Simulations Plus, Inc.
Q1 2015 Earnings Call Transcript

Published: 15 Jan 2015

[Renee Bouche:]

On behalf of Simulations Plus and Cognigen, I welcome you to our first quarter fiscal year 2015 financial results conference call and webinar. Company President Ted Grasela will be presenting this afternoon. Joining Ted are Chairman and CEO Walter Woltosz, Chief Financial Officer John Kneisel and Vice President of Marketing and Sales John DiBella. An opportunity to ask questions will follow Ted's presentation. [Operator Instructions] This call is being recorded for playback at our website, www.simulations-plus.com. It's now my pleasure to turn the presentation over to Walt Woltosz, for some opening remarks Chairman and CEO of Simulations Plus.

[Walter Woltosz:]

Thank you, Renee. Can you go to the second slide please? So got to keep the attorneys happy here with the Safe Harbor statements. So with the exception of historical information, matters discussed in this presentation are forward-looking statements that involve a number of risks and uncertainties. The actual results of the company could differ significantly from those statements. Factors that could cause or contribute to such differences include, but are not limited to, continuing demand for the company's products, competitive factors, the company's ability to finance future growth, the company's ability to produce and market new products in a timely fashion, the company's ability to continue to attract and retain skilled personnel and the company's ability to sustain or improve current levels of productivity. Further information on the company's risk factors is contained in the company's quarterly and annual reports and filed with the Securities and Exchange Commission. So with the acquisition of Cognigen that was completed on September 2nd, we have just completed our first quarter as the combined companies. It’s been a period of adjustment and updating the systems especially for Cognigen being a private company now being part of a public company there were quite a number of changes that needed to be made in how we accumulate and recognize revenues. For example a very important issue for public company on a quarterly basis and also for me to turn the reins as much as possible over to Ted who is now the President of both companies and I have made a commitment to cut back to 60% time. I have already taken the 40% cut in pay and benefits starting in September and made a New Year’s resolution to try to seriously get back to 60% time each week and take a couple of days off each week. I am going to get there. And so I have asked Ted to take over some of the things that he could do very quickly, such as the Investor Relations part of the business. And so Ted will be giving a presentation. He and I just returned from two days in Manhattan where we attended the Sidoti Microcap Conference and also met with some investors in the Manhattan area. Ted did most of those presentations, I think he’s got really good handle now on what it takes to provide the kind of information that investors want to hear from a public company and so I am going to sit back here and relax and let Ted run the show. Ted it’s up to you, so over to you now.

[Ted Grasela:]

