and six-month periods ended February 29, 2020 and February 28, 2019.

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 February 29, 2020 and August 31, 2019 for assets and liabilities measured at fair value on a recurring basis:

February 29, 2020:

	Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	12,248,652	$	–	$	–	$	12,248,652
Acquisition-related contingent consideration obligations	$	–	$	–	$	1,761,028	$	1,761,028

August 31, 2019:

	Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	11,435,499	$	–	$	–	$	11,435,499
Acquisition-related contingent consideration obligations	$	–	$	–	$	1,761,028	$	1,761,028

As of February 29, 2020, and August 31, 2019, 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, 2019	$	1,761,028
Contingent consideration payments		–
Change in value of contingent consideration		–
Value at February 29, 2020	$	1,761,028

11

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 February 29, 2020 and February 28, 2019 was $1,875 and was $3,750 for each of the six-month periods ended February 29, 2020, and February 28, 2019. Accumulated amortization as of February 29, 2020 and August 31, 2019 were $60,000 and $56,250, 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 February 29, 2020 and February 28, 2019 was $150,000 and $300,000 for each of the six-month periods ended February 29, 2020 and February 28, 2019. Accumulated amortization as of February 29, 2020 and August 31, 2019 were $3,475,000 and $3,175,000, respectively.

On June 1, 2017, as part of the acquisition of DILIsym Services, Inc. the Company acquired certain developed technologies associated with the drug induced liver disease (DILI). These technologies were valued at $2,850,000 and are being amortized over 9 years under the straight-line method. Amortization expense for the three months and six months ended February 29, 2020 was $79,167 and $158,333, respectively, and is included in cost of revenues. Accumulated amortization as of February 29, 2020 and August 31, 2019 were $870,833 and $712,513, respectively.

In September 2018, we purchased certain intellectual property rights of Entelos Holding Company, a Delaware Corporation. The cost of $50,000 is being amortized over 10 years under the straight-line method. Amortization expense for the three months and six months period ended February 29, 2020 was $1,250 and $2,500, respectively. Accumulated amortization as of February 29, 2020 and August 31, 2019 was $7,500 and $5,000 respectively.

Total amortization expense for intellectual property agreements for the three months ended February 29, 2020 and February 28, 2019 was $232,292 and $232,292 respectively, and total amortization expense for the six months ended February 29, 2020 and February 28, 2019 was $464,583 and $464,583 respectively. Accumulated amortization as of February 29, 2020 was $4,413,334 and $3,948,750 as of August 31, 2019.

Intangible assets

The following table summarizes intangible assets as of February 29, 2020:

	Amortization Period	Acquisition Value		Accumulated Amortization		Net book value
Customer relationships-Cognigen	Straight line 8 years	$	1,100,000	$	756,250	$	343,750
Trade Name-Cognigen	None		500,000		0		500,000
Covenants not to compete-Cognigen	Straight line 5 years		50,000		50,000		0
Covenants not to compete-DILIsym	Straight line 4 years		80,000		55,000		25,000
Trade Name-DILIsym	None		860,000		0		860,000
Customer relationships-DILIsym	Straight line 10 years		1,900,000		522,500		1,377,500
		$	4,490,000	$	1,383,750	$	3,106,250

12

Amortization expense for each of the three-month and six-month periods ended February 29, 2020 and February 28, 2019 was $86,875 and $173,750 as compared to $89,375 and $178,750, 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 computation is 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 six months ended February 29, 2020 and February 28,2019 were as follows:

	Three months ended				Six months ended
		2/29/2020		2/28/2019		2/29/2020		2/28/2019
Numerator:
Net income attributable to common shareholders	$	2,150,080	$	2,099,449	$	4,208,357	$	3,635,396
Denominator:
Weighted-average number of common shares outstanding during the period		17,638,406		17,476,603		17,623,699		17,449,069
Dilutive effect of stock options		677,418		526,138		681,946		535,009
Common stock and common stock equivalents used for diluted earnings per share		18,315,824		18,002,741		18,305,645		17,984,078

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 $344,928 and $208,715 for the three months ended February 29, 2020 and February 28, 2019, respectively and $639,632 and $408,744 for the six months ended February 29, 2020 and February 28, 2019, 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 six months ended February 29, 2020 and February 28, 2019.

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 adopted the new standard effective September 1, 2019.

NOTE 3. REVENUE RECOGNITION

The Company adopted Topic 606 effective September 1, 2018 using the modified retrospective method applying this guidance to all open contracts at the date of initial application, which resulted in an adjustment to retained earnings for the cumulative effect of applying this guidance. The most significant impact of Topic 606 on revenue to the Company relates to the timing of revenue recognition for one of its payment contracts. Under 606 the revenues under the contract are being recognized as time is expended and costs are being expensed as incurred. Under ASC 605 revenues were recognized as invoiced and certain costs were capitalized as development.

13

We generate revenue primarily from the sale of software licenses and providing consulting services to the pharmaceutical industry for drug development.

The Company determines revenue recognition through the following steps:

i.	Identification of the contract, or contracts, with a customer
ii.	Identification of the performance obligations in the contract
iii.	Determination of the transaction price
iv.	Allocation of the transaction price to the performance obligations in the contract
v.	Recognition of revenue when, or as, the Company satisfies a performance obligation

The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. Contracts generally have fixed pricing terms and are not subject to variable pricing. The Company considers the nature and significance of each specific performance obligation under a contract when allocating the proceeds under each contract. Accounting for contracts includes significant judgement in the estimation of estimated hours/cost to be incurred on consulting contracts, and the di minimis nature of the post sales costs associated with software sales.

Components of revenue

The following is a description of principal activities from which the Company generates revenue. As part of the accounting for these arrangements, the Company must develop assumptions that require judgment to determine the stand-alone selling price for each performance obligation identified in the contract. Stand-alone selling prices are determined based on the prices at which the Company separately sells its services or goods.

Revenue Components	Typical payment terms
Software Revenues: Software revenues are generated primarily from sales of software licenses at the time the software is unlocked and the term commences. The license period typically is one year or less. Along with the license a di minimis amount of customer support is provided to assist the customer with the software. Should the customer need more than a di minimis amount of support they can choose to enter into a separate contract for additional training. Most software is installed on our customers servers and the Company has no control of the software once the sale is made. For certain software arrangements the Company hosts the licenses on servers maintained by the Company, revenue for those arrangements are accounted as Software as a Service over the life of the contract. These arrangements are a small portion of software revenues of the Company.	Payments are generally due upon invoicing on a net 30 basis unless other payment terms are negotiated with the customer based on customer history. Typical industry standards apply.
Consulting Contracts: Consulting services provided to our customers are generally recognized over time as the contracts are performed and the services are rendered. The company measures its consulting revenue based on time expended compared to total estimated hours to complete a project. The Company believes the methods chosen for its contract revenue best depicts the transfer of benefits to the customer under the contracts.	Payment terms vary, depending on the size of the contract, credit history and history with the client and deliverables within the contract.
Consortium Member Based Services: The performance obligation is recognized on a time elapsed basis, by month, for which the services are provided, as the Company transfers control evenly over the contractual period.	Payment is due at the beginning of the period, generally on a net 30 or 60 basis.

14

Remaining performance obligations that do not fall under the expedients require the Company to perform various consulting and software development services and consortium memberships of approximately $3,900,000. It is anticipated these revenues will be recognized within the next two and ½ years.

Contract liabilities

During the three months and six months period ended February 29, 2020 the Company recognized $338,000 and $773,000 of revenue that was included in contract liabilities as of August 31, 2019.

Disaggregation of Revenues

	Three Months Ended February 29, 2020		Six Months Ended February 29, 2020
Disaggregation of Revenues:
Software licenses
Point in time	$	5,130,998	$	9,493,795
Over time		253,491		504,292
Consulting services
Over time		4,965,374		9,752,881
Total Revenue	$	10,349,863	$	19,750,968

NOTE 4: Property and Equipment

Property and equipment as of February 29, 2020 consisted of the following:

Equipment	$	744,126
Computer equipment		482,454
Furniture and fixtures		160,990
Leasehold improvements		110,165
Sub total		1,497,735
Less: Accumulated depreciation and amortization		(1,162,437	)
Net Book Value	$	335,298

NOTE 5: 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 started in FY 2018. In September 2018, $1,556,644 was paid out under the first earn-out payment, a second earn-out payment was made in August 2019 in the amount of $1,682,329. It is estimated that a final payment of approximately $1,761,028 will be paid in August 2020.

As of February 29, 2020 and August 31, 2019 the following liabilities have been recorded:

	February 29, 2020		August 31, 2019
Working Capital Liability	$	–	$	–
Holdback Liability		–		–
Earn-out Liability		1,761,028		1,761,028
Sub Total	$	1,761,028	$	1,761,028
Less: Current Portion		1,761,028		1,761,028
Long-Term	$	–	$	–

15

NOTE 6: 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 expired in October 2018; and was renewed for a three-year option to extending it to October 2021. The new base rent is $16,147 per month.

In September 2017 DILIsym service 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 initial base rent is $3,975 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 February 29, 2020, and February 28, 2019 was $149,928 and $144,763, respectively, and $294,693 and $288,775 for the six months ended February 29, 2020 and February 28, 2019, respectively.

Future minimum lease payments under non-cancelable operating leases with remaining terms of one year or more at February 29, 2020 were as follows:

Years Ending February 28,
2021	$	512,000
2022		145,000
	$	657,000

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 Dassault Systèmes Americas Corp. 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. We incurred royalty expense of $58,131 and $53,461, respectively, and for the three months ended February 29, 2020 and February 28, 2019, respectively and $111,441 and $91,571 for the six months ended February 29, 2020 and February 28, 2019, 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 $2,531 for fiscal year 2019. We file income tax returns with the IRS and various state jurisdictions and India. Our federal income tax returns for fiscal years 2016 through 2018 are open for audit, and our state tax returns for fiscal year 2015 through 2018 remain open for audit. In addition, certain elements of prior tax years, such as R&D credits, may remain open and may be subject to future audit.

16

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

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

NOTE 7: SHAREHOLDERS’ EQUITY

Dividend

The Company’s Board of Directors declared cash dividends during fiscal years 2020 and 2019. The details of the dividends paid are  in the following tables:

FY2020
Record Date	Distribution Date	Number of Shares Outstanding on Record Date		Dividend per Share		Total Amount
10/25/2019	11/01/2019		17,606,314	$	0.06	$	1,056,379
1/27/2020	2/03/2020		17,645,639	$	0.06		1,058,740
Total						$	2,115,119

FY2019
Record Date	Distribution Date	Number of Shares Outstanding on Record Date		Dividend per Share		Total Amount
11/01/2018	11/08/2018		17,417,875	$	0.06	$	1,045,073
1/25/2019	2/1/2019		17,481,450	$	0.06		1,048,887
4/24/2019	5/1/2019		17,515,228	$	0.06		1,050,914
7/25/2019	8/1/2019		17,536,454	$	0.06		1,052,181
Total						$	4,197,055

Stock Option 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 February 29, 2020, employees and directors hold stock options to purchase 1,251,564 shares of common stock at exercise prices ranging from $6.75 to $38.81.

The following table summarizes information about stock options:

Transactions in FY20	Number of Options			Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Life
Outstanding, August 31, 2019		1,163,259		$	12.63		7.13
Granted		168,500		$	33.51
Exercised		(52,360	)	$	7.75
Cancelled/Forfeited		(27,835	)	$	13.04
Expired		–		$	–
Outstanding, February 29, 2020		1,251,564		$	15.64		7.11
Exercisable, February 29, 2020		651,889		$	10.00		6.02

17

The weighted-average remaining contractual life of options outstanding issued under the Plan, both Qualified ISO and Non-Qualified SO, was 7.11 years at February 29, 2020. The total fair value of non-vested stock options as of February 29, 2020 was $6,712,000 and is amortizable over a weighted average period of 3.59 years.

 The fair value of these options was estimated at the date of grant using the Black-Scholes option-pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which do not have vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because our stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options.

The following table summarizes the fair value of the options, including both ISOs and NQSOs, granted during the current fiscal year 2020 and fiscal year 2019:

	YTD FY 2020		FY 2019
Estimated fair value of awards granted	$	1,851,815	$	1,928,820
Unvested Forfeiture Rate		0%		6.20%
Weighted average grant price	$	33.51	$	22.78
Weighted average market price	$	33.51	$	22.69
Weighted average volatility		32.13%		31.61%
Weighted average risk-free rate		1.69%		2.59%
Weighted average dividend yield		0.72%		1.10%
Weighted average expected life		6.68 years		6.64 years

The exercise prices for the options outstanding at February 29, 2020 ranged from $6.75 to $38.81, 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
$	6.75	$	8.00		192,353		4.52 years	$	6.84		192,353		4.52 years	$	6.85
$	8.01	$	16.00		602,161		6.54 years	$	9.97		401,606		6.47 years	$	9.92
$	16.01	$	24.00		241,550		8.30 years	$	20.68		57,930		7.86 years	$	21.00
$	24.01	$	38.81		215,500		9.66 years	$	33.67		0		0 years	$	0
					1,251,564		7.11 years	$	15.64		651,889		6.02 years	$	10.00

During the three and six-month periods ended February 29, 2020, the company issued 2,225 and 4,270 shares of stock to non-management directors of the Company valued at $72,490 and $144,903 respectively as compensation for services rendered to the Company.

NOTE 8: 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 February 29, 2020 the Company had cash and cash equivalents exceeding insured limits by $10,985,000.

18

Revenue concentration shows that international sales accounted for 33% and 38% of net sales for the six months ended February 29, 2020 and February 28, 2019, respectively. Three customers accounted for 7%, 6% (a dealer account in Japan representing various customers), and 6% of net sales during the six months ended February 29, 2020. Three customers accounted for 10%, 8%, and 6% (a dealer account in Japan representing various customers) of net sales during the six months ended February 28, 2019.

Accounts receivable concentration shows that four customers comprised 10% (a dealer account in Japan representing various customers), 5%, 5%, and 5% of accounts receivable at February 29, 2020, compared to four customers comprised 8% (a dealer account in Japan representing various customers), 7%, 5%, and 5% of accounts receivable at February 28, 2019.

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 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 9: 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 February 29, 2020 and February 28, 2019 (in thousands, because of rounding numbers may not foot):

Three months ended February 29, 2020
	Lancaster		Buffalo		North Carolina		Eliminations			Total
Net revenues	$	5,904	$	2,750	$	1,696	$	–		$	10,350
Income (loss) from operations		2,004		276		546		–			2,826
Total assets		42,881		10,465		13,555		(17,702	)		49,199
Capital expenditures		9		20		13		–			42
Capitalized software costs		573		16		31		–			620
Depreciation and amortization		435		89		151		–			675

Three months ended February 28, 2019
	Lancaster		Buffalo		North Carolina		Eliminations			Total
Net revenues	$	5,008	$	2,292	$	1,172	$	–		$	8,471
Income (loss) from operations		1,963		402		365		–			2,730
Total assets		36,231		9,973		14,859		(17,702	)		43,361
Capital expenditures		1		17		14		–			32
Capitalized software costs		494		36		45		–			575
Depreciation and amortization		464		89		144		–			697

Six months ended February 29, 2020
	Lancaster		Buffalo		North Carolina		Eliminations			Total
Net revenues	$	10,830	$	5,137	$	3,784	$	–		$	19,751
Income (loss) from operations		3,907		316		1,322		–			5,545
Total assets		42,881		10,465		13,555		(17,702	)		49,199
Capital expenditures		17		41		15		–			73
Capitalized software costs		1,030		36		61		–			1,127
Depreciation and amortization		870		175		300		–			1,345

19

Six months ended February 28, 2019
	Lancaster		Buffalo		North Carolina		Eliminations			Total
Net revenues	$	9,373	$	4,357	$	2,278	$	–		$	16,008
Income (loss) from operations		3,570		706		541		–			4,817
Total assets		36,231		9,973		14,859		(17,702	)		43,361
Capital expenditures		3		17		14		–			33
Capitalized software costs		784		66		90		–			940
Depreciation and amortization		926		180		286		–			1,393

In addition, the Company allocates revenues to geographic areas based on the locations of its customers. Geographical revenues for the three months and six months ended February 29, 2020 and February 28, 2019 were as follows (in thousands, because of rounding numbers may not foot):

Three months ended February 29, 2020
	North & South America		Europe		Asia		Total
Lancaster	$	2,607	$	1,610	$	1,687	$	5,904
Buffalo		2,750		–		–		2,750
North Carolina		1,469		126		101		1,696
Total	$	6,826	$	1,736	$	1,788	$	10,350

Three months ended February 28, 2019
	North & South America		Europe		Asia		Total
Lancaster	$	2,075	$	1,762	$	1,171	$	5,008
Buffalo		2,292		–		–		2,292
North Carolina		971		136		65		1,172
Total	$	5,338	$	1,898	$	1,236	$	8,472

Six months ended February 29, 2020
	North & South America		Europe		Asia		Total
Lancaster	$	5,153	$	2,757	$	2,920	$	10,830
Buffalo		5,137		–		–		5,137
North Carolina		3,206		451		126		3,784
Total	$	13,496	$	3,208	$	3,046	$	19,751

Six months ended February 28, 2019
	North & South America		Europe		Asia		Total
Lancaster	$	4,187	$	2,710	$	2,476	$	9,373
Buffalo		4,357		–		–		4,357
North Carolina		1,716		187		375		2,278
Total	$	10,260	$	2,897	$	2,851	$	16,008

20

NOTE 10: 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 $109,304 and $91,999 for the three months ended February 29, 2020 and February 28, 2019, respectively and $201,671 and $178,938 for the six months ended February 29, 2020 and February 28, 2019 respectively.

