Simulations Plus, Inc. 10-K

ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures Our Chief Executive Officer and our Chief Financial Officer, after evaluating our “disclosure controls and procedures” (as defined in Securities Exchange Act of 1934 (the “Exchange Act”) Rules 13a-15(e) and 15d-15(e) as of the end of the period covered by this Annual Report on Form 10-K (the “Evaluation Date”), have concluded that as of the Evaluation Date, our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and to ensure that information required to be disclosed by us in such reports is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, where appropriate, to allow timely decisions regarding required disclosure. Management Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of consolidated financial statements for external purposes in accordance with U.S. GAAP. Management assessed our internal control over financial reporting as of August 31, 2020, the end of our fiscal year. Management based its assessment on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Management’s assessment included evaluation of elements such as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and our overall control environment. 47 Based on this assessment, management has concluded that our internal control over financial reporting was effective as of the end of the fiscal year to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external reporting purposes in accordance with U.S. GAAP. We reviewed the results of management’s assessment with the Audit Committee of our Board of Directors. Inherent Limitations on Effectiveness of Controls Our management, including the CEO and CFO, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well-designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of the effectiveness of controls to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. 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. Attestation Report of the Registered Public Accounting Firm This annual report does not include an attestation report of our independent registered public accounting firm as the Company is a non-accelerated filer and is thus not required to provide such a report. ITEM 9B - OTHER INFORMATION None. 48 PART III ITEM 10 – DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE Information required by Item 10 is incorporated by reference from the sections entitled “Board Matters and Corporate Governance,” “Election of Directors,” “Executive Compensation and Other Information,” and “Security Ownership of Certain Beneficial Owners and Management” in our definitive proxy statement on Schedule 14A to be distributed in connection with our 2020 Annual Shareholders’ Meeting (the “Proxy Statement”). There have been no material changes to the procedures by which security holders may recommend nominees to our board of directors since we last described such procedures. The Company has a Corporate Code of Ethics which is posted on our website: www.simulations-plus.com. ITEM 11 – EXECUTIVE COMPENSATION The information required by Item 11 is incorporated by reference from the sections entitled “Executive Compensation and Other Information” and “Board Matters and Corporate Governance” in the Proxy Statement. ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required by Item 12 is incorporated by reference from the sections entitled “Security Ownership of Certain Beneficial Owners and Management” and “Executive Compensation and Other Information” in the Proxy Statement. ITEM 13 – CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information required by Item 13 is incorporated by reference from the subsection entitled “Certain Relationships and Related Transactions; Transactions with Related Persons” and the section entitled “Board Matters and Corporate Governance” in the Proxy Statement. ITEM 14 – PRINCIPAL ACCOUNTING FEES AND SERVICES The information required by Item 14 is incorporated by reference from the section of the proposal entitled “Ratification of Selection of Independent Registered Public Accounting Firm” in the Proxy Statement. 49 PART IV ITEM 15 – EXHIBITS, FINANCIAL STATEMENT SCHEDULES (a) (1) Financial Statements. The consolidated financial statements are included in this Annual Report on Form 10-K beginning on page F-1. (2) Financial Statement Schedules. All financial statement schedules have been omitted since the information is either not applicable or required or was included in the financial statements or notes included in this Annual Report on Form 10-K. (3) List of Exhibits required by Item 601 of Regulation S-K. See part (b) below. (b) Exhibits. The following exhibits are filed or furnished with this report. Those exhibits marked with a (†) refer to management contracts or compensatory plans or arrangements. 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. 2.2 (12)^ Share Purchase and Contribution Agreement, dated March 31, 2020 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. 4.3(13) Revolving Line of Credit Note, dated as of March 31, 2020, by and between the Company, as borrower, and Wells Fargo Bank, National Association, as lender. 4.4(13) Credit Agreement, dated as of March 31, 2020, by and between the Company, as borrower, and Wells Fargo Bank, National Association, as lender. 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 June 26, 2018 10.12 (14) (†) Employment Agreement by and between the Company and Shawn O’Connor dated September 3, 2020 50 21.1 * List of Subsidiaries. 23.1 * Consent of Independent Registered Public Accounting Firm. 31.1 * Section 302 – Certification of the Principal Executive Officer. 31.2 * Section 302 – Certification of the Principal Financial Officer. 32.1 * 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. * Filed herewith. ** The XBRL related information in Exhibit 101 shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document. (†) Refers to management contracts or compensatory plans or arrangements (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. (14) Incorporated by reference to an exhibit to the Company’s Form 8-K filed September 9, 2020. (c) Financial Statement Schedule. See Item 15(a)(2) above. 