SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

	☒	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended November 30, 2021

OR

	☐	Transmission Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 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 10th 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

Common Stock, par value $0.001 per share

Trading Symbol

SLP

Name of Each Exchange on Which Registered

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 filing 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	☐ 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 January 4, 2022, was 20,175,426.

Simulations Plus, Inc.

FORM 10-Q

For the Quarterly Period Ended November 30, 2021

Table of Contents

PART I. FINANCIAL INFORMATION
		Page
Item 1.	Condensed Consolidated Financial Statements

	Condensed Consolidated Balance Sheets at November 30, 2021 and August 31, 2021	3

	Condensed Consolidated Statements of Operations and Comprehensive Income for the three months ended November 30, 2021 and November 30, 2020	4

	Condensed Consolidated Statements of Shareholders’ Equity for the three months ended November 30, 2021 and November 30, 2020	5

	Condensed Consolidated Statements of Cash Flows for the three months ended November 30, 2021 and November 30, 2020	6

	Notes to Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	30

Item 4.	Controls and Procedures	30

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	31

Item 1A.	Risk Factors	31

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31

Item 3.	Defaults upon Senior Securities	31

Item 4.	Mine Safety Disclosures	31

Item 5.	Other Information	31

Item 6.	Exhibits	32

	Signatures	33

Part I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

SIMULATIONS PLUS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS


	(Unaudited)			(Audited)
	November 30,			August 31,
(in thousands, except share and per share amounts)	2021			2021
ASSETS
Current assets
Cash and cash equivalents	$	41,680		$	36,984
Accounts receivable, net of allowance for doubtful accounts of $12 and $78		11,823			9,851
Revenue in excess of billings		1,483			3,150
Prepaid income taxes		584			1,012
Prepaid expenses and other current assets		1,676			1,696
Short-term investments		82,660			86,620
Total current assets		139,906			139,313
Long-term assets
Capitalized computer software development costs, net of accumulated amortization of $14,734 and $14,438		8,189			7,646
Property and equipment, net		2,339			1,838
Operating lease right-of-use assets		1,146			1,276
Intellectual property, net of accumulated amortization of $6,873 and $6,516		10,112			10,469
Other intangible assets, net of accumulated amortization of $2,319 and $2,186		6,331			6,464
Goodwill		12,921			12,921
Other assets		50			51
Total assets	$	180,994		$	179,978

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable	$	19		$	387
Accrued payroll and other expenses		3,967			5,604
Contracts payable - current portion		4,671			4,550
Billings in excess of revenue		52			117
Operating lease liability - current portion		338			382
Deferred revenue		568			534
Total current liabilities		9,615			11,574

Long-term liabilities
Deferred income taxes, net		2,113			1,726
Operating lease liability		810			896
Total liabilities		12,538			14,196

Commitments and contingencies		–			–

Shareholders' equity
Preferred stock, $0.001 par value 10,000,000 shares authorized, no shares issued and outstanding		–			–
Common stock, $0.001 par value and additional paid-in capital —50,000,000 shares authorized, 20,168,796 and 20,141,521 shares issued and outstanding		134,512			133,418
Retained earnings		34,224			32,407
Accumulated other comprehensive loss		(280	)		(43	)
Total shareholders' equity		168,456			165,782
Total liabilities and shareholders' equity	$	180,994		$	179,978

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

SIMULATIONS PLUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Unaudited)


	Three Months Ended November 30,
(in thousands, except per common share amounts)	2021			2020

Revenue
Software	$	7,362		$	6,212
Services		5,055			4,489
Total revenue		12,417			10,701
Cost of revenue
Software		735			812
Services		2,021			1,621
Total cost of revenue		2,756			2,433
Gross profit		9,661			8,268
Operating expenses
Research and development		882			809
Selling, general, and administrative		4,988			4,408
Total operating expenses		5,870			5,217