NOTE 11 - SUBSEQUENT EVENTS:

Dividend Declared

On April 7, 2020, our Board of Directors declared a quarterly cash dividend of $0.06 per share to our shareholders. The dividend will be distributed on Friday, May 1, 2020, for shareholders of record as of Friday, April 24, 2020.

Acquisition of Subsidiary – Lixoft of Paris, France

On March 31, 2020, Simulations Plus, Inc., a California corporation (the “Company”) entered into a Share Purchase and Contribution Agreement (the “Purchase Agreement”) with the owners of Lixoft, a French société par actions simplifiée (the “Transferors”) whereby the Company shall acquire 100% of the equity interests of Lixoft from the Transferors on a debt-free basis which shall result in Lixoft becoming a wholly-owned subsidiary of the Company (the “Transaction”).

As consideration for the Transaction, the Company shall provide up to US$16,500,000 in aggregate consideration to the Transferors consisting of two-thirds (2/3) cash and one-third (1/3) in newly issued shares of restricted common stock of the Company (the “Shares”), as follows:

· US$11,000,000 shall be issued at closing (the “Closing Consideration”) consisting of:

o US$7,333,333 in cash; plus

o US$3,666,667 in Shares

· Up to US$5,500,000 issuable in connection with future earnout payments (2/3 cash and 1/3 Shares) (the “Earnout Consideration”):

o Number of Shares to be determined by the volume-weighted average price of the Company’s common stock for the thirty (30) trading days immediately preceding each earnout reference date;

o Subject to customary exchange rate provisions defining an acceptable range of USD/EUR exchange rate fluctuation;

o Payable in two installments: 12 months and 24 months after closing if and to the extent certain year-over-year performance thresholds are met

A portion of the Closing Consideration, totaling US$2,000,000 (2/3 in cash and 1/3 in Shares), shall be held back (with the Shares being held in an escrow account) against any indemnification claims by the Company for a period of 24 months after the closing of the Transaction.

In addition, at closing, the cash consideration at closing payable to Transferors will be increased by the amount by which Lixoft’s cash on hand exceeds US$150,000, which amount the Company estimates to be approximately US$3,600,000 (“Excess Cash”), and reduced by the amount of Lixoft’s indebtedness and transaction expenses at closing. The aforementioned consideration is subject to adjustment in the event certain working capital targets differ from working capital at closing.

The Shares issued in the Transaction shall not have registration rights and may not be sold for a period of two years after closing of the Transaction.

Lixoft shall be responsible for all taxes relating to all periods prior to and up to the closing of the Transaction. Certain members of senior management of Lixoft have agreed to remain employed and/or consulting with the Company for a period of three years after the closing of the Transaction and shall enter into customary employment/consulting arrangements, including non-competition and non-solicitation provisions for such period.

On April 1, 2020, the Company consummated the acquisition of 100% of the equity interests of Lixoft pursuant to the terms of the Purchase Agreement, with Lixoft becoming a wholly-owned subsidiary of the Company.

21

Under the terms of the Purchase Agreement, on April 1, 2020 the Company paid the Transferors cash in the amount of US$9,460,000, consisting of the cash Closing Consideration, plus Excess Cash, less the cash portion of the holdback consideration (described below) and the issuance of $3,666,667 worth shares of the Company’s common stock (111,682 shares of the Company’s common stock valued at approximately US$32.79 per share based upon the volume-weighted average price (the “Average Price”) of the Company’s shares of common stock for the thirty (30)-consecutive-trading-day period ending two trading days prior to April 1, 2020), of which 20,326 shares of the Company’s common stock were issued to an escrow account as holdback consideration. The Purchase Agreement provides for a two-year market stand-off period in which the newly-issued shares may not be sold by the recipients thereof.

As described above, a portion of the consideration paid at closing to the Transferors, totaling US$2,000,000, shall be held back against any indemnification claims by the Company for a period of 24 months after the closing of the Transaction. At the release date, subject to any offsets, the $2,000,000 in holdback consideration will be released, comprised of cash in the amount of US$1,333,333.33 and the release of US$666,666.67 worth of shares of the Company’s common stock from escrow (20,326 shares based on the original Average Price of approximately US$32.79).

Outbreak of the COVID-19 illness

An outbreak of a new strain of coronavirus, COVID-19, occurred in China in December 2019 and has spread around the world. The Center for Disease Control (CDC) has recognized this outbreak as a pandemic which has caused shutdowns to businesses and cities worldwide while disrupting supply chains, business operations, travel, consumer confidence, and business sentiment. The situation is ever evolving and its effects both short-term and long-term remain unknown. The majority of significant economic disruption experienced by businesses worldwide have occurred subsequent to our recent fiscal quarter ended February 29, 2020. The extent to which the COVID-19 outbreak impacts our results will depend on future developments that are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of the virus and the actions to contain its impact. The Company is in the process of monitoring and assessing the effect of the COVID-19 outbreak.

Line of Credit

On March 31, 2020, the Company entered into an agreement for a $3.5 million dollar line of credit with a bank, secured by the assets of the Company. Interest is due monthly at either (i) the bank’s base rate(prime), or (ii) a fixed rate per annum rate at LIBOR + 1.75% at the company’s discretion. Amounts outstanding under the agreement are due and payable April 15, 2022.

22

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 drug discovery and development software for mechanistic modeling and simulation, and for machine-learning-based prediction of properties of molecules solely from their structure. 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 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.

23

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 consulting services to guide early drug discovery (molecule design and screening), preclinical, and clinical development programs. They also use our software products and services 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.

Simulations Plus acquired Cognigen Corporation (Cognigen) as a wholly owned subsidiary in September 2014. Cognigen was originally incorporated in 1992. Through the integration of Cognigen into Simulations Plus, Simulations Plus became 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.

Simulation Plus acquired DILIsym Services, Inc. (DILIsym) as a wholly owned subsidiary in June 2017. The acquisition of DILIsym positions the Company as the leading provider of Drug Induced Liver Injury (DILI) modeling and simulation software and related scientific consulting 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™. 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. Since the acquisition, DILIsym has applied its mechanistic modeling resources in other disease areas including idiopathic pulmonary fibrosis (IPF) and others.

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™); a program which is designed for rapid analysis and regulatory submissions of pharmacokinetic data called PKPlus™; and a program called KIWI™ from our Cognigen division that provides an integrated platform for Nonmem 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. In May 2019, we were pleased to announce the Pharmaceuticals and Medical Devices Agency (PMDA) in Japan added licenses to the GastroPlus software suite.

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 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.

24

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 Dosage 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, with primary tasks completed in September 2018. Additional functionality was further requested by the FDA, and a new funded contract was awarded for the 2018-19 period.

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 was completed in September 2018, with further extensions under consideration with the FDA and/or large pharmaceutical company sponsor(s).

In September 2018, we were pleased to announce that we were awarded another funded RCA by the FDA to integrate drug product quality attributes into the mechanistic TCAT model in GastroPlus. This grant award, for $250,000 per year for up to two years, will focus on the incorporation of drug product quality attributes into dermal physiologically based pharmacokinetic (PBPK) models developed for dermatological topical dosage forms and transdermal delivery systems.

In July 2018 we entered into a one-year funded research collaboration with a large European consortium to further develop and validate the mechanistic Transdermal Compartmental Absorption and Transit (TCAT™) model in GastroPlus. This project will contribute substantially to improvements in the program, specifically directed toward the predictions of local exposure within the skin layer following topical administration of various chemicals. We expect the developments under this agreement will aid companies and regulatory agencies as they strive to implement an animal-free chemical safety assessment program.

In addition to the two active funded efforts with the FDA described above, we also have two unfunded RCAs with the FDA: one with the Office of Generic Drugs (OGD) that began in 2014, and one announced in July 2019 with the Center for Veterinary Medicine (CVM). With OGD, the objective 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. With CVM, the objective is to use GastroPlus, with in vitro and in vivo data, to investigate how bioequivalence (BE) of non-systemically absorbed products can be evaluated in canines without the need for clinical endpoint trials.

In September 2019, we entered into a new funded collaboration with a clinical-stage biotechnology company to develop an intra-articular (IA) delivery model in the GastroPlus® Additional Dosage Routes Module. This collaboration will enhance the GastroPlus physiologically based biopharmaceutics (PBBM)/PBPK model for drug dosing into joints through IA injection products and incorporate a mechanistic model for different species and population groups that will allow for efficient evaluation of IA injection strategies.

In October 2019, we entered into a new funded collaboration with a large pharmaceutical company to develop the Virtual Bioequivalence (BE) Trial Simulator™ in GastroPlus. This collaboration will enhance the GastroPlus PBBM /PBPK platform to evaluate population and formulation variability on the BE of different products. We intend to improve virtual BE trial simulation methodologies and efficiently address regulatory concerns as model results are reviewed.

In November 2019, we entered into a new funded collaboration with a large pharmaceutical company to modify the mechanistic oral absorption (ACAT™) model in GastroPlus to support gastrointestinal disease research. This collaboration will enhance and advance understanding of local drug disposition in the gut tissue and improve the accuracy of drug concentration predictions to assist with the development of new therapies for gastrointestinal diseases.

25

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 PBBM/PBPK modeling, 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. We work to release updated versions of the program on an ongoing basis. In June 2019, we released Version 9.7 of GastroPlus. This version adds a number of important new capabilities, including improvements to population simulations, dissolution, absorption, PBPK models, and drug-drug interactions, among others.

· The ability to add lysosomal trapping effect to PBPK tissues

· New mechanistic pregnancy PBPK model (with fetus compartment)

· Additional solubility inputs for different drug forms (crystalline, amorphous)

· New models of standard compounds (substrates/inhibitors/inducers) in DDI Module

· Expanded fed state conditions based on meal type

· New ability to allow different tissue model types (perfusion- or permeability-limited) between parent and metabolites or victim perpetrator in metabolite tracking/DDI simulations

· PK-PD model additions to PKPlus Module

· Updates to the dermal absorption (TCAT) model through Cosmetics Europe project

· New effect of immune response with intramuscular injection models

· Updated default populations for extensive, intermediate, and poor metabolizers based on specific genotypes

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, (3) design in vitro dissolution experiments to better mimic in vivo (animal and human) conditions, and (4) justify product specifications. Version 6.0 of DDDPlus was released in January 2019 and offers a series of new capabilities, including:

· simulation of the in vitro dissolution of long-acting injectable dosage forms (funded by the FDA grant supporting GastroPlus development)

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

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

· ability to fit models from precipitation experiments

· new dissolution apparatus models

· improved output reporting

MembranePlus™

Similar to DDDPlus, MembranePlus mechanistically simulates laboratory experiments, but in this case, the experiments are for measuring permeability or clearance of drug-like molecules through various membranes, including several different standard cell cultures (Caco-2, MDCK), as well as hepatocytes. The value of such simulations derives from the fact that when 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 or clearance mechanisms in human and animals.

PKPlus™

In August 2016, we released a 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 NCA as well as providing limited support for compartmental PK modeling.

26

PKPlus version 2.5 was released in July 2019. This new version incorporates a wide variety of requested features from current users, including:

· Import CDISC SEND packages with PC domain as source data

· Improved command line functionality

· 64-bit system optimization for improved performance

· Streamlined auto-reports

· Additional workflow refinements

Starting with version 2.0, we provide PKPlus for free to academics because we believe it will help educate the next generation of scientists entering the industries we serve and drive demand for the product. Hundreds of copies of PKPlus have been downloaded by universities around the world to date.

In November 2019, we entered into a new funded collaboration with a large pharmaceutical company to enhance the PKPlus software. Following a rigorous evaluation of multiple commercial offerings, our partner selected PKPlus as the pharmacokinetics/toxicokinetics (PK/TK) modeling program to support the internal data platform that connects their global teams. Our objectives for this project will be to design the next-generation engine that automates the import and mapping of data, selection of calculation templates, and generation of reports within a streamlined, validated system.

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 uses machine learning technology to predict 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 been 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.

27

Version 9.5 was released in April 2019, adding:

· Novel approaches to calculate uncertainty estimates on all regression models

· New machine learning models for important metabolism and transporter endpoints

· New machine learning models for AMES mutagenicity, a primary toxicity endpoint required during risk assessment

· New Structure Sensitivity Analysis visualization tool to easily map atom-level contributions to model predictions

· Improved rat-specific models to more accurately inform HTPK Simulation predictions

· Improved Pipeline Pilot and KNIME components to extend deployment options and enterprise support for ADMET Predictor

· Updates to output displays in MedChem Designer™

We have made significant investments in two key areas with recent versions: improving integration of our top-ranked ADMET Predictor and GastroPlus models to leverage our novel ‘Discovery PBPK’ approaches for chemists and safety researchers, and further enhancing our best-in-class machine learning engine to assist with drug discovery. Recent publications from pharmaceutical and chemical companies describing how they have leveraged our ‘Discovery PBPK’ methods to guide lead optimization and risk assessment illustrate how our unique offerings provide substantial value in these spaces.

In April 2019, we were pleased to announce the U.S. Food and Drug Administration’s (FDA) Center for Tobacco Products procured a 15-user license to the ADMET Predictor software suite. The purchase was made to support research projects aimed at informing regulatory decision making.

In December 2019, we entered into a new collaboration agreement with Bayer AG to advance our ADMET Predictor machine learning software for use within integrated drug discovery workflows by developing improved structure and tautomer handling capabilities that will support data integrity across the different discovery platforms.

Potential new markets for artificial intelligence (machine learning)

We are currently investigating applications of our sophisticated artificial intelligence (machine-learning) engine.

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.

MedChem Designer™

MedChem Designer 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 31,000 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 which provides a single number that instantly compare the effects of different structural changes in many dimensions. 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.

28

MedChem Studio™

The MedChem Studio Module in ADMET Predictor 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.

While MedChem Designer can be used to refine a small number of molecules, the MedChem Studio Module can be used to create and screen 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.

KIWI™

Drug development programs rely increasingly on modeling and simulation analyses to support decision-making and submissions to regulatory agencies. To ensure high-quality reproducible analyses, organizations must not only apply high-quality scientific methods, but must also be able to support the science with validated results. KIWI is a cloud-based web application that was developed to efficiently organize, process, maintain, and communicate data and results generated by pharmacometricians 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 regularly 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.

We release new versions of the program on a regular basis. KIWI Version 2 was released in December 2017, KIWI 3 was released in August 2018, and in 2019 Q1, an enhanced editor and grouping of visualizations for easy replication was added, resulting in streamlined model development.

KIWI 4 was released in June 2019, including a Model Wizard and Covariate Analysis toolset; these new modules aim to significantly reduce the time spent creating models, correcting errors, and replicating program files for performing initial model development steps and stepwise covariate analyses, allowing pharmacometricians to focus on interpretation of findings and implications for next steps. With continued feedback from KIWI license holders, various visualizations within KIWI 4 and the pharmacometric-specific Data Repository continue to be updated with new features and functionality.

In November 2019, a new feature release of KIWI 4 was deployed, including incremental modifications to the existing KIWI functionality to improve graph appearance in both the Visualize and Explore modules and introducing kiwiConnect, an R-based API to improve interaction and interconnectivity between R and KIWI. In February 2020, a major update to the Oracle database infrastructure for KIWI was completed, including new hardware, additional storage, and increased bandwidth.

29

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.

Version 8A of the DILIsym software was released in January of 2019. This version is again delivered as 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:

· 10 New validation compounds

· New Cholestatic liver injury mechanism

· New Oxidative stress (ROS) NRF2 adaptation response framework

· New Human SimPops with variability in bilirubin processing pathways

· New Liver injury biomarker GLDH

· Live DILIsym documentation website updated with new training resources

DILIsym version X is expected to be released in summer of 2020. DILIsym X will be completely refactored into a much faster and more user friendly software tool.

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 (NAFLD/NASH) by excess fat, fibrosis, and inflammation, 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. NAFLDsym version 2A was released in the summer of 2019 for licensing and consulting use. The software now includes the three most important components of NAFLD/NASH: steatosis, inflammation, and fibrosis, along with a host of other important updates.

