Simulations Plus, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended May 31, 2015. The interim financial statements are unaudited. Comparisons are with the same periods in 2014; Cognigen was acquired September 2, 2014, so reported year-over-year growth includes acquisition effects.
Business context
Simulations Plus develops pharmaceutical modeling and simulation software and provides consulting services. Its wholly owned subsidiary Cognigen provides clinical-pharmacology consulting and related software. The company says the combination is intended to bring together preclinical and clinical modeling capabilities.
Financial performance
| Metric | Three months ended May 31 | Nine months ended May 31 |
|---|---|---|
| Revenue | 2015: $5.942 million; 2014: $3.741 million; up 58.9% | 2015: $14.602 million; 2014: $9.463 million; up 54.3% |
| Gross margin | $4.827 million; 81.2% of revenue, versus $3.513 million and 93.9% | $11.364 million; 77.8%, versus $8.295 million and 87.6% |
| Operating income | $2.854 million; 48.0% margin, versus $2.074 million and 55.4% | $5.078 million; 34.8% margin, versus $4.165 million and 44.0% |
| Net income | $1.852 million; 31.1% margin, versus $1.308 million and 35.0%; up 41.6% | $3.352 million; 23.0% margin, versus $2.803 million and 29.6%; up 19.6% |
| Diluted EPS | $0.11, versus $0.08 | $0.20, versus $0.17 |
| Operating cash flow | Nine-month period: $3.943 million, versus $3.335 million |
Nine-month capitalized software development costs were $976,000, and cash used in investing activities was $2.902 million, including $2.080 million paid for Cognigen. Financing used $3.228 million, including $2.528 million of dividends and $750,000 of contract-payable payments. Cash declined to $6.429 million from $8.615 million at August 31, 2014.
Financial position and material changes
- At May 31, 2015, current assets were $11.823 million and current liabilities were $1.717 million; the company reported $6.429 million in cash and no conventional bank debt identified in the filing.
- Contract-payable obligations totaled $3.604 million: $750,000 current and $2.854 million long-term. These relate to the TSRL intellectual-property agreement and deferred Cognigen acquisition consideration.
- Total assets were $27.912 million, including $4.789 million of goodwill and $1.539 million of acquired intangible assets. Total shareholders’ equity was $19.817 million.
- Revenue and net income increased, but reported margins fell. Management attributed margin pressure primarily to Cognigen’s lower-margin consulting mix, higher amortization, and acquisition-related costs. Cognigen contributed $1.401 million of quarterly revenue and $3.807 million for the nine-month period.
- Nine-month SG&A included approximately $398,000 of one-time financial-adviser and broker fees related to the Cognigen acquisition. Management estimated that without these costs, nine-month net income would have been approximately $3.632 million.
Outlook, commentary, and risks
- Management expected Cognigen to add approximately $5 million of revenue for fiscal 2015. No formal full-year earnings guidance was provided.
- Management expected a major DDDPlus upgrade in the fourth fiscal quarter, before August 31, 2015. GastroPlus version 9.0 had been released during the period; MembranePlus, released in October 2014, was beginning to generate sales.
- The company had proposed a further FDA research collaboration for long-acting injectable microspheres, potentially funded at $200,000 annually for up to three years; an award decision was expected in August or September 2015. The existing ocular-model collaboration also provides $200,000 per year, subject to renewal and funding conditions.
- Management said existing capital and expected operating funds should meet working-capital and capital-expenditure needs for the foreseeable future. It cautioned that future financing, if needed, may not be available on acceptable terms.
- Risks cited include competition and rapid software-industry change, reliance on pharmaceutical-industry customers, customer and receivables concentration, international sales and currency movements, and acquisition integration and valuation uncertainty. The Cognigen purchase-price allocation remained provisional; future measurement adjustments could affect goodwill or other balances.
- A wrongful-death lawsuit naming the company was dismissed without prejudice. The filing said the plaintiff had until August 31, 2015 to identify evidence that could justify bringing the company back into the litigation; otherwise dismissal with prejudice was contemplated.
- The board had declared three fiscal-2015 dividends of $0.05 per share. Management anticipated quarterly dividends at that level but emphasized each distribution requires board approval and may change or be discontinued.
- Management concluded disclosure controls were effective and reported no material changes to internal controls over financial reporting during the quarter.
Important facts for investors to verify
- How much of reported growth reflects Cognigen versus organic performance, and how Cognigen’s margins and integration develop.
- Whether the provisional Cognigen purchase accounting, including goodwill and deferred consideration, is finalized without material adjustments.
- Collection and billing trends: accounts receivable rose to $3.990 million and revenues in excess of billings to $925,000 from $1.708 million and $159,000, respectively, at August 31, 2014.
- Progress on the planned DDDPlus upgrade, new-product adoption, and the pending FDA collaboration award.
- The outcome of the litigation dismissal period, future dividend approvals, and the timing and funding of contract-payable obligations.