Thanks very much Walt. Good afternoon everyone. It’s my pleasure to give my first quarterly report for the combines Simulations Plus Cognigen Company. And I’ll give a little bit of an overview backgrounds and talk about financial results and then talk about some of the things we’re going to do in the future and continue to grow these two great companies. For those of you who maybe on the call who are new to the company, just a little bit of background. Simulations Plus is a major software provider for pharmaceutical research and development. We also provide consulting services for particularly problem drugs and formulations that our customers may encounter don’t have access to the type of expertise that we have within the company. Our expertise in software tools and from the early drug discovery efforts through clinical trials and beyond patent life to support generic companies. In addition we’re exploring new applications in aerospace and general healthcare and I’ll talk about those briefly later in the presentation. The acquisition of Cognigen was completed in September 2014, and this more than doubles the workforce and is expected to add roughly $4 million to $5 million in revenue for fiscal year ‘15 and we just completed the first combined fiscal quarter on November 30th. Based on that information consolidated revenues are up 54% over last year’s first fiscal quarter and gross profit increased 41%. We’re currently distributing a dividend of $0.20 per year per share, that’s $0.05 per quarter, which of course is subject to Board approval each quarter. Little bit of overview as I remind you where are working within the pharmaceutical industry. The first line of graphics which shows the fuel all the way through animals and test tube testing in humans, represents -- is a graphical representation of the research and development lifecycle for a pharmaceutical and biotechnology company. Simulations Plus products particularly ADMET Predictor and GastroPlus which are the work horses of our company enabled scientist to work in that life cycle to take the information that they have about a compound and its properties and predict what's going to happen in the next stages of development, so that they can optimize their activities within the current stage and deliver a superior product to scientists working in the next stage. ADMET Predictor and GastroPlus are primarily used in the preclinical and discovery world and in addition now the Cognigen's expertise to that mix extends our capabilities to provide modeling in Simulations' report to the clinical research run as well as to participate more directly into regulatory submissions. Cognigen's work is primarily used as part of the effort required to justify the dose that is submitted to the regulatory agencies for approval. In addition to these products, we also have other products that are used -- where specialty products that are used by different scientists MedChem Studio and MedChem Designer which is of particular interest to scientist who work in the discovery groups and DDDPlus and MembranePlus which are used to for example scientist who work in formulations. I mean now we have resulting services and research operations with pharmaceutical company clients, biotechnology clients that is capable of expanding all of our products and all of the stages of research and development. Turning now to our financial results I'm going to be reporting on the fiscal quarter that ended November 30th, 2014 and I'll be comparing what was earned in the first quarter of this year compared to the first quarter of last year. Sales increased by $1.45 million to $4.1 million from $2.6 million. Over this first quarter Cognigen's revenue were $1.135 million and Simulations Plus revenue increased $310,000 or nearly 12%. Cost of revenues increased by $536,000, $521,000 of that increase was related to salaries at Cognigen representing roughly 46% of Cognigen's revenue. Simulations Plus cost of revenues decreased as a percentage of revenues by 1.8%, which is mainly attributable to the effect of the May 2014 TSRL agreement. We now have a fixed $150,000 charge per quarter instead of the previous floating royalty charge that we incurred based on the number of licenses we sold. Gross profit increased $896,000 to $3.1 million from $2.2 million, $600,000 of that increase is from Cognigen. Consolidated gross margins decreased to 75.6% from 82.5%. Cognigen's gross margin for the quarter was 53%, Simulations Plus margin for the quarter was 84.3%, up from 82.5% in the prior year. SG&A increased $1 million to $2.1 million from $1.1 million in the prior year. $538,000 of that increase was from Cognigen. During the current fiscal quarter, we incurred approximately 410,000 in one-time cost associated with the Cognigen acquisition which was charged to SG&A. Simulations Plus’ SG&A increased $72,000 over that period due to increases in commissions paid to our Asian dealers increased travel for training programs and trade shows and increased salary and benefit cost. As a percent of revenue, SG&A increased to 51% from 40%. The expenses of the Cognigen acquisition represented approximately 10% of that increase. Research and development expense increased 60% to $260,000 from $162,000. This increase resulted from a higher mix of expense R&D in the current quarter. Other income decreased by $36,000 as a result of foreign currency rate fluctuations. Net income decreased by $156,000 or 22.8% to $529,000 from $685,000. Without the one-time cost associated with the Cognigen acquisition, net income would have been approximately $290,000 higher in this fiscal period and would have resulted in a 19.6% increase for the quarter. Diluted earnings per share was $0.03 as decrease of $0.01 from $0.04. Without one-time charges diluted earnings per share would have been approximately $0.05 per share up 58%. Cash dividends totaling $0.05 per share were distributed during this fiscal quarter. This line shows the geographic distribution of sales for the first quarter and you can see that North America is a major source of our business, but also Europe and Asia has been coming on strong with Japan and China representing geographical regions with our increasing interest in the products. We have a few licenses in South America as well. This slide shows the number of new customers in the quarter for Simulations Plus and note that in the first quarter of this year we has acquired the largest number of new customers for the quarter at 23. The first quarter is traditionally a slower quarter rather compared to Q2 and Q3, so this increase as a slowest part of the year is encouraging for the reminder of the year. In terms of consolidated income statement comparing this quarter with last year, the thing to point out is the gross margin profit which I talked a little bit about 4s came down a little bit with the addition of Cognigen recognizing the fact that the consulting services had a lower profit margin than software sales. In addition, I already spoke about the SG&A increase largely resulting from the onetime charges associated with the Cognigen acquisition. The consolidating income statement which brings together or separates out Simulations Plus from Cognigen and then combines them for the total. Income from operations for Simulations Plus was $686,000 compared to $63,000 for Cognigen, and the net income was $489,000 for Simulations Plus, $40,000 for Cognigen. From a balance sheet standpoint you can see that the current ratio is healthy 6

[Unidentified Company Representative:]

Ted it reflects on the down pointing triangle next to the word questions. You will see the questions that people are asking you can take them in order.

[Renee Bouche:]

Ted we have one question Ray Drury has raised his hand to actually ask his question. So I will unmute Ray’s line, so that he can get his question in and then we’ll have a series of written questions to address. Ray.

[Unidentified Analyst:]

What is your thought around increasing the gross profit margin of Cognigen?

