The accompanying notes are an integral part of
these Condensed Consolidated Financial Statements.
The accompanying notes are an integral part of
these Condensed Consolidated Financial Statements.
The accompanying notes are an integral part of
these Condensed Consolidated Financial Statements.
The accompanying notes are an integral part of
these Condensed Consolidated Financial Statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1: GENERAL
This report on Form 10-Q for the quarter ended
February 28, 2021, should be read in conjunction with the our 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”)
was incorporated on July 17, 1996. In September 2014, Simulations Plus acquired all of the outstanding equity interests of Cognigen Corporation
(“Cognigen”) and Cognigen became a wholly owned subsidiary of Simulations Plus, Inc. In June 2017, Simulations Plus acquired
DILIsym Services, Inc. (“DILIsym”) as a wholly owned subsidiary. In April 2020, Simulations Plus, Inc. acquired Lixoft, a
French société par actions simplifiée (“Lixoft”) as a wholly owned subsidiary pursuant to a stock purchase
and contribution agreement. (Collectively, “Company”, “we”, “us”, “our”).
Lines of Business
We are a premier developer of drug discovery and
development software for modeling and simulation, and for the prediction of molecular properties utilizing artificial intelligence and
machine learning based technology. We also provide consulting services ranging from early drug discovery through preclinical and clinical
trial data analysis and for submissions to regulatory agencies. Our software and consulting services are provided to major pharmaceutical,
biotechnology, agrochemical, cosmetics, food industry companies, and to regulatory agencies worldwide for use in the conduct of 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”, we determine revenue recognition through the following
steps:
i.
|
Identification of the contract, or contracts, with a customer
|
ii.
|
Identification of the performance obligations in the contract
|
iii.
|
Determination of the transaction price
|
iv.
|
Allocation of the transaction price to the performance obligations in the contract
|
v.
|
Recognition of revenue when, or as, we satisfy a performance obligation
|
Deferred Commissions
Sales commissions earned by our sales force and
our commissioned sales representatives are considered incremental and recoverable costs of obtaining a contract with a customer. Sales
commissions for new contracts are deferred and then amortized on a straight-line basis over a period of benefit. We 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, while few, if any of the longer-term contracts have commissions associated with them.
Practical Expedients and Exemptions
We have elected the following additional
practical expedients in applying Topic 606:
·
|
Commission Expense: We apply the practical expedient in ASC Topic 606 to expense costs as incurred for sales commissions when the period of benefit is one year or less. Most of our contracts are of a duration of one year or less; few, if any of the longer term contracts have commissions associated with them.
|
·
|
Transaction Price Allocated to Future
Performance Obligations: ASC 606 requires that we disclose the aggregate amount of transaction price that is allocated to
performance obligations that have not yet been satisfied as of February 28, 2021. ASC 606 provides certain practical expedients that
limit the requirement to disclose the aggregate amount of transaction price allocated to unsatisfied performance obligations.
We applied the practical expedient to
not disclose the amount of transaction price allocated to unsatisfied performance obligations when the performance obligation is part
of a contract that has an original expected duration of one year or less.
|
Cash and Cash Equivalents
For purposes of the statements of cash flows, we consider all highly
liquid investments purchased with original maturities of three months or less to be cash equivalents.
Accounts Receivable
We analyze the age of customer balances, historical
bad-debt experience, customer creditworthiness, and changes in customer payment terms when making estimates of the collectability of our
trade accounts receivable balances. If we determine that the financial conditions of any of our customers have deteriorated, whether due
to customer-specific or general economic issues, an increase in the allowance may be made. Accounts receivable are written off when all
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, money market accounts, government-sponsored
enterprise securities, corporate bonds and/or commercial paper. We account for our investment in marketable securities in accordance with
Financial Accounting Standards Board (FASB) ASC 320, Investments – Debt and Equity Securities. This statement requires debt securities
to be classified into three categories:
Held-to-maturity—Debt securities that the
entity has the positive intent and ability to hold to maturity are reported at amortized cost. Discounts and premiums to par value of
the debt securities are amortized to interest income/expense over the term of the security. No gains or losses on investment securities
are realized until they are sold or a decline in fair value is determined to be other-than-temporary.
Trading Securities—Debt securities that
are bought and held primarily for the purpose of selling in the near term are reported at fair value, with unrealized gains and losses
included in earnings.
Available-for-Sale—Debt securities not classified
as either securities held-to-maturity or trading securities are reported at fair value with unrealized gains or losses excluded from earnings
and reported as a separate component of shareholders’ equity.
We classify our investments in marketable debt
securities based on the facts and circumstances present at the time of purchase of the securities. During the quarter ended February 28,
2021, all of our investments were classified as held-to-maturity.
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 $365 thousand and $314 thousand for the three months ended
February 28, 2021 and February 29, 2020, respectively and $690 thousand and $628 thousand for the six months ended February 28, 2021 and
February 29, 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:
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
|
Internal-use Software
We have a service contract related to the implementation of internally
used software. In accordance with ASC 350-40 “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing
Arrangement That Is a Service Contract”, we have capitalized certain internal-use software which are included in long-term assets.
The amortization will be classified as selling,
general, and administrative expenses on the condensed consolidated statement of operations and maintenance and minor upgrades are charged
to expense as incurred. Gains and losses on disposals are included in the results of operations. No amortization has been expensed for
the project as it is still in progress.
Leases
Supplemental balance sheet information related
to operating leases was as follows as of February 28, 2021:
Schedule of lease cost
|
|
|
|
|
(in thousands)
|
|
|
|
|
Right of use assets
|
|
$
|
1,532
|
|
Lease Liabilities, Current
|
|
$
|
469
|
|
Lease Liabilities, Long-term
|
|
$
|
1,064
|
|
Operating lease costs
|
|
$
|
314
|
|
Weighted Average remaining lease term
|
|
|
3.0 years
|
|
Weighted Average Discount rate
|
|
|
3.79%
|
|
Intangible Assets and Goodwill
We perform valuations of assets acquired and liabilities
assumed on each acquisition accounted for as a business combination and recognizes the assets acquired and liabilities assumed at their
acquisition-date fair value. Acquired intangible assets include customer relationships, software, trade names, and noncompete agreements.
We determine the appropriate useful life by performing an analysis of expected cash flows based on historical experience of the acquired
businesses. Intangible assets are amortized over their estimated useful lives using the straight-line method, which approximates the pattern
in which the majority of the economic benefits are expected to be consumed.
Goodwill represents the excess of the cost of
an acquired entity over the fair value of the acquired net assets. Goodwill is not amortized, instead it is tested for impairment annually
or when events or circumstances change that would indicate that goodwill might be impaired. Events or circumstances that could trigger
an impairment review include, but are not limited to, a significant adverse change in legal factors or in the business climate, an adverse
action or assessment by a regulator, unanticipated competition, a loss of key personnel, significant changes in the manner of our use
of the acquired assets or the strategy for our overall business, significant negative industry or economic trends, or significant underperformance
relative to expected historical or projected future results of operations.
Goodwill is tested for impairment at the reporting
unit level, which is one level below or the same as an operating segment. As of February 28, 2021, we determined that we have four reporting
units: Simulations Plus, Cognigen, DILIsym and Lixoft. When testing goodwill for impairment, we first perform a qualitative assessment
to determine whether it is necessary to perform step one of a two-step annual goodwill impairment test for each reporting unit. we are
required to perform step one only if it concludes that it is more likely than not that a reporting unit's fair value is less than its
carrying value. Should this be the case, the first step of the two-step process is to identify whether a potential impairment exists by
comparing the estimated fair values of our reporting units with their respective book values, including goodwill. If the estimated fair
value of the reporting unit exceeds book value, goodwill is considered not to be impaired, and no additional steps are necessary. If,
however, the fair value of the reporting unit is less than book value, then the second step is performed to determine if goodwill is impaired
and to measure the amount of impairment loss, if any. The amount of the impairment loss is the excess of the carrying amount of the goodwill
over its implied fair value. The estimate of implied fair value of goodwill is primarily based on an estimate of the discounted cash flows
expected to result from that reporting unit, but may require valuations of certain internally generated and unrecognized intangible assets
such as our software, technology, patents, and trademarks. If the carrying amount of goodwill exceeds the implied fair value of that goodwill,
an impairment loss is recognized in an amount equal to the excess.
As of February 28, 2021, the entire balance of
goodwill was attributed to three of the our reporting units: Cognigen, DILIsym, and Lixoft. Intangible assets subject to amortization
are reviewed for impairment whenever events or circumstances indicate that the carrying amount of these assets may not be recoverable.
We did not recognize any impairment charges during the three months and six months ended February 28, 2021 and February 29, 2020.
Reconciliation of Goodwill as of February 28,
2021:
Schedule of reconciliation of goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Cognigen
|
|
|
DILIsym
|
|
|
Lixoft
|
|
|
Total
|
|
Balance, August 31, 2020
|
|
$
|
4,789
|
|
|
$
|
5,598
|
|
|
$
|
2,534
|
|
|
$
|
12,921
|
|
Addition
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Impairments
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Balance, February 28, 2021
|
|
$
|
4,789
|
|
|
$
|
5,598
|
|
|
$
|
2,534
|
|
|
$
|
12,921
|
|
Fair Value of Financial Instruments
Assets and liabilities recorded at fair value
in the Condensed Balance Sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair
value. The categories, as defined by the standard are as follows:
Level Input:
|
|
Input Definition:
|
Level I
|
|
Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date.
|
Level II
|
|
Inputs, other than quoted prices included in Level I, that are observable for the asset or liability through corroboration with market data at the measurement date.
|
Level III
|
|
Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.
|
For certain of our financial instruments, including
accounts receivable, accounts payable, accrued payroll and other expenses, accrued bonuses to officers, and accrued warranty and service
costs, the amounts approximate fair value due to their short maturities.
The following table summarizes fair value measurements
at February 28, 2021 and August 31, 2020 for assets and liabilities measured at fair value on a recurring basis:
Schedule of fair value measurements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 28, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Cash and cash equivalents
|
|
$
|
42,385
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
42,385
|
|
Short-term investments
|
|
$
|
75,367
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
|
75,367
|
|
Acquisition-related contingent consideration obligations
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
4,974
|
|
|
$
|
4,974
|
|
August 31, 2020:
(in thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Cash and cash equivalents
|
|
$
|
49,207
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
49,207
|
|
Short-term investments
|
|
$
|
66,804
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
66,804
|
|
Acquisition-related contingent consideration obligations
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
4,731
|
|
|
$
|
4,731
|
|
As of February 28, 2021 and August 31, 2020, we
had a liability for contingent consideration related to our acquisition of Lixoft. The fair value measurement of the contingent consideration
obligations is determined using Level 3 inputs. The fair value of contingent consideration obligations is based on a discounted cash flow
model using a probability-weighted income approach. These fair value measurements represent Level 3 measurements as they are based on
significant inputs not observable in the market. Significant judgment is employed in determining the appropriateness of these assumptions
as of the acquisition date and for each subsequent period. Accordingly, changes in assumptions could have a material impact on the amount
of contingent consideration expense we record in any given period. Changes in the value of the contingent consideration obligations are
recorded in our Consolidated Statement of Operations.
The following is a reconciliation of contingent
consideration value:
Reconciliation of contingent consideration value
|
|
|
|
|
(in thousands)
|
|
|
|
|
Value at August 31, 2020
|
|
$
|
4,731
|
|
Contingent consideration payments
|
|
|
–
|
|
Change in value of contingent consideration
|
|
|
243
|
|
Value at February 28, 2021
|
|
$
|
4,974
|
|
Research and Development Costs
Research and development costs are charged to
expense as incurred until technological feasibility has been established. These costs include salaries, laboratory experiments, and purchased
software that was developed by other companies and incorporated into, or used in the development of, our final products.
Income Taxes
We account for income taxes in accordance with
ASC 740-10, “Income Taxes” which requires the recognition of deferred tax assets and liabilities for the expected future
tax consequences of events that have been included in the financial statements or tax returns.
Under this method, deferred income taxes are recognized
for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting
amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to
be realized. The provision for income taxes represents the tax payable for the period and the change during the period in deferred tax
assets and liabilities.
Intellectual
property
The following table summarizes intellectual property as of February 28, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Amortization
Period
|
|
Acquisition
Value
|
|
|
Accumulated
Amortization
|
|
|
Net Book
Value
|
|
Royalty Agreement buy out-Enslein Research
|
|
Straight line 10 years
|
|
$
|
75
|
|
|
$
|
67
|
|
|
$
|
8
|
|
Termination/nonassertion agreement-TSRL Inc.
|
|
Straight line 10 years
|
|
|
6,000
|
|
|
|
4,075
|
|
|
|
1,925
|
|
Developed technologies–DILIsym acquisition
|
|
Straight line 9 years
|
|
|
2,850
|
|
|
|
1,188
|
|
|
|
1,662
|
|
Intellectual rights of Entelos Holding Corp.
|
|
Straight line 10 years
|
|
|
50
|
|
|
|
12
|
|
|
|
38
|
|
Developed technologies–Lixoft acquisition
|
|
Straight line 16 years
|
|
|
8,010
|
|
|
|
459
|
|
|
|
7,551
|
|
|
|
|
|
$
|
16,985
|
|
|
$
|
5,801
|
|
|
$
|
11,184
|
|
The following table summarizes intellectual property
as of August 31, 2020:
(in
thousands)
|
|
Amortization
Period
|
|
Acquisition
Value
|
|
|
Accumulated
Amortization
|
|
|
Net Book
Value
|
|
Royalty Agreement buy out-Enslein Research
|
|
Straight line 10 years
|
|
$
|
75
|
|
|
$
|
64
|
|
|
$
|
11
|
|
Termination/nonassertion agreement-TSRL Inc.
|
|
Straight line 10 years
|
|
|
6,000
|
|
|
|
3,775
|
|
|
|
2,225
|
|
Developed technologies–DILIsym acquisition
|
|
Straight line 9 years
|
|
|
2,850
|
|
|
|
1,029
|
|
|
|
1,821
|
|
Intellectual rights of Entelos Holding Corp.
|
|
Straight line 10 years
|
|
|
50
|
|
|
|
10
|
|
|
|
40
|
|
Developed technologies–Lixoft acquisition
|
|
Straight line 16 years
|
|
|
8,010
|
|
|
|
209
|
|
|
|
7,801
|
|
|
|
|
|
$
|
16,985
|
|
|
$
|
5,087
|
|
|
$
|
11,898
|
|
Total amortization expense for intellectual property
agreements for the three months ended February 28, 2021 and February 29, 2020 was $357 thousand and $232 thousand, respectively, and total
amortization expense for the six months ended February 28, 2021 and February 29, 2020 was $714 thousand and $465 thousand, respectively.
Other intangible assets
Schedule of other intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the Company’s other intangible assets as of February 28, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Amortization
Period
|
|
Acquisition
Value
|
|
|
Accumulated
Amortization
|
|
|
Net Book
Value
|
|
Cognigen
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
Straight line 8 years
|
|
$
|
1,100
|
|
|
$
|
894
|
|
|
$
|
206
|
|
Trade name
|
|
None
|
|
|
500
|
|
|
|
–
|
|
|
|
500
|
|
Covenants not to compete
|
|
Straight line 5 years
|
|
|
50
|
|
|
|
50
|
|
|
|
–
|
|
DILIsym
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
Straight line 10 years
|
|
|
1,900
|
|
|
|
713
|
|
|
|
1,187
|
|
Trade name
|
|
None
|
|
|
860
|
|
|
|
–
|
|
|
|
860
|
|
Covenants not to compete
|
|
Straight line 4 years
|
|
|
80
|
|
|
|
75
|
|
|
|
5
|
|
Lixoft
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
Straight line 14 years
|
|
|
2,550
|
|
|
|
167
|
|
|
|
2,383
|
|
Trade name
|
|
None
|
|
|
1,550
|
|
|
|
–
|
|
|
|
1,550
|
|
Covenants not to compete
|
|
Straight line 3 years
|
|
|
60
|
|
|
|
18
|
|
|
|
42
|
|
|
|
|
|
$
|
8,650
|
|
|
$
|
1,917
|
|
|
$
|
6,733
|
|
The following table summarizes the Company’s
other intangible assets as of August 31, 2020:
(in thousands)
|
|
Amortization
Period
|
|
Acquisition
Value
|
|
|
Accumulated
Amortization
|
|
|
Net Book
Value
|
|
Cognigen
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
Straight line 8 years
|
|
$
|
1,100
|
|
|
$
|
825
|
|
|
$
|
275
|
|
Trade name
|
|
None
|
|
|
500
|
|
|
|
–
|
|
|
|
500
|
|
Covenants not to compete
|
|
Straight line 5 years
|
|
|
50
|
|
|
|
50
|
|
|
|
–
|
|
DILIsym
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
Straight line 10 years
|
|
|
1,900
|
|
|
|
618
|
|
|
|
1,282
|
|
Trade name
|
|
None
|
|
|
860
|
|
|
|
–
|
|
|
|
860
|
|
Covenants not to compete
|
|
Straight line 4 years
|
|
|
80
|
|
|
|
65
|
|
|
|
15
|
|
Lixoft
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
Straight line 14 years
|
|
|
2,550
|
|
|
|
76
|
|
|
|
2,474
|
|
Trade name
|
|
None
|
|
|
1,550
|
|
|
|
–
|
|
|
|
1,550
|
|
Covenants not to compete
|
|
Straight line 3 years
|
|
|
60
|
|
|
|
8
|
|
|
|
52
|
|
|
|
|
|
$
|
8,650
|
|
|
$
|
1,642
|
|
|
$
|
7,008
|
|
Total amortization expense for other intangible
assets for the three months ended February 28, 2021 and February 29, 2020 was $138 thousand and $87 thousand, respectively, and total
amortization expense for the six months ended February 28, 2021 and February 29, 2020 was $275 thousand and $174 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 six months
ended February 28, 2021 and February 29, 2020 were as follows:
Schedule of earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Three Months ended
|
|
|
Six Months Ended
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common shareholders
|
|
$
|
3,211
|
|
|
$
|
2,150
|
|
|
$
|
5,690
|
|
|
$
|
4,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares outstanding during the period
|
|
|
20,006
|
|
|
|
17,638
|
|
|
|
19,968
|
|
|
|
17,624
|
|
Dilutive effect of stock options
|
|
|
836
|
|
|
|
678
|
|
|
|
818
|
|
|
|
682
|
|
Common stock and common stock equivalents used for diluted earnings per share
|
|
|
20,842
|
|
|
|
18,316
|
|
|
|
20,786
|
|
|
|
18,306
|
|
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 $804 thousand and $417 thousand
for the three months ended February 28, 2021 and February 29, 2020, respectively, and $1.3 million and $784 thousand for the six months
ended February 28, 2021 and February 29, 2020, respectively. This expense is included in the condensed consolidated statements of operations
as Selling, general, and administration and Research and development expense.
Impairment of Long-lived Assets
We account for the impairment and disposition
of long-lived assets in accordance with ASC 350, “Intangibles – Goodwill and Other” and ASC 360, “Property
and Equipment”. Long-lived assets to be held and used are reviewed for events or changes in circumstances that indicate that
their carrying value may not be recoverable. We measure recoverability by comparing the carrying amount of an asset to the expected future
undiscounted net cash flows generated by the asset. If we determine that the asset may not be recoverable, or if the carrying amount of
an asset exceeds its estimated future undiscounted cash flows, we recognize an impairment charge to the extent of the difference between
the fair value and the asset's carrying amount. No impairment losses were recorded during the six months ended February 28, 2021 and February
29, 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. We adopted this ASU on September 1, 2019.
NOTE 3: REVENUE RECOGNITION
Contract Liabilities
During the three and six months ended
February 28, 2021, we recognized $104
thousand and $400
thousand, respectively, of revenue that was included in contract liabilities as of August 31, 2020, and during the three and six
months ended February 29, 2020, we recognized $338
thousand and $773
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 six months ended February 28, 2021 and February 29, 2020 were as follows:
Schedule of disaggregation of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Software licenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Point in time
|
|
$
|
7,536
|
|
|
$
|
5,131
|
|
|
$
|
13,472
|
|
|
$
|
9,494
|
|
Over time
|
|
|
291
|
|
|
|
254
|
|
|
|
503
|
|
|
|
504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consulting services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Over time
|
|
|
5,320
|
|
|
|
4,965
|
|
|
|
9,873
|
|
|
|
9,753
|
|
Total revenue
|
|
$
|
13,147
|
|
|
$
|
10,350
|
|
|
$
|
23,848
|
|
|
$
|
19,751
|
|
Remaining Performance Obligations
Remaining performance obligations that do not
fall under the expedients require us to perform various consulting and software development services of approximately $3.8
million. It is anticipated that a majority of these revenues will be recognized within the next twelve months.
NOTE
4: PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
Schedule of property and equipment
|
|
|
|
(in thousands)
|
|
February 28, 2021
|
|
|
August 31, 2020
|
|
Equipment
|
|
$
|
1,012
|
|
|
$
|
865
|
|
Computer equipment
|
|
|
583
|
|
|
|
548
|
|
Furniture and fixtures
|
|
|
161
|
|
|
|
161
|
|
Leasehold improvements
|
|
|
123
|
|
|
|
114
|
|
Construction in progress
|
|
|
391
|
|
|
|
–
|
|
Sub total
|
|
|
2,270
|
|
|
|
1,688
|
|
Less: accumulated depreciation
|
|
|
(1,346
|
)
|
|
|
(1,250
|
)
|
Net book value
|
|
$
|
924
|
|
|
$
|
438
|
|
NOTE 5: INVESTMENTS
We invest a portion of our excess cash balances
in short-term debt securities. Investments at February 28, 2021 consisted of corporate bonds with maturities remaining of less than 12
months. We may also invest excess cash balances in certificates of deposit, money market accounts, government-sponsored enterprise securities,
corporate bonds and/or commercial paper. We account for investments in accordance with FASB ASC 320, Investments – Debt and Equity
Securities. At February 28, 2021, all investments were classified as held-to-maturity securities.
The following tables summarize our short-term
investments as of February 28, 2021 and August 31, 2020:
Schedule of short term investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 28, 2021
|
|
|
|
(in thousands)
|
|
Amortized Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial notes (due within one year)
|
|
$
|
75,367
|
|
|
$
|
–
|
|
|
$
|
(65
|
)
|
|
$
|
75,302
|
|
Total
|
|
$
|
75,367
|
|
|
$
|
–
|
|
|
$
|
(65
|
)
|
|
$
|
75,302
|
|
August 31, 2020
(in thousands)
|
|
Amortized Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial notes (due within one year)
|
|
$
|
66,804
|
|
|
$
|
–
|
|
|
$
|
(61
|
)
|
|
$
|
66,743
|
|
Total
|
|
$
|
66,804
|
|
|
$
|
–
|
|
|
$
|
(61
|
)
|
|
$
|
66,743
|
|
NOTE 6: CONTRACTS PAYABLE
DILIsym Acquisition Liabilities:
On June 1, 2017, we acquired DILIsym. The agreement
provided for a working capital adjustment, an eighteen-month $1.0 million holdback provision against certain representations and warranties,
and an earnout agreement of up to an additional $5.0 million in earnout payments based on earnings over three years following acquisition.
The earnout liability has been recorded at an estimated fair value. Payments under the earnout liability started in fiscal year 2019.
In September 2018, $1.6 million was paid out under the first earnout payment, a second earnout payment was made in August 2019 in the
amount of $1.7 million. The final payment of $1.8 million was paid in August 2020. In addition, no claims were made against the holdback
and the $1.0 million holdback provision was released eighteen months after June 1, 2017.
Lixoft Acquisition Liabilities:
On April 1, 2020, we acquired Lixoft.
The agreement provided for a 24 month $2.0 million holdback escrow provision against certain representations and warrantees, comprised
of $1.3 million of cash and shares of stock valued at $667 thousand 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 earnout payments of up to $5.5 million (two-thirds
cash and one-third newly issued, restricted shares of our common stock). The former shareholders of Lixoft can earn up to $2.0 million
the first year and $3.5 million in year two.
As of February 28, 2021 and August 31, 2020 the
following liabilities have been recorded:
Schedule of Liabilities
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
February 28,
2021
|
|
|
August 31,
2020
|
|
Holdback liability — Lixoft
|
|
$
|
1,333
|
|
|
$
|
1,333
|
|
Earnout liability — Lixoft
|
|
|
4,974
|
|
|
|
4,731
|
|
Sub total
|
|
$
|
6,307
|
|
|
$
|
6,064
|
|
Less: current portion
|
|
|
2,000
|
|
|
|
2,000
|
|
Long-term portion
|
|
$
|
4,307
|
|
|
$
|
4,064
|
|
NOTE 7: COMMITMENTS AND CONTINGENCIES
Leases
We lease approximately 9,255 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,
we exercised the two, two-year options extending the term of the lease through February 2, 2021 at a fixed rate of $25 thousand per month.
In December 2020, the lease was amended to extend the term to January 31, 2026. The amendment decreased the leased square footage from
13,500 sq. ft to 9,255 sq. ft, and correspondingly reduced the base rent from $25 thousand per month to $16.7 thousand per month. The
amended lease also allows us to opt out of the last 4 years of the lease upon 180-day notice to the landlord with no penalty.
Our Cognigen 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
extending it to November 2021. The new base rent is $16 thousand 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, which added 686 square feet and extended the term of the lease to September 30, 2023. The new base
rent is approximately $8 thousand 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 thousand. 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 thousand per quarter (approximately $5.3 thousand
per month) and can be adjusted each December based on a consumer price index.
Rent expense, including common area maintenance
fees for the three months ended February 28, 2021, and February 29, 2020 was $147 thousand and $150 thousand, respectively, and $332
thousand and $295 thousand for the six months ended February 28, 2021 and February 29, 2020, respectively.
Future minimum lease payments under noncancelable
operating leases with remaining terms of one year or more at February 28, 2021 were as follows:
Future minimum lease payments
|
|
|
|
|
(in thousands)
Years Ending
February 28,
|
|
|
|
2022
|
|
$
|
513
|
|
2023
|
|
|
370
|
|
2024
|
|
|
328
|
|
2025
|
|
|
244
|
|
2026
|
|
|
183
|
|
Future minimum lease payments
|
|
$
|
1,638
|
|
Line of
Credit
On March 31, 2020, we entered into a
Credit Agreement with Wells Fargo Bank, N.A. The Credit Agreement provides us with a credit facility of $3.5 million through
April 15, 2022. As of February 28, 2021, there were no amounts drawn against the line of credit.
Employment Agreements
In the normal course of business, we have entered
into employment agreements with certain of our key management personnel that may require compensation payments upon termination.
License Agreement
We 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 paid a royalty
of 25% of revenue derived from the sale of the Metabolism/Metabolite module. This agreement was renegotiated, and we do 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. We have not experienced any adverse impact on revenue since terminating the license agreement.
We are in the process of making arrangements to
replace the database, which is expected to be completed by the end of fiscal year 2021.
Income Taxes
We follow guidance issued by the FASB with regard
to our accounting for uncertainty in income taxes recognized in the financial statements. Such guidance prescribes a recognition threshold
of more likely than not and a measurement process for financial statement recognition and measurement of a tax position taken or expected
to be taken in a tax return. In making this assessment, a company must determine whether it is more likely than not that a tax position
will be sustained upon examination, based solely on the technical merits of the position and must assume that the tax position will be
examined by taxing authorities. Our policy is to include interest and penalties related to income tax expense. We file income tax returns
with the IRS and various state jurisdictions as well as with the countries of India and France. Our federal income tax returns for fiscal
year 2017 thru 2019 are open for audit, and our state tax returns for fiscal year 2016 through 2019 remain open for audit.
Our review of prior year tax positions using the
criteria and provisions presented in guidance issued by FASB did not result in a material impact on our financial position or results
of operations.
Legal Proceedings
We may be subject to litigation, claims, investigations and audits
arising from time to time in the ordinary course of our business; however, at this time, we are not a party to any legal proceedings and
are not aware of any pending, threatened, or unasserted legal proceedings of any kind.
NOTE 8: SHAREHOLDERS’ EQUITY
Dividends
Our Board of Directors declared cash dividends
during fiscal years 2021 and 2020. The details of the dividends paid are in the following tables:
Schedule of dividends declared and paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except dividend per share amounts)
|
Fiscal Year 2021
|
|
|
|
|
|
|
Record Date
|
|
Distribution Date
|
|
Number of Shares
Outstanding on
Record Date
|
|
|
Dividend per
Share
|
|
|
Total
Amount
|
|
10/26/2020
|
|
11/02/2020
|
|
|
19,924
|
|
|
$
|
0.06
|
|
|
$
|
1,195
|
|
1/25/2021
|
|
2/01/2021
|
|
|
20,010
|
|
|
$
|
0.06
|
|
|
|
1,201
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,396
|
|
(in thousands, except dividend per share amounts
|
Fiscal Year 2020
|
|
|
|
|
|
|
Record Date
|
|
Distribution Date
|
|
Number of Shares
Outstanding on
Record Date
|
|
|
Dividend per
Share
|
|
|
Total
Amount
|
|
10/25/2019
|
|
11/01/2019
|
|
|
17,606
|
|
|
$
|
0.06
|
|
|
$
|
1,056
|
|
1/27/2020
|
|
2/03/2020
|
|
|
17,646
|
|
|
$
|
0.06
|
|
|
|
1,059
|
|
4/24/2020
|
|
5/01/2020
|
|
|
17,769
|
|
|
$
|
0.06
|
|
|
|
1,066
|
|
7/27/2020
|
|
8/03/2020
|
|
|
17,820
|
|
|
$
|
0.06
|
|
|
|
1,069
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,250
|
|
Stock Option Plans
On February 23, 2007, the Board of Directors adopted
and the shareholders approved the 2007 Stock Option Plan under which a total of 1.0 million shares of common stock were reserved for issuance.
On February 25, 2014 the shareholders approved an additional 1.0 million shares increasing the total number of shares available to be
granted under the 2007 Stock Option Plan to 2.0 million. 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 1.0 million shares of common
stock were reserved for issuance. This plan will terminate in December 2026 by its term.
On November 20, 2020, the Board of Directors adopted
an amendment to the 2017 Equity Incentive Plan to, subject to shareholder approval, increase the number of shares reserved for issuance
under the plan from 1.0 million shares of common stock to 1.75 million shares of common stock. The amendment, which was submitted for
shareholder approval at our 2021 annual shareholder meeting, was not approved by the shareholders. As a result, we expect to submit a
new equity plan for adoption by the Board of Directors and shareholders in May 2021. If approved, the new equity incentive plan will replace
the 2017 Equity Incentive Plan, except that outstanding awards granted prior to the adoption of the new equity incentive plan will continue
to be governed by the 2017 Equity Incentive Plan.
As of February 28, 2021, employees and directors
hold Qualified Incentive Stock Options (“ISOs”) and Non-Qualified Stock Options (“NQSOs) to purchase 1.3 million shares
of common stock at exercise prices ranging from $6.85 to $61.84.
The following table summarizes information about stock options:
Schedule of stock option activity
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
thousands, except per share and weighted-average amounts)
Transactions during the six months ended February 28, 2021
|
|
Number of
Options
|
|
|
Weighted-
Average
Exercise
Price
Per Share
|
|
|
Weighted-
Average
Remaining
Contractual
Life
|
|
Outstanding, August 31, 2020
|
|
|
1,224
|
|
|
$
|
17.76
|
|
|
|
6.79
|
|
Granted
|
|
|
206
|
|
|
$
|
57.83
|
|
|
|
|
|
Exercised
|
|
|
(134
|
)
|
|
$
|
13.11
|
|
|
|
|
|
Cancelled/Forfeited
|
|
|
(34
|
)
|
|
$
|
26.19
|
|
|
|
|
|
Outstanding, February 28, 2021
|
|
|
1,262
|
|
|
$
|
24.57
|
|
|
|
6.88
|
|
Exercisable, February 28, 2021
|
|
|
657
|
|
|
$
|
11.68
|
|
|
|
5.31
|
|
The weighted-average remaining contractual life
of options outstanding issued under the Plan, both ISOs and NQSOs, was 6.88 years at February 28, 2021. The total fair value of nonvested
stock options as of February 28, 2021 was $20.1 million and is amortizable over a weighted average period of 3.73 years.
The fair value of these options was estimated
at the date of grant using the Black-Scholes option-pricing model. The Black-Scholes option-valuation model was developed for use in estimating
the fair value of traded options, which do not have vesting restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions, including the expected stock price volatility.
The following table summarizes the fair value
of the options, including both ISOs and NQSOs, granted during the six months ended February 28, 2021 and fiscal year 2020:
Schedule of fair value of options
|
|
|
|
|
|
|
|
|
(in thousands except pricing)
|
|
Six months ended February 28, 2021
|
|
|
Fiscal Year 2020
|
|
Estimated fair value of awards granted
|
|
$
|
4,657
|
|
|
$
|
2,997
|
|
Unvested forfeiture rate
|
|
|
0%
|
|
|
|
0%
|
|
Weighted average grant price
|
|
$
|
57.83
|
|
|
$
|
39.23
|
|
Weighted average market price
|
|
$
|
57.83
|
|
|
$
|
39.23
|
|
Weighted average volatility
|
|
|
40.47%
|
|
|
|
33.56%
|
|
Weighted average risk-free rate
|
|
|
0.60%
|
|
|
|
1.39%
|
|
Weighted average dividend yield
|
|
|
0.41%
|
|
|
|
0.65%
|
|
Weighted average expected life
|
|
|
6.64 years
|
|
|
|
6.67 years
|
|
The exercise prices for the options outstanding
at February 28, 2021 ranged from $6.85 to $61.84, and the information relating to these options is as follows:
(in thousands except
prices)
|
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
|
|
$
|
6.85
|
|
|
$
|
8.00
|
|
|
|
150
|
|
|
|
3.50 years
|
|
|
$
|
6.85
|
|
|
|
150
|
|
|
|
3.50 years
|
|
|
$
|
6.85
|
|
$
|
8.01
|
|
|
$
|
16.00
|
|
|
|
470
|
|
|
|
5.55 years
|
|
|
$
|
9.93
|
|
|
|
402
|
|
|
|
5.48 years
|
|
|
$
|
9.89
|
|
$
|
16.01
|
|
|
$
|
24.00
|
|
|
|
191
|
|
|
|
7.21 years
|
|
|
$
|
20.47
|
|
|
|
65
|
|
|
|
6.41 years
|
|
|
$
|
20.42
|
|
$
|
24.01
|
|
|
$
|
38.00
|
|
|
|
189
|
|
|
|
8.66 years
|
|
|
$
|
33.45
|
|
|
|
39
|
|
|
|
8.63 years
|
|
|
$
|
33.82
|
|
$
|
38.01
|
|
|
$
|
52.00
|
|
|
|
15
|
|
|
|
9.09 years
|
|
|
$
|
38.59
|
|
|
|
1
|
|
|
|
8.98 years
|
|
|
$
|
38.81
|
|
$
|
52.01
|
|
|
$
|
61.84
|
|
|
|
247
|
|
|
|
9.68 years
|
|
|
$
|
58.53
|
|
|
|
–
|
|
|
|
–
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
1,262
|
|
|
|
6.88 years
|
|
|
$
|
24.57
|
|
|
|
657
|
|
|
|
5.31 years
|
|
|
$
|
11.68
|
|
During the three and six months ended February
28, 2021 we issued 1,105 and 2,380 shares of stock valued at $87 and $170 thousand
to our nonmanagement directors as compensation for services rendered to us.
In August 2020, we closed an underwritten
public offering of approximately 2.1
million shares of our common stock to the public at $55.00 per
share, which included the full exercise of the underwriters’ option to purchase approximately 273
thousand 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.
The offering was made pursuant to our automatic shelf registration statement on Form S-3 filed with the SEC on July
9, 2020.
The balance of par value common stock and additional
paid in capital as of February 28, 2021 was $10 thousand and $130.7 million, respectively.
NOTE 9: CONCENTRATIONS AND UNCERTAINTIES
Financial instruments that potentially subject us to concentration of credit risk consist principally of cash, cash equivalents, trade accounts receivable and short-term investments. We hold cash and cash equivalents at banks located in California and North Carolina with balances that often exceed FDIC-insured limits. In addition, we hold cash at a bank in France that is not FDIC-insured. Historically, we have not experienced any losses in such accounts. However, considering the current banking environment, we are investigating alternative ways to minimize our exposure to such risks. While we may be exposed to credit losses due to the nonperformance of our counterparties, we do not expect the settlement of these transactions to have a material effect on our results of operations, cash flows, or financial condition. We maintain cash at financial institutions that may, at times, exceed federally insured limits. As of February 28, 2021 we had cash and cash equivalents exceeding insured limits by $12.7 million.
Revenue concentration shows that international
sales accounted for 34% and 33% of net sales for the six months ended February 28, 2021 and February 29, 2020, respectively. Two customers
accounted for 13% and 5% of net sales during the six months ended February 28, 2021. Three customers accounted for 7%, 6% (a dealer account
in Japan representing various customers), and 6% of net sales during the six months ended February 29, 2020.
Accounts receivable concentration shows that four
customers comprised 15%, 10%, 6%, and 5% (a dealer account in Japan representing various customers) of accounts receivable at February
28, 2021. Accounts receivable concentration shows that four customers comprised 10% (a dealer account in Japan representing various customers),
5%, 5% and 5% at February 29, 2020.
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. The
extent to which the COVID-19 pandemic impacts our business going forward will depend on numerous factors we cannot reliably predict, including
the duration and scope of the pandemic; businesses and individuals' actions in response to the pandemic; and the impact on economic activity
including the possibility of recession or financial market instability. These factors may adversely impact consumer, business, and government
spending as well as customers' ability to pay for our products and services on an ongoing basis. As a result, our growth rate could
be affected by consolidation and downsizing in the pharmaceutical industry.
NOTE 10: SEGMENT AND GEOGRAPHIC REPORTING
We account for segments and geographic revenues
in accordance with guidance issued by the FASB. Our reportable segments are strategic business units that offer different products and
services.
Results for each segment and consolidated results
are as follows for the three and six months ended February 28, 2021 and February 29, 2020:
Schedule of consolidated results from reportable segments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Three Months Ended February 28, 2021
|
|
|
|
Simulations Plus
|
|
|
Cognigen
|
|
|
DILIsym
|
|
|
Lixoft*
|
|
|
Eliminations
|
|
|
Total
|
|
Revenues
|
|
$
|
6,646
|
|
|
$
|
2,783
|
|
|
$
|
2,114
|
|
|
$
|
1,604
|
|
|
$
|
–
|
|
|
$
|
13,147
|
|
Income from operations before income taxes
|
|
$
|
2,121
|
|
|
$
|
279
|
|
|
$
|
260
|
|
|
$
|
826
|
|
|
$
|
–
|
|
|
$
|
3,486
|
|
Total assets
|
|
$
|
165,712
|
|
|
$
|
12,712
|
|
|
$
|
15,242
|
|
|
$
|
21,420
|
|
|
$
|
(39,317
|
)
|
|
$
|
175,769
|
|
Capital expenditures
|
|
$
|
232
|
|
|
$
|
126
|
|
|
$
|
5
|
|
|
$
|
15
|
|
|
$
|
–
|
|
|
$
|
378
|
|
Capitalized software costs
|
|
$
|
588
|
|
|
$
|
5
|
|
|
$
|
35
|
|
|
$
|
118
|
|
|
$
|
–
|
|
|
$
|
746
|
|
Depreciation and amortization
|
|
$
|
485
|
|
|
$
|
84
|
|
|
$
|
149
|
|
|
$
|
193
|
|
|
$
|
–
|
|
|
$
|
911
|
|
*Lixoft was purchased on April 1, 2020.
(in thousands)
|
|
Three Months Ended February 29, 2020
|
|
|
|
Simulations Plus
|
|
|
Cognigen
|
|
|
DILIsym
|
|
|
Eliminations
|
|
|
Total
|
|
Revenues
|
|
$
|
5,904
|
|
|
$
|
2,750
|
|
|
$
|
1,696
|
|
|
$
|
–
|
|
|
$
|
10,350
|
|
Income from operations
|
|
$
|
2,004
|
|
|
$
|
276
|
|
|
$
|
546
|
|
|
$
|
–
|
|
|
$
|
2,826
|
|
Total assets
|
|
$
|
42,881
|
|
|
$
|
10,465
|
|
|
$
|
13,555
|
|
|
$
|
(17,702
|
)
|
|
$
|
49,199
|
|
Capital expenditures
|
|
$
|
9
|
|
|
$
|
20
|
|
|
$
|
13
|
|
|
$
|
–
|
|
|
$
|
42
|
|
Capitalized software costs
|
|
$
|
573
|
|
|
$
|
16
|
|
|
$
|
31
|
|
|
$
|
–
|
|
|
$
|
620
|
|
Depreciation and amortization
|
|
$
|
435
|
|
|
$
|
89
|
|
|
$
|
151
|
|
|
$
|
–
|
|
|
$
|
675
|
|
(in thousands)
|
|
Six Months Ended February 28, 2021
|
|
|
|
Simulations Plus
|
|
|
Cognigen
|
|
|
DILIsym
|
|
|
Lixoft*
|
|
|
Eliminations
|
|
|
Total
|
|
Revenues
|
|
$
|
12,078
|
|
|
$
|
5,451
|
|
|
$
|
3,486
|
|
|
$
|
2,833
|
|
|
$
|
–
|
|
|
$
|
23,848
|
|
Income from operations before income taxes
|
|
$
|
4,486
|
|
|
$
|
485
|
|
|
$
|
215
|
|
|
$
|
1,351
|
|
|
$
|
–
|
|
|
$
|
6,537
|
|
Total assets
|
|
$
|
165,712
|
|
|
$
|
12,712
|
|
|
$
|
15,242
|
|
|
$
|
21,420
|
|
|
$
|
(39,317
|
)
|
|
$
|
175,769
|
|
Capital expenditures
|
|
$
|
371
|
|
|
$
|
189
|
|
|
$
|
5
|
|
|
$
|
18
|
|
|
$
|
–
|
|
|
$
|
583
|
|
Capitalized software costs
|
|
$
|
1,156
|
|
|
$
|
5
|
|
|
$
|
78
|
|
|
$
|
235
|
|
|
$
|
–
|
|
|
$
|
1,474
|
|
Depreciation and amortization
|
|
$
|
936
|
|
|
$
|
165
|
|
|
$
|
298
|
|
|
$
|
377
|
|
|
$
|
–
|
|
|
$
|
1,776
|
|
*Lixoft was purchased on April 1, 2020.
(in thousands)
|
|
Six Months Ended February 29, 2020
|
|
|
|
Simulations Plus
|
|
|
Cognigen
|
|
|
DILIsym
|
|
|
Eliminations
|
|
|
Total
|
|
Revenues
|
|
$
|
10,830
|
|
|
$
|
5,137
|
|
|
$
|
3,784
|
|
|
$
|
–
|
|
|
$
|
19,751
|
|
Income from operations
|
|
$
|
3,907
|
|
|
$
|
316
|
|
|
$
|
1,322
|
|
|
$
|
–
|
|
|
$
|
5,545
|
|
Total assets
|
|
$
|
42,881
|
|
|
$
|
10,465
|
|
|
$
|
13,555
|
|
|
$
|
(17,702
|
)
|
|
$
|
49,199
|
|
Capital expenditures
|
|
$
|
17
|
|
|
$
|
41
|
|
|
$
|
15
|
|
|
$
|
–
|
|
|
$
|
73
|
|
Capitalized software costs
|
|
$
|
1,030
|
|
|
$
|
36
|
|
|
$
|
61
|
|
|
$
|
–
|
|
|
$
|
1,127
|
|
Depreciation and amortization
|
|
$
|
870
|
|
|
$
|
175
|
|
|
$
|
300
|
|
|
$
|
–
|
|
|
$
|
1,345
|
|
In addition, we allocate revenues to geographic
areas based on the locations of our customers. Geographical revenues for the three and six months ended February 28, 2021 and February
29, 2020 were as follows:
Schedule of geographical revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Three Months Ended February 28, 2021
|
|
|
|
Americas
|
|
|
EMEA
|
|
|
Asia Pacific
|
|
|
Total
|
|
Simulations Plus
|
|
$
|
2,884
|
|
|
$
|
2,350
|
|
|
$
|
1,412
|
|
|
$
|
6,646
|
|
Cognigen
|
|
|
2,783
|
|
|
|
–
|
|
|
|
–
|
|
|
|
2,783
|
|
DILIsym
|
|
|
2,067
|
|
|
|
45
|
|
|
|
2
|
|
|
|
2,114
|
|
Lixoft
|
|
|
928
|
|
|
|
676
|
|
|
|
–
|
|
|
|
1,604
|
|
Total
|
|
$
|
8,662
|
|
|
$
|
3,071
|
|
|
$
|
1,414
|
|
|
$
|
13,147
|
|
(in thousands)
|
|
Three Months Ended February 29, 2020
|
|
|
|
Americas
|
|
|
EMEA
|
|
|
Asia Pacific
|
|
|
Total
|
|
Simulations Plus
|
|
$
|
2,607
|
|
|
$
|
1,610
|
|
|
$
|
1,687
|
|
|
$
|
5,904
|
|
Cognigen
|
|
|
2,750
|
|
|
|
–
|
|
|
|
–
|
|
|
|
2,750
|
|
DILIsym
|
|
|
1,469
|
|
|
|
126
|
|
|
|
101
|
|
|
|
1,696
|
|
Total
|
|
$
|
6,826
|
|
|
$
|
1,736
|
|
|
$
|
1,788
|
|
|
$
|
10,350
|
|
(in thousands)
|
|
Six Months Ended February 28, 2021
|
|
|
|
Americas
|
|
|
EMEA
|
|
|
Asia Pacific
|
|
|
Total
|
|
Simulations Plus
|
|
$
|
5,403
|
|
|
$
|
4,239
|
|
|
$
|
2,436
|
|
|
$
|
12,078
|
|
Cognigen
|
|
|
5,451
|
|
|
|
–
|
|
|
|
–
|
|
|
|
5,451
|
|
DILIsym
|
|
|
3,393
|
|
|
|
66
|
|
|
|
27
|
|
|
|
3,486
|
|
Lixoft
|
|
|
1,538
|
|
|
|
1,255
|
|
|
|
40
|
|
|
|
2,833
|
|
Total
|
|
$
|
15,785
|
|
|
$
|
5,560
|
|
|
$
|
2,503
|
|
|
$
|
23,848
|
|
(in thousands)
|
|
Six Months Ended February 29, 2020
|
|
|
|
Americas
|
|
|
EMEA
|
|
|
Asia Pacific
|
|
|
Total
|
|
Simulations Plus
|
|
$
|
5,153
|
|
|
$
|
2,757
|
|
|
$
|
2,920
|
|
|
$
|
10,830
|
|
Cognigen
|
|
|
5,137
|
|
|
|
–
|
|
|
|
–
|
|
|
|
5,137
|
|
DILIsym
|
|
|
3,207
|
|
|
|
451
|
|
|
|
126
|
|
|
|
3,784
|
|
Total
|
|
$
|
13,497
|
|
|
$
|
3,208
|
|
|
$
|
3,046
|
|
|
$
|
19,751
|
|
NOTE 11: EMPLOYEE BENEFIT PLAN
We maintain a 401(k) Plan for all eligible employees,
and we make matching contributions equal to 100% of the employee’s elective deferral, not to exceed 4% of total employee compensation.
We can also elect to make a profit-sharing contribution. Our contributions to this Plan amounted to $131 thousand and $109 thousand for
the three months ended February 28, 2021 and February 29, 2020, respectively and $252 thousand and $202 thousand for the six months ended
February 28, 2021 and February 29, 2020, respectively.
NOTE 12: ACQUISITION
On March 31, 2020, we entered into a Stock Purchase
and Contribution Agreement (the “Agreement”) with Lixoft. On April 1, 2020, we completed the acquisition of all outstanding
equity interests of Lixoft pursuant to the terms of the Agreement, with Lixoft becoming our wholly owned subsidiary. We believe the combination
of Simulations Plus and Lixoft provides substantial potential based on the complementary strengths of each of the companies.
Under the terms of the Agreement, as described
below, we will pay the former shareholders of Lixoft total consideration of up to $16.5 million, consisting of two-thirds cash and one-third
newly issued, unregistered shares of our common stock. In addition, we will pay $3.5 million of excess working capital based on the March
31, 2020 financial statements of Lixoft.
On April 1, 2020, we paid the former shareholders
of Lixoft a total of $10.8 million, comprised of cash in the amount of $9.5 million and the issuance of 111,682 shares of our common stock
valued at $3.7 million, 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 our shares of common stock
for the 30-consecutive-trading-day period ending two trading days prior to April 1, 2020. A total of 9,669 shares are held in an escrow
account for potential 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, we will pay the former shareholders
of Lixoft a total of $2.0 million, comprised of $1.3 million of cash and shares released from escrow valued at $666 thousand 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 earnout payments
up to an additional $5.5 million, two-thirds cash and one-third newly issued, unregistered shares of our 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 $2.0 million the first
year and $3.5 million in year two. The earnout 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
|
|
|
|
|
(in thousands)
|
|
|
|
|
Assets acquired, including cash of $3,799 and accounts receivable of $629
|
|
$
|
5,007
|
|
Developed technologies acquired
|
|
|
8,010
|
|
Estimated value of intangible assets acquired (customer lists, trade name etc.)
|
|
|
4,160
|
|
Estimated goodwill acquired
|
|
|
2,534
|
|
Liabilities assumed
|
|
|
(1,118
|
)
|
Total consideration
|
|
$
|
18,593
|
|
Goodwill was 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.
Consolidated supplemental Pro Forma information
The following unaudited consolidated supplemental
pro forma information assumes that the acquisition of Lixoft took place on September 1, 2019 for the income statement for the three and
six months ended February 28, 2021. These amounts have been calculated after applying our accounting policies and adjusting the results
of Lixoft to reflect the same expenses in the three and six months ended February 29, 2020. 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, 2019, together with consequential tax effects.
Schedule of Pro Forma Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
For the three months ended
|
|
|
For the six months ended
|
|
|
|
(Actual)
|
|
|
(Pro forma)
|
|
|
(Actual)
|
|
|
(Pro forma)
|
|
|
|
February 28, 2021
|
|
|
February 29, 2020
|
|
|
February 28, 2021
|
|
|
February 29, 2020
|
|
Net Sales
|
|
$
|
13,147
|
|
|
$
|
11,486
|
|
|
$
|
23,848
|
|
|
$
|
22,007
|
|
Net Income
|
|
$
|
3,211
|
|
|
$
|
2,777
|
|
|
$
|
5,690
|
|
|
$
|
5,293
|
|
NOTE 13: SUBSEQUENT EVENTS
On Friday, April 9, 2021, our Board of Directors declared a quarterly cash dividend of $0.06 per share to our shareholders. The dividend amount of $1.2 million will be distributed on Monday, May 3, 2021, for shareholders of record as of Monday, April 26, 2021.