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

SIMULATIONS PLUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

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

SIMULATIONS PLUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

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

SIMULATIONS PLUS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1: GENERAL

This report on Form 10-Q for the quarter ended November 30, 2020,May 31, 2021, should be read in conjunction with the Company's annual reportour Annual Report on Form 10-K for the year ended August 31, 2020, filed with the Securities and Exchange Commission (“SEC”) on November 16, 2020. As contemplated by the SEC under Article 8 of Regulation S-X, the accompanying consolidated financial statements and footnotes have been condensed and therefore do not contain all disclosures required by generally accepted accounting principles. The interim financial data are unaudited; however, in the opinion of Simulations Plus, Inc. ("we", "our", "us"), the interim data includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the interim periods. Results for interim periods are not necessarily indicative of those to be expected for the full year.

Organization

Simulations Plus, Inc. (“Simulations Plus”, “Lancaster”) was incorporated on July 17, 1996. 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)(“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 designsWe are a premier developer of drug discovery and developsdevelopment software for modeling and simulation, and for the prediction of molecular properties utilizing artificial intelligence and machine learning based technology. We also provide consulting services ranging from early drug discovery through preclinical and clinical trial data analysis and for submissions to regulatory agencies. Our software and consulting services are provided to major pharmaceutical, simulation softwarebiotechnology, agrochemical, cosmetics and food industry companies, and to promote cost-effective solutions to a number of problems in pharmaceutical research andregulatory agencies worldwide for use in the educationconduct 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 health care outside of the pharmaceutical industry.  industry-based research.

NOTE 2: SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

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

Use of Estimates

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

Reclassifications

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

Revenue Recognition

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

In accordance with Accounting Standards Codification Topic 606 (ASC Topic 606), “Revenue from Contracts with Customers”, the Company determineswe determine revenue recognition through the following steps:

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 determineddetermine 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, while few, if any of the longer-term contracts have commissions associated with them.

Practical Expedients and Exemptions

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

Cash and Cash Equivalents

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

Accounts Receivable

We analyze the age of customer balances, historical bad-debt experience, customer creditworthiness, and changes in customer payment terms when making estimates of the collectability of the Company’sour trade accounts receivable balances. If we determine that the financial conditions of any of itsour 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 allreasonable collection attempts have failed.

Investments

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

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

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

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

The Company classifies itsWe classify our investments in marketable debt securities based on the facts and circumstances present at the time of purchase of the securities. During the quarter ended November 30, 2020,May 31, 2021, all of the Company’sour 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 software development costs are comprised primarily of salaries and direct payroll-related costs and the purchase of existing software to be used in our software products.

Amortization of capitalized software development costs is calculated on a product-by-product basis on the straight-line method over the estimated economic life of the products (not to exceed five years). Amortization of software development costs amounted to $325344 thousand and $314310 thousand for the three months ended November 30,May 31, 2021 and 2020, respectively, and 2019,$1.0 million and $938 thousand for the nine months ended May 31, 2021 and 2020, respectively. We expect future amortization expense to vary due to increases in capitalized computer software development costs.

We test capitalized computer software development costs for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

Property and Equipment

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

Internal-use Software

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

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

Leases

Supplemental balance sheet information related to operating leases was as follows as of November 30, 2020:May 31, 2021: 

Intangible Assets and Goodwill

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

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

Goodwill is tested for impairment at the reporting unit level, which is one level below or the same as an operating segment. As of November 30, 2020, the CompanyMay 31, 2021, we determined that it haswe have four reporting units: Simulations Plus, Cognigen, DILIsym and Lixoft. When testing goodwill for impairment, the Companywe first performsperform 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 isWe are required to perform step one only if it concludes that it is more likely than not that a reporting unit's fair value is less than its carrying value. Should this be the case, the first step of the two-step process is to identify whether a potential impairment exists by comparing the estimated fair values of the Company'sour 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'sour software, technology, patents, and trademarks. If the carrying amount of goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess.

As of November 30, 2020,May 31, 2021, the entire balance of goodwill was attributed to three of the Company'sour reporting units,units: Cognigen, DILIsym, and Lixoft. Intangible assets subject to amortization are reviewed for impairment whenever events or circumstances indicate that the carrying amount of these assets may not be recoverable. The CompanyWe did not recognize any impairment charges during the three months and nine months ended November 30, 2020May 31, 2021 and 2019.2020.

Reconciliation of Goodwill for the period ended November 30, 2020:as of May 31, 2021:

Fair Value of Financial Instruments

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

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

The following table summarizes fair value measurements at November 30, 2020May 31, 2021 and August 31, 2020 for assets and liabilities measured at fair value on a recurring basis:

November 30, 2020:

August 31, 2020:

As of November 30, 2020May 31, 2021 and August 31, 2020, the Company haswe had a liability for contingent consideration related to itsour acquisition of Lixoft. The fair value measurement of the contingent consideration obligations is determined using Level 3 inputs. The fair value of contingent consideration obligations is based on a discounted cash flow model using a probability-weighted income approach. These fair value measurements represent Level 3 measurements as they are based on significant inputs not observable in the market. Significant judgment is employed in determining the appropriateness of these assumptions as of the acquisition date and for each subsequent period. Accordingly, changes in assumptions could have a material impact on the amount of contingent consideration expense the Company recordswe record in any given period. Changes in the value of the contingent consideration obligations are recorded in the Company’sour Consolidated Statement of Operations.