[Walter Woltosz:]

Over the past several years, I personally had spent a lot of time improving and designing the processes that we use for receiving data from our customers, consolidating it into analysis, record data sets, running through an analysis and then reporting the results for regulatory review. That process has really been completed for the most part as of now and we feel like we're in a good position to be able to ramp up and handle all the additional workload that we're expecting as we ramp up our sales and marketing efforts. In past, Cognigen relied primarily on word of mouth and we were focused on repeat business from our customers who were pleased with our services, so we'll be expanding that and as we add new working project level, our gross margin should increase.

[Unidentified Analyst:]

How does the pricing of your offerings compared to your competitors, do you have the ability to raise prices?

[John Kneisel:]

We -- Simulations Plus have basically one competitor a non-public company called [indiscernible] so it's been difficult for us to get information about actually what's [indiscernible] charges and numbers of customers and so forth. Basic intelligence that we have suggest that they cost their charge about $300,000 for a license compared to roughly if you buy all the modules for GastroPlus, it's roughly $120,000 $125,000. Our pricing has resulted in a much larger user base. We believe and what [indiscernible] has been able to accomplish, we are exploring ways of increasing prices without discouraging the user base that we have now. And so we'll be experimenting with that with renewals in the future.

[Unidentified Analyst:]

Do you anticipate R&D expense to remain or increase from first quarter as you continue to develop AEROModeler and MRI Modeler?

[John Kneisel:]

The R&D expense that was noted for the last quarter goes up and down within Simulations Plus based on the types of activities that are scientist engaging, so whether the expenses are the research and development expenses are expense to capitalize it's a function of the type of work that they do. We are currently putting finishing touches on prototypes for AEROModeler and MRI Modeler and in fact have been using it to [MRIs] experimental data and prototype data to give people an idea of the power of that approach. So depending on what happens next with those products, we hope to be able to get funding from interested customers to continue to develop the software and customize it for particular applications. So always we'd like to be able to fund a future development using the funding of interested customers.

[Unidentified Analyst:]

What is the market potential for AEROModeler and MRI Modeler?

[Unidentified Company Representative:]

We don’t have a big handle on the size of that market the -- I think and you're aware that just about every hospital in the country has to have an MRI machine otherwise they feel like they're not working at the technology edge. So the size of the market will depend on performance of the product and whether physicians actually find it helpful in their diagnosis. The way that the neuro network works and being able to quickly go through a large number of patient related variables for example and provide guidance towards a diagnosis should have a significant impact on physician time required to read these results and come to conclusions and recommendations. So we have to keep an eye on the value of the information and the ultimate size of market, it's much harder for me to come up with a guesstimate on what the market for AEROModeler is going to be.

[Unidentified Analyst:]

What is the market potential, your current level of penetration and strategy to grow Cognigen?

[Walter Woltosz:]

Yes, so, one of the things that has been interesting to us in the last year is the number of new customers that we've encountered, so in calendar year of 2014 and I apologize for having to go between the fiscal year of Simulations Plus which ends at the end of August in calendar year it decides how we would think about these kinds of issues in the past, but in calendar year in 2014 we added 6 new customers these were companies that we had never worked with before. So this represents a couple of things one is the expanding interest incorporating modeling and simulation results into throughout filings to regulatory agencies. It reflects the regulatory agencies interest in using that information to drive our drug developments a regulatory decision making and drug development decision making, and also it reflects a fact that as pharma companies have consolidated. Many of the scientists who have left had gone work and start-up biotech companies. And some of our new customers have included scientists who left wants to start a new company and now are coming to us for support in the smaller biotechnology companies. So the expanding market and interesting modeling and simulation and the changing in the landscape which is leading to more outsourcing we are hoping it will allow us to grow Cognigen and increase our profit margins by not increasing the number of people but increasing the throughput and through Cognigen.

[Renee Bouche:]

Can you provide some details regarding the types of commercial companies in this quarter’s purchased licenses?

[Walter Woltosz:]

I would like to turn that over to John DiBella if he is on the line he wouldn’t mind handling that question.

[John DiBella:]

Sure. The companies that licensed, the commercial companies that licensed this quarter were midsize and small size pharmaceutical and biotechnology companies. Several of them again Ted mentioned earlier based over in the Asian territory Korea and Japan and then a couple of more in North America and Europe. But small, midsize companies and the pharmaceutical and biotechnologies basis.

[Unidentified Analyst:]

The first quarter fiscal year ’15 gross margin for Cognigen is 53%, going forward how represented if this fit a Cognigen portion of the business? I know that in the last call you would way to couple of queues but if there is rough indication based on this number?

[John Kneisel:]

I think that the growth in gross profit is when we coupled to increase in the throughput that we are hoping to achieve with the increased marketing sales. What I have talked about target for Cognigen and we are looking at a 10% net revenue to the bottom line and that’s the best plan for fiscal ‘15.

[Unidentified Analyst:]

Any estimate on the revenue from MembranePlus for fiscal year ’15?

[Walter Woltosz:]

John would you mind answering that?

[John DiBella:]

I think it’s been our precedent to not necessarily offer any estimates. The initial round of evaluation so we have had approximately a dozen of evaluations which have started for the software have been very positive and several of those companies had started to work in licenses into their budget. I would hope that we will see anywhere from 15 to 20 companies licensed to software within the fiscal year but I can’t give an x amount of revenue.

[Unidentified Analyst:]

What is the sales cycle for Cognigen?

[Walter Woltosz:]

The sales cycle is quite variable actually, so for existing customers when we get engaged in a project typically we have the fixed price contract. And as customers start realizing the value of the information that we are generating often times there are additional questions and additional analysis that we need to deal with. And we deal those using the change. So the sales cycle on that particular study has actually grew pretty quick, it doesn’t take very long at all. In other cases companies are asking us for a and prior to accepting they will send auditor or a team of auditors to Cognigen to review our operating procedures our security, our computer systems. Over the last 10 years we have gone through 44 of these and all cases have come out successfully. That kind of sales cycle might be three months to six months depending on the urgency behind the nature of the request. So I would say from very short to roughly six months sales cycle.

[Unidentified Analyst:]

Perhaps you can go back to the page in the presentation describing income from operations. the Cognigen figure of $40,000 appears low does that include the acquisition related cost of $410,000?

[John Kneisel:]

Hi, Walter. Yes the short answer is that it did in fact include this one-time charges.

[Walter Woltosz:]

Thanks John. Meaning those charges were brought on the Simulations Plus site it does not include in there, sorry to correct you.

[Unidentified Analyst:]

The Cognigen revenue outlook is lower now at $4 million to $5 million, and it was the time of the acquisition. What is the explanation?

[John DiBella:]

I think we’ve been saying all along that we were targeting somewhere between $4 million and $5 million in this first year recognizing that at least in the first quarter there were going to be some adjustments that we had to make in terms of the operations with Cognigen. We alluded to that Walt alluded to that a little bit at the beginning there has been quite a bit of effort on part by senior managements to come to understand what’s going to be expected in a publicly held company. And I think we’ve adapted so that goes well. We had to do quite a bit of retooling certainly from walked back in that little bit. We have very good systems in place for keeping track of time and effort required to complete projects but we have to do quite a bit to retool that so that instead of being focused on a fiscal year basis we would be able to get John Kneisel the results that he needed for the quarter we’re reporting. We’ve pretty much accomplished all of that now and so all of our energies are being spent on marketing and sales and executing on projects.

[Unidentified Analyst:]

How large is the new market opportunity for the biotech elements that will be added to GastroPlus.

[Walter Woltosz:]

John DiBella, would you like to tackle that one?

[John DiBella:]

Sure. I think from some of the research that we’ve done, the bio-pharmaceuticals market is approximately 25% of the traditional small molecule pharmaceuticals market. The first iteration of the features that are going to be added to GastroPlus would be useful for approximately 50%, maybe 60%, of the research activities for large molecules. So I think that in this initial release we’ll be able to address a number of research needs for a portion of that market and then hopefully with future versions when we add some additional capabilities we’ll be able to provide solutions for the entire market. But I would say that right now it’s approximately again according to our research around 25% of the small molecule market.

[Unidentified Analyst:]

Okay. And Walter has another question, software revenue was up 12% while unit volume increased by 25%. Can you explain that?

[Walter Woltosz:]

John DiBella or John Kneisel, would you like to tackle that one.

[John Kneisel:]

I think that’s just indicative of the academic non-profit licenses that we secure. So, all unit licenses are treated equally. But of course we do offer significant discounts for non-profit for academic research activity. So, there were number of the smaller sales that we saw in the first quarter which led to software revenue being up at a percentage of little bit lower than the overall unit volume.

[Unidentified Analyst:]

What is the software renewal rate?

