Simulations Plus, Inc. — Q1 FY2015 Form 10-Q
Reporting period: Three months ended November 30, 2014. The unaudited consolidated results include Cognigen Corporation from its September 2, 2014 acquisition; the comparable 2013 reported period did not include Cognigen. The fiscal year began September 1, 2014.
Financial performance
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Revenue | $4.086 million | $2.641 million | +54.7% |
| Gross profit / margin | $3.088 million / 75.6% | $2.193 million / 82.5% | Margin down 6.9 percentage points |
| Operating income / margin | $749,377 / 18.3% | $959,373 / 36.3% | Down 21.9% |
| Net income / margin | $528,904 / 12.9% | $685,155 / 25.9% | Down 22.8% |
| Diluted EPS | $0.03 | $0.04 | Down $0.01 |
| Operating cash flow | $226,793 | $1.351 million | Down $1.124 million |
Revenue included $1.135 million from Cognigen. Simulations Plus division revenue rose 11.7% to $2.951 million, principally on increased software sales. Cognigen reported $63,000 of operating income before taxes on $1.135 million revenue; Simulations Plus reported $683,000 on $2.951 million.
SG&A rose 94.4% to $2.079 million, including $538,000 of Cognigen expenses and approximately $398,000 of one-time acquisition advisory fees. Research and development costs were approximately $534,000, of which $274,000 was capitalized and $260,000 expensed. Management said net income would have been approximately $820,000 absent the nearly $400,000 advisory fees and approximately $13,000 of acquisition-related legal costs; this is a management-adjusted comparison, not reported GAAP income.
Cash, liquidity and obligations
- Cash and cash equivalents were $5.791 million at November 30, down from $8.615 million at August 31, 2014. The quarter used $2.208 million in investing, including $2.080 million cash paid for Cognigen, and $842,056 for dividends.
- Current assets were $10.686 million and current liabilities $1.784 million. Accounts receivable was $2.996 million; revenues in excess of billings were $735,000.
- Total liabilities were $8.642 million, including $3.230 million deferred income taxes and $4.354 million of non-interest-bearing contract payments ($750,000 current and $3.604 million long-term). The filing reports no interest paid; it does not report conventional bank or bond debt.
- Shareholders’ equity was $18.465 million. Shares issued and outstanding at November 30 were 16,841,114; 16,852,117 were outstanding January 14, 2015.
Material changes and significant transactions
- The September 2014 Cognigen acquisition was funded with $2.080 million cash and 491,159 shares valued at approximately $3.277 million at the acquisition-date share price. A further $1.800 million is due around the two-year anniversary of the merger agreement, subject to offsets: $720,000 cash and 170,014 shares. The preliminary purchase-price allocation recorded $4.789 million goodwill; acquisition accounting remained provisional.
- Reported revenue growth reflects the acquired business as well as organic growth. Pro forma information assuming Cognigen had been acquired in September 2013 shows comparative revenue of $3.834 million and net income of $492,000 for Q1 FY2014, versus $4.086 million and $529,000 in Q1 FY2015. The pro forma figures include specified acquisition, amortization, depreciation and tax adjustments.
- Following termination of the TSRL royalty agreement, the company is amortizing $6.0 million of consideration over ten years. Current-quarter intellectual-property amortization was $150,000 for this agreement. Management said Simulations Plus royalty costs declined approximately $155,000, offset by approximately $150,000 added amortization.
- The company paid a $0.05-per-share dividend, totaling $842,056, during the quarter. It anticipated future dividends of $0.05 per share per quarter, subject to board approval and with no assurance of payment.
Outlook, risks and other matters
- Management expected Cognigen to add approximately $5 million to revenue for FY2015 and cited complementary capabilities in preclinical and clinical modeling as a source of potential growth. This is an expectation, not a formal earnings forecast.
- Management expected GastroPlus version 9.0 in early 2015, with biologics and dermal absorption capabilities. MembranePlus was released in October 2014. The company also described exploratory aerospace and healthcare applications for its modeling technology.
- Management believed existing capital and expected operating cash flows would meet working-capital and capital-expenditure needs for the foreseeable future. It reported a history of positive operating cash flow, while noting that inadequate cash generation could require financing or restructuring.
- Risks identified include intense and rapidly changing software competition, dependence on product development and distribution, pharmaceutical-industry consolidation and downsizing, customer and receivables concentration, and foreign-exchange exposure. International revenue was 39% of the quarter’s total. Two customers each represented 12% and 10% of revenue; four customers represented 48% of receivables in aggregate.
- A wrongful-death action related to a 2012 plane crash named the company, which denied the allegations. The plaintiff agreed to dismiss the company without prejudice in November 2014; the filing described a nine-month period through August 31, 2015 for possible reinstatement if supporting evidence emerged.
- The filing reported disclosure controls as effective and no material change in internal control over financial reporting during the quarter. Interim results are unaudited and not necessarily indicative of full-year results.
Most important facts for investors to verify
- How much of reported growth and future revenue comes from Cognigen, and whether its contribution meets management’s approximately $5 million FY2015 expectation.
- Whether gross and operating margins recover from the acquisition-related mix and higher expenses, and how much of the quarter’s costs were genuinely nonrecurring.
- Cash generation and liquidity after the acquisition, dividends, and scheduled contract payments, including the later Cognigen payment.
- Completion and any revisions to the provisional Cognigen purchase-price allocation, goodwill and deferred-tax estimates.
- Execution and commercial uptake of planned product releases and the expected quarterly dividend, which remains discretionary.