Income from operations		3,791			3,051

Other income (expense)
Interest income		64			61
Change in valuation of contingent consideration		(121	)		(121	)
Gain on sale of assets		1			–
Gain on currency exchange		121			5
Total other income (expense), net		65			(55	)

Income before income taxes		3,856			2,996
Provision for income taxes		(830	)		(517	)
Net Income	$	3,026		$	2,479

Earnings per share
Basic	$	0.15		$	0.12
Diluted	$	0.15		$	0.12

Weighted-average common shares outstanding
Basic		20,150			19,930
Diluted		20,746			20,799

Other comprehensive income (loss), net of tax
Foreign currency translation adjustments		(237	)		–
Comprehensive income	$	2,789		$	2,479

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

SIMULATIONS PLUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(Unaudited)


(in thousands, except per common share amounts)	Three Months Ended November 30,
	2021			2020
Common stock and additional paid in capital
Balance, beginning of period	$	133,418		$	128,541
Exercise of stock options		372			180
Stock-based compensation		634			449
Shares issued to Directors for services		88			83
Balance, end of period	$	134,512		$	129,253

Retained earnings
Balance, beginning of period	$	32,407		$	27,436
Declaration of dividend		(1,209	)		(1,195	)
Net income		3,026			2,479
Balance, end of period	$	34,224		$	28,720

Accumulated other comprehensive income (loss)
Balance, beginning of period	$	(43	)	$	58
Other comprehensive loss		(237	)		–
Balance, end of period	$	(280	)	$	58
Total shareholders’ equity		165,782			–
Other comprehensive income (loss)		–			–
Total shareholders’ equity	$	168,456		$	158,031
Cash dividends declared per common share	$	0.06		$	0.06

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

SIMULATIONS PLUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Three Months Ended November 30,
(in thousands)	2021			2020
Cash flows from operating activities
Net income	$	3,026		$	2,479
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		845			865
Change in value of contingent consideration		121			121
Amortization of investment premiums		610			630
Stock-based compensation		722			532
Deferred income taxes		387			47
Currency translation adjustments		(237	)		–
(Increase) decrease in
Accounts receivable		(1,972	)		91
Revenue in excess of billings		1,667			256
Prepaid income taxes		428			410
Prepaid expenses and other assets		21			(141	)
Increase (decrease) in
Accounts payable		(368	)		(15	)
Accrued payroll and other expenses		(1,637	)		49
Billings in excess of revenue		(65	)		65
Deferred revenue		34			(56	)
Net cash provided by operating activities		3,582			5,333

Cash flows provided by (used in) investing activities
Purchases of property and equipment		(561	)		(205	)
Purchases of short-term investments		(12,717	)		(30,959	)
Proceeds from sale of short-term investments		16,067			6,018
Capitalized computer software development costs		(838	)		(728	)
Net cash provided by (used in) investing activities		1,951			(25,874	)

Cash flows used in financing activities
Payment of dividends		(1,209	)		(1,195	)
Proceeds from the exercise of stock options		372			180
Net cash used in financing activities		(837	)		(1,015	)

Net increase (decrease) in cash and cash equivalents		4,696			(21,556	)
Cash and cash equivalents, beginning of year		36,984			49,207
Cash and cash equivalents, end of period	$	41,680		$	27,651

Supplemental disclosures of cash flow information
Income taxes paid	$	23		$	57

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

SIMULATIONS PLUS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1: GENERAL

This report on Form 10-Q for the quarter ended November 30, 2021 should be read in conjunction with our Annual Report on Form 10-K for the year ended August 31, 2021, filed with the Securities and Exchange Commission (“SEC”) on October 27, 2021. 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”) was incorporated on July 17, 1996. In September 2014, Simulations Plus acquired all of the outstanding equity interests of Cognigen Corporation (“Cognigen”) and Cognigen became a wholly owned subsidiary of Simulations Plus, Inc. In June 2017, Simulations Plus acquired DILIsym Services, Inc. (“DILIsym”) as a wholly owned subsidiary. In April 2020, Simulations Plus, Inc. acquired Lixoft, a French société par actions simplifiée (“Lixoft”) as a wholly owned subsidiary pursuant to a stock purchase and contribution agreement. (Collectively, “Company,” “we,” “us,” “our”).