RENAsym

Where DILIsym is used to investigate the likelihood that a known drug molecule would cause injury to the liver, RENAsym will be focused on investigating and predicting drug-induced kidney injury, or acute kidney injury (AKI). RENAsym will be another “shrink wrap” software product, usable across many companies and drug development projects. The software will utilize predictions of drug exposure in the kidney from PBPK platforms such as GastroPlus, along with in vitro data related to certain kidney injury mechanisms, to make predictions. The first expected release of RENAsym will be available in summer of 2021. The initial development is being funded via an NIH small business grant.

IPFsym

IPFsym is a software tool that will investigate the likelihood that various molecules might provide beneficial therapeutic benefits to treat or cure idiopathic pulmonary fibrosis (IPF). IPFsym, like NAFLDsym, 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. IPFsym is targeted for release for licensing and consulting use sometime in 2021. The software will include the most important mechanisms of IPF and will be closely coupled with GastroPlus for drug concentration predictions within the lungs.

30

In January 2019 DILIsym Services and Simulations Plus entered into a two-year, $2.7 million collaboration with a large pharmaceutical company on the development of a new Quantitative Systems Pharmacology (QSP) model that will provide the ability to predict the efficacy of drugs being developed to treat idiopathic pulmonary fibrosis (IPF). Part of this funding will go towards expansion of GastroPlus to improve the predictions of compound exposure upon inhalation of drugs.

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 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.

Currently we are entering year four of 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 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 80-100 drug projects per year. Traditionally, the model-based analysis of clinical trial data was different from the modeling analysis offered by GastroPlus or our quantitative systems toxicology/pharmacology software (DILIsym and NAFLDsym); 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 support safety and efficacy decisions, first-in-human estimations, formulation optimization, and drug-drug interaction assessments. Beginning in 2014, the U.S. FDA and other regulatory agencies began to emphasize the need to push mechanistic PBPK modeling and simulation into clinical pharmacology, with final guidance documents completed in 2018, and we have seen the benefit of having our clinical pharmacology teams across all three divisions working together to achieve this goal.

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, pursuant to which a small royalty is paid based on revenues on each license for the Metabolism Module in ADMET Predictor.

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 $2,300,000 compared to the royalty payments that would have been paid to TSRL if paid consistent with past practices.

31

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 100 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 by sales and marketing staff and 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 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.

PRODUCTION

Our pharmaceutical software products are designed and developed by our development teams in California, North Carolina (Research Triangle Park), and New York (Buffalo), we also employee people who are able to 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 PKPlus software product competes with one major and a few minor software programs. 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 and scientific consulting service providers, but also with the in-house development and scientific consulting 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 remain a focus of our marketing strategy.

32

Based on our technical knowledge and expertise, the Company is strategically placed to offer modeling and simulation consulting services to companies. Our clients seek out our services for multiple reasons: (1) to acquire scientific, therapeutic area related or modeling expertise that they do not have in-house, (2) to address an excess of modeling and simulation requirements beyond the capacity of in-house resources, (3) to fulfill their modeling requirements more efficiently than they could do in-house, and (4) to utilize our software when they do not have the in-house expertise to do so. We apply our software and assist companies in such areas as: physiologically based pharmacokinetic modeling (PBPK), pharmacokinetic/pharmacodynamic (PK/PD) data analysis; and quantitative systems pharmacology/toxicology (QSP/T). We compete against numerous service providers, ranging from departments within large contract research organizations (CROs) to independent consulting organizations of various sizes as well as individual consultants.

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,(2) develop and maintain a proprietary database of results of physical experiments that serve as a basis for simulated studies and empirical models, (3) continue to attract and retain a highly skilled scientific and engineering team, (4) aggressively promote our products and services to our global market, and (5) 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 both our pharmaceutical software and services business.

Results of Operations

Comparison of Three Months Ended February 29, 2020 and February 28, 2019.

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
	2/29/20					2/28/19
Net revenues	$	10,350		100.0%		$	8,472		100.0%
Cost of revenues		2,666		25.8			2,208		26.1
Gross profit		7,684		74.2			6,264		73.9
Selling, general and administrative		4,110		39.7			2,809		33.2
Research and development		748		7.2			724		8.5
Total operating expenses		4,858		46.9			3,533		41.7
Income from operations		2,826		27.3			2,730		32.2
Other income (expense)		10		0.1			(35	)	(0.4	)
Income from operations before taxes		2,836		27.4			2.696		31.8
Benefit (Provision for) for income taxes		(686	)	(6.6	)		(596	)	(7.0	)
Net income	$	2,150		20.8%		$	2,099		24.8%

Net Revenues

Consolidated net revenues increased by 22.2% or $1.88 million to $10.3 million in the second fiscal quarter of Fiscal Year 2020 (“2QFY20”) from $8.47 million in the second fiscal quarter of Fiscal Year 2019 (“2QFY19”). Changes by division are as follows:

· Lancaster: $895,000 increase, representing a 17.9% increase to $5.9 million

· Buffalo (Cognigen): $458,000 increase, representing a 20% increase to $2.75 million

· North Carolina (DILIsym): $525,000 increase, representing a 44.8% increase to $1.7 million

33

Consolidated software and software-related sales increased $629,000 or 13.2%, while consolidated consulting and analytical study revenues increased $1.25 million or 33.6% over 2QFY19.

Cost of Revenues

Consolidated cost of revenues increased by $459,000, or 20.8%, in 2QFY20 to $2.67 million from $2.21 million in 2QFY19. Labor-related cost increased by $329,000, a combination of increased labor count, and salary increases. Direct contract expenses increased by $153,000 this fiscal quarter compared to the prior year due to increased testing and subcontractor costs in the period.

Cost of Revenues as a percentage of revenues decreased by .30% in 2QFY20 to 25.8% as compared to 26.1% in 2QFY19, due to higher sales.

Gross Profit

Consolidated gross margin increased $1.4 million or 22.7%, to $7.68 million in 2QFY20 from $6.26 million in 2QFY19. The Lancaster division’s gross margin increased $888,000 or 21.3%, resulting in an 85.7% gross margin percentage. The Buffalo division’s gross margin increased $172,000 or 13.9%, resulting in a gross margin percentage of 51.2%. DILIsym of North Carolina showed an increase in gross margin of $361,000 or 42.1%, resulting in a gross margin of 71.7%

Overall gross margin as a percentage of revenue increased by .32% to 74.2% in 2QFY20 from 73.9% in 2QFY19.

Selling, General and Administrative Expenses

Selling, general, and administrative (SG&A) expenses increased $1,302,000, or 46.3% to $4.11 million in 2QFY20 from $2.81 million in 2QFY19. As a percent of revenues, SG&A was 39.7% for 2QFY20, compared to 33.2% in 2QFY19.

The major increases in SG&A expense were:

o Selling expenses, including commissions and advertising, increased $91,000.

o Legal and consulting fees increased $300,000 due to services related to an acquisition.

o G&A Salaries and Wages increased by $476,000; this increase is a combination of increased stock compensation costs, annual salary increases, 401k expense, and increased head count. Payroll tax increased $132,000.

o Corporate Travel Expense increased $47,000. Contract Labor increased $169,000 related to outsourced services and Director compensation.

o Insurance Expense increased $64,000; mostly health-related medical costs due to cost increases and higher employee counts.

The major decreases in SG&A expense were:

o Accounting expenses decreased $84,000.

Research and Development

Total research and development cost increased $68,000 in 2QFY20 compared to 2QFY19. In 2QFY20 we incurred approximately $1,368,000 of research and development costs, of this amount, $620,000 was capitalized and $748,000 was expensed. In 2QFY19 we incurred approximately $1,299,000 of research and development costs, of this amount, $575,000 was capitalized and $724,000 was expensed.

Income from operations

Income from operations increased $96,000 or 3.5% in 2QFY20 compared to 2QFY19.

·	Lancaster	Increased $40,000 or 2.0%
·	Buffalo	Decreased $125,000 or 31.2%
·	No. Carolina	Increased $181,000 or 49.5%

34

Provision for Income Taxes

The provision for income taxes was $686,000 for 2QFY20 compared to $596,000 for 2QFY19. Our effective tax rate increased 2.07% to 24.2% in 2QFY20 from 22.1% in 2QFY19.

Net Income

Net income increased by $51,000, or 2.4%, in 2QFY20 to $2.15 million from $2.1 million in 2QFY19.

Comparison of Six Months Ended February 29, 2020 and February 28, 2019

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):

	Six Months Ended
	2/29/20					2/28/19
Net revenues	$	19,751		100.00%		$	16,008		100.00%
Cost of revenues		5,309		26.9			4,407		27.5
Gross profit		14,442		73.1			11,601		72.5
Selling, general and administrative		7,623		38.6			5,530		34.5
Research and development		1,274		6.5			1,254		7.8
Total operating expenses		8,897		45.0			6,784		42.4
Income from operations		5,545		28.1			4,817		30.1
Other income		25		.13			(100	)	(0.6	)
Income from operations before taxes		5,570		28.2			4,717		29.5
Benefit (Provision for) for income taxes		(1,361	)	(6.9	)		(1,082	)	(6.8	)
Net income	$	4,209		21.3%		$	3,635		22.7%

Net Revenues

Consolidated net revenues increased by $3.74 million or 23.4% to $19.75 million in the first six months of Fiscal Year 2020 “6moFY20”) from $16.01 million in the first six months of Fiscal Year 2019 (“6moFY19”). Changes by division are as follows:

· Lancaster: $1.46 million increase, representing a 15.5% increase to $10.83 million

· Buffalo (Cognigen): $780,000 increase, representing a 17.9% increase to $5.14 million

· North Carolina (DILIsym): $1.51 million increase, representing an 66.1% increase to $3.78 million

Consolidated software and software-related sales increased $1.16 million or 13.1%, while consolidated consulting and analytical study revenues increased $2.58 million or 36% over 6moFY19.

Cost of Revenues

Consolidated cost of revenues increased by $902,000, or 20.5%, in 6moFY20 to $5.31 million from $4.41 million in 6moFY19. Labor-related costs accounted for $658,000 of this increase. Other significant increases in cost of revenues included an additional $361,000 of direct contract costs. During the period software amortization decreased by approximately $56,000.

Cost of Revenues as a percentage of revenue decreased by 0.7% in 6moFY20 to 26.9% as compared to 27.5% in 6moFY19.

35

Gross Profit

Consolidated gross margin increased $2.84 million or 24.5%, to $14.44 million in 6moFY20 from $11.60 million in 6moFY19. The Lancaster division’s gross margin increased $1.53 million or 19.9%, resulting in a gross margin percentage of 85.3%. The Buffalo division’s gross margin increased $193,000 or 8.3%, resulting in a gross margin percentage of 49.2%, and DILIsym of North Carolina showed an increase in gross margin of $1.12 million or 71.7%, resulting in a 70.7% gross margin percentage.

Overall gross margin as a percentage of revenue increased by 0.7% to 73.1% in 6moFY20 from 72.5% in 6moFY19.

Selling, General and Administrative Expenses

Selling, general, and administrative (SG&A) expenses increased $2.09 million, or 37.9% to $7.62 million in 6moFY20 from $5.53 million in 6moFY19. As a percent of revenues, SG&A was 38.6% for 6moFY20, compared to 34.5% in 6moFY19.

The major increases in SG&A expense were:

o Selling expenses, including commissions expense: $117,000

o Contract labor: $319,000 made up of outsourced services and increased Director compensation program costs

o Legal and consulting fees increased $300,000 due to services related to a potential acquisition

o G&A Salaries and Wages increased by $882,000; this increase is predominantly related to increased head count in Lancaster and Buffalo, increased stock compensation costs, annual salary increases and 401k expenses

o Insurance Expense $136,000; mostly health-related medical costs due to cost increases and higher employee counts

o Payroll tax expense increased $249,000

o Corporate travel increased $93,000

The major decreases in SG&A expense were:

o Accounting costs decreased $47,000

Research and Development

Total research and development cost increased $207,000 in 6moFY20 compared to 6moFY19. In 6moFY20 we incurred approximately $2,401,000 of research and development costs, of this amount, $1,127,000 was capitalized and $1,274,000 was expensed. In 6moFY19 we incurred approximately $2,194,000 of research and development costs, of this amount, $940,000 was capitalized and $1,254,000 was expensed.

Income from operations

Income from operations increased $727,000 or 15.1% in 6moFY20 compared to 6moFY19.

·	Lancaster	Increased $336,000 or 9.4%
·	Buffalo	Decreased $390,000 or 55.3%
·	No. Carolina	Increased $781,000 or 144.5%

Other income (expense)

Other income(expense) was income of $25,000 compared to expense of $100,000 in 6moFY19. This $125,000 difference primarily reflects interest expense.

Provision for Income Taxes

The provision for income taxes was $1,361,000 for 2QFY20 compared to $1,082,000 for 2QFY19. Our effective tax rate increased 1.5% to 24.4% in 1QFY20 from 22.9% in 1QFY19.

Net Income

Net income increased by $573,000, or 15.8%, in 6moFY20 to $4.21 million from $3.64 million in 6moFY19.

36

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.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

As of February 29, 2020 and August 31, 2019, we had cash and cash equivalents of $12.25 million and $11.40 million, respectively. We do not hold any investments that are exposed to market risk due to changes in interest rates, which could adversely affect the value of our assets and liabilities. In addition, 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 six months ended February 29, 2020 and February 28, 2019, we sold $1,506,000 and $2,347,000, and $1,062,000 and $1,871,000, 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 February 29, 2020. 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 February 29, 2020, 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.

37

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, 2019, 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.

Our business is subject to risks arising from epidemic diseases, such as the recent outbreak of the COVID-19 illness.

The recent outbreak of the Coronavirus Disease 2019, or COVID-19, which has been declared by the World Health Organization to be a “public health emergency of international concern,” has spread across the globe and is impacting worldwide economic activity. A public health epidemic, including COVID-19, poses the risk that we or our employees, contractors, suppliers, and other partners may be prevented from conducting business activities for an indefinite period of time, including due to shutdowns that may be requested or mandated by governmental authorities. While it is not possible at this time to estimate the impact that COVID-19 could have on our business, the continued spread of COVID-19 and the measures taken by the governments of countries affected could disrupt the supply chain and adversely impact our business, financial condition or results of operations. The COVID-19 outbreak and mitigation measures may also have an adverse impact on global economic conditions which could have an adverse effect on our business and financial condition. The extent to which the COVID-19 outbreak impacts our results will depend on future developments that are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of the virus and the actions to contain its impact.

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

38

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.
10.11 (11)(†)	Employment Agreement by and between the Company and Shawn O’Connor, dated as of June 26, 2018.
10.12 (12)	Share Purchase and Contribution Agreement Relating to Lixoft, dated as of March 31, 2020.
10.13 (13)	Revolving Line of Credit Note
10.14 (13)	Credit Agreement
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.
(11)	Incorporated by reference to an exhibit to the Company’s Form 10-Q filed July 10, 2018.
(12)	Incorporated by reference to an exhibit to the Company’s Form 8-K filed April 2, 2020.
(13)	Incorporated by reference to an exhibit to the Company’s Form 8-K filed April 3, 2020.

39

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 April 9, 2020.

		Simulations Plus, Inc.
Date:	April 9, 2020	By: /s/ John R Kneisel
		John R. Kneisel
		Chief Financial Officer

40

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: April 9, 2020

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: April 9, 2020

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 February 29, 2020, 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)

April 9, 2020

/s/  John R. Kneisel                                    

John R. Kneisel

Chief Financial Officer

(Principal Financial Officer)

April 9, 2020

(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.)

XML

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

6 Months Ended

Feb. 29, 2020

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, its wholly owned subsidiary, Cognigen Corporation, and as of June 1, 2017, the accounts of DILIsym Services, Inc. All significant intercompany accounts and transactions are eliminated in consolidation.

Estimates

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

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09 and its related amendments regarding Accounting Standards Codification Topic 606 (ASC Topic 606), Revenue from Contracts with Customers. The standard provides principles for recognizing revenue for the transfer of promised goods or services to customers with the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard also provides guidance on the recognition of incremental costs related to obtaining customer contracts. We adopted ASC Topic 606, effective September 1, 2018, utilizing the modified retrospective method. This approach was applied to contracts that were in process as of September 1, 2018, and the corresponding incremental costs of obtaining those contracts, which resulted in a cumulative effect adjustment of $493,279 to the opening balance of retained earnings at the date of adoption. The adoption of this ASU primarily impacts the timing of our revenue recognition for certain sales contracts, the capitalization and amortization of incremental costs of obtaining a contract, and related disclosures. The reported results for fiscal year 2019 reflect the application of ASC Topic 606.

We generate revenue primarily from the sale of software licenses and providing consulting services to the pharmaceutical industry for drug development.