51 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. November 16, 2020 SIMULATIONS PLUS, INC. By: /s/ John R. Kneisel John R. Kneisel Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title /s/ Shawn O’Connor Chief Executive Officer (Principal executive officer) Shawn O’Connor November 16, 2020 /s/ Walter S. Woltosz Chairman of the Board of Directors Walter S. Woltosz November 16, 2020 /s/ Dr. Lisa LaVange Director Dr. Lisa LaVange November 16, 2020 /s/ Dr. Daniel Weiner Director Dr. Daniel Weiner November 16, 2020 /s/ Dr. David L. Ralph Director Dr. David L. Ralph November 16, 2020 /s/ Dr. John K. Paglia Director Dr. John K. Paglia November 16, 2020 /s/ John R. Kneisel Chief Financial Officer (Principal financial John R. Kneisel officer and principal accounting officer) November 16, 2020 52 SIMULATIONS PLUS, INC. & SUBSIDIARY CONTENTS August 31, 2020, 2019 and 2018 Page REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-2 FINANCIAL STATEMENTS Consolidated Balance Sheets F-3 Consolidated Statements of Operations and Comprehensive Income F-4 Consolidated Statements of Shareholders’ Equity F-5 Consolidated Statements of Cash Flows F-6 Notes to Consolidated Financial Statements F-7 – F-31 F- 1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Simulations Plus, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Simulations Plus, Inc. and subsidiaries (the Company) as of August 31, 2020 and 2019, and the related consolidated statements of operations and comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended August 31, 2020, and the related notes (collectively referred to as the financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of August 31, 2020 and 2019, and the consolidated results of its operations and its cash flows for each of the years in the three-year period ended August 31, 2020, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Rose, Snyder & Jacobs LLP Rose, Snyder & Jacobs LLP We have served as the Company’s auditor since 2004. Encino, California November 16, 2020 F- 2 SIMULATIONS PLUS, INC. CONSOLIDATED BALANCE SHEETS As of August 31, 2020 2019 ASSETS Current assets Cash and cash equivalents $ 49,207,314 $ 11,435,499 Accounts receivable, net of allowance for doubtful accounts of $ 50,000 and $ 0 7,421,970 5,026,558 Revenues in excess of billings 3,093,343 3,233,659 Prepaid income taxes 969,688 765,110 Prepaid expenses and other current assets 1,595,447 704,316 Short-term investments 66,803,595 – Total current assets 129,091,357 21,165,142 Long-term assets Capitalized computer software development costs, net of accumulated amortization of $ 13,581,599 and $ 12,356,055 6,087,378 4,959,736 Property and equipment, net (note 4) 437,787 341,145 Operating lease right of use asset 926,600 – Intellectual property, net of accumulated amortization of $ 5,087,031 and $ 3,948,750 11,897,970 5,026,249 Other intangible assets net of accumulated amortization of $ 1,641,725 and $ 1,210,000 7,008,275 3,280,000 Goodwill 12,921,185 10,387,198 Other assets 50,965 37,227 Total assets $ 168,421,517 $ 45,196,697 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable $ 349,939 $ 204,075 Accrued payroll and other expenses 2,250,692 1,639,038 Current portion - Contracts payable (note 6) 2,000,000 1,761,028 Billings in excess of revenues 140,991 798,549 Operating Lease Liability, current portion 463,465 – Deferred revenue 299,482 380,787 Total current liabilities 5,504,569 4,783,477 Long-term liabilities Deferred income taxes, net 2,353,858 2,731,616 Operating Lease Liability 463,312 – Payments due under Contracts payable (note 6) 4,063,833 – Total liabilities 12,385,572 7,515,093 Commitments and Contingencies (note 7) – – Shareholders' equity (note 8) 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 19,923,277 and 17,591,834 shares issued and outstanding 9,926 7,595 Additional paid-in capital 128,531,427 15,319,474 Accumulated Other Comprehensive Income 58,467 – Retained earnings 27,436,125 22,354,535 Total shareholders' equity 156,035,945 37,681,604 Total liabilities and shareholders' equity $ 168,421,517 $ 45,196,697 The accompanying notes are an integral part of these consolidated financial statements. F- 3 SIMULATIONS PLUS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME For the years ended August 31, 2020 2019 2018 Revenues $ 41,589,084 $ 33,970,440 $ 29,666,524 Cost of revenues 10,649,230 9,025,704 7,994,228 Gross margin 30,939,854 24,944,736 21,672,296 Operating expenses Selling, general, and administrative 16,360,053 11,796,027 9,583,852 Research and development 2,974,623 2,499,980 1,790,656 Total operating expenses 19,334,676 14,296,007 11,374,508 Income from operations 11,605,178 10,648,729 10,297,788 Other income (expense) Interest income 29,468 33,522 27,122 Change in value of contingent consideration ( 202,500 ) ( 109,078 ) ( 153,034 ) (Loss) income on currency exchange ( 45,097 ) ( 16,697 ) ( 32,934 ) Total other income (expense) ( 218,129 ) ( 92,253 ) ( 158,846 ) Income before provision for income taxes 11,387,049 10,556,476 10,138,942 Provision for income taxes ( 2,054,989 ) ( 1,973,147 ) ( 1,204,130 ) Net Income $ 9,332,060 $ 8,583,329 $ 8,934,812 Earnings per share Basic $ 0.52 $ 0.49 $ 0.52 Diluted $ 0.50 $ 0.48 $ 0.50 Weighted-average common shares outstanding Basic 17,819,064 17,492,258 17,328,707 Diluted 18,538,373 18,057,431 17,860,392 Other Comprehensive Income, net of tax Foreign currency translation adjustments $ 58,467 $ – $ – Comprehensive Income $ 9,390,527 $ – $ – The accompanying notes are an integral part of these consolidated financial statements. F- 4 SIMULATIONS PLUS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the years ended August 31, 2020, 2019 and 2018 Additional Accumulated Other Common Stock Paid-In Comprehensive Retained Shares Amount Capital Income Earnings Total Balance, August 31, 2017 17,277,604 $ 7,278 $ 12,109,141 $ – $ 13,688,468 $ 25,804,887 Exercise of stock options 130,006 131 635,452 – – 635,583 Stock-based Compensation – – 562,078 – – 562,078 Shares issued to Directors for services 8,835 8 146,997 – – 147,005 Declaration of Dividend – – – – ( 4,161,740 ) ( 4,161,740 ) Net income – – – – 8,934,812 8,934,812 Balance, August 31, 2018 17,416,445 $ 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 166,703 168 787,979 – – 788,147 Stock-based Compensation – – 865,848 – – 865,848 Shares issued to Directors for services 8,686 10 211,979 – – 211,989 Declaration of Dividend – – – – ( 4,197,055 ) ( 4,197,055 ) Net income – – – – 8,583,329 8,583,329 Balance, August 31, 2019 17,591,834 $ 7,595 $ 15,319,474 $ – $ 22,354,535 $ 37,681,604 Exercise of stock options 121,647 121 629,626 – – 629,747 Stock-based Compensation – – 1,286,625 – – 1,286,625 Shares issued to Directors for services 7,205 7 289,893 – – 289,900 Declaration of Dividend – – – – ( 4,250,470 ) ( 4,250,470 ) Shares issued - Lixoft 111,682 112 3,260,562 – – 3,260,674 Common stock issued for cash, net 2,090,909 2,091 107,745,247 – – 107,747,338 Foreign Currency Translation Adjustments – – – 58,467 – 58,467 Net income – – – – 9,332,060 9,332,060 Balance, August 31, 2020 19,923,277 $ 9,926 $ 128,531,427 $ 58,467 $ 27,436,125 $ 156,035,945 The accompanying notes are an integral part of these consolidated financial statements. F- 5 SIMULATIONS PLUS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended August 31, 2020, 2019 and 2018 2020 2019 2018 Cash flows from operating activities Net income $ 9,332,060 $ 8,583,329 $ 8,934,812 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 2,961,930 2,750,245 2,721,304 Change in value of contingent consideration 202,500 109,060 152,752 Stock-based compensation 1,576,525 1,077,837 709,083 Deferred income taxes ( 377,759 ) ( 299,096 ) ( 1,731,821 ) (Increase) decrease in Accounts receivable ( 2,017,792 ) 487,970 ( 1,465,803 ) Revenues in excess of billings 140,316 ( 1,248,063 ) ( 504,514 ) Prepaid income taxes ( 12,380 ) ( 452,517 ) 149,850 Prepaid expenses and other assets ( 398,213 ) ( 93,877 ) ( 153,682 ) Increase (decrease) in Accounts payable 220,584 ( 147,529 ) 110,713 Accrued payroll