Effective September 1, 2021, the Company merged Cognigen and DILIsym with and into Simulations Plus, Inc. through short form mergers (the “Mergers”). To effectuate the Mergers, the Company filed Certificates of Ownership with the Secretaries of State of the states of Delaware (Cognigen’s and DILIsym’s state of incorporation) and California (Simulation Plus’ state of incorporation). Consummation of the Mergers was not subject to approval of the Company’s stockholders and did not impact the rights of the Company’s stockholders.

Lines of Business

We are a premier developer of drug discovery and development software for modeling and simulation, and for the prediction of molecular properties utilizing artificial intelligence (“AI”) and machine learning based technology. We also provide consulting services ranging from early drug discovery through preclinical and clinical trial data analysis and for submissions to regulatory agencies. Our software and consulting services are provided to major pharmaceutical, biotechnology, agrochemical, cosmetics, and food industry companies. They are also provided to academic agencies for use in the conduct of industry-based research and to regulatory agencies for product approval.

NOTE 2: SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Simulations Plus, Inc. and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated upon consolidation.

Use of Estimates

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

Reclassifications

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

Revenue Recognition

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

In accordance with Accounting Standards Codification Topic 606 (ASC Topic 606), “Revenue from Contracts with Customers”, we determine 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, we satisfy a performance obligation

Deferred Commissions

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

Practical Expedients and Exemptions

We have elected the following additional practical expedients in applying Topic 606:

Commission Expense: 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. This expense is included in the condensed consolidated statements of operations as selling, general, and administrative expense.

Transaction Price Allocated to Future Performance Obligations: ASC 606 requires that we disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied as of November 30, 2021. ASC 606 provides certain practical expedients that limit the requirement to disclose the aggregate amount of transaction price allocated to unsatisfied performance obligations.

We applied the practical expedient to not disclose the amount of transaction price allocated to unsatisfied performance obligations when the performance obligation is part of a contract that has an original expected duration of one year or less.

Cash and Cash Equivalents

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

Accounts Receivable

We analyze the age of customer balances, historical bad-debt experience, customer creditworthiness, and changes in customer payment terms when making estimates of the collectability of our trade accounts receivable balances. If we determine that the financial conditions of any of our customers have deteriorated, whether due to customer-specific or general economic issues, an increase in the allowance may be made. Accounts receivable are written off when reasonable collection attempts have failed.

Investments

The Company may invest excess cash balances in short-term and long-term marketable debt securities. Investments may consist of certificates of deposit, money market accounts, government-sponsored enterprise securities, corporate bonds and/or commercial paper within the parameters of our Investment Policy and Guidelines. The Company accounts for its investments in marketable securities in accordance with Financial Accounting Standards Board (“FASB”) ASC 320, Investments – Debt and Equity Securities. This statement requires debt securities to be classified into three categories:

Held-to-maturity—Debt securities that the entity has the positive intent and ability to hold to maturity are reported at amortized cost. Discounts and premiums to par value of the debt securities are amortized to interest income/expense over the term of the security. No gains or losses on investment securities are realized until they are sold or a decline in fair value is determined to be other-than-temporary.

Trading Securities—Debt securities that are bought and held primarily for the purpose of selling in the near term are reported at fair value, with unrealized gains and losses included in earnings.

Available-for-Sale—Debt securities not classified as either securities held-to-maturity or trading securities are reported at fair value with unrealized gains or losses excluded from earnings and reported as a separate component of shareholders’ equity.

We classify our investments in marketable debt securities based on the facts and circumstances present at the time of purchase of the securities. During the quarter ended November 30, 2021, all of our investments were classified as held-to-maturity.

Capitalized Computer Software Development Costs

Software development costs are capitalized in accordance with FASB ASC 985-20, Costs of Software to Be Sold, Leased, or Marketed. Capitalization of software development costs begins upon the establishment of technological feasibility and is discontinued when the product is available for sale.

The establishment of technological feasibility and the ongoing assessment for recoverability of capitalized software development costs require considerable judgment by management with respect to certain external factors including, but not limited to, technological feasibility, anticipated future gross revenue, estimated economic life, and changes in software and hardware technologies. Capitalized software development costs are comprised primarily of salaries and direct payroll-related costs and the purchase of existing software to be used in our software products.

Amortization of capitalized software development costs is calculated on a product-by-product basis on the straight-line method over the estimated economic life of the products (not to exceed five years). Amortization of software development costs amounted to $296 thousand and $325 thousand for the three months ended November 30, 2021 and 2020, 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 calculated 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

Internal-use Software

We have a service contract related to the implementation of internally used software. In accordance with ASC 350-40 “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract”, we have capitalized certain internal-use software which are included in long-term assets.

The amortization will be classified as selling, general, and administrative expenses on the condensed consolidated statement of operations, and maintenance and minor upgrades are charged to expense as incurred. Gains and losses on disposals are included in the results of operations. No amortization has been expensed for the project as it is still in progress.

Leases

Supplemental balance sheet information related to operating leases was as follows as of November 30, 2021:


(in thousands)
Right-of-use assets	$	1,146
Lease liabilities, current	$	338
Lease liabilities, long-term	$	810
Operating lease costs	$	141
Weighted average remaining lease term		2.25 years
Weighted average discount rate		3.79%

Intangible Assets and Goodwill

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

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

Goodwill is tested for impairment at the reporting unit level, which is one level below or the same as an operating segment. As of November 30, 2021, we determined that we have four reporting units: Simulations Plus, Cognigen, DILIsym, and Lixoft. When testing goodwill for impairment, we first perform a qualitative assessment to determine whether it is necessary to perform step one of a two-step annual goodwill impairment test for each reporting unit. We are required to perform step one only if it concludes that it is more likely than not that a reporting unit's fair value is less than its carrying value. Should this be the case, the first step of the two-step process is to identify whether a potential impairment exists by comparing the estimated fair values of our reporting units with their respective book values, including goodwill. If the estimated fair value of the reporting unit exceeds book value, goodwill is considered not to be impaired, and no additional steps are necessary. If, however, the fair value of the reporting unit is less than book value, then the second step is performed to determine if goodwill is impaired and to measure the amount of impairment loss, if any. The amount of the impairment loss is the excess of the carrying amount of the goodwill over its implied fair value. The estimate of implied fair value of goodwill is primarily based on an estimate of the discounted cash flows expected to result from that reporting unit but may require valuations of certain internally generated and unrecognized intangible assets such as our software, technology, patents, and trademarks. If the carrying amount of goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess.

As of November 30, 2021, the entire balance of goodwill was attributed to three of our reporting units: Cognigen, DILIsym, and Lixoft. Intangible assets subject to amortization are reviewed for impairment whenever events or circumstances indicate that the carrying amount of these assets may not be recoverable. We did not recognize any impairment charges during the three months ended November 30, 2021 and 2020.

Reconciliation of Goodwill as of November 30, 2021:

Schedule of reconciliation of goodwill
(in thousands)	Cognigen		DILIsym		Lixoft		Total
Balance, August 31, 2021	$	4,789	$	5,598	$	2,534	$	12,921
Addition		–		–		–		–
Impairments		–		–		–		–
Balance, November 30, 2021	$	4,789	$	5,598	$	2,534	$	12,921

Fair Value of Financial Instruments

Assets and liabilities recorded at fair value in the Condensed Balance Sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. The categories, as defined by the standard are as follows:

Level Input:		Input Definition:
Level I		Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date.
Level II		Inputs, other than quoted prices included in Level I, that are observable for the asset or liability through corroboration with market data at the measurement date.
Level III		Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.

For certain of our financial instruments, including accounts receivable, accounts payable, accrued payroll and other expenses, accrued bonuses to officers, and accrued warranty and service costs, the amounts approximate fair value due to their short maturities.

The following table summarizes fair value measurements at November 30, 2021 and August 31, 2021 for assets and liabilities measured at fair value on a recurring basis:

November 30, 2021:

Schedule of fair value measurements
(in thousands)	Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	41,680	$	–	$	–	$	41,680
Short-term investments	$	82,364	$	–	$	–	$	82,364
Acquisition-related contingent consideration obligations	$	–	$	–	$	3,338	$	3,338

August 31, 2021:

(in thousands)	Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	36,984	$	–	$	–	$	36,984
Short-term investments	$	86,484	$	–	$	–	$	86,484
Acquisition-related contingent consideration obligations	$	–	$	–	$	3,217	$	3,217

As of November 30, 2021 and August 31, 2021, we had a liability for contingent consideration related to our acquisition of Lixoft. The fair value measurement of the contingent consideration obligations is determined using Level 3 inputs. The fair value of contingent consideration obligations is based on a discounted cash flow model using a probability-weighted income approach. These fair value measurements represent Level 3 measurements as they are based on significant inputs not observable in the market. Significant judgment is employed in determining the appropriateness of these assumptions as of the acquisition date and for each subsequent period. Accordingly, changes in assumptions could have a material impact on the amount of contingent consideration expense we record in any given period. Changes in the value of the contingent consideration obligations are recorded in our Consolidated Statement of Operations.

The following is a reconciliation of contingent consideration value:


(in thousands)
Value at August 31, 2021	$	3,217
Contingent consideration payments		–
Change in value of contingent consideration		121
Value at November 30, 2021	$	3,338

Research and Development Costs

Research and development costs are charged to expense as incurred until technological feasibility has been established. These costs include salaries, laboratory experiments, and purchased software that was developed by other companies and incorporated into, or used in the development of, our final products.

Income Taxes

We account for income taxes in accordance with ASC 740-10, “Income Taxes” 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

The following table summarizes intellectual property as of November 30, 2021:

Schedule of intellectual property
(in thousands)	Amortization Period	Acquisition Value		Accumulated Amortization		Net Book Value
Royalty Agreement buy out-Enslein Research	Straight line 10 years	$	75	$	73	$	2
Termination/nonassertion agreement-TSRL Inc.	Straight line 10 years		6,000		4,525		1,475
Developed technologies–DILIsym acquisition	Straight line 9 years		2,850		1,425		1,425
Intellectual rights of Entelos Holding Corp.	Straight line 10 years		50		16		34
Developed technologies–Lixoft acquisition	Straight line 16 years		8,010		834		7,176
		$	16,985	$	6,873	$	10,112

The following table summarizes intellectual property as of August 31, 2021:

(in thousands)	Amortization Period	Acquisition Value		Accumulated Amortization		Net Book Value
Royalty Agreement buy out-Enslein Research	Straight line 10 years	$	75	$	71	$	4
Termination/nonassertion agreement-TSRL Inc.	Straight line 10 years		6,000		4,375		1,625
Developed technologies–DILIsym acquisition	Straight line 9 years		2,850		1,346		1,504
Intellectual rights of Entelos Holding Corp.	Straight line 10 years		50		15		35
Developed technologies–Lixoft acquisition	Straight line 16 years		8,010		709		7,301
		$	16,985	$	6,516	$	10,469

Amortization expense for intellectual property agreements for the three months ended November 30, 2021 and 2020 was $357 thousand and $357 thousand, respectively.

Other intangible assets

The following table summarizes our other intangible assets as of November 30, 2021:

Schedule of other intangible assets
(in thousands)	Amortization Period	Acquisition Value		Accumulated Amortization		Net Book Value
Cognigen
Customer relationships	Straight line 8 years	$	1,100	$	997	$	103
Trade name	None		500		–		500
Covenants not to compete	Straight line 5 years		50		50		–
DILIsym
Customer relationships	Straight line 10 years		1,900		855		1,045
Trade name	None		860		–		860
Covenants not to compete	Straight line 4 years		80		80		–
Lixoft
Customer relationships	Straight line 14 years		2,550		304		2,246
Trade name	None		1,550		–		1,550
Covenants not to compete	Straight line 3 years		60		33		27
		$	8,650	$	2,319	$	6,331

The following table summarizes our other intangible assets as of August 31, 2021:

(in thousands)	Amortization Period	Acquisition Value		Accumulated Amortization		Net Book Value
Cognigen
Customer relationships	Straight line 8 years	$	1,100	$	963	$	137
Trade name	None		500		–		500
Covenants not to compete	Straight line 5 years		50		50		–
DILIsym
Customer relationships	Straight line 10 years		1,900		807		1,093
Trade name	None		860		–		860
Covenants not to compete	Straight line 4 years		80		80		–
Lixoft
Customer relationships	Straight line 14 years		2,550		258		2,292
Trade name	None		1,550		–		1,550
Covenants not to compete	Straight line 3 years		60		28		32
		$	8,650	$	2,186	$	6,464

Amortization expense for other intangible assets for the three months ended November 30, 2021 and 2020 was $133 thousand and $137 thousand, respectively. According to policy in addition to normal amortization, these assets are tested for impairment as needed.

Earnings per Share

We report earnings per share in accordance with FASB ASC 260-10. Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of common shares available. Diluted earnings per share is computed similarly to basic earnings per share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. The components of basic and diluted earnings per share for the three months ended November 30, 2021 and 2020 were as follows:

Schedule of earnings per share
	Three months ended November 30,
(in thousands)	2021		2020
Numerator:
Net income attributable to common shareholders	$	3,026	$	2,479

Denominator:
Weighted-average number of common shares outstanding during the period		20,150		19,930
Dilutive effect of stock options		596		869
Common stock and common stock equivalents used for diluted earnings per share		20,746		20,799

Stock-Based Compensation

Compensation costs related to stock options are determined in accordance with FASB ASC 718-10, “Compensation-Stock Compensation”, 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 expense related to stock options, not including shares issued to Directors for services, was $634 thousand and $449 thousand for the three months ended November 30, 2021 and 2020, respectively. This expense is included in the condensed consolidated statements of operations as selling, general, and administration and research and development expense.

Impairment of Long-lived Assets

We account for the impairment and disposition of long-lived assets in accordance with ASC 350, “Intangibles – Goodwill and Other” 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 three months ended November 30, 2021 and 2020.

Recently Issued Accounting Pronouncements

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which is intended to simplify various areas related to the accounting for income taxes and improve consistent application of Topic 740. The guidance eliminates certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside-basis differences related to changes in ownership of equity-method investments and foreign subsidiaries. The guidance also simplifies aspects of accounting for franchise taxes and the accounting for the enacted changes in tax laws or rates, as well as the accounting for the step-up in the tax basis of goodwill. ASU 2019-12 is effective for us beginning in fiscal 2022. The adoption of the new standard is not expected to have a material impact on the Company’s consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). The amendments in ASU 2020-04 provide temporary optional expedients and exceptions for applying GAAP to contract modifications, hedging relationships, and other transactions to ease the potential accounting and financial reporting burden associated with transitioning away from reference rates that are expected to be discontinued, including the London Interbank Offered Rate (“LIBOR”). This ASU is effective as of March 12, 2020, through December 31, 2022. The adoption of the new standard has not had and is not expected to have a material impact on our financial statements or related disclosures.

In October 2021, the FASB issued Accounting Standards Update No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU 2021-08”). The amendment requires contract assets and contract liabilities acquired in a business combination to be recognized and measured in accordance with ASC 606, Revenue from Contracts with Customers, as if the acquirer had originated the contract. The Update is intended to improve the accounting for acquired revenue contracts with customers in a business combination, related to the recognition of an acquired contract liability, and to payment terms and their effect on subsequent revenue recognized by the acquirer. The amendment also provides certain practical expedients when applying the guidance. ASU 2021-08 is effective for interim and annual periods beginning after December 15, 2022, on a prospective basis, with early adoption permitted. The Company expects to adopt ASU 2021-08 in the first quarter of fiscal year 2024. The Company is currently evaluating the potential impact of ASU 2021-08 to its consolidated financial statements.

In November 2021, the FASB issued ASU 2021-10, “Government Assistance (Topic 832),” which requires business entities to disclose information about transactions with a government that are accounted for by applying a grant or contribution model by analogy (for example, IFRS guidance in IAS 20 or guidance on contributions for not-for-profit entities in ASC 958-605). For transactions within scope, the new standard requires the disclosure of information about the nature of the transaction, including significant terms and conditions, as well as the amounts and specific financial statement line items affected by the transaction. The new guidance is effective for annual reporting periods beginning after December 15, 2021. The Company does not expect that the adoption of this standard will have a material impact on its condensed consolidated financial statements; however, the Company expects to increase its disclosures with respect to government assistance beginning in the first quarter of fiscal year 2023.

NOTE 3: REVENUE RECOGNITION

Contract Liabilities

During the three months ended November 30, 2021 and 2020, we recognized $353 thousand and $296 thousand of revenue that was included in contract liabilities as of August 31, 2021, and 2020, respectively.

Disaggregation of Revenue

The components of disaggregation of revenue for the three months ended November 30, 2021 and 2020 were as follows:

Schedule of disaggregation of revenue
(in thousands)	Three Months Ended November 30,
	2021		2020
Software licenses:
Point in time	$	7,107	$	6,001
Over time		255		211

Consulting services:
Over time		5,055		4,489
Total revenue	$	12,417	$	10,701

Remaining Performance Obligations

Remaining performance obligations that do not fall under the expedients require us to perform various consulting and software development services of approximately $3.5 million. It is anticipated that a majority of these revenues will be recognized within the next twelve months.

NOTE 4: PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:

Schedule of property and equipment
(in thousands)	November 30, 2021			August 31, 2021
Equipment	$	677		$	606
Computer equipment		383			293
Furniture and fixtures		36			36
Leasehold improvements		13			13
Construction in progress*		1,702			1,302
Sub total		2,811			2,250
Less: accumulated depreciation		(472	)		(412	)
Net book value	$	2,339		$	1,838

*	Includes ERP costs associated with the development of internal-use software.

NOTE 5: INVESTMENTS

We invest a portion of our excess cash balances in short-term debt securities within the parameters of our Investment Policy and Guidelines. Investments as of November 30, 2021, consisted of corporate bonds with maturities remaining of less than 12 months. We may also invest excess cash balances in certificates of deposit, money market accounts, government-sponsored enterprise securities, corporate bonds, and/or commercial paper. We account for investments in accordance with FASB ASC 320, Investments – Debt and Equity Securities. As of November 30, 2021, all investments were classified as held-to-maturity securities.

The following tables summarize our short-term investments as of November 30, 2021 and August 31, 2021:

November 30, 2021

Schedule of short term investments
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value

Commercial notes (due within one year)	$	82,660	$	–	$	(296	)	$	82,364
Total	$	82,660	$	–	$	(296	)	$	82,364

August 31, 2021

(in thousands)

Amortized Cost

Gross

Unrealized

Gains

Gross

Unrealized

Losses

Fair Value

SEC Form 10-Q filed by Simulations Plus, Inc.