[John Kneisel:]

That was still within our historical norms. In terms of accounts, it was around 91% for renewal and in terms of actual fees it was closer to 97%. So, that means that some of the renewals that did not come in were of that non-profit academic variety not hitting us as much on the revenue side.

[Unidentified Analyst:]

Since AEROModeler seems to target the military industry. Are there any concerns that if SLP gets paying customers that export restrictions might be placed on SLP software?

[John Kneisel:]

Walt, would you mind answering that question.

[Walter Woltosz:]

Not at all. No, I do not see any restrictions on our software this used for other purposes the application and the specific defense related application is very likely to be restricted I would guess. But it would not affect our other software.

[Unidentified Analyst:]

Are there any other products in the market like AEROModeler and MRI Modeler that we know about?

[Walter Woltosz:]

We know some products in the aerospace realm that are not of the same look at AEROModeler. So the idea of AEROModeler is to take advantage of more detailed computations that can be done for example with computational fluid dynamics which is very accurate but very-very slow to run take advantage of that to provide simulated data that we can use to train the artificial neural network ensembles and then those become what’s called the surrogate models. So it’s based on the more tedious calculation but then when you go to use it, it runs very, very fast. So for example computational fluid dynamics or CFD calculation for one missile configuration at one member and one angle of attack might run for hours, where we would predict that within milliseconds with accuracies that are almost as good. It’s very difficult to see the error in our models against the training data because it is almost perfect, it’s 0.999 to 1. So there are some other programs in aerospace. For the MRI we’re not aware of anything that is directly like MRI modeler, we know some people in academia have played around with using neuro networks but we believe that what we have is so much different in the way we develop neuro network samples and we’ve seen the results in our chemistry work where we’re consistently rated number one in predicting the accuracy across the board in the pharmaceutical comparisons. And is the same numerical engine with some small tweaks to adjust for the different data set sizes that we’re using for both aero modeler and MRI modeler. So we don’t see a direct competitive for MRI modeler or aero modeler, we may find out that there is something we don’t know about but right now we think there is pretty unique progress.

[Unidentified Analyst:]

What explains the relatively stronger software performance in Asia compared to the U.S. and Europe?

[John DiBella:]

There is probably a couple of factors that contribute to it. One would be we have made it one of our goals to try and educate more scientists over in those Asian territories and so new did visit Korea, Japan a couple of times, China couple of times last year. And we’ve also spent a lot of time educating our distributors in those territories, the Chinese and Japanese distributors are now at a level where they are able to explain very well the benefits to using software. The partners that we have in Korea have been really, really good advocates for the tools over there and have provided training locally for the users. So it’s a combination of us going over there and educating more scientists than the management at these companies on the utility of the software and how their peers in territories outside of Asia have been using it for a while and it’s also spending some time more time with our distributors I think in helping them become stronger representatives for us over in the territories.

[Unidentified Analyst:]

What is Cognigen’s backlog? How far into the future does that visibility extend?

[Walter Woltosz:]

Traditionally we’ve had a pretty good idea of what the next nine months are going to look like, increasingly as clients know that they want to use us to do these analysis they look at the project management timelines for clinical studies that need to get completed in order to generate the data that we’re going to use for analysis. So we have a pretty good window out to nine months from current and in fact we have a little bit of an idea of what will happen 2016 because there are a few contracts that you have -- we have been told to make sure that we save resources, have available resources for the analysis then. But I will say that most of the time we have a pretty good idea of what the next nine months are going to look like.

[Unidentified Analyst:]

And the last appears to be a clarification. Eugene Robins, says so to be clear the Cognigen EBITDA margin should be around 15% for this quarter’s results. And it’s revenue profile lumpy quarter-over-quarter?

[Walter Woltosz:]

Well as I mentioned we’re looking for a 10% net revenue number over the course of the fiscal year. I think it’s a little premature to talk about lumpy or non-lumpy at the present time, because this first quarter was an important quarter of transition and we had to learn quite a bit about functioning a health company. We think we’ve learned those lessons very well and so we’re looking forward to the future now.

[Renee Bouche:]

That appears to be all the questions Ted.

[Ted Grasela:]

If there are no other questions, I thank you very much for your attention to this presentation and for your questions and I look forward to sharing next quarter results with you once that teleconference is scheduled. Thank you very much.

[Renee Bouche:]

Thank you Ted. This concludes today’s conference call and webinar. If you missed any part of today's presentation a replay will be available at our Web site, www.simulations-plus.com. Thank you for joining us and have a wonderful afternoon.