Simulations Plus, Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended August 31, 2014. This is an annual filing, not a standalone fourth-quarter report; it provides quarterly sales figures. Financial results are for Simulations Plus before Cognigen was acquired on September 2, 2014.
Business context and reporting period
Simulations Plus develops pharmaceutical research and modeling software, led by its GastroPlus product, and provides related consulting services. The company reported growth in software licenses and expanded product development. Its September 2014 acquisition of Cognigen added clinical-trial modeling and consulting services and was completed after the fiscal year-end.
Key financial metrics
| Metric | FY2014 | FY2013 |
|---|---|---|
| Net sales | $11.461 million | $10.071 million |
| Gross profit / margin | $9.832 million / 85.8% | $8.424 million / 83.6% |
| Income from operations / margin | $4.439 million / 38.7% | $4.072 million / 40.4% |
| Net income / margin | $3.025 million / 26.4% | $2.887 million / 28.7% |
| Diluted EPS | $0.18 | $0.18 |
| Cash from operating activities | $5.306 million | $2.562 million |
| Cash and cash equivalents at year-end | $8.615 million | $10.179 million |
Cost of sales was $1.629 million. SG&A was $4.440 million, up 25.1%; R&D expense was $0.953 million. Total R&D spending was $2.322 million, including $1.369 million capitalized. The effective tax rate was 33.0%.
At August 31, 2014, total assets were $20.981 million, current assets $11.533 million, current liabilities $1.391 million, and total liabilities $5.545 million. The company had $2.5 million remaining payable to TSRL: $750,000 due in each of 2015 and 2016, and $1.0 million due in 2017. These obligations are non-interest-bearing.
Cash declined by $1.564 million during the year. Investing activities used $3.894 million, including $2.5 million paid for intellectual-property rights and $1.369 million of capitalized software development. Financing activities used $2.977 million, principally dividends of $3.076 million. The filing reports no bank borrowings at year-end; the TSRL contract payable is the material debt-like obligation disclosed.
Material changes versus FY2013
- Sales rose 13.8%, primarily as software revenue increased approximately $1.642 million, or 17.8%, from new and existing licensees and additional modules. Study revenue fell $244,000, partly because funded collaborations ended.
- Gross margin improved by 2.2 percentage points, partly reflecting lower royalties after termination of the TSRL license. Operating income increased 9.0%, while net income increased 4.8% as higher operating expenses, lower other income, and higher taxes offset part of the gross-profit growth.
- Operating cash flow more than doubled to $5.306 million. Cash nevertheless fell, reflecting the TSRL payment, dividends, and software investment.
- International sales represented 51% of revenue, compared with 48% in FY2013. Asia revenue increased to $2.819 million from $1.882 million.
- FY2014 fourth-quarter sales were $1.998 million, versus $1.568 million in the prior-year quarter. Management says the fourth quarter is typically seasonally weak.
Outlook, commentary, risks, and unusual items
- Acquisition: Cognigen was acquired September 2, 2014. Management expected it to add approximately $5 million of revenue in FY2015. The stated transaction consideration was $7.0 million, while the preliminary purchase-price allocation showed total consideration of $7.258 million, including an estimated working-capital adjustment; purchase accounting remained provisional.
- Product and collaboration plans: MembranePlus was released in October 2014, after year-end. GastroPlus version 9.0 was expected in December 2014 or early 2015. A September 2014 FDA research collaboration relating to an ocular model provides $200,000 annually and may be renewed for up to three years. No consolidated earnings or revenue guidance is provided.
- TSRL agreement: The company paid $3.5 million of the $6.0 million termination consideration in FY2014 ($2.5 million cash and $1.0 million in shares). It expects the end of royalties to produce savings in most quarters compared with prior arrangements; $2.5 million remained payable at year-end.
- Dividends: FY2014 cash dividends totaled $3.076 million, or $0.19 per share. Management expected quarterly dividends of $0.05 per share to continue, subject to board approval; continuation is not assured.
- Risks and contingencies: Management cited pharmaceutical-industry consolidation, competition, dependence on continued product development and skilled staff, uncertain opportunities in aerospace and healthcare, and customer and geographic concentration. Two customers (one a Japanese dealer representing multiple customers) accounted for 14% and 8% of sales; two customers accounted for 30% and 17% of receivables. Cash balances often exceeded FDIC-insured limits. A wrongful-death suit naming the company was dismissed without prejudice in November 2014, with a nine-month period during which the plaintiff could seek to bring the company back into the case.
- Controls and audit: Management concluded disclosure controls and internal control over financial reporting were effective as of August 31, 2014. The independent auditor gave an unqualified opinion on the financial statements but was not engaged to audit internal controls.
Important facts for investors to verify
- Review the Cognigen acquisition’s final purchase-price allocation, working-capital adjustment, integration costs, and realized contribution to revenue and earnings.
- Confirm the timing and cash funding of the remaining $2.5 million TSRL payments, and whether royalty savings exceed amortization and other costs.
- Track software-license renewals, consulting revenue, and customer concentration, including the Japanese dealer’s share of sales and receivables.
- Assess whether product releases and FDA collaborations generate commercial demand and whether the expected FY2015 Cognigen revenue contribution is achieved.
- Reconcile the MD&A’s selected-results table: its displayed total operating-expense figure does not agree with the audited statements, which report $5.392 million for FY2014 and $4.352 million for FY2013.