Simulations Plus, Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended August 31, 2016. Although the request refers to 2016 Q4, this filing reports annual results; it does not provide a complete standalone fourth-quarter income statement.
Business context
Simulations Plus develops pharmaceutical research and development software, led by GastroPlus, and provides consulting and contract research services through its California operations and wholly owned subsidiary Cognigen. The company also markets chemistry and machine-learning software and is exploring applications outside life sciences. Fiscal 2016 was the second full year including Cognigen.
Financial performance and position
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Revenue | $19.972 million | $18.314 million | +9.1% |
| Gross profit / margin | $15.371 million / 77.0% | $13.922 million / 76.0% | Profit +10.4% |
| Operating income / margin | $7.232 million / 36.2% | $5.857 million / 32.0% | +23.5% |
| Net income / net margin | $4.950 million / 24.8% | $3.843 million / 21.0% | +28.8% |
| Diluted EPS | $0.29 | $0.23 | — |
| Cash from operations | $5.415 million | $7.135 million | Lower by $1.720 million |
- Software license revenue rose $1.340 million and consulting revenue rose $318,000. California-division revenue grew 10.2% to $14.418 million; Cognigen revenue increased to $5.554 million from $5.228 million.
- SG&A decreased slightly to $6.694 million; R&D expense was $1.445 million. Total R&D spending, including capitalized development, was approximately $2.641 million, of which $1.196 million was capitalized.
- At year-end, cash and equivalents were $8.030 million, total assets $28.043 million, and shareholders’ equity $22.733 million. Current liabilities were $2.126 million. Cash declined $521,000 during the year.
- The remaining $1.0 million TSRL contract payment was classified as current and due in April 2017. The filing reports no bank borrowings; it describes the TSRL amount as a non-interest-bearing payment obligation. The final Cognigen acquisition payment was completed in July 2016.
- Cash dividends totaled $3.413 million, or $0.20 per share for the year. Management indicated an expectation of quarterly $0.05 dividends, subject to board approval.
Material changes and operating developments
- Revenue growth and operating leverage lifted operating and net margins. Cost of revenue fell to 23.0% of revenue from 24.0%, partly reflecting the sales mix.
- Operating cash flow fell despite higher net income, with accounts receivable increasing $1.416 million; investing cash use included $1.196 million of capitalized software development and the $720,000 cash installment for Cognigen.
- The company released ADMET Predictor 8.0, DDDPlus 5.0, KIWI 1.5, and standalone PKPlus. Software renewal rates were 88% by account and above 94% by revenue; management reported 75 new clients.
- International sales represented 38% of revenue, versus 37% in FY2015. Three customers represented 23% of FY2016 sales, including a Japanese dealer representing multiple customers.
Outlook, commentary, and risks
- No numerical revenue or earnings guidance was provided. Management plans to develop and market software and consulting services, pursue strategic acquisitions and partnerships, and explore aerospace and broader healthcare applications.
- Management expects existing capital and anticipated operating cash flow to meet foreseeable working-capital and capital-expenditure needs. It cautioned that acquisitions could require substantial cash or external financing.
- Management cited pharmaceutical-industry consolidation and downsizing, competition, the uncertain acceptance of new products, and uncertain opportunities in new markets as potential risks. The fourth fiscal quarter is generally seasonally the weakest.
- Two funded FDA research collaborations, each providing up to $200,000 per year, were renewed for another year in September 2016; an additional FDA collaboration is unfunded. A five-year consulting agreement with a major research foundation began during FY2016.
- Internal controls: Management concluded disclosure controls and internal control over financial reporting were ineffective due to a material weakness in IT general controls, including access, segregation-of-duties, system configuration, and change-management deficiencies. The auditor issued an adverse opinion on internal control but an unqualified opinion on the financial statements. Management said most remediation steps were implemented in FY2016 and expected substantial implementation and testing by February 28, 2017.
- A wrongful-death lawsuit named the company in connection with an aircraft crash. The plaintiff agreed to dismiss the company without prejudice; the company reported it was pursuing final dismissal with prejudice.
- Revenue recognition and lease accounting standards were among new standards under evaluation; the company had not determined their financial-statement effects.
Important facts for investors to verify
- Progress and independent testing of remediation for the disclosed material weakness in IT controls.
- Collection of the year-end receivables increase and its effect on operating cash flow.
- Payment of the remaining $1.0 million TSRL obligation in April 2017 and the economics of related intellectual-property amortization.
- Whether software renewals, new products such as PKPlus, and consulting contracts sustain growth and margins.
- Continuation of quarterly dividends, which remain at the board’s discretion, and the resolution of the lawsuit dismissal.