Simulations Plus, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended August 31, 2015. The filing is an annual report, not a standalone fourth-quarter report. It reports fourth-quarter revenue but not quarterly profit or cash flow.
Business context
Simulations Plus develops pharmaceutical research and development modeling software and provides consulting services. Its September 2, 2014 acquisition of Cognigen added clinical-pharmacology and clinical-trial consulting. The company operates through Simulations Plus and Cognigen reporting units; Cognigen contributed results from the acquisition date, while FY2014 included no Cognigen operations.
Financial performance and liquidity
| Metric | FY2015 | FY2014 | Change / context |
|---|---|---|---|
| Revenue | $18.314 million | $11.461 million | Up 59.8%; Cognigen contributed $5.228 million. Simulations Plus revenue increased 14.5% to $13.086 million. |
| Gross profit / margin | $13.998 million / 76.4% | $9.832 million / 85.8% | Gross profit up 42.4%; lower consolidated margin reflected Cognigen’s consulting mix. |
| Operating expenses | $8.142 million | $5.392 million | Higher mainly with Cognigen and increased R&D and SG&A. |
| Operating income / margin | $5.857 million / 32.0% | $4.439 million / 38.7% | Operating income up 31.9%; margin declined. |
| Net income / margin | $3.843 million / 21.0% | $3.025 million / 26.4% | Up 27.0%; FY2015 included about $400,000 of one-time Cognigen acquisition advisory costs. |
| Diluted EPS | $0.23 | $0.18 | Increased year over year. |
| Operating cash flow | $7.135 million | $5.306 million | Positive for the eleventh consecutive fiscal year, according to management. |
| Cash and cash equivalents | $8.551 million | $8.615 million | Down $64,000. |
At year-end, current assets were $11.533 million and current liabilities $3.613 million (a calculated current ratio of approximately 3.2). Total liabilities were $7.812 million and shareholders’ equity $19.532 million. The company reported no bank borrowings; contractual payments included $2.604 million current and $1.000 million long-term, principally amounts due under the TSRL agreement and deferred Cognigen consideration. Management said operating cash and existing capital should cover foreseeable working-capital and capital needs.
Investing activities used $3.130 million, including $2.080 million cash paid for Cognigen and $1.169 million of capitalized software development costs. Financing activities used $4.069 million, including $3.376 million in dividends and $750,000 of contract-payable payments. The board indicated an intention to continue quarterly dividends of $0.05 per share, subject to declaration.
Material changes versus FY2014
- The Cognigen acquisition expanded services and materially increased revenue, expenses, assets, and liabilities; reported growth therefore is not wholly organic.
- Revenue from Cognigen was $5.228 million, with $1.041 million operating income before taxes; Simulations Plus reported $13.086 million revenue and $4.816 million operating income before taxes.
- Cost of revenue rose to 23.6% of sales from 14.2%, primarily reflecting Cognigen’s lower-margin consulting mix. SG&A increased to $6.813 million from $4.440 million; R&D expense rose to $1.328 million from $0.953 million.
- Net other expense was $164,000 versus $74,000 other income, mainly due to foreign-exchange losses. The effective tax rate declined to 32.5% from 33.0%.
- FY2015 revenue included $3.712 million in the fourth quarter, compared with $1.998 million in FY2014’s fourth quarter. Management noted that the June–August quarter is generally seasonally weaker.
Outlook, commentary, risks, and unusual items
- Management plans continued investment in product development, sales and marketing, consulting, partnerships, and potential acquisitions; it is also exploring aerospace and healthcare uses of its machine-learning technology. No quantified revenue or earnings guidance is provided.
- Management cited software-license renewal rates of 91% by count and greater than 95% by revenue, and 86 new clients, including new departments at existing clients.
- Product developments include GastroPlus 9.0, released in April 2015; MembranePlus, released in October 2014 with only a few initial sales; and planned releases of PKPlus and ADMET Predictor 8.0. DDDPlus is also described as nearing a major upgrade. These plans and adoption prospects are forward-looking, not assured.
- Two FDA research collaboration agreements announced or renewed in September 2015 could provide up to $200,000 per year each, subject to their terms and progress. The filing also describes an existing five-year FDA collaboration on mechanistic in vitro-in vivo correlations.
- Key risks include competition and rapid technology change, dependence on pharmaceutical customers and continued industry R&D spending, uncertain acceptance of new products and new-market applications, and execution and valuation risks related to acquisitions. International sales were 37% of FY2015 revenue; the company also reported customer and receivables concentrations.
- Cash balances often exceeded FDIC insurance limits. Foreign-exchange movements caused a $182,000 loss in FY2015. The company cautioned that pharmaceutical-industry consolidation or downsizing could affect future growth.
- The Cognigen acquisition created $4.789 million of goodwill and $1.503 million of other acquired intangible assets at year-end. Management reported no impairment charges in FY2015 or FY2014.
- A wrongful-death lawsuit naming the company was dismissed without prejudice; after the stated period passed without notice of supporting evidence, the company was preparing documents for final dismissal with prejudice.
- Management concluded disclosure controls and internal control over financial reporting were effective at August 31, 2015. The independent auditor issued an unqualified opinion on the financial statements, but did not audit or opine on internal-control effectiveness.
Important facts for investors to verify
- How much of subsequent growth came from Cognigen versus organic software and consulting demand, and whether Cognigen’s margins and integration performance met expectations.
- Cash generation after dividends, software-development capitalization, acquisition-related payments, and remaining TSRL obligations; confirm the timing and funding of the deferred Cognigen consideration.
- Renewal rates, new-product sales and releases, and whether the planned products and FDA collaborations generate meaningful recurring revenue.
- Customer and geographic concentration, currency exposure, and the security and insurance coverage of bank deposits.
- Current status of the litigation dismissal and the IRS audit of the FY2014 tax return, which had begun in October 2015 and was not yet complete when disclosed.