13. ACQUISITION/MERGER WITH SUBSIDIARIES

12 Months Ended

Aug. 31, 2019

Business Combinations [Abstract]

ACQUISITION/MERGER WITH SUBSIDIARIES

NOTE 13 - ACQUISITION/MERGER WITH SUBSIDIARIES

DILIsym Services, Inc.

On May 1, 2017, the Company entered into a Stock Purchase Agreement (the “Stock Agreement”) with DILIsym Services, Inc. (“DILIsym”). On June 1, 2016, the Company consummated the acquisition of all outstanding equity interests of DILIsym pursuant to the terms of the Stock Agreement, with DILIsym becoming a wholly owned subsidiary of the Company. We believe the combination of Simulations Plus and DILIsym provides substantial future potential based on the complementary strengths of each of the companies.

Under the terms of the Stock Agreement, as described below, the Company will pay the former shareholders of DILIsym total consideration of approximately $10,463,000.

On June 1, 2017, the Company paid the former shareholders of DILIsym a total of $4,515,982, which included a $4,000,000 initial payment and a preliminary working capital payment of $515,982. An additional working capital adjustment of $247,328 was due under the agreement and was paid subsequent in FY 2018. In December 2018, the Company paid the former shareholders of DILIsym a total of $1,000,000 under a holdback provision.

The agreement calls for earn-out payments up to an additional $5,000,000 based on a formula of pre-tax earnings over a three years period. The Earn-out liability has been recorded at fair value. Payments made under the earn-out are as follows: In September 2018, $1,556,644 was paid out under the first earn-out payment, a second earn-out payment was made in August 2019 in the amount of $1,682,329, and it is estimated that a final payment of approximately $1,761,000 will be paid in August 2020.

Under the acquisition method of accounting, the total estimated purchase price is allocated to DILIsym’s tangible and intangible assets and liabilities based on their estimated fair values at the date of the completion of the acquisition (June 1, 2017). The following table summarizes the preliminary allocation of the purchase price for DILIsym:

Assets acquired, including accounts receivable of $255,000 and estimated Contracts receivable of $153,000	$	2,283,110
Developed technologies acquired		2,850,000
Estimated value of intangibles acquired (Customer Lists, trade name etc.)		2,840,000
Current liabilities assumed		(911,049	)
Goodwill		5,597,950
Estimated deferred income taxes		(2,212,160	)
Total Consideration	$	10,463,310

Goodwill has been provided in the transaction based on estimates of future earnings of this subsidiary including anticipated synergies associated with the positioning of the combined company as a leader in model-based drug development. Based on the structure of the transaction, the Company does not anticipate benefiting from any tax deductions in future periods for recognized goodwill.

PROFORMA INFORMATION (UNAUDITED)

Consolidated supplemental Pro Forma information

The following consolidated supplemental pro forma information assumes that the acquisition of DILIsym took place on September 1, 2015 for the income statements for the fiscal year ended August 31, 2017, and 2016. These amounts (in thousands) have been calculated after applying the Company’s accounting policies and adjusting the results of DILIsym to reflect the same expenses in the fiscal year ended August 31, 2017 that were incurred in the fiscal year ended August 31, 2016. The adjustments include costs of acquisition of $620,000, and the amortization of intangibles and other technologies acquired during the merger assuming the fair value adjustments applied on September 1, 2015, together with consequential tax effects.

	(Actual)		(Actual)		(Pro forma)*
	2019		2018		2017
Net Sales	$	33,970	$	29,667	$	27,184
Net Income	$	8,583	$	8,935	$	6,325

*Includes 3 months actual results for the period of June 1, 2017 to August 31, 2017