and other expenses 23,030 486,862 168,883 Billings in excess of revenues ( 657,558 ) 413,946 167,645 Accrued income taxes – – – Deferred revenue ( 81,305 ) ( 29,747 ) 27,966 Net cash provided by operating activities 10,911,938 11,638,420 9,287,188 Cash flows used in investing activities Purchases of property and equipment ( 231,380 ) ( 137,745 ) ( 183,291 ) Purchases of intellectual property – ( 50,000 ) – Purchase of short-term investments ( 67,248,924 ) – – Cash used to acquire subsidiaries ( 9,471,352 ) – – Cash received in acquisition 3,799,134 – – Capitalized computer software development costs ( 2,353,188 ) ( 1,767,996 ) ( 2,145,429 ) Net cash used in investing activities ( 75,505,710 ) ( 1,955,741 ) ( 2,328,720 ) Cash flows provided by (used in) financing activities Payment of dividends ( 4,250,470 ) ( 4,197,055 ) ( 4,161,740 ) Payments on contracts payable ( 1,761,028 ) ( 4,238,973 ) ( 247,328 ) Proceeds from the exercise of stock options 629,747 788,147 635,583 Proceeds from follow-on public offering, net 107,747,338 – – Net cash provided by (used in) financing activities 102,365,587 ( 7,647,881 ) ( 3,773,485 ) Net increase in cash and cash equivalents 37,771,815 2,034,798 3,184,983 Cash and cash equivalents, beginning of year 11,435,499 9,400,701 6,215,718 Cash and cash equivalents, end of period $ 49,207,314 $ 11,435,499 $ 9,400,701 Supplemental disclosures of cash flow information Income taxes paid $ 2,352,770 $ 2,673,475 $ 2,712,988 Non-Cash Investing and Financing Activities Stock issued for acquisition of Lixoft $ 3,260,674 $ – $ – Creation of contract liabilities for acquisition of subsidiaries $ 4,528,000 $ – $ – Right of use assets capitalized $ 1,498,542 $ – $ – The accompanying notes are an integral part of these consolidated financial statements. F- 6 Simulations Plus, Inc. Notes to Financial Statements For the Year Ended August 31, 2020 NOTE 1 - ORGANIZATION AND LINES OF BUSINESS Organization Simulations Plus, Inc. (“Simulations Plus”, “Lancaster”) was incorporated on July 17, 1996. In September 2014, Simulations Plus acquired all of the outstanding equity interests of Cognigen Corporation (“Cognigen”, “Buffalo”) 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”, “Paris”) as a wholly-owned subsidiary pursuant to a stock purchase and contribution agreement. (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 - SUMMARY OF 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, as of June 1, 2017, the accounts of DILIsym Services, Inc., and as of April 1, 2020, Lixoft accounts. All significant intercompany accounts and transactions are eliminated in 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 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 years 2020 and 2019 reflect the application of ASC Topic 606, while the reported results for fiscal year 2018 are not adjusted and continue to be reported under ASC Topic 605. F- 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 August 31, 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 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 all collection attempts have failed. F- 8 Investments We 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. The Company accounts for its investment in marketable securities in accordance with 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. 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. The Company classifies its investments in marketable debt securities based on the facts and circumstances present at the time of purchase of the securities. During the years ended August 31, 2020, all of the Company’s investments were classified as held-to-maturity. Held-to-maturity investments are measured and recorded at amortized cost on the Company’s Consolidated Balance Sheet. 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. 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 computer software development costs are comprised primarily of salaries and direct payroll-related costs and the purchase of existing software to be used in the Company's software products. Amortization of capitalized computer software development costs is provided 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 $ 1,225,544 , $ 1,331,753 , and $ 1,300,434 for the years ended August 31, 2020, 2019, and 2018, 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, or fair market value for property and equipment acquired in business combinations, less accumulated depreciation and amortization. Depreciation and amortization are provided using the straight-line method over the estimated useful lives as follows: Property and Equipment estimated useful lives Equipment 5 years Computer equipment 3 to 7 years Furniture and fixtures 5 to 7 years Leasehold improvements Shorter of life of asset or lease Maintenance and minor replacements are charged to expense as incurred. Gains and losses on disposals are included in the results of operations. F- 9 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: Schedule of Operating assets and liabilities 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 August 31, 2020: Schedule of lease cost Right of use assets $ 926,600 Lease Liabilities, Current $ 463,465 Lease Liabilities, Long-term $ 463,312 Operating lease costs $ 600,717 Weighted Average remaining lease term 2.27 years Weighted Average Discount rate 4.25 % F- 10 Intangible Assets and Goodwill 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 name, 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 under-performance 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 August 31, 2020, the Company determined that it has four reporting units, Simulations Plus, Cognigen Corporation, DILIsym Services, Inc. and Lixoft. 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 August 31, 2020, the entire balance of goodwill was attributed to three of the Company's reporting units, Cognigen Corporation, DILIsym Services 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. The Company has no t recognized any impairment charges during the periods ended August 31, 2020, 2019 and 2018. Reconciliation of Goodwill for the period ended August 31, 2020: Schedule of reconciliation of goodwill Cognigen DILIsym Lixoft Total Balance, August 31, 2017 $ 4,789,248 $ 5,597,950 $ – $ 10,387,198 Addition – – – – Impairments – – – – Balance, August 31, 2018 4,789,248 5,597,950 – 10,387,198 Addition – – – – Impairments – – – – Balance, August 31, 2019 4,789,248 5,597,950 – 10,387,198 Addition – – 2,533,987 2,533,987 Impairments – – – – Balance, August 31, 2020 $ 4,789,248 $ 5,597,950 $ 2,533,987 $ 12,921,185 F- 11 Other Intangible Assets The following table summarizes other intangible assets as of August 31, 2020: Schedule of other intangible assets Amortization Period Acquisition Value Accumulated Amortization Net book value Customer relationships-Cognigen Straight line 8 years $ 1,100,000 $ 825,000 $ 275,000 Trade Name-Cognigen None 500,000 – 500,000 Covenants not to compete-Cognigen Straight line 5 years 50,000 50,000 – Covenants not to compete-DILIsym Straight line 4 years 80,000 65,000 15,000 Trade Name-DILIsym None 860,000 – 860,000 Customer