The Company determines revenue recognition through the following steps:

i.	Identification of the contract, or contracts, with a customer
ii.	Identification of the performance obligations in the contract
iii.	Determination of the transaction price
iv.	Allocation of the transaction price to the performance obligations in the contract
v.	Recognition of revenue when, or as, the Company satisfies a performance obligation

Deferred Commissions

Sales commissions earned by our sales force and our commissioned sales representatives are considered incremental and recoverable costs of obtaining a contract with a customer. Sales commissions for new contracts are deferred and then amortized on a straight-line basis over a period of benefit. We determined the period of benefit by taking into consideration our customer contracts, our technology and other factors. Sales commissions for renewal contracts are deferred and then amortized on a straight-line basis over the related contractual renewal period. Amortization expense is included in sales and marketing expenses on the condensed consolidated statements of operations.

We apply the practical expedient in ASC Topic 606 to expense costs as incurred for sales commissions when the period of benefit would have been one year or less. Most of our contracts are of a duration of one year or less, few, if any of the longer-term contracts have commissions associated with them.

Practical Expedients and Exemptions

The Company has elected the following additional practical expedients in applying Topic 606:

• Commission Expense: We apply the practical expedient in ASC Topic 606 to expense costs as incurred for sales commissions when the period of benefit is one year or less. Most of our contracts are of a duration of one year or less, few, if any of the longer term contracts have commissions associated with them.

• Transaction Price Allocated to Future Performance Obligations   ASC 606 requires that the Company disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied as of February 29, 2020. ASC 606 provides certain practical expedients that limit the requirement to disclose the aggregate amount of transaction price allocated to unsatisfied performance obligations.   The Company applied the practical expedient to not disclose the amount of transaction price allocated to unsatisfied performance obligations when the performance obligation is part of a contract that has an original expected duration of one year or less.

Cash and Cash Equivalents

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 $314,003 and $344,714 for the three months ended February 29, 2020 and February 28, 2019, respectively, and $627,671 and $683,787 for the six months ended February 29, 2020 and February 28, 2019, 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.

Leases

Leases

In February 2016, the FASB issued ASU No. 2016-02—Leases, to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessor have not significantly changed from previous U.S. GAAP. This ASU was effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2018. We adopted this ASU on September 1, 2019.

We lease various production, administrative and sales offices under operating leases. We evaluate our contracts to determine if an arrangement is a lease at inception and classify it as a finance or operating lease. Currently, all our leases are classified as operating leases. Leased assets and corresponding liabilities are recognized based on the present value of the lease payments over the lease term. Our lease terms may include options to extend when it is reasonably certain that we will exercise that option. Costs associated with operating leases are recognized on a straight-line basis within operating expenses over the term of the lease. With the adoption of ASC 842 on September 1, 2019, we recognized all leases with terms greater than 12 months in duration on our consolidated balance sheets as right-of-use assets and lease liabilities. We adopted the standard using the prospective approach and did not retrospectively apply to prior periods. Right-of-use assets are recorded in long-term assets on our consolidated balance sheets. Current and non-current lease liabilities are recorded as operating lease liabilities within current liabilities and long-term liabilities, respectively, on our consolidated balance sheets. As part of the adoption of this standard we recorded the following assets and liabilities as of September 1, 2019:

Right of use assets	$	902,553
Lease Liabilities, Current	$	537,017
Lease Liabilities, Long-term	$	365,536

We have made certain assumptions and judgments when applying ASC 842, the most significant of which are:

· We elected the package of practical expedients available for transition that allow us to not reassess whether expired or existing contracts contain leases under the new definition of a lease, lease classification for expired or existing leases and whether previously capitalized initial direct costs would qualify for capitalization under ASC 842.

· We did not elect to use hindsight when considering judgments and estimates such as assessments of lessee options   to extend or terminate a lease or purchase the underlying asset.

· For all asset classes, we elected to not recognize a right-of-use asset and lease liability for short-term leases.

· The determination of the discount rate used in a lease is our estimated incremental borrowing rate that is based on what we would expect to pay to borrow over a similar term an amount equal to the lease payments.

Supplemental balance sheet information related to operating leases was as follows as of February 29, 2020:

Right of use asset	$	637,509
Lease Liabilities, Current	$	493,257
Lease Liabilities, Long-term	$	142,343
Operating lease costs	$	282,951
Weighted Average remaining lease term		1.08 years
Weighted Average Discount rate		5%

Goodwill and indefinited-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 non-compete agreements. The Company determines the appropriate useful life by performing an analysis of expected cash flows based on historical experience of the acquired businesses. Intangible assets are amortized over their estimated useful lives using the straight-line method, which approximates the pattern in which the majority of the economic benefits are expected to be consumed.

Goodwill represents the excess of the cost of an acquired entity over the fair value of the acquired net assets. Goodwill is not amortized, instead it is tested for impairment annually or when events or circumstances change that would indicate that goodwill might be impaired. Events or circumstances that could trigger an impairment review include, but are not limited to, a significant adverse change in legal factors or in the business climate, an adverse action or assessment by a regulator, unanticipated competition, a loss of key personnel, significant changes in the manner of the Company's use of the acquired assets or the strategy for the Company's overall business, significant negative industry or economic trends, or significant 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 February 29, 2020, 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 February 29, 2020, 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 and six-month periods ended February 29, 2020 and February 28, 2019.

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 February 29, 2020 and August 31, 2019 for assets and liabilities measured at fair value on a recurring basis:

February 29, 2020:

	Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	12,248,652	$	–	$	–	$	12,248,652
Acquisition-related contingent consideration obligations	$	–	$	–	$	1,761,028	$	1,761,028

August 31, 2019:

	Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	11,435,499	$	–	$	–	$	11,435,499
Acquisition-related contingent consideration obligations	$	–	$	–	$	1,761,028	$	1,761,028

As of February 29, 2020, and August 31, 2019, 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, 2019	$	1,761,028
Contingent consideration payments		–
Change in value of contingent consideration		–
Value at February 29, 2020	$	1,761,028

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 February 29, 2020 and February 28, 2019 was $1,875 and was $3,750 for each of the six-month periods ended February 29, 2020, and February 28, 2019. Accumulated amortization as of February 29, 2020 and August 31, 2019 were $60,000 and $56,250, 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 February 29, 2020 and February 28, 2019 was $150,000 and $300,000 for each of the six-month periods ended February 29, 2020 and February 28, 2019. Accumulated amortization as of February 29, 2020 and August 31, 2019 were $3,475,000 and $3,175,000, respectively.

On June 1, 2017, as part of the acquisition of DILIsym Services, Inc. the Company acquired certain developed technologies associated with the drug induced liver disease (DILI). These technologies were valued at $2,850,000 and are being amortized over 9 years under the straight-line method. Amortization expense for the three months and six months ended February 29, 2020 was $79,167 and $158,333, respectively, and is included in cost of revenues. Accumulated amortization as of February 29, 2020 and August 31, 2019 were $870,833 and $712,513, respectively.

In September 2018, we purchased certain intellectual property rights of Entelos Holding Company, a Delaware Corporation. The cost of $50,000 is being amortized over 10 years under the straight-line method. Amortization expense for the three months and six months period ended February 29, 2020 was $1,250 and $2,500, respectively. Accumulated amortization as of February 29, 2020 and August 31, 2019 was $7,500 and $5,000 respectively.

Total amortization expense for intellectual property agreements for the three months ended February 29, 2020 and February 28, 2019 was $232,292 and $232,292 respectively, and total amortization expense for the six months ended February 29, 2020 and February 28, 2019 was $464,583 and $464,583 respectively. Accumulated amortization as of February 29, 2020 was $4,413,334 and $3,948,750 as of August 31, 2019.

Intangible assets

Intangible assets

The following table summarizes intangible assets as of February 29, 2020:

	Amortization Period	Acquisition Value		Accumulated Amortization		Net book value
Customer relationships-Cognigen	Straight line 8 years	$	1,100,000	$	756,250	$	343,750
Trade Name-Cognigen	None		500,000		0		500,000
Covenants not to compete-Cognigen	Straight line 5 years		50,000		50,000		0
Covenants not to compete-DILIsym	Straight line 4 years		80,000		55,000		25,000
Trade Name-DILIsym	None		860,000		0		860,000
Customer relationships-DILIsym	Straight line 10 years		1,900,000		522,500		1,377,500
		$	4,490,000	$	1,383,750	$	3,106,250

Amortization expense for each of the three-month and six-month periods ended February 29, 2020 and February 28, 2019 was $86,875 and $173,750 as compared to $89,375 and $178,750, 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 computation is 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 six months ended February 29, 2020 and February 28,2019 were as follows:

	Three months ended				Six months ended
		2/29/2020		2/28/2019		2/29/2020		2/28/2019
Numerator:
Net income attributable to common shareholders	$	2,150,080	$	2,099,449	$	4,208,357	$	3,635,396
Denominator:
Weighted-average number of common shares outstanding during the period		17,638,406		17,476,603		17,623,699		17,449,069
Dilutive effect of stock options		677,418		526,138		681,946		535,009
Common stock and common stock equivalents used for diluted earnings per share		18,315,824		18,002,741		18,305,645		17,984,078

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 $344,928 and $208,715 for the three months ended February 29, 2020 and February 28, 2019, respectively and $639,632 and $408,744 for the six months ended February 29, 2020 and February 28, 2019, 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 six months ended February 29, 2020 and February 28, 2019.

Recently Issued Accounting Standards

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 adopted the new standard effective September 1, 2019.

XML

4. PROPERTY AND EQUIPMENT

6 Months Ended

Feb. 29, 2020

Property, Plant and Equipment [Abstract]

PROPERTY AND EQUIPMENT

NOTE 4: Property and Equipment

Property and equipment as of February 29, 2020 consisted of the following:

Equipment	$	744,126
Computer equipment		482,454
Furniture and fixtures		160,990
Leasehold improvements		110,165
Sub total		1,497,735
Less: Accumulated depreciation and amortization		(1,162,437	)
Net Book Value	$	335,298

XML

8. CONCENTRATIONS AND UNCERTAINTIES

6 Months Ended

Feb. 29, 2020

Risks and Uncertainties [Abstract]

CONCENTRATIONS AND UNCERTAINTIES

NOTE 8: 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 February 29, 2020 the Company had cash and cash equivalents exceeding insured limits by $10,985,000.

Revenue concentration shows that international sales accounted for 33% and 38% of net sales for the six months ended February 29, 2020 and February 28, 2019, respectively. Three customers accounted for 7%, 6% (a dealer account in Japan representing various customers), and 6% of net sales during the six months ended February 29, 2020. Three customers accounted for 10%, 8%, and 6% (a dealer account in Japan representing various customers) of net sales during the six months ended February 28, 2019.

Accounts receivable concentration shows that four customers comprised 10% (a dealer account in Japan representing various customers), 5%, 5%, and 5% of accounts receivable at February 29, 2020, compared to four customers comprised 8% (a dealer account in Japan representing various customers), 7%, 5%, and 5% of accounts receivable at February 28, 2019.

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 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.

XML

2. SIGNIFICANT ACCOUNTING POLICIES

6 Months Ended

Feb. 29, 2020

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, its wholly owned subsidiary, Cognigen Corporation, and as of June 1, 2017, the accounts of DILIsym Services, Inc. All significant intercompany accounts and transactions are eliminated in consolidation.

Estimates

Our financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management’s application of accounting policies. Actual results could differ from those estimates. Significant accounting policies for us include revenue recognition, accounting for capitalized computer software development costs, valuation of stock options, and accounting for income taxes.

Reclassifications

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

Revenue Recognition

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09 and its related amendments regarding Accounting Standards Codification Topic 606 (ASC Topic 606), Revenue from Contracts with Customers. The standard provides principles for recognizing revenue for the transfer of promised goods or services to customers with the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard also provides guidance on the recognition of incremental costs related to obtaining customer contracts. We adopted ASC Topic 606, effective September 1, 2018, utilizing the modified retrospective method. This approach was applied to contracts that were in process as of September 1, 2018, and the corresponding incremental costs of obtaining those contracts, which resulted in a cumulative effect adjustment of $493,279 to the opening balance of retained earnings at the date of adoption. The adoption of this ASU primarily impacts the timing of our revenue recognition for certain sales contracts, the capitalization and amortization of incremental costs of obtaining a contract, and related disclosures. The reported results for fiscal year 2019 reflect the application of ASC Topic 606.

We generate revenue primarily from the sale of software licenses and providing consulting services to the pharmaceutical industry for drug development.

The Company determines revenue recognition through the following steps:

i.	Identification of the contract, or contracts, with a customer
ii.	Identification of the performance obligations in the contract
iii.	Determination of the transaction price
iv.	Allocation of the transaction price to the performance obligations in the contract
v.	Recognition of revenue when, or as, the Company satisfies a performance obligation

Deferred Commissions

Sales commissions earned by our sales force and our commissioned sales representatives are considered incremental and recoverable costs of obtaining a contract with a customer. Sales commissions for new contracts are deferred and then amortized on a straight-line basis over a period of benefit. We determined the period of benefit by taking into consideration our customer contracts, our technology and other factors. Sales commissions for renewal contracts are deferred and then amortized on a straight-line basis over the related contractual renewal period. Amortization expense is included in sales and marketing expenses on the condensed consolidated statements of operations.

We apply the practical expedient in ASC Topic 606 to expense costs as incurred for sales commissions when the period of benefit would have been one year or less. Most of our contracts are of a duration of one year or less, few, if any of the longer-term contracts have commissions associated with them.

Practical Expedients and Exemptions

The Company has elected the following additional practical expedients in applying Topic 606:

• Commission Expense: We apply the practical expedient in ASC Topic 606 to expense costs as incurred for sales commissions when the period of benefit is one year or less. Most of our contracts are of a duration of one year or less, few, if any of the longer term contracts have commissions associated with them.

• Transaction Price Allocated to Future Performance Obligations   ASC 606 requires that the Company disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied as of February 29, 2020. ASC 606 provides certain practical expedients that limit the requirement to disclose the aggregate amount of transaction price allocated to unsatisfied performance obligations.   The Company applied the practical expedient to not disclose the amount of transaction price allocated to unsatisfied performance obligations when the performance obligation is part of a contract that has an original expected duration of one year or less.

Cash and Cash Equivalents

For purposes of the statements of cash flows, the Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents.

Accounts Receivable

We analyze the age of customer balances, historical bad-debt experience, customer creditworthiness, and changes in customer payment terms when making estimates of the collectability of the Company’s trade accounts receivable balances. If we determine that the financial conditions of any of our customers 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 $314,003 and $344,714 for the three months ended February 29, 2020 and February 28, 2019, respectively, and $627,671 and $683,787 for the six months ended February 29, 2020 and February 28, 2019, 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.

Leases

In February 2016, the FASB issued ASU No. 2016-02—Leases, to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessor have not significantly changed from previous U.S. GAAP. This ASU was effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2018. We adopted this ASU on September 1, 2019.

We lease various production, administrative and sales offices under operating leases. We evaluate our contracts to determine if an arrangement is a lease at inception and classify it as a finance or operating lease. Currently, all our leases are classified as operating leases. Leased assets and corresponding liabilities are recognized based on the present value of the lease payments over the lease term. Our lease terms may include options to extend when it is reasonably certain that we will exercise that option. Costs associated with operating leases are recognized on a straight-line basis within operating expenses over the term of the lease. With the adoption of ASC 842 on September 1, 2019, we recognized all leases with terms greater than 12 months in duration on our consolidated balance sheets as right-of-use assets and lease liabilities. We adopted the standard using the prospective approach and did not retrospectively apply to prior periods. Right-of-use assets are recorded in long-term assets on our consolidated balance sheets. Current and non-current lease liabilities are recorded as operating lease liabilities within current liabilities and long-term liabilities, respectively, on our consolidated balance sheets. As part of the adoption of this standard we recorded the following assets and liabilities as of September 1, 2019:

Right of use assets	$	902,553
Lease Liabilities, Current	$	537,017
Lease Liabilities, Long-term	$	365,536

We have made certain assumptions and judgments when applying ASC 842, the most significant of which are:

· We elected the package of practical expedients available for transition that allow us to not reassess whether expired or existing contracts contain leases under the new definition of a lease, lease classification for expired or existing leases and whether previously capitalized initial direct costs would qualify for capitalization under ASC 842.

· We did not elect to use hindsight when considering judgments and estimates such as assessments of lessee options   to extend or terminate a lease or purchase the underlying asset.

· For all asset classes, we elected to not recognize a right-of-use asset and lease liability for short-term leases.

· The determination of the discount rate used in a lease is our estimated incremental borrowing rate that is based on what we would expect to pay to borrow over a similar term an amount equal to the lease payments.

Supplemental balance sheet information related to operating leases was as follows as of February 29, 2020:

Right of use asset	$	637,509
Lease Liabilities, Current	$	493,257
Lease Liabilities, Long-term	$	142,343
Operating lease costs	$	282,951
Weighted Average remaining lease term		1.08 years
Weighted Average Discount rate		5%

Goodwill and indefinite-lived assets

The Company performs valuations of assets acquired and liabilities assumed on each acquisition accounted for as a business combination and recognizes the assets acquired and liabilities assumed at their acquisition date fair value. Acquired intangible assets include customer relationships, software, trade names, and non-compete agreements. The Company determines the appropriate useful life by performing an analysis of expected cash flows based on historical experience of the acquired businesses. Intangible assets are amortized over their estimated useful lives using the straight-line method, which approximates the pattern in which the majority of the economic benefits are expected to be consumed.