The following is a reconciliation of contingent consideration value:

Reconciliation of contingent consideration

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

Income Taxes

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

Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The provision for income taxes represents the tax payable for the period and the change during the period in deferred tax assets and liabilities.

Intellectual property

The following table summarizes intellectual property as of November 30, 2020:

The following table summarizes intellectual property as of August 31, 2020:

Total amortization expense for intellectual property agreements for the three months ended November 30,May 31, 2021 and 2020 and 2019 was $357358 thousand and $232 316 thousand, respectively, and total amortization expense for the nine months ended May 31, 2021 and 2020 was $1.1 million and $781thousand, respectively.

Other intangible assets

The following table summarizes the Company’s other intangible assets as of November 30, 2020:

The following table summarizes the Company’sour other intangible assets as of August 31, 2020:

AmortizationTotal amortization expense for each ofother intangible assets for the three months ended November 30,May 31, 2021 and 2020 and 2019 was $137 thousand and $87120 thousand, respectively, and total amortization expense for the nine months ended May 31, 2021 and 2020 was $412 thousand and $293 thousand, respectively. According to policy in addition to normal amortization, these assets are tested for impairment as needed.

Earnings per Share

We report earnings per share in accordance with FASB ASC 260-10. Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of common shares available. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. The components of basic and diluted earnings per share for the three and nine months ended November 30,May 31, 2021 and 2020 and 2019 were as follows:

Stock-Based Compensation

Compensation costs related to stock options are determined in accordance with FASB ASC 718-10, “Compensation-Stock Compensation”, using the modified prospective method. Under this method, compensation cost is calculated based on the grant-date fair value estimated in accordance with FASB ASC 718-10, amortized on a straight-line basis over the options’ vesting period. Stock-based compensation expense was $449$705 thousand and $295$287 thousand for the three months ended November 30,May 31, 2021 and 2020, respectively, and 2019,$2.0 million and $927 thousand for the nine months ended May 31, 2021 and 2020, respectively. This expense is included in the condensed consolidated statements of operations as Selling, general, and administration and Research and development expense.

Impairment of Long-lived Assets

The Company accountsWe account for the impairment and disposition of long-lived assets in accordance with ASC 350, “Intangibles – Goodwill and Other” and ASC 360, “Property and Equipment”. Long-lived assets to be held and used are reviewed for events or changes in circumstances that indicate that their carrying value may not be recoverable. We measure recoverability by comparing the carrying amount of an asset to the expected future undiscounted net cash flows generated by the asset. If we determine that the asset may not be recoverable, or if the carrying amount of an asset exceeds its estimated future undiscounted cash flows, we recognize an impairment charge to the extent of the difference between the fair value and the asset's carrying amount. NoNaN impairment losses were recorded during the threenine months ended November 30, 2020May 31, 2021 and 2019.2020.

Recently Issued Accounting Pronouncements

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

In 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 CompanyWe adopted this ASU on September 1, 2019.

We do not expect any other recently issued accounting pronouncements to have a material effect on our financial statements.

NOTE 3: REVENUE RECOGNITION

Contract Liabilities

During the three and nine months ended November 30, 2020 and 2019, the CompanyMay 31, 2021, we recognized $29630 thousand and $306430 thousand, respectively, of revenue that was included in contract liabilities as of August 31, 2020, and 2019, respectively.during the three and nine months ended May 31, 2020, we recognized $109 thousand and $882 thousand, respectively, of revenue that was included in contract liabilities as of August 31, 2019.

Disaggregation of Revenues

The components of disaggregation of revenue for the three and nine months ended May 31, 2021 and 2020 were as follows: 

Remaining Performance Obligations

Remaining performance obligations that do not fall under the expedients require the Companyus to perform various consulting and software development services of approximately $2.74.3 million. It is anticipated that a majority of these revenues will be recognized within the next twelve months.

NOTE 4: PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:

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

NOTE 5: INVESTMENTS

The Company investsWe invest a portion of itsour excess cash balances in short-term debt securities.securities within the parameters of our Investment Policy and Guidelines. Investments at November 30, 2020as of May 31, 2021 consisted of corporate bonds with maturities remaining of less than 12 months. The CompanyWe may also invest excess cash balances in certificates of deposit, money market accounts, government-sponsored enterprise securities, corporate bonds and/or commercial paper. The Company accountsWe account for its investments in accordance with FASB ASC 320, Investments – Debt and Equity Securities. At November 30, 2020,As of May 31, 2021, all investments were classified as held-to-maturity securities.

The following tables summarize the Company’sour short-term investments as of November 30, 2020May 31, 2021 and August 31, 2020: