Simulations Plus Inc.

04/10/2026 | Press release | Distributed by Public on 04/10/2026 14:06

Quarterly Report for Quarter Ending February 28, 2026 (Form 10-Q)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Executive Overview
Our clients face many challenges. Developing new therapies is time-consuming and expensive, requiring an average of 10-15 years and an average cost of approximately $2.2 billion to develop a single drug. Drug sponsors must prioritize not only efficacy and safety of the drug, but also issues like drug-drug interactions, inclusion of patients representative of the indicated population, regulatory approvals, minimization of animal testing, safety and compliance during clinical trials, and commercial success. Our clients face many macro-economic issues including the current attention on global drug pricing resulting in temporary reduction in R&D spending on the part of pharmaceutical and biotech companies.
Our MIDD software and services allow clients to use modeling and simulation to accelerate drug development, reduce the costs of R&D, comply with regulatory guidance and best practices, and increase confidence in the safety and efficacy of their drugs and biologics. Our adaptive learning solutions support the success of clinical trials by accelerating recruitment of an appropriate patient population, increasing retention of participants, and by driving competency and compliance with trial protocols, while our medical communications solutions provide support in obtaining regulatory approval and commercialization of drugs.
The Company is headquartered in Research Triangle Park, North Carolina, and has a European office in Paris, France. The Company has a remote work culture that supports employee work-life balance and minimizes its carbon footprint.
Forward-Looking Statements
This document and the documents incorporated in this document by reference contain forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact contained in this document and the materials accompanying this document are forward-looking statements.
The forward-looking statements are based on the beliefs of our management, as well as assumptions made by and information currently available to our management. Frequently, but not always, forward-looking statements are identified by the use of the future tense and by words such as "believes," "expects," "anticipates," "intends," "will," "may," "could," "would," "projects," "continues," "estimates," or similar expressions. Forward-looking statements are not guarantees of future performance and actual results could differ materially from those indicated by the forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause our or our industry's actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by the forward-looking statements.
The forward-looking statements contained or incorporated by reference in this document are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended ("Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act"), and are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. These statements include declarations regarding our plans, intentions, beliefs, or current expectations.
Among the important factors that could cause actual results to differ materially from those indicated by forward-looking statements are the risks and uncertainties described under "Risk Factors" in our Annual Report on Form 10-K for the year ended August 31, 2025, filed with the Securities and Exchange Commission ("SEC") on December 1, 2025, and elsewhere in this document and in our other filings with the SEC.
Forward-looking statements are expressly qualified in their entirety by this cautionary statement. The forward-looking statements included in this document are made as of the date of this document and we do not undertake any obligation to update forward-looking statements to reflect new information, subsequent events, or otherwise.
Our historical results are not necessarily indicative of the results that may be expected for any period in the future.
Results of Operations
Comparison of Three Months Ended February 28, 2026, and February 28, 2025
(in thousands) Three Months Ended % of Revenue
February 28, 2026 February 28, 2025 February 28, 2026 February 28, 2025 $ Change % Change
Revenues
Software $ 14,635 $ 13,484 60 % 60 % $ 1,151 9 %
Services 9,656 8,948 40 % 40 % 708 8 %
Total revenues 24,291 22,432 100 % 100 % 1,859 8 %
Cost of revenue
Software 1,648 2,587 7 % 12 % (939) -36 %
Services 6,500 6,718 27 % 30 % (218) -3 %
Total cost of revenues 8,148 9,305 34 % 41 % (1,157) -12 %
Gross profit 16,143 13,127 66 % 59 % 3,016 23 %
Research and development 3,470 2,143 14 % 10 % 1,327 62 %
Sales and marketing 2,930 3,717 12 % 17 % (787) -21 %
General and administrative 4,113 4,555 17 % 20 % (442) -10 %
Total operating expenses 10,513 10,415 43 % 46 % 98 1 %
Income from operations 5,630 2,712 23 % 12 % 2,918 108 %
Other income, net 256 796 1 % 4 % (540) -68 %
Income before income taxes 5,886 3,508 24 % 16 % 2,378 68 %
Income tax expense (1,351) (434) -6 % -2 % (917) 211 %
Net income $ 4,535 $ 3,074 19 % 14 % $ 1,461 48 %
Revenues
Revenues increased by $1.9 million, or 8%, to $24.3 million for the three months ended February 28, 2026, compared to $22.4 million for the three months ended February 28, 2025. This increase is primarily due to a $1.2 million, or 9% increase, in software-related revenue and a $0.7 million, or 8%, increase in service-related revenue when compared to the three months ended February 28, 2025. The software-related revenue increase of $1.2 million, or 9%, compared to the three months ended February 28, 2025, was primarily due to a $1.2 million increase in revenue from Development solutions, $0.4 million increase in revenue from Discovery solutions, partially offset by a $0.5 million decline in revenue from Clinical Operations solutions. The service-related revenue increase of $0.7 million, or 8%, compared to the three months ended February 28, 2025, was primarily due to organic revenue growth of $0.8 million from Development solutions.
Cost of revenues
Cost of revenues decreased by $1.2 million, or 12%, for the three months ended February 28, 2026, compared to the three months ended February 28, 2025. This decrease is primarily due to a $0.9 million, or 36%, decrease in software-related costs, partially offset by a $0.2 million, or 3%, increase in service-related costs.
The software-related costs decrease of $0.9 million, or 36%, compared to the three months ended February 28, 2025, was primarily due to less amortization of $0.8 million following the impairment of the Pro-ficiency developed technology in the third quarter of fiscal 2025.
The service-related costs increased $0.2 million, or 3%, compared to the three months ended February 28, 2025; the increase was primarily due to higher fulfillment costs associated with increased client services activity. The modest increase in service-related costs relative to revenue growth also reflected improved operating efficiency from headcount reductions implemented in the third quarter of fiscal 2025, and organizational changes that shifted certain internal resources from supporting services to research and development.
Gross profit
Gross profit increased $3.0 million, or 23% to $16.1 million for the three months ended February 28, 2026, compared to $13.1 million for the three months ended February 28, 2025. This increase was primarily driven by higher revenues, lower software-related costs, organizational changes that shifted certain internal resources from supporting services to research and development, improved billable utilization, and higher average yields.
Software gross profit increased by $2.1 million to 89% gross margin compared to 81% gross margin for the three months ended February 28, 2025. This improvement was primarily driven by increased software-related revenue, particularly from Development and Discovery solutions, and lower software-related costs, largely reflecting reduced amortization expense following the impairment of the Pro-ficiency developed technology in the third quarter of fiscal 2025.
Services gross profit increased by $0.9 million to 33% gross margin compared to 25% gross margin for the three months ended February 28, 2025. The increase was primarily attributable to higher services revenue from increased client services activity within Development solutions, as well as improved operating efficiency driven by headcount reductions implemented in the third quarter of fiscal 2025, organizational changes that shifted certain internal resources from supporting services to research and development, higher billable utilization, and higher average yields.
Overall gross margin was 66% for the three months ended February 28, 2026, compared to 59% for the three months ended February 28, 2025, primarily due to higher software and services revenues, lower software amortization expense, organizational changes that shifted certain internal resources from supporting services to research and development, higher billable utilization, and higher average yields.
Research and development
We incurred $4.3 million of research and development costs during the three months ended February 28, 2026. Of this amount, $0.8 million was capitalized as part of capitalized software development costs, and $3.5 million was expensed. We incurred $2.9 million of research and development costs during the three months ended February 28, 2025. Of this amount, $0.8 million was capitalized, and $2.1 million was expensed. Research and development spend increased by $1.3 million, or 46%, for the three months ended February 28, 2026, compared to the three months ended February 28, 2025, representing our continued investment in innovation for future growth, including the development of an integrated, cloud-enabled modeling ecosystem that connects our validated scientific engines with AI-driven capabilities and workflow automation across the drug development lifecycle. The increase was primarily attributable to higher personnel-related costs, including organizational changes that shifted certain internal resources from supporting services to research and development, as well as increased efforts to support these development initiatives.
R&D spend as a percentage of revenue increased to 14% for the three months ended February 28, 2026, from 10% for the three months ended February 28, 2025, representing our continued investment in innovation for future growth. Total R&D cost (defined as capitalized R&D plus R&D expense) was 18% of revenue for the three months ended February 28, 2026, compared to 13% for the three months ended February 28, 2025.
Sales and marketing expenses
Sales and marketing expenses decreased by $0.8 million, or 21%, to $2.9 million for the three months ended February 28, 2026, compared to $3.7 million for the three months ended February 28, 2025. Sales and marketing as a percentage of revenue, decreased to 12% for the three months ended February 28, 2026, from 17% for the three months ended February 28, 2025. The decrease is attributable to the headcount reduction implemented in the third quarter of fiscal 2025.
General, and administrative expenses
G&A expenses decreased by $0.4 million, or 10%, to $4.1 million for the three months ended February 28, 2026, compared to $4.6 million for the three months ended February 28, 2025. G&A as a percentage of revenue decreased to 17% for the three months ended February 28, 2026, from 20% for the three months ended February 28, 2025. The decrease primarily reflected lower corporate support costs and reduced non-recurring spending.
Other income
Total other income was $0.3 million for the three months ended February 28, 2026, compared to total other income of $0.8 million for the three months ended February 28, 2025. Interest income increased by $0.1 million due to higher balances of
cash invested in interest-bearing accounts. For the three months ended February 28, 2025, the Company recognized $0.6 million gain on the change in fair value of contingent consideration related to the Immunetrics holdback liability, which was settled.
Income tax expense
The expense for income taxes was $1.4 million for the three months ended February 28, 2026, compared to $0.4 million for the three months ended February 28, 2025. The Company tax rate increased to 23% for the three months ended February 28, 2026, compared to 12% for the three months ended February 28, 2025. The increase in the tax rate is primarily due to the result of a favorable discrete item in the prior year that did not recur in the current year, a less favorable jurisdictional mix of earnings between the U.S. and France, increased unfavorable Global Intangible Low-Taxed Income ("GILTI") impacts driven by higher French taxable income, and a lower Foreign-Derived Intangible Income ("FDII") benefit. In addition, certain items affecting the current-year effective tax rate relate to accelerated deductions elected under the One Big Beautiful Bill Act ("OBBBA"). These deductions are expected to be favorable to cash flows as they accelerate the timing of tax benefits and reduce near-term cash tax payments.
Results of Operations
Comparison of Six Months Ended February 28, 2026, and February 28, 2025
(in thousands) Six Months Ended % of Revenue
February 28, 2026 February 28, 2025 February 28, 2026 February 28, 2025 $ Change % Change
Revenue
Software $ 23,518 $ 24,199 55 % 59 % $ (681) -3 %
Services 19,194 17,157 45 % 41 % 2,037 12 %
Total revenues 42,712 41,356 100 % 100 % 1,356 3 %
Cost of revenue
Software 3,060 5,225 7 % 13 % (2,165) -41 %
Services 12,618 12,786 30 % 31 % (168) -1 %
Total cost of revenues 15,678 18,011 37 % 44 % (2,333) -13 %
Gross profit 27,034 23,345 63 % 56 % 3,689 16 %
Research and development 6,450 3,991 15 % 10 % 2,459 62 %
Sales and marketing 6,109 6,568 14 % 16 % (459) -7 %
General and administrative 8,132 9,948 19 % 24 % (1,816) -18 %
Total operating expenses 20,691 20,507 48 % 50 % 184 1 %
Income from operations 6,343 2,838 15 % 7 % 3,505 124 %
Other income, net 513 940 1 % 2 % (427) -45 %
Income before income taxes 6,856 3,778 16 % 9 % 3,078 81 %
Income tax expense (1,645) (498) -4 % -1 % (1,147) 230 %
Net income $ 5,211 $ 3,280 12 % 8 % $ 1,931 59 %
Revenues
Revenues increased by $1.4 million, or 3%, to $42.7 million for the six months ended February 28, 2026, compared to $41.4 million for the six months ended February 28, 2025. This increase is primarily due to a $2.0 million, or 12%, increase in service-related revenue and a $0.7 million, or 3%, decrease in software-related revenue when compared to the six months ended February 28, 2025. The service-related revenue increase of $2.0 million, or 12%, compared to the six months ended February 28, 2025, was primarily due to organic revenue growth within Development solutions of $1.3 million and Commercialization solutions of $0.8 million. The software-related revenue decrease of $0.7 million, or 3%, compared to the six months ended February 28, 2025, was primarily due to Clinical Operations solutions revenue decline of $1.9 million, partially offset by revenue growth of $0.8 million and $0.5 million within Development solutions and Discovery solutions, respectively.
Cost of revenues
Cost of revenues decreased by $2.3 million, or 13%, for the six months ended February 28, 2026, compared to the six months ended February 28, 2025. This decrease is primarily due to a $2.2 million or 41% decrease in software-related costs and a $0.2 million or 1% increase in service-related costs.
The software-related costs decrease of $2.2 million or 41%, compared to the six months ended February 28, 2025, was attributable to $1.6 million less amortization of acquired technology from the Pro-ficiency as the balances were impaired in the third quarter of fiscal 2025.
The service-related costs increase of $0.2 million or 1%, compared to the six months ended February 28, 2025. The increase in service-related costs was primarily due to higher fulfillment costs associated with increased client services activity. The modest increase in service-related costs relative to service-related revenue growth reflected improved operating efficiency resulting from headcount reductions implemented in the third quarter of fiscal 2025, organizational changes that shifted certain internal resources from supporting services to research and development.
Gross profit
Gross profit increased to $27.0 million or 63% gross margin for the six months ended February 28, 2026, compared to $23.3 million or 56% gross margin for the six months ended February 28, 2025. The increase was primarily attributable to higher service-related revenues, lower software-related costs, organizational changes that shifted certain internal resources from supporting services to research and development, and improved operating efficiency.
Software gross profit increased by $1.5 million, and software gross margin increased to 87% for the six months ended February 28, 2026, compared to 78% for the six months ended February 28, 2025. This improvement was primarily due to lower software-related costs, largely reflecting reduced amortization expense following the impairment of the Pro-ficiency acquired technology in the third quarter of fiscal 2025, partially offset by lower software-related revenue driven primarily by a decline in Clinical Operations solutions revenue.
Services gross profit increased by $2.2 million, and services gross margin increased to 34% for the six months ended February 28, 2026, compared to 25% for the six months ended February 28, 2025. This improvement was primarily due to higher service-related revenue from organic growth within Development solutions and Commercialization solutions, together with improved operating efficiency resulting from headcount reductions implemented in the third quarter of fiscal 2025 and organizational changes that shifted certain internal resources from supporting services to research and development.
Overall gross margin increased to 63% for the six months ended February 28, 2026, compared to 56% for the six months ended February 28, 2025, primarily due to higher service-related revenues, lower software amortization expense, organizational changes that shifted certain internal resources from supporting services to research and development, and improved operating efficiency.
Research and development
We incurred $8.2 million of research and development costs during the six months ended February 28, 2026. Of this amount, $1.7 million was capitalized as part of capitalized software development costs and $6.5 million was expensed. We incurred $5.5 million of research and development costs during the six months ended February 28, 2025. Of this amount, $1.5 million was capitalized and $4.0 million was expensed. Research and development spend increased by $2.7 million, or 48%, for the six months ended February 28, 2026, compared to the six months ended February 28, 2025, reflecting higher investment in product and platform development activities, including continued enhancement and expansion of our software offerings and related capabilities. The increase was primarily attributable to higher personnel-related costs, including organizational changes that shifted certain internal resources from supporting services to research and development, as well as increased efforts to support these development initiatives.
R&D spend as a percentage of revenue increased to 15% for the six months ended February 28, 2026, from 10% for the six months ended February 28, 2025, representing our continued investment in innovation for future growth, including the development of an integrated, cloud-enabled modeling ecosystem that connects our validated scientific engines with AI-driven capabilities and workflow automation across the drug development lifecycle. Total R&D cost (defined as capitalized R&D plus R&D expense) was 18% of revenue for the six months ended February 28, 2026, compared to 13% for the six months ended February 28, 2025.
Sales and marketing expenses
Sales and marketing expenses decreased by $0.5 million, or 7%, to $6.1 million for the six months ended February 28, 2026, compared to $6.6 million for the six months ended February 28, 2025. The decrease is attributable to $0.4 million lower compensation cost from the headcount reduction implemented in the third quarter of fiscal 2025, offset by $0.3 million of higher variable selling costs and customer-facing activities to support commercial execution and demand generation across our offerings.
General, and administrative expenses
General and administrative ("G&A") expenses decreased by $1.8 million, or 18%, to $8.1 million for the six months ended February 28, 2026, compared to $9.9 million for the six months ended February 28, 2025. The decrease primarily reflected lower corporate support costs and reduced non-recurring spending. In addition, merger-and-acquisition-related costs decreased due to lower deal activity and associated professional fees in the current period. Facilities costs decreased as we continued to optimize our real estate footprint consistent with a remote-first operating model.
Other income
Total other income was $0.5 million for the six months ended February 28, 2026, compared to total other income of $0.9 million for the six months ended February 28, 2025. The decrease is attributable to a $0.6 million decrease in the fair value of the Immunetrics earnout liability in the prior period, as no earnout payment was anticipated related to the second earnout measurement period, this was partially offset by increased interest income of $0.2 million due to higher balances of cash invested in interest-bearing accounts.
Income tax expense
The expense for income taxes was $1.6 million for the six months ended February 28, 2026, compared to $0.5 million for the six months ended February 28, 2025. The Company tax rate increased to 24% for the six months ended February 28, 2026, compared to 13% for the six months ended February 28, 2025. The increase in the tax rate is primarily due to the result of a favorable discrete item in the prior year that did not recur in the current year, a less favorable jurisdictional mix of earnings between the U.S. and France, increased unfavorable Global Intangible Low-Taxed Income ("GILTI") impacts driven by higher French taxable income, and a lower Foreign-Derived Intangible Income ("FDII") benefit. In addition, certain items affecting the current-year effective tax rate relate to accelerated deductions elected under the One Big Beautiful Bill Act ("OBBBA"). These deductions are expected to be favorable to cash flows as they accelerate the timing of tax benefits and reduce near-term cash tax payments.
Liquidity and Capital Resources
Our principal sources of capital have been cash flows from our operations. We expect existing cash, cash equivalents, short-term investments, cash generated by ongoing operations, and working capital will be sufficient to fund our operating activities and cash commitments for investing and financing activities and material capital expenditures for the next 12 months.
We continue to seek opportunities for strategic acquisitions, investments, and partnerships. If one or more strategic opportunities are identified, a substantial portion of our cash reserves may be required to complete the transaction. If we identify an attractive strategic opportunity that would require more cash to complete than we are willing or able to use from our cash reserves, we may consider financing options to complete the transaction, including obtaining loans or selling our securities. Additionally, our quest for strategic opportunities could result in a significant change to our liquidity position and/or our results of operations if any such transactions are completed.
Except as discussed elsewhere in this Quarterly Report, we are not aware of any trends or demands, commitments, events, or uncertainties that are reasonably likely to result in a decrease in liquidity of our assets.
Cash, Cash Equivalents, and Investments
At February 28, 2026, the Company had $25.7 million in cash and cash equivalents, $16.1 million in short-term investments, and net working capital of $55.2 million. Short-term investments consist of CD's, corporate bonds, and cash equivalents. The investments are U.S.-dollar-denominated securities.
Cash Flows
Operating Activities
Our cash flows from operating activities primarily include net income adjusted for (i) non-cash items included in net income, such as provisions (recoveries) for credit losses, depreciation and amortization, stock-based compensation, deferred taxes, and other non-cash items and (ii) changes in the balances of operating assets and liabilities. Net cash provided by operating activities was $10.6 million for the six months ended February 28, 2026, compared to $4.4 million for the six months ended February 28, 2025. The $6.3 million improvement was driven primarily by an increase in cash-adjusted net income, an increase in deferred revenue and a decrease in cash outflow in other liabilities, partially offset by an increase in accounts receivable.
Investing Activities
Net cash used in investing activities during the six months ended February 28, 2026, was $16.2 million, compared to $2.5 million during the six months ended February 28, 2025. The increase of $13.8 million primarily reflects deployment and rebalancing of our short-term investment portfolio and capitalized software development to support product and platform enhancements. During the six months ended February 28, 2026, we invested $16.0 million in short-term investments as part of our treasury strategy to prudently invest excess cash while preserving liquidity and capital, and we incurred $1.7 million of capitalized computer software development costs to support ongoing product development and technology improvements. These uses of cash were partially offset by $1.5 million of maturities of short-term investments as securities matured in the normal course of portfolio management.
Financing Activities
Net cash provided by financing activities during the six months ended February 28, 2026, was $0.5 million, compared to cash used in financing activities of $1.3 million for the six months ended February 28, 2025. The increase of $1.7 million was attributable to cash settlement of $1.6 million from the holdback obligations related to the Immunetrics acquisition and an increase in proceeds from the exercise of stock options.
Share Repurchases
For the three and six months ended February 28, 2026, and February 28, 2025, respectively, we did not repurchase any shares of Company stock. As of February 28, 2026, $30 million remains available for additional repurchases under our authorized repurchase program. However, we are not obligated to repurchase any additional shares, and the timing, manner, price, and actual amount of further share repurchases will depend on a variety of factors, including stock price, market conditions, other capital management needs and opportunities, and corporate and regulatory considerations. The share repurchase program has no expiration date but may be terminated at any time at our Board of Directors' discretion.
Critical Accounting Estimates
Estimates
Our financial statements and accompanying notes are prepared in accordance with GAAP. 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. Critical Accounting Estimates for us include revenue recognition, accounting for capitalized software development costs, accounting for intangible assets and goodwill, valuation of stock options, business acquisitions and accounting for income taxes.
Revenue Recognition
We generate revenue primarily from the sale of software licenses, providing consulting services, and customizing a software platform tailored to the pharmaceutical industry for drug development.
The Company determines revenue recognition through the following steps:
i.Identification of the contract, or contracts, with a customer
ii.Identification of the performance obligations in the contract
iii.Determination of the transaction price
iv.Allocation of the transaction price to the performance obligations in the contract
v.Recognition of revenue when, or as, the Company satisfies a performance obligation
The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance, and collectability of consideration is probable. Contracts generally have fixed pricing terms and are not subject to variable pricing. The Company considers the nature and significance of each specific performance obligation under a contract when allocating the proceeds under each contract. Accounting for contracts includes significant judgment in the estimation of hours/cost to be incurred on consulting contracts, and the de minimisnature of the post-sales costs associated with software sales.
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 computer 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 the Company's software products. Total capitalized computer software development costs were $0.8 million and $0.8 million for the three months ended February 28, 2026, and February 28, 2025, respectively.
Amortization of capitalized computer 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 $0.9 million and $0.8 million, respectively, for the three months ended February 28, 2026, and February 28, 2025, respectively and $1.7 million and $1.6 million, respectively, for the six months ended February 28, 2026, and February 28, 2025. We expect future amortization expense to vary due to variations 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.
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 names, and noncompete agreements. The Company determines the appropriate useful life by performing an analysis of expected cash flows based on historical experience of the acquired businesses. Intangible assets are amortized over their estimated useful lives using the straight-line method, which approximates the pattern in which the majority of the economic benefits are expected to be consumed.
Goodwill represents the excess of the cost of an acquired entity over the fair value of the acquired net assets. Goodwill is not amortized; instead, it is tested for impairment annually or when events or circumstances change that would indicate that goodwill might be impaired. Events or circumstances that could trigger an impairment review include, but are not limited to, a significant adverse change in legal factors or in the business climate, an adverse action or assessment by a regulator, unanticipated competition, a loss of key personnel, significant changes in the manner of the Company's use of the acquired assets or the strategy for the Company's overall business, significant negative industry or economic trends, or significant underperformance relative to expected historical or projected future results of operations.
Goodwill is tested for impairment at the reporting unit level, which is one level below or the same as an operating segment. As of February 28, 2026, the Company determined that it had two reporting units - Software and Services.
As of February 28, 2026, the entire balance of goodwill was attributed to both of the Company's reporting units, Software and Services. Intangible assets subject to amortization are reviewed for impairment whenever events or circumstances indicate that the carrying amount of these assets may not be recoverable.
No impairment losses were recorded during the three and six months ended February 28, 2026, and February 28, 2025, respectively.
Business Acquisitions
The Company accounted for the acquisitions using the acquisition 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, and estimates of terminal values. Business acquisitions are included in the Company's consolidated financial statements as of the date of the acquisition.
Research and Development Costs
R&D costs are charged to expense as incurred until technological feasibility has been established, or when the costs are for maintenance and minor modification of existing software products that do not add significant new capabilities to the products. These costs include salaries and benefits, 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
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 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.
Stock-Based Compensation
The Company accounts for stock options in accordance with ASC 718-10, "Compensation-Stock Compensation." Under this method, compensation costs include the estimated grant-date fair value of awards amortized over the options' vesting period. Stock-based compensation costs related to stock options, not including shares issued to directors for services, was $1.5 million and $1.6 million for the three months ended February 28, 2026, and February 28, 2025, respectively, and $3.0 million and $3.3 million for the six months ended February 28, 2026, and February 28, 2025, respectively.
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