relationships-DILIsym Straight line 10 years 1,900,000 617,500 1,282,500 Customer relationships-Lixoft Straight line 14 years 2,550,000 75,892 2,474,108 Trade Name-Lixoft None 1,550,000 – 1,550,000 Covenants not to compete-Lixoft Straight line 3 years 60,000 8,333 51,667 $ 8,650,000 $ 1,641,725 $ 7,008,275 Amortization expense for the year ended August 31, 2020, 2019 and 2018 was $ 431,725 , $ 357,500 , and $ 357,500 . Future amortization for the next five years is as follows: Schedule of future amortization Year ending August 31, Amount 2021 $ 545,000 2022 $ 530,000 2023 $ 384,000 2024 $ 372,000 2025 $ 372,000 Business Acquisitions The Company accounted for the acquisition of Cognigen, DILIsym Services, Inc. and Lixoft using the purchase method of accounting where the assets acquired and liabilities assumed are recognized based on their respective estimated fair values. The excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Determining the fair value of certain acquired assets and liabilities is subjective in nature and often involves the use of significant estimates and assumptions, including, but not limited to, the selection of appropriate valuation methodology, projected revenue, expenses and cash flows, weighted average cost of capital, discount rates, estimates of advertiser and publisher turnover rates and estimates of terminal values. Business acquisitions are included in the Company's consolidated financial statements as of the date of the acquisition. Fair Value of Financial Instruments Assets and liabilities recorded at fair value in the Consolidated 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: F- 12 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, and accrued bonuses to officers the carrying amounts approximate fair value due to their short-term nature. The following table summarizes fair value measurements at August 31, 2020 and August 31, 2019 for assets and liabilities measured at fair value on a recurring basis: August 31, 2020: Summarizes fair value measurements Level 1 Level 2 Level 3 Total Cash and cash equivalents $ 49,207,314 $ – $ – $ 49,207,314 Short-term investments $ 66,803,595 $ – $ – $ 66,803,595 Acquisition-related contingent consideration obligations $ – $ – $ 4,730,500 $ 4,730,500 August 31, 2019: Level 1 Level 2 Level 3 Total Cash and cash equivalents $ 11,435,499 $ – $ – $ 11,435,499 Short-term investments $ – $ – $ – $ – Acquisition-related contingent consideration obligations $ – $ – $ 1,761,028 $ 1,761,028 As of August 31, 2020 and 2019, the Company has a liability for contingent consideration related to its acquisition of Lixoft and 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. Reconciliation of contingent consideration value Value at August 31, 2019 $ 1,761,028 Purchase price contingent consideration 4,528,000 Contingent consideration payments ( 1,761,028 ) Change in value of contingent consideration 202,500 Value at August 31, 2020 $ 4,730,500 F- 13 Advertising The Company expenses advertising costs as incurred. Advertising costs for the years ended August 31, 2020, 2019 and 2018 were approximately $ 63,944 , $ 83,213 and $ 67,848 , respectively. 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 which 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 the royalty agreement with Enslein Research. The cost of $ 75,000 is being amortized over 10 years under the straight-line method . Amortization expense for each of the fiscal years ended August 31, 2020 and 2019 was $ 7,500 . Accumulated amortization as of August 31, 2020 and 2019 was $ 63,750 and $ 56,250 , respectively. On May 15, 2014, we entered into a termination and non-assertion 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 for the year ended August 31, 2020, and 2019 was $ 600,000 . Accumulated amortization as of August 31, 2020 and 2019 was $ 3,775,000 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 fiscal years ended August 31, 2020 and 2019 was $ 316,667 and $ 316,667 , respectively, and is included in cost of revenues. Total accumulated amortization as of August 31, 2020 and 2019 was $ 1,029,167 and $ 712,500 , 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 year ended August 31, 2020 and 2019 was $ 5,000 and $ 5,000 . Accumulated amortization as of August 31, 2020 and 2019 was $ 10,000 and $ 5,000 , respectively. On April 1, 2020, as part of the acquisition of Lixoft, the Company acquired certain developed technologies associated with the Lixoft scientific software. These technologies were valued at $ 8,010,000 and are being amortized over 16 years under the straight-line method . Amortization expense for the fiscal years ended August 31, 2020 was $ 208,594 and is included in cost of revenues. Total accumulated amortization as of August 31, 2020 was $ 208,594 . F- 14 Total amortization expense for intellectual property agreements for the years ended August 31, 2020, 2019 and 2018 was $ 1,138,280 , $ 929,167 , and $ 924,167 . Accumulated amortization as of August 31, 2020 and 2019 was $ 5,087,031 and $ 3,948,750 , respectively. Future amortization for the next five years is as follows: Schedule of future amortization expenses Years ending August 31, TSRL Enslein DILI-Acquired Developed Technologies Lixoft-Acquired Developed Technologies Entelos Total 2021 $ 600,000 $ 7,500 $ 316,667 $ 500,625 $ 5,000 $ 1,429,792 2022 $ 600,000 $ 3,750 $ 316,667 $ 500,625 $ 5,000 $ 1,426,042 2023 $ 600,000 $ – $ 316,667 $ 500,625 $ 5,000 $ 1,422,292 2024 $ 425,000 $ – $ 316,667 $ 500,625 $ 5,000 $ 1,247,292 2025 $ – $ – $ 316,667 $ 500,625 $ 5,000 $ 822,292 Earnings per Share The Company reports earnings per share in accordance with FASB ACS 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 years ended August 31, 2020, 2019 and 2018 were as follows: Schedule of earnings per share 2020 2019 2018 Numerator Net income attributable to common shareholders $ 9,332,060 $ 8,583,329 $ 8,934,812 Denominator Weighted-average number of common shares outstanding during the year 17,819,064 17,492,258 17,328,707 Dilutive effect of stock options 719,309 565,173 531,685 Common stock and common stock equivalents used for diluted earnings per share 18,538,373 18,057,431 17,860,392 Stock-Based Compensation The Company accounts for stock options using the modified prospective method in accordance with FASB ASC 718-10, “Compensation-Stock Compensation” . Under this method, compensation costs include estimated grant date fair value of the awards amortized over the options’ vesting period. Stock-based compensation was $ 1,286,625 , $ 865,848 and $ 562,078 for the fiscal years ended August 31, 2020, 2019 and 2018, respectively, and is included in the statements of operations as Consulting, Salaries, 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 years ended August 31, 2020, 2019 and 2018. F- 15 Recently Issued Accounting Standards 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. 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. The Company adopted this ASU on September 1, 2019. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606), which amends certain aspects of the Board's new revenue standard, ASU 2014-09, Revenue from Contracts with Customers. The standard was adopted concurrently with the adoption of ASU 2014-09 which is effective for annual and interim periods beginning after December 15, 2017. 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 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. F- 16 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 $ 3,303,461 . It is anticipated these revenues will be recognized within the next year. Contract liabilities During the year ended August 31, 2020 the Company recognized $ 1,146,000 of revenue that was included in contract liabilities as of August 31, 2019. F- 17 Disaggregation of Revenues Schedule of disaggregation of revenues Disaggregation of Revenues: Year Ended August 31, 2020 Year Ended August 31, 2019 Software licenses Point in time $ 20,668,195 $ 17,425,353 Over time 919,344 1,053,562 Consulting services Over time 20,001,545 15,491,525 Total Revenue $ 41,589,084 $ 33,970,440 Contracts in Progress Contracts in progress are included in the accompanying balance sheets under the following captions: Schedule of contract in progress 2020 2019 Revenues in excess of billings $ 3,093,343 $ 3,233,659 Billings in excess of revenues ( 140,991 ) ( 798,549 ) Revenues over billings on uncompleted contracts $ 2,952,352 $ 2,435,110 Cost, estimated earnings, and billings on uncompleted contracts are summarized as follows as of August 31, 2020 and 2019: 2020 2019 Revenues earned to date on uncompleted contracts $ 20,235,573 $ 19,254,928 Billings to date on uncompleted contracts ( 17,283,221 ) ( 16,819,818 ) Revenues over billings on uncompleted contracts $ 2,952,352 $ 2,435,110 Balance increases and decreases in these accounts are due to the timing of amounts billed, payments received, and revenue recognized. NOTE 4 – PROPERTY AND EQUIPMENT Property and equipment at August 31, 2020 and 2019 consisted of the following: Schedule of property and equipment 2020 2019 Equipment $ 864,560 $ 741,486 Computer equipment 547,738 411,632 Furniture and fixtures 160,991 160,990 Leasehold improvements 114,005 110,165 1,687,294 1,424,273 Less accumulated depreciation and amortization 1,249,507 1,083,128 Total $ 437,787 $ 341,145 Depreciation expense was $ 166,379 , $ 131,827 , and $ 139,202 for the years ended August 31, 2020, 2019, and 2018, respectively. F- 18 NOTE 5 – INVESTMENTS The Company invests a portion of its excess cash balances in short-term debt securities. Investments at August 31, 2020 consisted of corporate bonds with maturities remaining of less than 12 months. The Company may also invest excess cash balances in certificates of deposits, money market accounts, government-sponsored enterprise securities, corporate bonds and/or commercial paper. The Company accounts for its investments in accordance with FASB ASC 320, Investments – Debt and Equity Securities. At August 31, 2020, all investments were classified as held-to-maturity securities. The following tables summarize the Company’s short-term investments as of August 31, 2020. The Company had no short-term investments for the year ended August 31, 2019. FY 2020 Schedule of short term investment Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Commercial notes (due within one year) $ 66,803,595 $ – $ ( 60,977 ) $ 66,742,618 Total $ 66,803,595 $ – $ ( 60,977 ) $ 66,742,618 NOTE 6 - 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 three years following acquisition. The Earn-out liability has been recorded at an estimated fair value. Payments under the Earn-out liability will be due starting in FY 2019. 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. The final payment of $1,761,028 was paid in August 2020. Lixoft Acquisition Liabilities : On April 1, 2020, the Company acquired Lixoft. The agreement provided for a twenty-four month $2,000,000 holdback provision against certain representations and warrantees, comprised of $1,333,333 of cash and the release from an escrow shares of stock valued at $666,337 issued at the date of the Agreement. In addition, based on a revenue growth formula for the two years subsequent to April 1, 2020, the agreement calls for earn-out payments up to $5,500,000 (two thirds cash and one-third newly issued, unregistered shares of the Company’s common stock). The former shareholders can earn up to $2,000,000 the first year and $3,500,000 in year two. As of August 31, 2020 and 2019 the following liabilities have been recorded: Schedule of Liabilities 2020 2019 Holdback Liability - Lixoft $ 1,333,333 $ – Earn-out Liability - Lixoft 4,730,500 – Earn-out Liability - Dilisym – 1,761,028 Sub Total $ 6,063,833 $ 1,761,028 Less: Current Portion 2,000,000 1,761,028 Long-Term $ 4,063,833 $ – F- 19 NOTE 7 - 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 November 2021. The new base rent is $16,147 per month. DILIsym leases approximately 2,700 square feet of space in Research Triangle Park, North Carolina. The initial three-year term was due to expire October 2020. An amendment to the initial lease became effective April 1, 2020. This amendment added 686 square feet and extended the term of the lease to September 30, 2023. The new base rent is approximately $7,500 per month with an annual 3% adjustment. In Paris, France Lixoft leases approximately 2,300 square feet of office space, which as of April 1, 2020, had minimum payments equaling $288,000. The lease is for a 9-year term, with an option to terminate every 3 years, and expires in November of 2024. The rent is $16,555 per quarter and can be adjusted each December based on a consumer price index. Rent expense, including common area maintenance fees for the years ended August 31, 2020, 2019 and 2018 was $ 644,000 , $ 584,000 and $ 567,000 , respectively. Future minimum lease payments under non-cancelable operating leases with remaining terms of one year or more at August 31, 2020 were as follows: Future minimum lease payments Years Ending August 31, 2021 $ 486,000 2022 217,000 2023 172,000 2024 75,000 2025 11,000 Future minimum lease payments $ 961,000 Line of Credit On March 31, 2020, Simulations Plus, Inc. entered into a Credit Agreement with Wells Fargo Bank, N.A. The Credit Agreement, has provided Simulations Plus, Inc. with a credit facility of $ 3,500,000 through April 15, 2022 . As of August 31, 2020, there were no amounts drawn against the line of credit. Interest accrues daily at the bank’s base rate. The base rate is the rate equal to the highest of (i) the Prime Rate in effect, (ii) 1.5% above Daily One Month LIBOR, and (iii) the Federal Funds Rate plus 1.5%. The rate at August 31, 2020 was 3.25%. Under the terms of the agreement the borrower is to maintain a zero No balance under this line of credit for a period of thirty consecutive days during each 12-month period commencing March 31, 2020. The Credit Agreement is collateralized by the assets of Simulations Plus Lancaster Division and is subject to certain financial covenants. 