Goodwill represents the excess of the cost of an acquired entity over the fair value of the acquired net assets. Goodwill is not amortized, instead it is tested for impairment annually or when events or circumstances change that would indicate that goodwill might be impaired. Events or circumstances that could trigger an impairment review include, but are not limited to, a significant adverse change in legal factors or in the business climate, an adverse action or assessment by a regulator, unanticipated competition, a loss of key personnel, significant changes in the manner of the Company's use of the acquired assets or the strategy for the Company's overall business, significant negative industry or economic trends, or significant 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 February 29, 2020, 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 February 29, 2020, 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 and six-month periods ended February 29, 2020 and February 28, 2019.

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 February 29, 2020 and August 31, 2019 for assets and liabilities measured at fair value on a recurring basis:

February 29, 2020:

	Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	12,248,652	$	–	$	–	$	12,248,652
Acquisition-related contingent consideration obligations	$	–	$	–	$	1,761,028	$	1,761,028

August 31, 2019:

	Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	11,435,499	$	–	$	–	$	11,435,499
Acquisition-related contingent consideration obligations	$	–	$	–	$	1,761,028	$	1,761,028

As of February 29, 2020, and August 31, 2019, 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, 2019	$	1,761,028
Contingent consideration payments		–
Change in value of contingent consideration		–
Value at February 29, 2020	$	1,761,028

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 February 29, 2020 and February 28, 2019 was $1,875 and was $3,750 for each of the six-month periods ended February 29, 2020, and February 28, 2019. Accumulated amortization as of February 29, 2020 and August 31, 2019 were $60,000 and $56,250, 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 February 29, 2020 and February 28, 2019 was $150,000 and $300,000 for each of the six-month periods ended February 29, 2020 and February 28, 2019. Accumulated amortization as of February 29, 2020 and August 31, 2019 were $3,475,000 and $3,175,000, respectively.

On June 1, 2017, as part of the acquisition of DILIsym Services, Inc. the Company acquired certain developed technologies associated with the drug induced liver disease (DILI). These technologies were valued at $2,850,000 and are being amortized over 9 years under the straight-line method. Amortization expense for the three months and six months ended February 29, 2020 was $79,167 and $158,333, respectively, and is included in cost of revenues. Accumulated amortization as of February 29, 2020 and August 31, 2019 were $870,833 and $712,513, respectively.

In September 2018, we purchased certain intellectual property rights of Entelos Holding Company, a Delaware Corporation. The cost of $50,000 is being amortized over 10 years under the straight-line method. Amortization expense for the three months and six months period ended February 29, 2020 was $1,250 and $2,500, respectively. Accumulated amortization as of February 29, 2020 and August 31, 2019 was $7,500 and $5,000 respectively.

Total amortization expense for intellectual property agreements for the three months ended February 29, 2020 and February 28, 2019 was $232,292 and $232,292 respectively, and total amortization expense for the six months ended February 29, 2020 and February 28, 2019 was $464,583 and $464,583 respectively. Accumulated amortization as of February 29, 2020 was $4,413,334 and $3,948,750 as of August 31, 2019.

Intangible assets

The following table summarizes intangible assets as of February 29, 2020:

	Amortization Period	Acquisition Value		Accumulated Amortization		Net book value
Customer relationships-Cognigen	Straight line 8 years	$	1,100,000	$	756,250	$	343,750
Trade Name-Cognigen	None		500,000		0		500,000
Covenants not to compete-Cognigen	Straight line 5 years		50,000		50,000		0
Covenants not to compete-DILIsym	Straight line 4 years		80,000		55,000		25,000
Trade Name-DILIsym	None		860,000		0		860,000
Customer relationships-DILIsym	Straight line 10 years		1,900,000		522,500		1,377,500
		$	4,490,000	$	1,383,750	$	3,106,250

Amortization expense for each of the three-month and six-month periods ended February 29, 2020 and February 28, 2019 was $86,875 and $173,750 as compared to $89,375 and $178,750, 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 computation is 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 six months ended February 29, 2020 and February 28,2019 were as follows:

	Three months ended				Six months ended
		2/29/2020		2/28/2019		2/29/2020		2/28/2019
Numerator:
Net income attributable to common shareholders	$	2,150,080	$	2,099,449	$	4,208,357	$	3,635,396
Denominator:
Weighted-average number of common shares outstanding during the period		17,638,406		17,476,603		17,623,699		17,449,069
Dilutive effect of stock options		677,418		526,138		681,946		535,009
Common stock and common stock equivalents used for diluted earnings per share		18,315,824		18,002,741		18,305,645		17,984,078

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 $344,928 and $208,715 for the three months ended February 29, 2020 and February 28, 2019, respectively and $639,632 and $408,744 for the six months ended February 29, 2020 and February 28, 2019, 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 six months ended February 29, 2020 and February 28, 2019.

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 adopted the new standard effective September 1, 2019.

XML

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) - USD ($)	3 Months Ended		6 Months Ended
	Feb. 29, 2020	Feb. 28, 2019	Feb. 29, 2020	Feb. 28, 2019
Income Statement [Abstract]
Revenues	$ 10,349,863	$ 8,471,720	$ 19,750,968	$ 16,007,623
Cost of revenues	2,666,388	2,207,831	5,309,297	4,406,952
Gross margin	7,683,475	6,263,889	14,441,671	11,600,671
Operating expenses
Selling, general, and administrative	4,110,018	2,809,691	7,623,381	5,530,093
Research and development	747,612	724,034	1,273,965	1,253,670
Total operating expenses	4,857,630	3,533,725	8,897,346	6,783,763
Income from operations	2,825,845	2,730,164	5,544,325	4,816,908
Other income (expense)
Interest income	12,073	5,573	23,349	9,245
Interest expense	0	(38,188)	0	(76,376)
(Loss) income on currency exchange	(1,825)	(1,916)	1,886	(32,526)
Total other income (expense)	10,248	(34,531)	25,235	(99,657)
Income before provision for income taxes	2,836,093	2,695,633	5,569,560	4,717,251
Provision for income taxes	(686,013)	(596,184)	(1,361,203)	(1,081,855)
Net Income	$ 2,150,080	$ 2,099,449	$ 4,208,357	$ 3,635,396
Earnings per share
Basic	$ 0.12	$ 0.12	$ 0.24	$ 0.21
Diluted	$ 0.12	$ 0.12	$ 0.23	$ 0.20
Weighted-average common shares outstanding
Basic	17,638,406	17,476,603	17,623,699	17,449,069
Diluted	18,315,824	18,002,741	18,305,645	17,984,078

XML

5. CONTRACTS PAYABLE (Details Narrative) - USD ($)	1 Months Ended	12 Months Ended
	Sep. 30, 2018	Aug. 31, 2019	Feb. 29, 2020
Other Liabilities Disclosure [Abstract]
Earn-out payment made	$ 1,556,644	$ 1,682,329
Earn-out payment to be made			$ 1,761,028

XML

3. REVENUE RECOGNITION (Details - Disaggregation) - USD ($)	3 Months Ended		6 Months Ended
	Feb. 29, 2020	Feb. 28, 2019	Feb. 29, 2020	Feb. 28, 2019
Revenues	$ 10,349,863	$ 8,471,720	$ 19,750,968	$ 16,007,623
Software Licenses [Member] | Transferred At Point In Time [Member]
Revenues	5,130,998		9,493,795
Software Licenses [Member] | Transferred Over Time [Member]
Revenues	253,491		504,292
Consulting Services [Member] | Transferred Over Time [Member]
Revenues	$ 4,965,374		$ 9,752,881

XML

5. CONTRACTS PAYABLE (Tables)

6 Months Ended

Feb. 29, 2020

Other Liabilities Disclosure [Abstract]

Schedule of Liabilities

	February 29, 2020		August 31, 2019
Working Capital Liability	$	–	$	–
Holdback Liability		–		–
Earn-out Liability		1,761,028		1,761,028
Sub Total	$	1,761,028	$	1,761,028
Less: Current Portion		1,761,028		1,761,028
Long-Term	$	–	$	–

XML

2. SUMMARY - Property useful lives (Details)	6 Months Ended
	Feb. 29, 2020
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

XML

9. SEGMENT AND GEOGRAPHIC REPORTING (Details - geographic) - USD ($)	3 Months Ended		6 Months Ended
	Feb. 29, 2020	Feb. 28, 2019	Feb. 29, 2020	Feb. 28, 2019
Revenues	$ 10,349,863	$ 8,471,720	$ 19,750,968	$ 16,007,623
North and South America [Member]
Revenues	6,826,000	5,338,000	13,496,000	10,260,000
North and South America [Member] | Lancaster [Member]
Revenues	2,607,000	2,075,000	5,153,000	4,187,000
North and South America [Member] | Buffalo [Member]
Revenues	2,750,000	2,292,000	5,137,000	4,357,000
North and South America [Member] | North Carolina [Member]
Revenues	1,469,000	971,000	3,206,000	1,716,000
Europe [Member]
Revenues	1,736,000	1,898,000	3,208,000	2,897,000
Europe [Member] | Lancaster [Member]
Revenues	1,610,000	1,762,000	2,757,000	2,710,000
Europe [Member] | Buffalo [Member]
Revenues	0	0	0	0
Europe [Member] | North Carolina [Member]
Revenues	126,000	136,000	451,000	187,000
Asia [Member]
Revenues	1,788,000	1,236,000	3,046,000	2,851,000
Asia [Member] | Lancaster [Member]
Revenues	1,687,000	1,171,000	2,920,000	2,476,000
Asia [Member] | Buffalo [Member]
Revenues	0	0	0	0
Asia [Member] | North Carolina [Member]
Revenues	101,000	65,000	126,000	375,000
Lancaster [Member]
Revenues	5,904,000	5,008,000	10,830,000	9,373,000
Buffalo [Member]
Revenues	2,750,000	2,292,000	5,137,000	4,357,000
North Carolina [Member]
Revenues	$ 1,696,000	$ 1,172,000	$ 3,784,000	$ 2,278,000

XML

7. SHAREHOLDERS EQUITY (Details - Options outstanding and exercisable) - Stock Options [Member] - $ / shares	6 Months Ended
	Feb. 29, 2020	Aug. 31, 2019
Awards outstanding	1,251,564	1,163,259
Awards outstanding weighted average remaining contractual life	7 years 1 month 9 days
Awards outstanding weighted average exercise price	$ 15.64	$ 12.63
Awards exercisable	651,889
Awards exercisable weighted average remaining contractual life	6 years 7 days
Awards exercisable weighted average exercise price	$ 10.00
$6.75 to $8.00 [Member]
Exercise price low	6.75
Exercise price high	$ 8.00
Awards outstanding	192,353
Awards outstanding weighted average remaining contractual life	4 years 6 months 7 days
Awards outstanding weighted average exercise price	$ 6.84
Awards exercisable	192,353
Awards exercisable weighted average remaining contractual life	4 years 6 months 7 days
Awards exercisable weighted average exercise price	$ 6.85
$8.01 to $16.00 [Member]
Exercise price low	8.01
Exercise price high	$ 16.00
Awards outstanding	602,161
Awards outstanding weighted average remaining contractual life	6 years 6 months 14 days
Awards outstanding weighted average exercise price	$ 9.97
Awards exercisable	401,606
Awards exercisable weighted average remaining contractual life	6 years 5 months 20 days
Awards exercisable weighted average exercise price	$ 9.92
$16.01 to $24.00 [Member]
Exercise price low	16.01
Exercise price high	$ 24.00
Awards outstanding	241,550
Awards outstanding weighted average remaining contractual life	8 years 3 months 19 days
Awards outstanding weighted average exercise price	$ 20.68
Awards exercisable	57,930
Awards exercisable weighted average remaining contractual life	7 years 10 months 10 days
Awards exercisable weighted average exercise price	$ 21.00
$24.01 to $38.81 [Member]
Exercise price low	24.01
Exercise price high	$ 38.81
Awards outstanding	215,500
Awards outstanding weighted average remaining contractual life	9 years 7 months 28 days
Awards outstanding weighted average exercise price	$ 33.67
Awards exercisable	0
Awards exercisable weighted average remaining contractual life	0 years
Awards exercisable weighted average exercise price	$ 0.00

XML

6. COMMITMENTS AND CONTINGENCIES (Tables)

6 Months Ended

Feb. 29, 2020

Commitments and Contingencies Disclosure [Abstract]

Future minimum lease payments

Future minimum lease payments under non-cancelable operating leases with remaining terms of one year or more at February 29, 2020 were as follows:

Years Ending February 28,
2021	$	512,000
2022		145,000
	$	657,000

XML

2. SUMMARY - Right to use assets (Details) - USD ($)	6 Months Ended
	Feb. 29, 2020	Sep. 02, 2019	Aug. 31, 2019
Right of use assets	$ 637,509		$ 0
Lease liabilities, current	493,257		0
Lease liabilities, noncurrent	142,343		$ 0
Operating lease costs	$ 282,951
Weighted average remaining lease term	1 year 29 days
Weighted average discount rate	5.00%
Accounting Standards Update 201602 [Member]
Right of use assets		$ 902,553
Lease liabilities, current		537,017
Lease liabilities, noncurrent		$ 365,536

XML

9. SEGMENT AND GEOGRAPHIC REPORTING (Details - Segments within the U.S.) - USD ($)	3 Months Ended		6 Months Ended
	Feb. 29, 2020	Feb. 28, 2019	Feb. 29, 2020	Feb. 28, 2019	Aug. 31, 2019
Net Revenues	$ 10,349,863	$ 8,471,720	$ 19,750,968	$ 16,007,623
Income (loss) from operations before income taxes	2,825,845	2,730,164	5,544,325	4,816,908
Total assets	49,199,903		49,199,903		$ 45,196,697
Consolidation Eliminations [Member]
Total assets	(17,702,000)	(17,702,000)	(17,702,000)	(17,702,000)
Lancaster [Member]
Net Revenues	5,904,000	5,008,000	10,830,000	9,373,000
Income (loss) from operations before income taxes	2,004,000	1,963,000	3,907,000	3,570,000
Total assets	42,881,000	36,231,000	42,881,000	36,231,000
Capital expenditures	9,000	1,000	17,000	3,000
Capitalized software costs	573,000	494,000	1,030,000	784,000
Depreciation and Amortization	435,000	464,000	870,000	926,000
Buffalo [Member]
Net Revenues	2,750,000	2,292,000	5,137,000	4,357,000
Income (loss) from operations before income taxes	276,000	402,000	316,000	706,000
Total assets	10,465,000	9,973,000	10,465,000	9,973,000
Capital expenditures	20,000	17,000	41,000	17,000
Capitalized software costs	16,000	36,000	36,000	66,000
Depreciation and Amortization	89,000	89,000	175,000	180,000
North Carolina [Member]
Net Revenues	1,696,000	1,172,000	3,784,000	2,278,000
Income (loss) from operations before income taxes	546,000	365,000	1,322,000	541,000
Total assets	13,555,000	14,859,000	13,555,000	14,859,000
Capital expenditures	13,000	14,000	15,000	14,000
Capitalized software costs	31,000	45,000	61,000	90,000
Depreciation and Amortization	$ 151,000	$ 144,000	$ 300,000	$ 286,000

XML

7. SHAREHOLDERS' EQUITY (Details - Assumptions) - Options, ISOs and NQSOs [Member] - USD ($)	6 Months Ended
	Feb. 29, 2020	Feb. 28, 2019
Estimated fair value of awards granted	$ 1,851,815	$ 1,928,820
Unvested Forfeiture Rate	0.00%	6.20%
Weighted average grant price	$ 33.51	$ 22.78
Weighted average market price	$ 33.51	$ 22.69
Weighted average volatility	32.13%	31.61%
Weighted average risk free rate	1.69%	2.59%
Weighted average dividend yield	0.72%	1.10%
Weighted average expected life	6 years 8 months 5 days	6 years 7 months 21 days

XML

5. CONTRACTS PAYABLE

6 Months Ended

Feb. 29, 2020

Other Liabilities Disclosure [Abstract]

CONTRACTS PAYABLE

NOTE 5: 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 started in FY 2018. In September 2018, $1,556,644 was paid out under the first earn-out payment, a second earn-out payment was made in August 2019 in the amount of $1,682,329. It is estimated that a final payment of approximately $1,761,028 will be paid in August 2020.

As of February 29, 2020 and August 31, 2019 the following liabilities have been recorded:

	February 29, 2020		August 31, 2019
Working Capital Liability	$	–	$	–
Holdback Liability		–		–
Earn-out Liability		1,761,028		1,761,028
Sub Total	$	1,761,028	$	1,761,028
Less: Current Portion		1,761,028		1,761,028
Long-Term	$	–	$	–

XML

9. SEGMENT AND GEOGRAPHIC REPORTING

6 Months Ended

Feb. 29, 2020

Segments, Geographical Areas [Abstract]

SEGMENT AND GEOGRAPHIC REPORTING

NOTE 9: 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 February 29, 2020 and February 28, 2019 (in thousands, because of rounding numbers may not foot):

Three months ended February 29, 2020
	Lancaster		Buffalo		North Carolina		Eliminations			Total
Net revenues	$	5,904	$	2,750	$	1,696	$	–		$	10,350
Income (loss) from operations		2,004		276		546		–			2,826
Total assets		42,881		10,465		13,555		(17,702	)		49,199
Capital expenditures		9		20		13		–			42
Capitalized software costs		573		16		31		–			620
Depreciation and amortization		435		89		151		–			675

Three months ended February 28, 2019
	Lancaster		Buffalo		North Carolina		Eliminations			Total
Net revenues	$	5,008	$	2,292	$	1,172	$	–		$	8,471
Income (loss) from operations		1,963		402		365		–			2,730
Total assets		36,231		9,973		14,859		(17,702	)		43,361
Capital expenditures		1		17		14		–			32
Capitalized software costs		494		36		45		–			575
Depreciation and amortization		464		89		144		–			697

Six months ended February 29, 2020
	Lancaster		Buffalo		North Carolina		Eliminations			Total
Net revenues	$	10,830	$	5,137	$	3,784	$	–		$	19,751
Income (loss) from operations		3,907		316		1,322		–			5,545
Total assets		42,881		10,465		13,555		(17,702	)		49,199
Capital expenditures		17		41		15		–			73
Capitalized software costs		1,030		36		61		–			1,127
Depreciation and amortization		870		175		300		–			1,345

Six months ended February 28, 2019
	Lancaster		Buffalo		North Carolina		Eliminations			Total
Net revenues	$	9,373	$	4,357	$	2,278	$	–		$	16,008
Income (loss) from operations		3,570		706		541		–			4,817
Total assets		36,231		9,973		14,859		(17,702	)		43,361
Capital expenditures		3		17		14		–			33
Capitalized software costs		784		66		90		–			940
Depreciation and amortization		926		180		286		–			1,393

In addition, the Company allocates revenues to geographic areas based on the locations of its customers. Geographical revenues for the three months and six months ended February 29, 2020 and February 28, 2019 were as follows (in thousands, because of rounding  numbers may not foot):

Three months ended February 29, 2020
	North & South America		Europe		Asia		Total
Lancaster	$	2,607	$	1,610	$	1,687	$	5,904
Buffalo		2,750		–		–		2,750
North Carolina		1,469		126		101		1,696
Total	$	6,826	$	1,736	$	1,788	$	10,350

Three months ended February 28, 2019
	North & South America		Europe		Asia		Total
Lancaster	$	2,075	$	1,762	$	1,171	$	5,008
Buffalo		2,292		–		–		2,292
North Carolina		971		136		65		1,172
Total	$	5,338	$	1,898	$	1,236	$	8,472

Six months ended February 29, 2020
	North & South America		Europe		Asia		Total
Lancaster	$	5,153	$	2,757	$	2,920	$	10,830
Buffalo		5,137		–		–		5,137
North Carolina		3,206		451		126		3,784
Total	$	13,496	$	3,208	$	3,046	$	19,751

Six months ended February 28, 2019
	North & South America		Europe		Asia		Total
Lancaster	$	4,187	$	2,710	$	2,476	$	9,373
Buffalo		4,357		–		–		4,357
North Carolina		1,716		187		375		2,278
Total	$	10,260	$	2,897	$	2,851	$	16,008

XML

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Tables)

6 Months Ended

Feb. 29, 2020

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

Right to use asset

As part of the adoption of this standard we recorded the following assets and liabilities as of September 1, 2019:

Right of use assets	$	902,553
Lease Liabilities, Current	$	537,017
Lease Liabilities, Long-term	$	365,536

Supplemental balance sheet information related to operating leases was as follows as of February 29, 2020:

Right of use asset	$	637,509
Lease Liabilities, Current	$	493,257
Lease Liabilities, Long-term	$	142,343
Operating lease costs	$	282,951
Weighted Average remaining lease term		1.08 years
Weighted Average Discount rate		5%

Fair value measurements

The following table summarizes fair value measurements at February 29, 2020 and August 31, 2019 for assets and liabilities measured at fair value on a recurring basis:

February 29, 2020:

	Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	12,248,652	$	–	$	–	$	12,248,652
Acquisition-related contingent consideration obligations	$	–	$	–	$	1,761,028	$	1,761,028

August 31, 2019:

	Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	11,435,499	$	–	$	–	$	11,435,499
Acquisition-related contingent consideration obligations	$	–	$	–	$	1,761,028	$	1,761,028

Reconciliation of contingent consideration value

The following is a reconciliation of contingent consideration value.

Value at August 31, 2019	$	1,761,028
Contingent consideration payments		–
Change in value of contingent consideration		–
Value at February 29, 2020	$	1,761,028

Schedule of intangible assets

	Amortization Period	Acquisition Value		Accumulated Amortization		Net book value
Customer relationships-Cognigen	Straight line 8 years	$	1,100,000	$	756,250	$	343,750
Trade Name-Cognigen	None		500,000		0		500,000
Covenants not to compete-Cognigen	Straight line 5 years		50,000		50,000		0
Covenants not to compete-DILIsym	Straight line 4 years		80,000		55,000		25,000
Trade Name-DILIsym	None		860,000		0		860,000
Customer relationships-DILIsym	Straight line 10 years		1,900,000		522,500		1,377,500
		$	4,490,000	$	1,383,750	$	3,106,250

Earnings per share

	Three months ended				Six months ended
		2/29/2020		2/28/2019		2/29/2020		2/28/2019
Numerator:
Net income attributable to common shareholders	$	2,150,080	$	2,099,449	$	4,208,357	$	3,635,396
Denominator:
Weighted-average number of common shares outstanding during the period		17,638,406		17,476,603		17,623,699		17,449,069
Dilutive effect of stock options		677,418		526,138		681,946		535,009
Common stock and common stock equivalents used for diluted earnings per share		18,315,824		18,002,741		18,305,645		17,984,078

XML

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited) - USD ($)	Common Stock	Additional Paid-In Capital	Retained Earnings	Total
Beginning balance, shares at Aug. 31, 2018	17,416,445
Beginning balance, value at Aug. 31, 2018	$ 7,417	$ 13,453,668	$ 18,461,540	$ 31,922,625
Cumulative Effect of Changes related to adoption of ASC 606			(493,279)	(493,279)
Exercise of stock options, shares	41,103
Exercise of stock options, amount	$ 42	357,410		357,452
Stock-based compensation		200,029		200,029
Shares issued to Directors for services, shares	2,222
Shares issued to Directors for services, value	$ 2	44,904		44,906
Declaration of dividends			(1,045,073)	(1,045,073)
Net income			1,535,947	1,535,947
Ending balance, shares at Nov. 30, 2018	17,459,770
Ending balance, value at Nov. 30, 2018	$ 7,461	14,056,011	18,459,135	32,522,607
Beginning balance, shares at Aug. 31, 2018	17,416,445
Beginning balance, value at Aug. 31, 2018	$ 7,417	13,453,668	18,461,540	31,922,625
Net income				3,635,396
Ending balance, shares at Feb. 28, 2019	17,499,958
Ending balance, value at Feb. 28, 2019	$ 7,503	14,435,592	19,509,697	33,952,792
Beginning balance, shares at Nov. 30, 2018	17,459,770
Beginning balance, value at Nov. 30, 2018	$ 7,461	14,056,011	18,459,135	32,522,607
Exercise of stock options, shares	37,680
Exercise of stock options, amount	$ 38	121,912		121,950
Stock-based compensation		208,715		208,715
Shares issued to Directors for services, shares	2,508
Shares issued to Directors for services, value	$ 4	48,954		48,958
Declaration of dividends			(1,048,887)	(1,048,887)
Net income			2,099,449	2,099,449
Ending balance, shares at Feb. 28, 2019	17,499,958
Ending balance, value at Feb. 28, 2019	$ 7,503	14,435,592	19,509,697	33,952,792
Exercise of stock options, shares	25,849
Exercise of stock options, amount	$ 26	103,747		103,773
Stock-based compensation		224,654		224,654
Shares issued to Directors for services, shares	2,176
Shares issued to Directors for services, value	$ 2	49,023		49,025
Declaration of dividends			(1,050,914)	(1,050,914)
Net income			2,888,706	2,888,706
Ending balance, shares at May. 31, 2019	17,527,983
Ending balance, value at May. 31, 2019	$ 7,531	14,813,016	21,347,489	36,168,036
Exercise of stock options, shares	62,071
Exercise of stock options, amount	$ 62	204,910		204,972
Stock-based compensation		232,450		232,450
Shares issued to Directors for services, shares	1,780
Shares issued to Directors for services, value	$ 2	69,098		69,100
Declaration of dividends			(1,052,181)	(1,052,181)
Net income			2,059,227	2,059,227
Ending balance, shares at Aug. 31, 2019	17,591,834
Ending balance, value at Aug. 31, 2019	$ 7,595	15,319,474	22,354,535	37,681,604
Exercise of stock options, shares	29,445
Exercise of stock options, amount	$ 29	135,529		135,558
Stock-based compensation		294,704		294,704
Shares issued to Directors for services, shares	2,045
Shares issued to Directors for services, value	$ 2	72,411		72,413
Declaration of dividends			(1,056,379)	(1,056,379)
Net income			2,058,277	2,058,277
Ending balance, shares at Nov. 30, 2019	17,623,324
Ending balance, value at Nov. 30, 2019	$ 7,626	15,822,118	23,356,433	39,186,177
Beginning balance, shares at Aug. 31, 2019	17,591,834
Beginning balance, value at Aug. 31, 2019	$ 7,595	15,319,474	22,354,535	37,681,604
Net income				4,208,357
Ending balance, shares at Feb. 29, 2020	17,648,464
Ending balance, value at Feb. 29, 2020	$ 7,651	16,406,702	24,447,773	40,862,126
Beginning balance, shares at Nov. 30, 2019	17,623,324
Beginning balance, value at Nov. 30, 2019	$ 7,626	15,822,118	23,356,433	39,186,177
Exercise of stock options, shares	22,915
Exercise of stock options, amount	$ 23	167,168		167,191
Stock-based compensation		344,928		344,928
Shares issued to Directors for services, shares	2,225
Shares issued to Directors for services, value	$ 2	72,488		72,490
Declaration of dividends			(1,058,740)	(1,058,740)
Net income			2,150,080	2,150,080
Ending balance, shares at Feb. 29, 2020	17,648,464
Ending balance, value at Feb. 29, 2020	$ 7,651	$ 16,406,702	$ 24,447,773	$ 40,862,126

XML

5. CONTRACTS PAYABLE (Details) - USD ($)	Feb. 29, 2020	Aug. 31, 2019
Total contract with customer	$ 1,761,028	$ 1,761,028
Less: Current Portion	1,761,028	1,761,028
Long-Term	0	0
Working Capital Liability [Member]
Total contract with customer	0	0
Holdback Liability [Member]
Total contract with customer	0	0
Earn-Out Liability [Member]
Total contract with customer	$ 1,761,028	$ 1,761,028

XML

Document and Entity Information - shares	6 Months Ended
	Feb. 29, 2020	Apr. 09, 2020
Cover [Abstract]
Entity Registrant Name	SIMULATIONS PLUS INC
Entity Central Index Key	0001023459
Document Type	10-Q
Document Period End Date	Feb. 29, 2020
Amendment Flag	false
Current Fiscal Year End Date	--08-31
Is Entity's Reporting Status Current?	Yes
Entity Filer Category	Accelerated Filer
Entity Emerging Growth Company	false
Entity Small Business	true
Entity Shell Company	false
Entity Interactive data	Yes
Incorporation state	CA
Entity file number	001-32046
Entity Common Stock, Shares Outstanding		17,768,034
Document Fiscal Period Focus	Q2
Document Fiscal Year Focus	2020

XML

2. SIGNIFICANT ACCOUNTING POLICIES (Details Narrative) - USD ($)	3 Months Ended		6 Months Ended
	Feb. 29, 2020	Feb. 28, 2019	Feb. 29, 2020	Feb. 28, 2019	Aug. 31, 2019	Sep. 02, 2018
Amortization of software development	$ 314,003	$ 344,714	$ 627,671	$ 683,787
Impairment of intangible assets	0	0	0	0
Accumulated amortization of intellectual property	1,383,750		1,383,750
Stock-based compensation			784,535	502,605
Impairment of long-lived assets			0	0
Stock Options [Member]
Stock-based compensation	344,928	208,715	639,632	408,744
Intellectual Property [Member]
Amortization of intangible assets	232,292	232,292	464,583	464,583
Accumulated amortization of intellectual property	4,413,334		4,413,334		$ 3,948,750
Intellectual Property [Member] | Enslien Research
Amortization of intangible assets	1,875	1,875	3,750	3,750
Accumulated amortization of intellectual property	60,000		60,000		56,250
Intellectual Property [Member] | TSRL [Member]
Amortization of intangible assets	150,000	150,000	300,000	300,000
Accumulated amortization of intellectual property	3,475,000		3,475,000		3,175,000
Intellectual Property [Member] | DILIsym [Member]
Amortization of intangible assets	79,167	79,167	158,333	158,333
Accumulated amortization of intellectual property	870,833		870,833		712,513
Intellectual Property [Member] | Entelos [Member]
Amortization of intangible assets	1,250	1,250	2,500	2,500
Accumulated amortization of intellectual property	7,500		7,500		5,000
Other Intangible Assets
Amortization of intangible assets	86,875	$ 89,375	173,750	$ 178,750
Accumulated amortization of intellectual property	$ 1,383,750		$ 1,383,750		$ 1,210,000
Cumulative Effect Period Of Adoption Adjustment [Member]
Cumulative affect of ASC 606 adoption						$ 493,279

XML

3. REVENUE RECOGNITION

6 Months Ended

Feb. 29, 2020

Revenue from Contract with Customer [Abstract]

REVENUE RECOGNITION

NOTE 3. REVENUE RECOGNITION

The Company adopted Topic 606 effective September 1, 2018 using the modified retrospective method applying this guidance to all open contracts at the date of initial application, which resulted in an adjustment to retained earnings for the cumulative effect of applying this guidance. The most significant impact of Topic 606 on revenue to the Company relates to the timing of revenue recognition for one of its payment contracts. Under 606 the revenues under the contract are being recognized as time is expended and costs are being expensed as incurred. Under ASC 605 revenues were recognized as invoiced and certain costs were capitalized as development.

We generate revenue primarily from the sale of software licenses and providing consulting services to the pharmaceutical industry for drug development.

The Company determines revenue recognition through the following steps:

i.	Identification of the contract, or contracts, with a customer
ii.	Identification of the performance obligations in the contract
iii.	Determination of the transaction price
iv.	Allocation of the transaction price to the performance obligations in the contract
v.	Recognition of revenue when, or as, the Company satisfies a performance obligation

The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. Contracts generally have fixed pricing terms and are not subject to variable pricing. The Company considers the nature and significance of each specific performance obligation under a contract when allocating the proceeds under each contract. Accounting for contracts includes significant judgement in the estimation of estimated hours/cost to be incurred on consulting contracts, and the di minimis nature of the post sales costs associated with software sales.

Components of revenue

The following is a description of principal activities from which the Company generates revenue. As part of the accounting for these arrangements, the Company must develop assumptions that require judgment to determine the stand-alone selling price for each performance obligation identified in the contract. Stand-alone selling prices are determined based on the prices at which the Company separately sells its services or goods.

Revenue Components	Typical payment terms
Software Revenues: Software revenues are generated primarily from sales of software licenses at the time the software is unlocked and the term commences. The license period typically is one year or less. Along with the license a di minimis amount of customer support is provided to assist the customer with the software. Should the customer need more than a di minimis amount of support they can choose to enter into a separate contract for additional training. Most software is installed on our customers servers and the Company has no control of the software once the sale is made. For certain software arrangements the Company hosts the licenses on servers maintained by the Company, revenue for those arrangements are accounted as Software as a Service over the life of the contract. These arrangements are a small portion of software revenues of the Company.	Payments are generally due upon invoicing on a net 30 basis unless other payment terms are negotiated with the customer based on customer history. Typical industry standards apply.
Consulting Contracts: Consulting services provided to our customers are generally recognized over time as the contracts are performed and the services are rendered. The company measures its consulting revenue based on time expended compared to total estimated hours to complete a project. The Company believes the methods chosen for its contract revenue best depicts the transfer of benefits to the customer under the contracts.	Payment terms vary, depending on the size of the contract, credit history and history with the client and deliverables within the contract.
Consortium Member Based Services: The performance obligation is recognized on a time elapsed basis, by month, for which the services are provided, as the Company transfers control evenly over the contractual period.	Payment is due at the beginning of the period, generally on a net 30 or 60 basis.

Remaining performance obligations that do not fall under the expedients require the Company to perform various consulting and software development services and consortium memberships of approximately $3,900,000. It is anticipated these revenues will be recognized within the next two and ½ years.

Contract liabilities

During the three months and six months period ended February 29, 2020 the Company recognized $338,000 and $773,000 of revenue that was included in contract liabilities as of August 31, 2019.

Disaggregation of Revenues

	Three Months Ended February 29, 2020		Six Months Ended February 29, 2020
Disaggregation of Revenues:
Software licenses
Point in time	$	5,130,998	$	9,493,795
Over time		253,491		504,292
Consulting services
Over time		4,965,374		9,752,881
Total Revenue	$	10,349,863	$	19,750,968

XML

2. SUMMARY - Contingent consideration (Details) - USD ($)	6 Months Ended
	Feb. 29, 2020	Feb. 28, 2019
Accounting Policies [Abstract]
Contingent consideration, beginning balance	$ 1,761,028
Contingent consideration payments	0
Change in value of contingent consideration	0	$ 76,376
Contingent consideration, ending balance	$ 1,761,028

XML

4. PROPERTY AND EQUIPMENT (Tables)

6 Months Ended

Feb. 29, 2020

Property, Plant and Equipment [Abstract]

Property and equipment

Equipment	$	744,126
Computer equipment		482,454
Furniture and fixtures		160,990
Leasehold improvements		110,165
Sub total		1,497,735
Less: Accumulated depreciation and amortization		(1,162,437	)
Net Book Value	$	335,298

XML

9. SEGMENT AND GEOGRAPHIC REPORTING (Tables)

6 Months Ended

Feb. 29, 2020

Segments, Geographical Areas [Abstract]

Schedule of consolidated results from reportable segments

Results for each segment and consolidated results are as follows for the three-month periods ended February 29, 2020 and February 28, 2019 (in thousands, because of rounding numbers may not foot):

Three months ended February 29, 2020
	Lancaster		Buffalo		North Carolina		Eliminations			Total
Net revenues	$	5,904	$	2,750	$	1,696	$	–		$	10,350
Income (loss) from operations		2,004		276		546		–			2,826
Total assets		42,881		10,465		13,555		(17,702	)		49,199
Capital expenditures		9		20		13		–			42
Capitalized software costs		573		16		31		–			620
Depreciation and amortization		435		89		151		–			675

Three months ended February 28, 2019
	Lancaster		Buffalo		North Carolina		Eliminations			Total
Net revenues	$	5,008	$	2,292	$	1,172	$	–		$	8,471
Income (loss) from operations		1,963		402		365		–			2,730
Total assets		36,231		9,973		14,859		(17,702	)		43,361
Capital expenditures		1		17		14		–			32
Capitalized software costs		494		36		45		–			575
Depreciation and amortization		464		89		144		–			697

Six months ended February 29, 2020
	Lancaster		Buffalo		North Carolina		Eliminations			Total
Net revenues	$	10,830	$	5,137	$	3,784	$	–		$	19,751
Income (loss) from operations		3,907		316		1,322		–			5,545
Total assets		42,881		10,465		13,555		(17,702	)		49,199
Capital expenditures		17		41		15		–			73
Capitalized software costs		1,030		36		61		–			1,127
Depreciation and amortization		870		175		300		–			1,345

Six months ended February 28, 2019
	Lancaster		Buffalo		North Carolina		Eliminations			Total
Net revenues	$	9,373	$	4,357	$	2,278	$	–		$	16,008
Income (loss) from operations		3,570		706		541		–			4,817
Total assets		36,231		9,973		14,859		(17,702	)		43,361
Capital expenditures		3		17		14		–			33
Capitalized software costs		784		66		90		–			940
Depreciation and amortization		926		180		286		–			1,393

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 six months ended February 29, 2020 and February 28, 2019 were as follows (in thousands, because of rounding  numbers may not foot):

Three months ended February 29, 2020
	North & South America		Europe		Asia		Total
Lancaster	$	2,607	$	1,610	$	1,687	$	5,904
Buffalo		2,750		–		–		2,750
North Carolina		1,469		126		101		1,696
Total	$	6,826	$	1,736	$	1,788	$	10,350

Three months ended February 28, 2019
	North & South America		Europe		Asia		Total
Lancaster	$	2,075	$	1,762	$	1,171	$	5,008
Buffalo		2,292		–		–		2,292
North Carolina		971		136		65		1,172
Total	$	5,338	$	1,898	$	1,236	$	8,472

Six months ended February 29, 2020
	North & South America		Europe		Asia		Total
Lancaster	$	5,153	$	2,757	$	2,920	$	10,830
Buffalo		5,137		–		–		5,137
North Carolina		3,206		451		126		3,784
Total	$	13,496	$	3,208	$	3,046	$	19,751

Six months ended February 28, 2019
	North & South America		Europe		Asia		Total
Lancaster	$	4,187	$	2,710	$	2,476	$	9,373
Buffalo		4,357		–		–		4,357
North Carolina		1,716		187		375		2,278
Total	$	10,260	$	2,897	$	2,851	$	16,008

XML

7. SHAREHOLDERS' EQUITY (Details Narrative)	3 Months Ended	6 Months Ended
	Feb. 29, 2020 USD ($) shares	Feb. 29, 2020 USD ($) shares
Fair value of non-vested stock options | $	$ 6,712,000	$ 6,712,000
Weighted average period of vesting		3 years 7 months 2 days
Non-managment Directors [Member]
Stock issued for compensation, shares | shares	2,225	4,270
Stock issued for compensation, value | $	$ 72,490	$ 144,903
2017 Equity Incentive Plan [Member]
Common stock reserved for issuance under the plan | shares	1,000,000	1,000,000
Equity plan termination date		Dec. 31, 2026

XML

7. SHAREHOLDERS EQUITY (Details - Dividends) - USD ($)	6 Months Ended		12 Months Ended
	Feb. 29, 2020	Feb. 28, 2019	Aug. 31, 2019
Total Amount	$ 2,115,119	$ 2,093,960	$ 4,197,055
FY 2020 1st Qtr [Member]
Record Date	Oct. 25, 2019
Distribution Date	Nov. 01, 2019
Number of Shares Outstanding on Record Date	17,606,314
Dividend per Share	$ 0.06
Total Amount	$ 1,056,379
FY 2020 2nd Qtr [Member]
Record Date	Jan. 27, 2020
Distribution Date	Feb. 03, 2020
Number of Shares Outstanding on Record Date	17,645,639
Dividend per Share	$ 0.06
Total Amount	$ 1,058,740
FY 2019 1st Qtr [Member]
Record Date			Nov. 01, 2018
Distribution Date			Nov. 08, 2018
Number of Shares Outstanding on Record Date			17,417,875
Dividend per Share			$ 0.06
Total Amount			$ 1,045,073
FY 2019 2nd Qtr [Member]
Record Date			Jan. 25, 2019
Distribution Date			Feb. 01, 2019
Number of Shares Outstanding on Record Date			17,481,450
Dividend per Share			$ 0.06
Total Amount			$ 1,048,887
FY 2019 3rd Qtr [Member]
Record Date			Apr. 24, 2019
Distribution Date			May 01, 2019
Number of Shares Outstanding on Record Date			17,515,228
Dividend per Share			$ 0.06
Total Amount			$ 1,050,914
FY 2019 4th Qtr [Member]
Record Date			Jul. 25, 2019
Distribution Date			Aug. 01, 2019
Number of Shares Outstanding on Record Date			17,536,454
Dividend per Share			$ 0.06
Total Amount			$ 1,052,181

XML

10. EMPLOYEE BENEFIT PLAN (Details Narrative) - USD ($)	3 Months Ended		6 Months Ended
	Feb. 29, 2020	Feb. 28, 2019	Feb. 29, 2020	Feb. 28, 2019
Retirement Benefits [Abstract]
Contribution by employer in benefit plan	$ 109,304	$ 91,999	$ 201,671	$ 178,938

XML

3. REVENUE RECOGNITION (Details Narrative)	3 Months Ended	6 Months Ended
	Feb. 29, 2020 USD ($)	Feb. 29, 2020 USD ($)
Revenue from Contract with Customer [Abstract]
Revenues included in contract liabilities	$ 338,000	$ 773,000
Remaining performance obligations	$ 3,900,000	$ 3,900,000
Remaining performance obligations recognition period	2 years 6 months	2 years 6 months

XML

1. GENERAL

6 Months Ended

Feb. 29, 2020

Organization, Consolidation and Presentation of Financial Statements [Abstract]

GENERAL

NOTE 1: GENERAL

This report on Form 10-Q for the quarter ended February 29, 2020 should be read in conjunction with the Company's annual report on Form 10-K for the year ended August 31, 2019, filed with the Securities and Exchange Commission (“SEC”) on November 13, 2019. As contemplated by the SEC under Article 8 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.

XML

2. SUMMARY - Intangible assets (Details) - USD ($)	6 Months Ended
	Feb. 29, 2020	Aug. 31, 2019
Acquisition value	$ 4,490,000
Accumulated amortization	1,383,750
Net book value	$ 3,106,250	$ 3,280,000
Customer Relationships [Member] | Cognigen
Amortization period	Straight line 8 years
Acquisition value	$ 1,100,000
Accumulated amortization	756,250
Net book value	$ 343,750
Customer Relationships [Member] | DILIsym [Member]
Amortization period	Straight line 8 years
Acquisition value	$ 1,900,000
Accumulated amortization	522,500
Net book value	$ 1,377,500
Trade name | Cognigen
Amortization period	None
Acquisition value	$ 500,000
Accumulated amortization	0
Net book value	$ 500,000
Trade name | DILIsym [Member]
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	50,000
Net book value	$ 0
Covenants not to compete | DILIsym [Member]
Amortization period	Straight line 4 years
Acquisition value	$ 80,000
Accumulated amortization	55,000
Net book value	$ 25,000

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (Parenthetical) - USD ($)	Feb. 29, 2020	Aug. 31, 2019
Allowance for doubtful accounts	$ 0	$ 0
Accumulated amortization of computer software development costs	12,983,725	$ 12,356,055
Accumulated amortization on intangible assets	$ 1,383,750
Preferred stock par value	$ 0.001	$ 0.001
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	$ 0.001
Common stock shares authorized	50,000,000	50,000,000
Common stock shares issued	17,648,646	17,591,834
Common stock shares outstanding	17,648,646	17,591,834
Intellectual Property [Member]
Accumulated amortization on intangible assets	$ 4,413,334	$ 3,948,750
Other Intangible Assets
Accumulated amortization on intangible assets	$ 1,383,750	$ 1,210,000

XML

6. COMMITMENTS AND CONTINGENCIES (Details)	Feb. 29, 2020 USD ($)
Commitments and Contingencies Disclosure [Abstract]
2021	$ 512,000
2022	145,000
Future minimum lease payments	$ 657,000

XML

7. SHAREHOLDERS' EQUITY

6 Months Ended

Feb. 29, 2020

Equity [Abstract]

SHAREHOLDERS' EQUITY

NOTE 7: SHAREHOLDERS’ EQUITY

Dividend

The Company’s Board of Directors declared cash dividends during fiscal years 2020 and 2019. The details of the dividends paid are  in the following tables:

FY2020
Record Date	Distribution Date	Number of Shares Outstanding on Record Date		Dividend per Share		Total Amount
10/25/2019	11/01/2019		17,606,314	$	0.06	$	1,056,379
1/27/2020	2/03/2020		17,645,639	$	0.06		1,058,740
Total						$	2,115,119

FY2019
Record Date	Distribution Date	Number of Shares Outstanding on Record Date		Dividend per Share		Total Amount
11/01/2018	11/08/2018		17,417,875	$	0.06	$	1,045,073
1/25/2019	2/1/2019		17,481,450	$	0.06		1,048,887
4/24/2019	5/1/2019		17,515,228	$	0.06		1,050,914
7/25/2019	8/1/2019		17,536,454	$	0.06		1,052,181
Total						$	4,197,055

Stock Option 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 February 29, 2020, employees and directors hold stock options to purchase 1,251,564 shares of common stock at exercise prices ranging from $6.75 to $38.81.

The following table summarizes information about stock options:

Transactions in FY20	Number of Options			Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Life
Outstanding, August 31, 2019		1,163,259		$	12.63		7.13
Granted		168,500		$	33.51
Exercised		(52,360	)	$	7.75
Cancelled/Forfeited		(27,835	)	$	13.04
Expired		–		$	–
Outstanding, February 29, 2020		1,251,564		$	15.64		7.11
Exercisable, February 29, 2020		651,889		$	10.00		6.02

The weighted-average remaining contractual life of options outstanding issued under the Plan, both Qualified ISO and Non-Qualified SO, was 7.11 years at February 29, 2020. The total fair value of non-vested stock options as of February 29, 2020 was $6,712,000 and is amortizable over a weighted average period of 3.59 years.

 The fair value of these options was estimated at the date of grant using the Black-Scholes option-pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which do not have vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because our stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options.

The following table summarizes the fair value of the options, including both ISOs and NQSOs, granted during the current fiscal year 2020 and fiscal year 2019:

	YTD FY 2020		FY 2019
Estimated fair value of awards granted	$	1,851,815	$	1,928,820
Unvested Forfeiture Rate		0%		6.20%
Weighted average grant price	$	33.51	$	22.78
Weighted average market price	$	33.51	$	22.69
Weighted average volatility		32.13%		31.61%
Weighted average risk-free rate		1.69%		2.59%
Weighted average dividend yield		0.72%		1.10%
Weighted average expected life		6.68 years		6.64 years

The exercise prices for the options outstanding at February 29, 2020 ranged from $6.75 to $38.81, 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
$	6.75	$	8.00		192,353		4.52 years	$	6.84		192,353		4.52 years	$	6.85
$	8.01	$	16.00		602,161		6.54 years	$	9.97		401,606		6.47 years	$	9.92
$	16.01	$	24.00		241,550		8.30 years	$	20.68		57,930		7.86 years	$	21.00
$	24.01	$	38.81		215,500		9.66 years	$	33.67		0		0 years	$	0
					1,251,564		7.11 years	$	15.64		651,889		6.02 years	$	10.00

During the three and six-month periods ended February 29, 2020, the company issued 2,225 and 4,270 shares of stock to non-management directors of the Company valued at $72,490 and $144,903 respectively as compensation for services rendered to the Company.

XML

11. SUBSEQUENT EVENTS

6 Months Ended

Feb. 29, 2020

Subsequent Events [Abstract]

SUBSEQUENT EVENTS

NOTE 11 - SUBSEQUENT EVENTS:

Dividend Declared

On April 7, 2020, our Board of Directors declared a quarterly cash dividend of $0.06 per share to our shareholders. The dividend will be distributed on Friday, May 1, 2020, for shareholders of record as of Friday, April 24, 2020.

Acquisition of Subsidiary – Lixoft of Paris, France

On March 31, 2020, Simulations Plus, Inc., a California corporation (the “Company”) entered into a Share Purchase and Contribution Agreement (the “Purchase Agreement”) with the owners of Lixoft, a French société par actions simplifiée (the “Transferors”) whereby the Company shall acquire 100% of the equity interests of Lixoft from the Transferors on a debt-free basis which shall result in Lixoft becoming a wholly-owned subsidiary of the Company (the “Transaction”).

As consideration for the Transaction, the Company shall provide up to US$16,500,000 in aggregate consideration to the Transferors consisting of two-thirds (2/3) cash and one-third (1/3) in newly issued shares of restricted common stock of the Company (the “Shares”), as follows:

· US$11,000,000 shall be issued at closing (the “Closing Consideration”) consisting of:

o US$7,333,333 in cash; plus

o US$3,666,667 in Shares

· Up to US$5,500,000 issuable in connection with future earnout payments (2/3 cash and 1/3 Shares) (the “Earnout Consideration”):

o Number of Shares to be determined by the volume-weighted average price of the Company’s common stock for the thirty (30) trading days immediately preceding each earnout reference date;

o Subject to customary exchange rate provisions defining an acceptable range of USD/EUR exchange rate fluctuation;

o Payable in two installments: 12 months and 24 months after closing if and to the extent certain year-over-year performance thresholds are met

A portion of the Closing Consideration, totaling US$2,000,000 (2/3 in cash and 1/3 in Shares), shall be held back (with the Shares being held in an escrow account) against any indemnification claims by the Company for a period of 24 months after the closing of the Transaction.

In addition, at closing, the cash consideration at closing payable to Transferors will be increased by the amount by which Lixoft’s cash on hand exceeds US$150,000, which amount the Company estimates to be approximately US$3,600,000 (“Excess Cash”), and reduced by the amount of Lixoft’s indebtedness and transaction expenses at closing. The aforementioned consideration is subject to adjustment in the event certain working capital targets differ from working capital at closing.

The Shares issued in the Transaction shall not have registration rights and may not be sold for a period of two years after closing of the Transaction.

Lixoft shall be responsible for all taxes relating to all periods prior to and up to the closing of the Transaction. Certain members of senior management of Lixoft have agreed to remain employed and/or consulting with the Company for a period of three years after the closing of the Transaction and shall enter into customary employment/consulting arrangements, including non-competition and non-solicitation provisions for such period.

On April 1, 2020, the Company consummated the acquisition of 100% of the equity interests of Lixoft pursuant to the terms of the Purchase Agreement, with Lixoft becoming a wholly-owned subsidiary of the Company.

Under the terms of the Purchase Agreement, on April 1, 2020 the Company paid the Transferors cash in the amount of US$9,460,000, consisting of the cash Closing Consideration, plus Excess Cash, less the cash portion of the holdback consideration (described below) and the issuance of $3,666,667 worth shares of the Company’s common stock (111,682 shares of the Company’s common stock valued at approximately US$32.79 per share based upon the volume-weighted average price (the “Average Price”) of the Company’s shares of common stock for the thirty (30)-consecutive-trading-day period ending two trading days prior to April 1, 2020), of which 20,326 shares of the Company’s common stock were issued to an escrow account as holdback consideration. The Purchase Agreement provides for a two-year market stand-off period in which the newly-issued shares may not be sold by the recipients thereof.

As described above, a portion of the consideration paid at closing to the Transferors, totaling US$2,000,000, shall be held back against any indemnification claims by the Company for a period of 24 months after the closing of the Transaction. At the release date, subject to any offsets, the $2,000,000 in holdback consideration will be released, comprised of cash in the amount of US$1,333,333.33 and the release of US$666,666.67 worth of shares of the Company’s common stock from escrow (20,326 shares based on the original Average Price of approximately US$32.79).

Outbreak of the COVID-19 illness

An outbreak of a new strain of coronavirus, COVID-19, occurred in China in December 2019 and has spread around the world. The Center for Disease Control (CDC) has recognized this outbreak as a pandemic which has caused shutdowns to businesses and cities worldwide while disrupting supply chains, business operations, travel, consumer confidence, and business sentiment. The situation is ever evolving and its effects both short-term and long-term remain unknown. The majority of significant economic disruption experienced by businesses worldwide have occurred subsequent to our recent fiscal quarter ended February 29, 2020. The extent to which the COVID-19 outbreak impacts our results will depend on future developments that are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of the virus and the actions to contain its impact. The Company is in the process of monitoring and assessing the effect of the COVID-19 outbreak.

Line of Credit

On March 31, 2020, the Company entered into an agreement for a $3.5 million dollar line of credit with a bank, secured by the assets of the Company. Interest is due monthly at either (i) the bank’s base rate(prime), or (ii) a fixed rate per annum rate at LIBOR + 1.75% at the company’s discretion. Amounts outstanding under the agreement are due and payable April 15, 2022.

XML

6. COMMITMENTS AND CONTINGENCIES (Details Narrative) - USD ($)	3 Months Ended		6 Months Ended		12 Months Ended
	Feb. 29, 2020	Feb. 28, 2019	Feb. 29, 2020	Feb. 28, 2019	Aug. 31, 2019
Commitments and Contingencies Disclosure [Abstract]
Rent expense	$ 149,928	$ 147,763	$ 294,693	$ 288,775
Royalty expense	$ 58,131	$ 53,461	$ 111,441	$ 91,571
Interest and penalty expense					$ 531

XML

4. PROPERTY AND EQUIPMENT (Details) - USD ($)	Feb. 29, 2020	Aug. 31, 2019
Property and equipment, gross	$ 1,497,735
Less accumulated depreciation and amortization	(1,162,437)
Net Book Value	335,298	$ 341,145
Equipment [Member]
Property and equipment, gross	744,125
Computer equipment [Member]
Property and equipment, gross	482,454
Furniture and fixtures [Member]
Property and equipment, gross	160,990
Leasehold improvements [Member]
Property and equipment, gross	$ 110,165

XML

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - USD ($)	6 Months Ended
	Feb. 29, 2020	Feb. 28, 2019
Cash flows from operating activities
Net income	$ 4,208,357	$ 3,635,396
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization	1,345,313	1,392,763
Change in value of contingent consideration	0	76,376
Stock-based compensation	784,535	502,605
Deferred income taxes	(17,218)	(149,623)
(Increase) decrease in
Accounts receivable	(2,217,786)	(713,027)
Revenues in excess of billings	(879,526)	(278,922)
Prepaid income taxes	307,878	312,593
Prepaid expenses and other assets	91,811	91,927
Increase (decrease) in
Accounts payable	420,570	(61,861)
Accrued payroll and other expenses	(114,056)	(16,597)
Billings in excess of revenues	93,356	574,345
Accrued income taxes	0	106,845
Deferred revenue	(197,477)	214,897
Net cash provided by operating activities	3,825,757	5,687,717
Cash flows from investing activities
Purchases of property and equipment	(73,462)	(33,394)
Purchases of intellectual property	0	(50,000)
Capitalized computer software development costs	(1,126,772)	(939,869)
Net cash used in investing activities	(1,200,234)	(1,023,263)
Cash flows from financing activities
Payment of dividends	(2,115,119)	(2,093,960)
Payments on contracts payable	0	(2,556,644)
Proceeds from the exercise of stock options	302,749	479,402
Net cash used in financing activities	(1,812,370)	(4,171,202)
Net increase (decrease) in cash and cash equivalents	813,153	493,252
Cash and cash equivalents, beginning of year	11,435,499	9,400,701
Cash and cash equivalents, end of period	12,248,652	9,893,953
Supplemental disclosures of cash flow information
Income taxes paid	1,066,000	781,838
Non-Cash Investing and Financing Activities
Right of use assets acquired	$ 902,553	$ 0

XML

2. SUMMARY - Earnings per share (Details) - USD ($)	3 Months Ended						6 Months Ended
	Feb. 29, 2020	Nov. 30, 2019	Aug. 31, 2019	May 31, 2019	Feb. 28, 2019	Nov. 30, 2018	Feb. 29, 2020	Feb. 28, 2019
Numerator
Net income attributable to common shareholders	$ 2,150,080	$ 2,058,277	$ 2,059,227	$ 2,888,706	$ 2,099,449	$ 1,535,947	$ 4,208,357	$ 3,635,396
Denominator
Weighted-average number of common shares outstanding during the period	17,638,406				17,476,603		17,623,699	17,449,069
Dilutive effect of stock options	677,418				526,138		681,946	535,009
Common stock and common stock equivalents used for diluted earnings per share	18,315,824				18,002,741		18,305,645	17,984,078

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) - USD ($)	Feb. 29, 2020	Aug. 31, 2019
Current assets
Cash and cash equivalents	$ 12,248,652	$ 11,435,499
Accounts receivable, net of allowance for doubtful accounts of $0	7,244,344	5,026,558
Revenues in excess of billings	4,113,185	3,233,659
Prepaid income taxes	457,232	765,110
Prepaid expenses and other current assets	612,505	704,316
Total current assets	24,675,918	21,165,142
Long-term assets
Capitalized computer software development costs, net of accumulated amortization of $12,983,725 and $12,356,055	5,458,837	4,959,736
Property and equipment, net (note 4)	335,298	341,145
Operating lease right of use asset	637,509	0
Intellectual property, net of accumulated amortization of $4,413,334 and $3,948,750	4,561,666	5,026,249
Other intangible assets net of accumulated amortization of $1,383,750 and $1,210,000	3,106,250	3,280,000
Goodwill	10,387,198	10,387,198
Other assets	37,227	37,227
Total assets	49,199,903	45,196,697
Current liabilities
Accounts payable	624,645	204,075
Accrued payroll and other expenses	1,526,891	1,639,038
Income taxes payable	0	0
Current portion - Contracts payable (note 5)	1,761,028	1,761,028
Billings in excess of revenues	891,905	798,549
Operating lease liability, current portion	493,257	0
Deferred revenue	183,310	380,787
Total current liabilities	5,481,036	4,783,477
Long-term liabilities
Deferred income taxes, net	2,714,398	2,731,616
Operating lease liability	142,343	0
Total liabilities	8,337,777	7,515,093
Commitments and contingencies (note 6)
Shareholders' equity (note 7)
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 17,648,646 and 17,591,834 shares issued and outstanding	7,651	7,595
Additional paid-in capital	16,406,702	15,319,474
Retained earnings	24,447,773	22,354,535
Total shareholders' equity	40,862,126	37,681,604
Total liabilities and shareholders' equity	$ 49,199,903	$ 45,196,697

XML

6. COMMITMENTS AND CONTINGENCIES

6 Months Ended

Feb. 29, 2020

Commitments and Contingencies Disclosure [Abstract]

COMMITMENTS AND CONTINGENCIES

NOTE 6: 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 expired in October 2018; and was renewed for a three-year option to extending it to October 2021. The new base rent is $16,147 per month.

In September 2017 DILIsym service 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 initial base rent is $3,975 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 February 29, 2020, and February 28, 2019 was $149,928 and $144,763, respectively, and $294,693 and $288,775 for the six months ended February 29, 2020 and February 28, 2019, respectively.

Future minimum lease payments under non-cancelable operating leases with remaining terms of one year or more at February 29, 2020 were as follows:

Years Ending February 28,
2021	$	512,000
2022		145,000
	$	657,000

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 Dassault Systèmes Americas Corp. 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. We incurred royalty expense of $58,131 and $53,461, respectively, and for the three months ended February 29, 2020 and February 28, 2019, respectively and $111,441 and $91,571 for the six months ended February 29, 2020 and February 28, 2019, 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 $2,531 for fiscal year 2019. We file income tax returns with the IRS and various state jurisdictions and India. Our federal income tax returns for fiscal years 2016 through 2018 are open for audit, and our state tax returns for fiscal year 2015 through 2018 remain open for audit. In addition, certain elements of prior tax years, such as R&D credits, may remain open and may be subject to future 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

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

XML

10. EMPLOYEE BENEFIT PLAN

6 Months Ended

Feb. 29, 2020

Retirement Benefits [Abstract]

EMPLOYEE BENEFIT PLAN

NOTE 10: 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 $109,304 and $91,999 for the three months ended February 29, 2020 and February 28, 2019, respectively and $201,671 and $178,938 for the six months ended February 29, 2020 and February 28, 2019 respectively.

XML

3. REVENUE RECOGNITION (Tables)

6 Months Ended

Feb. 29, 2020

Revenue from Contract with Customer [Abstract]

Disaggregation of revenues

	Three Months Ended February 29, 2020		Six Months Ended February 29, 2020
Disaggregation of Revenues:
Software licenses
Point in time	$	5,130,998	$	9,493,795
Over time		253,491		504,292
Consulting services
Over time		4,965,374		9,752,881
Total Revenue	$	10,349,863	$	19,750,968

XML

7. SHAREHOLDERS' EQUITY (Tables)

6 Months Ended

Feb. 29, 2020

Equity [Abstract]

Schedule of dividends declared and paid

The Company’s Board of Directors declared cash dividends during fiscal years 2020 and 2019. The details of the dividends paid are in the following tables:

FY2020
Record Date	Distribution Date	Number of Shares Outstanding on Record Date		Dividend per Share		Total Amount
10/25/2019	11/01/2019		17,606,314	$	0.06	$	1,056,379
1/27/2020	2/03/2020		17,645,639	$	0.06		1,058,740
Total						$	2,115,119

FY2019
Record Date	Distribution Date	Number of Shares Outstanding on Record Date		Dividend per Share		Total Amount
11/01/2018	11/08/2018		17,417,875	$	0.06	$	1,045,073
1/25/2019	2/1/2019		17,481,450	$	0.06		1,048,887
4/24/2019	5/1/2019		17,515,228	$	0.06		1,050,914
7/25/2019	8/1/2019		17,536,454	$	0.06		1,052,181
Total						$	4,197,055

Schedule of stock option activity

The following table summarizes information about stock options:

Transactions in FY20	Number of Options			Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Life
Outstanding, August 31, 2019		1,163,259		$	12.63		7.13
Granted		168,500		$	33.51
Exercised		(52,360	)	$	7.75
Cancelled/Forfeited		(27,835	)	$	13.04
Expired		–		$	–
Outstanding, February 29, 2020		1,251,564		$	15.64		7.11
Exercisable, February 29, 2020		651,889		$	10.00		6.02

Schedule of assumptions

The following table summarizes the fair value of the options, including both ISOs and NQSOs, granted during the current fiscal year 2020 and fiscal year 2019:

	YTD FY 2020		FY 2019
Estimated fair value of awards granted	$	1,851,815	$	1,928,820
Unvested Forfeiture Rate		0%		6.20%
Weighted average grant price	$	33.51	$	22.78
Weighted average market price	$	33.51	$	22.69
Weighted average volatility		32.13%		31.61%
Weighted average risk-free rate		1.69%		2.59%
Weighted average dividend yield		0.72%		1.10%
Weighted average expected life		6.68 years		6.64 years

Schedule of options by exercise price range

The exercise prices for the options outstanding at February 29, 2020 ranged from $6.75 to $38.81, 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
$	6.75	$	8.00		192,353		4.52 years	$	6.84		192,353		4.52 years	$	6.85
$	8.01	$	16.00		602,161		6.54 years	$	9.97		401,606		6.47 years	$	9.92
$	16.01	$	24.00		241,550		8.30 years	$	20.68		57,930		7.86 years	$	21.00
$	24.01	$	38.81		215,500		9.66 years	$	33.67		0		0 years	$	0
					1,251,564		7.11 years	$	15.64		651,889		6.02 years	$	10.00

XML

2. SUMMARY - Fair value measurements (Details) - Fair Value Measurements Recurring [Member] - USD ($)	Feb. 29, 2020	Aug. 31, 2019
Cash and Cash Equivalents [Member]
Fair value assets	$ 12,248,652	$ 11,435,499
Acquisition-related Contingent Consideration Obligations [Member]
Fair value liabilities	1,761,028	1,761,028
Fair Value, Inputs, Level 1 [Member] | Cash and Cash Equivalents [Member]
Fair value assets	12,248,652	11,435,499
Fair Value, Inputs, Level 1 [Member] | Acquisition-related Contingent Consideration Obligations [Member]
Fair value liabilities	0	0
Fair Value, Inputs, Level 2 [Member] | Cash and Cash Equivalents [Member]
Fair value assets	0	0
Fair Value, Inputs, Level 2 [Member] | Acquisition-related Contingent Consideration Obligations [Member]
Fair value liabilities	0	0
Fair Value, Inputs, Level 3 [Member] | Cash and Cash Equivalents [Member]
Fair value assets	0	0
Fair Value, Inputs, Level 3 [Member] | Acquisition-related Contingent Consideration Obligations [Member]
Fair value liabilities	$ 1,761,028	$ 1,761,028

XML

8. CONCENTRATIONS AND UNCERTAINTIES (Details Narrative) - USD ($)	6 Months Ended
	Feb. 29, 2020	Feb. 28, 2019
Cash and cash equivalents exceeding insured limits	$ 10,985,000
Net Sales [Member] | International Sales [Member]
Net sales concentration percentage	33.00%	38.00%
Net Sales [Member] | Customer 1 [Member]
Net sales concentration percentage	7.00%	10.00%
Net Sales [Member] | Customer 2 [Member]
Net sales concentration percentage	6.00%	8.00%
Net Sales [Member] | Customer 3 [Member]
Net sales concentration percentage	6.00%	0.00%
Accounts Receivable [Member] | Customer 1 [Member]
Net sales concentration percentage	10.00%	8.00%
Accounts Receivable [Member] | Customer 2 [Member]
Net sales concentration percentage	5.00%	7.00%
Accounts Receivable [Member] | Customer 3 [Member]
Net sales concentration percentage	5.00%	5.00%
Accounts Receivable [Member] | Customer 4 [Member]
Net sales concentration percentage	5.00%	5.00%

XML

7. SHAREHOLDERS EQUITY (Details - Option activity) - Stock Options [Member]	6 Months Ended
	Feb. 29, 2020 $ / shares shares
Number of Options
Option outstanding, beginning balance | shares	1,163,259
Granted | shares	168,500
Exercised | shares	(52,360)
Canceled/Forfeited | shares	(27,835)
Expired | shares	0
Awards Outstanding, ending balance | shares	1,251,564
Vested and Exercisable, end of period | shares	651,889
Weighted-Average Exercise Price Per Share
Outstanding | $ / shares	$ 12.63
Granted | $ / shares	33.51
Exercised | $ / shares	7.75
Canceled/Forfeited | $ / shares	13.04
Expired | $ / shares
Outstanding | $ / shares	15.64
Vested and Exercisable, end of period | $ / shares	$ 10.00
Weighted-Average Remaining Contractual Life
Weighted average remaining contractual life	7 years 1 month 9 days
Vested and Exercisable	6 years 7 days