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. F- 20 License Agreement The Company had 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. This agreement was recently renegotiated, and the Company does not bear any royalty obligations towards Dassault Systèmes Americas Corp. effective as of June 30, 2019. In addition, the license agreement terminated on September 5, 2020. Under this agreement for the years ended August 31, 2020, 2019 and 2018 we incurred royalty expense (benefit) of $ ( 26,055 ) , $ 195,828 and $ 175,740 , respectively. The Company is in the process of replacing the database. Litigation We are not a party to any legal proceedings and are not aware of any pending legal proceedings of any kind. NOTE 8 - SHAREHOLDERS' EQUITY Dividend The Company’s Board of Directors declared cash dividends during fiscal year 2020, 2019 and 2018. The details of dividend paid are in the following tables: Schedule of dividends declared and paid FY2018 Record Date Distribution Date Number of Shares Outstanding on Record Date Dividend per Share Total Amount 11/13/2017 11/20/2017 17,284,792 $ 0.06 $ 1,037,088 1/26/2018 2/02/2018 17,317,752 $ 0.06 1,039,065 4/25/2018 5/02/2018 17,354,005 $ 0.06 1,041,240 7/26/2018 8/02/2018 17,405,775 $ 0.06 1,044,347 Total $ 4,161,740 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 2/01/2019 17,481,450 $ 0.06 1,048,887 4/24/2019 5/01/2019 17,515,228 $ 0.06 1,050,914 7/25/2019 8/01/2019 17,536,454 $ 0.06 1,052,181 Total $ 4,197,055 F- 21 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 4/24/2020 5/01/2020 17,769,134 $ 0.06 1,066,148 7/27/2020 8/03/2020 17,820,057 $ 0.06 1,069,203 Total $ 4,250,470 Although dividend distributions are currently expected to continue on a quarterly basis, the Company’s Board of Directors reserves the right to discontinue the dividend distribution any time. 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 August 31, 2020, employees and directors hold stock options to purchase 1,223,661 shares of common stock at exercise prices ranging from $6.75 to $61.84 per share. The following table summarizes information about stock options: Schedule of stock option activity Transactions in FY18 Number of Options Weighted-Average Exercise Price Per Share Weighted-Average Remaining Contractual Life Outstanding, August 31, 2017 1,249,126 $ 8.51 7.74 Granted 52,000 22.36 Exercised ( 130,006 ) 5.97 Canceled/Forfeited ( 30,144 ) 9.10 Expired ( 6,000 ) 5.06 Outstanding, August 31, 2018 1,134,976 $ 9.44 7.31 Vested and Exercisable, August 31, 2018 483,696 $ 7.79 6.48 Vested and Expected to Vest, August 31, 2018 1,069,807 $ 9.35 7.26 F- 22 Transactions in FY19 Number of Options Weighted-Average Exercise Price Per Share Weighted-Average Remaining Contractual Life Outstanding, August 31, 2018 1,134,976 $ 9.44 7.31 Granted 263,500 22.78 Exercised ( 166,703 ) 7.15 Canceled/Forfeited ( 68,514 ) 12.17 Expired – – Outstanding, August 31, 2019 1,163,259 $ 12.63 7.13 Vested and Exercisable, August 31, 2019 515,394 $ 8.57 6.09 Vested and Expected to Vest, August 31, 2019 1,101,800 $ 12.39 7.07 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 223,000 39.23 Exercised ( 121,647 ) 9.29 Canceled/Forfeited ( 40,951 ) 14.19 Expired – – Outstanding, August 31, 2020 1,223,661 $ 17.76 6.79 Vested and Exercisable, August 31, 2020 596,311 $ 10.69 5.59 Vested and Expected to Vest, August 31, 2020 1,194,239 $ 17.75 6.77 Intrinsic Value of options outstanding and options exercisable Intrinsic Value of options outstanding and options exercisable Intrinsic Value of Options Outstanding Intrinsic Value of Options Exercisable Intrinsic Value of Options Exercised FY18 $ 13,064,884 $ 6,315,086 $ 1,495,313 FY19 $ 27,312,742 $ 14,194,724 $ 3,224,454 FY20 $ 51,272,966 $ 29,150,912 $ 4,085,753 The weighted-average remaining contractual life of options outstanding issued under the Plan, both Qualified ISO and Non-Qualified SO, was 6.79 years at August 31, 2020. The total fair value of non-vested stock options as of August 31, 2020 was $ 22,122,054 and is amortizable over a weighted average period of 3.39 years. F- 23 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: Schedule of fair value of options FY 2020 FY 2019 Estimated fair value of awards granted $ 2,997,120 $ 1,928,820 Unvested Forfeiture Rate 0 % 6.20 % Weighted average grant price $ 39.23 $ 22.78 Weighted average market price $ 39.23 $ 22.69 Weighted average volatility 33.56 % 31.61 % Weighted average risk-free rate 1.39 % 2.59 % Weighted average dividend yield 0.65 % 1.10 % Weighted average expected life 6.67 years 6.64 years The exercise prices for the options outstanding at August 31, 2020 ranged from $6.75 to $61.84, and the information relating to these options is as follows: Schedule of options by exercise price range Exercise Price Awards Outstanding Awards Exercisable Low High Quantity Weighted Average Remaining Contractual Life Weighted Average Exercise Price Quantity Weighted Average Remaining Contractual Life Weighted Average Exercise Price $ 6.75 $ 8.00 177,730 4.0 years $ 6.85 177,730 4.0 years $ 6.85 $ 8.01 $ 16.00 547,901 6.0 years $ 9.98 350,721 6.0 years $ 9.97 $ 16.01 $ 24.00 230,280 7.8 years $ 20.70 50,560 7.2 years $ 21.18 $ 24.01 $ 38.00 204,950 9.1 years $ 33.45 17,300 8.9 years $ 34.23 $ 38.01 $ 52.00 19,800 9.6 years $ 38.64 – – – $ 52.01 $ 61.84 43,000 9.9 years $ 61.84 – – – 1,223,661 6.8 years $ 17.76 596,311 5.6 years $ 10.69 Follow-on Public Offering In August 2020, the company closed an underwritten public offering of 2,090,909 shares of its common stock to the public at $ 55.00 per share, which included the full exercise of the underwriters’ option to purchase 272,727 additional shares of common stock. The aggregate gross proceeds to the company from this offering were approximately $ 115 million, before deducting underwriting discounts and commissions; net proceeds were approximately $ 107.7 million 107,747,338 . The offering was made pursuant to the Company’s automatic shelf registration statement on Form S-3 filed with the Securities and Exchange Commission on July 9, 2020. F- 24 NOTE 9 - INCOME TAXES We utilize FASB 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. The components of the income tax provision for fiscal year 2020, 2019 and 2018 were as follows: Components of the income tax provision 2020 2019 2018 Current Federal $ 2,097,725 $ 1,794,596 $ 2,370,955 State 477,744 426,364 460,619 Foreign 39,038 51,285 104,377 Total current tax expense (benefit) 2,614,507 2,272,245 2,935,951 Deferred Federal ( 427,644 ) ( 140,730 ) ( 1,698,201 ) State ( 131,874 ) ( 158,368 ) ( 33,620 ) Total deferred federal and state ( 559,518 ) ( 299,098 ) ( 1,731,821 ) Total $ 2,054,989 $ 1,973,147 $ 1,204,130 A reconciliation of the expected income tax (benefit) computed using the federal statutory income tax rate to the Company's effective income tax rate is as follows for fiscal year 2020, 2019 and 2018: Effective income tax rate 2020 2019 2018 Income tax computed at federal statutory tax rate 21.0 % 21.0 % 25.4 % State taxes, net of federal benefit 4.2 4.1 4.0 Meals & entertainment 0.1 0.1 0.0 Stock based compensation ( 1.2 ) ( 2.6 ) 0.5 Other permanent differences ( 0.3 ) ( 0.7 ) 1.2 Research and development credit ( 2.7 ) ( 2.3 ) ( 2.6 ) Foreign tax related differences ( 1.4 ) – – Research & credit adjustments to expense 0.3 – – Domestic production activities – – ( 1.8 ) Change in deferred income taxes due to statutory rate changes – – ( 14.8 ) Change in prior year estimated taxes ( 1.8 ) ( 0.9 ) ( 0.0 ) Total 18.0 % 18.7 % 11.9 % F- 25 Significant components of the Company's deferred tax assets and liabilities for income taxes for the fiscal years ended August 31, 2020 and 2019 are as follows: Components of the Company deferred tax assets and liabilities 2020 2019 Deferred tax assets Accrued payroll and other expenses $ 402,355 $ 236,455 Deferred revenue 6,862 55,038 Capitalized merger costs 742,056 361,103 Intellectual property 7,677 9,301 State taxes 100,326 89,537 Allowance for doubtful accounts 13,450 – State tax deferred 125,417 146,815 Total deferred tax assets 1,398,143 898,249 Less: Valuation allowance – – Deferred tax asset 1,398,143 898,249 Deferred tax liabilities Property and equipment ( 81,910 ) ( 61,991 ) State tax deferred ( 19,468 ) ( 16,471 ) Intellectual property ( 1,876,274 ) ( 2,217,234 ) Capitalized computer software development costs ( 1,774,349 ) ( 1,334,169 ) Total deferred tax liabilities ( 3,752,001 ) ( 3,629,865 ) Net deferred tax liabilities $ ( 2,353,858 ) $ ( 2,731,616 ) 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 income tax expense. Interest and penalties totaled $ 332 , $ 2,531 , and $- 0 - for fiscal years 2020, 2019, and 2018, respectively. We file income tax returns with the IRS and various state jurisdictions and India. Our federal income tax returns for fiscal year 2016 thru 2019 are open for audit, and our state tax returns for fiscal year 2015 through 2019 remain open for audit. In addition, our California tax return for the fiscal year 2007 and fiscal year 2008 remains open with regard to R&D tax credits as a result of a previous audit for which we received a letter from the California Franchise Tax Board stating that an audit will not be conducted for those years at this time; however it 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. NOTE 10 – 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, 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 August 31, 2020, the Company had cash and cash equivalents exceeding insured limits by $ 10,790,000 . F- 26 Revenue concentration shows that international sales accounted for 29 %, 34 % and 39 % of net sales for fiscal years 2020, 2019 and 2018, respectively. Three customers accounted for 9 %, 7 % (a dealer account in Japan representing various customers), and 7 % of net sales for fiscal year 2020. Three customers accounted for 8 %, 8 % (a dealer account in Japan representing various customers), and 7 % of net sales for fiscal year 2019. Four customers accounted for 9 % (a dealer account in Japan representing various customers), 7 %, 6 % and 5 % of net sales for fiscal year 2018. FY20 accounts receivable concentrations show that two customers comprised 13 % and 10 % of accounts receivable as of August 31, 2020, respectively. FY19 accounts receivable concentrations show that one customer comprised 10 % of accounts receivable as of August 31, 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. During economic downturns, we have seen consolidations in the pharmaceutical industry. Although we have not seen any significant reduction in total revenues to date, our growth rate could be affected by consolidation and downsizing in the pharmaceutical industry. NOTE 11 – 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 years ended August 31, 2020, 2019 and 2018 (in thousands, because of rounding, numbers may not foot): Schedule of consolidated results from reportable segments Year ended August 31, 2020 Simulations Plus, Inc. Cognigen Corporation DILIsym Lixoft* Eliminations Total Net revenues $ 21,961 $ 11,105 $ 6,948 $ 1,575 $ – $ 41,589 Income from operations before income taxes $ 7,374 $ 1,770 $ 1,744 $ 717 $ – $ 11,605 Total assets $ 162,807 $ 11,654 $ 14,084 $ 19,972 $ ( 40,095 ) $ 168,422 Goodwill $ – $ 4,789 $ 5,598 $ 2,534 $ – $ 12,921 Capital expenditures $ 111 $ 87 $ 31 $ 2 $ – $ 231 Capitalized software costs $ 2,028 $ 40 $ 124 $ 160 $ – $ 2,353 Depreciation and amortization $ 1,713 $ 349 $ 600 $ 300 $ – $ 2,962 F- 27 Year ended August 31, 2019 Simulations Plus, Inc. Cognigen Corporation DILIsym Lixoft* Eliminations Total Net revenues $ 19,585 $ 9,321 $ 5,065 $ – $ – $ 33,970 Income from operations before income taxes $ 7,752 $ 1,481 $ 1,416 $ – $ – $ 10,648 Total assets $ 38,535 $ 11,196 $ 13,168 $ – $ ( 17,702 ) $ 45,197 Goodwill $ – $ 4,789 $ 5,598 $ – $ – $ 10,387 Capital expenditures $ 39 $ 79 $ 20 $ – $ – $ 138 Capitalized software costs $ 1,482 $ 114 $ 172 $ – $ – $ 1,768 Depreciation and amortization $ 1,806 $ 364 $ 580 $ – $ – $ 2,750 Year ended August 31, 2018 Simulations Plus, Inc. Cognigen Corporation DILIsym Lixoft* Eliminations Total Net revenues $ 17,553 $ 7,857 $ 4,257 $ – $ – $ 29,667 Income from operations before income taxes $ 7,533 $ 1,902 $ 863 $ – $ – $ 10,298 Total assets $ 38,000 $ 8,733 $ 14,248 $ – $ ( 17,702 ) $ 43,279 Goodwill $ – $ 4,789 $ 5,598 $ – $ – $ 10,387 Capital expenditures $ 65 $ 100 $ 18 $ – $ – $ 183 Capitalized software costs $ 1,365 $ 625 $ 155 $ – $ – $ 2,145 Depreciation and amortization $ 1,748 $ 401 $ 572 $ – $ – $ 2,721 In addition, the Company allocates revenues to geographic areas based on the locations of its customers. Geographical revenues for the years ended August 31, 2020, 2019 and 2018 were as follows (in thousands, because of rounding, numbers may not foot): Schedule of geographical revenues Year ended August 31, 2020 North & South America Europe Asia Total Simulations Plus, Inc. $ 11,124 $ 5,024 $ 5,812 $ 21,961 Cognigen Corporation 11,105 – – 11,105 DILIsym Services, Inc. 6,057 646 246 6,948 Lixoft* 1,388 157 30 1,575 Total $ 29,674 $ 5,827 $ 6,088 $ 41,589,084 41,589 F- 28 Year ended August 31, 2019 North & South America Europe Asia Total Simulations Plus, Inc. $ 9,381 $ 5,144 $ 5,060 $ 19,585 Cognigen Corporation 9,321 – – 9,321 DILIsym Services, Inc. 3,875 685 505 5,065 Lixoft* – – – – Total $ 22,577 $ 5,829 $ 5,565 $ 33,970,440 33,971 Year ended August 31, 2018 North & South America Europe Asia Total Simulations Plus, Inc. $ 7,856 $ 4,964 $ 4,733 $ 17,553 Cognigen Corporation 7,857 – – 7,857 DILIsym Services, Inc. 3,163 312 782 4,257 Lixoft* – – – – Total $ 18,876 $ 5,276 $ 5,515 $ 29,666,524 29,667 *Lixoft was acquired on April 1, 2020. NOTE 12 – RELATED PARTY TRANSACTIONS On June 1, 2017 the Company acquired DILIsym Service, Inc. As part of that agreement the Company paid $ 1,704,000 to former shareholders of DILIsym Services, Inc. who are currently employees of the Consolidated Company. In addition, as part of the acquisition agreement the Company owes approximately $ 2,260,000 of acquisition liabilities at August 31, 2018 to the former shareholders who are still employees of the Consolidated Company. One of the former shareholders of DILIsym is currently a director of Simulations Plus, under the agreement he received approximately $29,000 and could receive up to approximately $30,000 in future earn-out payments. In September 2018, subsequent to year end under terms of the agreement the Company made payments in the amount of approximately $ 587,000 and $ 10,000 , respectively to the employees and the current director. In fiscal year 2019, under terms of the agreement the Company made payments in the amount of approximately $ 1,599,534 and $ 27,312 , respectively to the employees and the current director. In August 2020 the Company made final payments under the agreement in the amount of approximately $ 664,506 and $ 11,346 , respectively to the employees and the current director. On April 1, 2020 the Company acquired Lixoft of Paris. As part of that agreement the Company paid $ 6,720,615 and issued stock with a value of $ 2,602,081 to former shareholders of Lixoft who are currently employees of the Consolidated Company. In addition, as part of the acquisition agreement the Company owes approximately $ 947,220 of acquisition liabilities at August 31, 2020 to the former shareholders who are still employees of the Consolidated Company. F- 29 NOTE 13 - EMPLOYEE BENEFIT PLAN We maintain a 401(k) Plan for eligible employees. We make matching contributions equal to 100% of the employee’s elective deferral, not to exceed 4% of the total employee compensation. We can also elect to make a profit-sharing contribution. We contributed $ 456,484 , $ 404,684 and $ 326,762 for fiscal years 2020, 2019 and 2018, respectively. NOTE 14 - ACQUISITION/MERGER WITH SUBSIDIARIES On March 31, 2020, the Company entered into a Stock Purchase and Contribution Agreement (the “Agreement”) with Lixoft, a French société par actions simplifiée (“Lixoft”). On April 1, 2020, the Company consummated the acquisition of all outstanding equity interests of Lixoft pursuant to the terms of the Agreement, with Lixoft becoming a wholly owned subsidiary of the Company. We believe the combination of Simulations Plus and Lixoft provides substantial future potential based on the complementary strengths of each of the companies. Under the terms of the Agreement, as described below, the Company will pay the former shareholders of Lixoft total consideration of up to $16,500,000, consisting of two-thirds cash and one-third newly issued, unregistered shares of the Company’s common stock. In addition, the Company will pay $3,456,029 of excess working capital based on the March 31, 2020 financial statements of Lixoft. On April 1, 2020, the Company paid the former shareholders of Lixoft a total of $10,789,362, comprised of cash in the amount of $9,460,129 and the issuance of 111,682 shares of the Company’s common stock valued at $3,662,337, net of adjustments and a holdback for representations and warranties (under the terms of the Agreement a price of approximately $32.15 dollars per share was used based upon the volume-weighted average closing price of the Company’s shares of common stock for the 30-consecutive-trading-day period ending two trading days prior to April 1, 2020). 9,669 shares are held in an escrow for offset for representations and warrantees. Within three business days following the two-year anniversary of March 31, 2020 (the date of the Agreement) and subject to any offsets for representations and warrantees, the Company will pay the former shareholders of Lixoft a total of $2,000,000, comprised of $1,333,333 of cash and the release from an escrow shares of stock valued at $666,337 issued at the date of the Agreement. The Agreement provides for a two-year market standoff period in which the newly issued shares may not be sold by the recipients thereof. In addition, the agreement calls for earn-out payments up to an additional $5,500,000, two-thirds cash and one-third newly issued, unregistered shares of the Company’s common stock based on a revenue growth formula each year for the two years subsequent to April 1, 2020. The former shareholders can earn up to $2,000,000 the first year and $3,500,000 in year two. The Earn-out liability has been recorded at fair value. Under the acquisition method of accounting, the total purchase price reflects Lixoft’s tangible and intangible assets and liabilities based on their estimated fair values at the date of the completion of the acquisition (April 1, 2020). The following table summarizes the preliminary allocation of the purchase price for Lixoft: Allocation of purchase price Assets acquired, Including cash of $3,799,134 and accounts receivable of $629,481 $ 5,006,892 Developed Technologies Acquired 8,010,000 Estimated value of Intangibles assets acquired (Customer Lists, trade name etc.) 4,160,000 Estimated Goodwill acquired 2,533,987 Liabilities Assumed ( 1,117,519 ) Total Consideration $ 18,593,360 Goodwill has been provided in the transaction based on estimates of future earnings of this subsidiary including anticipated synergies associated with the positioning of the combined company as a leader in model-based drug development. F- 30 Consolidated supplemental Pro Forma information The following unaudited consolidated supplemental pro forma information assumes that the acquisition of Lixoft took place on September 1, 2017 for the income statement years periods ended August 31, 2020. These amounts have been calculated after applying the Company’s accounting policies and adjusting the results of Lixoft to reflect the same expenses in the years ended August 31, 2019 and 2018. The adjustments include costs of acquisition, and amortization of intangibles and other technologies acquired during the merger, assuming the fair-value adjustments applied on September 1, 2017, together with consequential tax effects. Schedule of statement of income (Pro forma) (Pro forma) (Pro forma) 2020* 2019 2018 (in thousands) (in thousands) (in thousands) (unaudited) (unaudited) (unaudited) Net Sales $ 43,970 $ 36,918 $ 31,891 Net Income $ 10,630 $ 9,250 $ 9,132 *Balances include five months actual results for Lixoft. NOTE 15 - UNAUDITED QUARTERLY FINANCIAL DATA The following table presents selected unaudited quarterly financial data for each full quarterly period of the years ended August 31, 2020 and 2019 (in thousands except for per share data), because of rounding, numbers may not foot: Quarterly Financial Information First Second Third Fourth Year ended August 31, 2020 Quarter Quarter Quarter Quarter Revenues $ 9,401 $ 10,350 $ 12,298 $ 9,540 Gross Profit $ 6,758 $ 7,683 $ 9,633 $ 6,865 Net Income $ 2,058 $ 2,150 $ 2,936 $ 2,188 Earnings per share, Basic $ 0.12 $ 0.12 $ 0.17 $ 0.12 Earnings per share, Diluted $ 0.11 $ 0.12 $ 0.16 $ 0.11 First Second Third Fourth Year ended August 31, 2019 Quarter Quarter Quarter Quarter Revenues $ 7,536 $ 8,472 $ 9,937 $ 8,026 Gross Profit $ 5,336 $ 6,264 $ 7,613 $ 5,735 Net Income $ 1,536 $ 2,099 $ 2,889 $ 2,059 Earnings per share, Basic $ 0.09 $ 0.12 $ 0.16 $ 0.12 Earnings per share, Diluted $ 0.09 $ 0.12 $ 0.16 $ 0.11 NOTE 16 - SUBSEQUENT EVENTS Dividend Declared On October 9, 2020, our Board of Directors declared a quarterly cash dividend of $0.06 per share to our shareholders. The dividend in the amount of $1,195,461 was distributed on Monday, November 2, 2020, for shareholders of record as of Monday, October 26, 2020. F- 31