Update - Taglich Brothers | Brokerage Firm | MicroCap Market · The biosimulation (model-based...

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Simulations Plus, Inc. Rating: Buy Howard Halpern SLP $10.05 — (NasdaqCM) January 13, 2017 2015 A 2016 A 2017 E 2018 E Net sales (in millions) $18.3 $20.0 $22.0 $24.5 Earnings per share

2014 A $11.5 $0.18 $0.23 $0.29 $0.32 $0.37

52-Week range $11.89 – $6.74 Fiscal year ends: August Shares outstanding a/o 1/09/17 17.2 million Revenue/shares (ttm) $1.19 Approximate float 11 million Price/Sales (ttm) 8.4X Market Capitalization $173 million Price/Sales (2018) E 7.1X Tangible Book value/shr $0.74 Price/Earnings (ttm) 31.4X Price/Book 13.6X Price/Earnings (2018) E 27.2X Annual Dividend $0.20 Dividend Yield 2.0% Simulations Plus, Inc., based in Lancaster, CA, develops drug discovery/development software, and provides preclinical/clinical consulting for regulatory submissions. Key Investment Considerations:

Maintaining Buy rating and increasing our 12-month price target to $12.30 per share from $11.95 due to increased sector and SLP’s valuations. SLP’s long-term growth should be driven by the use of software tools and analytics for drug discovery and development increases, expansion of the acquired Cognigen Corp. business, and development of new solutions for clients’ research and development programs. In April 2016 SLP received a $4.7 million, five-year contract from a major research foundation for Cognigen’s KIWI’s cloud-based software collaboration platform, which will be used for the foundation’s global teams engaged in model based drug development. The biosimulation (model-based prediction) technology market is projected to grow 16.6% annually, reaching $3 billion in 2022. SLP has penetrated approximately 20% of the viable pharmaceutical, biotechnology, and generic companies that would be potential users of the company’s software and/or consulting services. 1Q17 EPS (reported 1/9/17) increased $0.02 per share to $0.08, on a 12% rise in sales to $5.4 million. We forecasted sales of $5 million and EPS of $0.07. Our FY17 sales and income forecasts are largely unchanged at $22 million and $2.6 million or $0.32 per share. For FY18, we maintained our EPS projection of $0.37 per share on sales growth of 11.3% to $24.5 million due primarily to anticipated new customer growth to 150, up from 125 in FY17 and 75 in FY16. The PKPlus™ software offering (launch in 4Q16) and demand for its consulting services should support SLP’s sales growth.

Simulations Plus, Inc.

Taglich Brothers, Inc. 2

Investment Recommendation Maintaining Buy rating due to SLP’s growth potential, which should be sustained due to the increasing use of software tools and analytics for drug discovery and development, and leveraging of the acquisition of Cognigen Corp. The collaboration between Cognigen and SLP scientists has resulted in new and innovative solutions for its clients’ research and development programs. The acquisition and growing client base should underlie accelerating net income growth in FY18 (see chart right). We forecast income growth accelerating from 4.8% in FY14 to 17.8% in FY18 (see chart above). FY16 growth was driven by the addition of 75 new customers or new departments within existing customers and the acquisition of Cognigen. In FY17 and FY18 we project the Simulations Plus division should add 125 and 150 new customers or new departments within existing customers, respectively. FY17/18 growth should be driven by the August 2016 release of PKPlus, which will extend SLP’s reach so that pharmaceutical industry scientists can generate the analyses and the output needed to begin the process of satisfying regulatory agency requirements, and the April 2016 $4.7 million, five-year KIWI platform contract that should begin to generate revenue in the 2H17. We are increasing our 12-month price target to $12.30 per share from $11.95 due primarily to increased sector valuation. Our price target and dividend yield imply a total year-ahead return of 25%. The application software, business services, and medical technology industries’ trailing 12-month EPS multiple increased to 64X from 56X in December 2016, while SLP’s current forward P/E multiple increased to 27.2X (prior was 24.6X) based on our FY18 EPS forecast of $0.37 per share. We applied a 35X multiple (prior was 34X) to our FY18 EPS and discounted in order to obtain a year-ahead value of $12.30 per share. Simulations Plus shares are suited for investors seeking exposure to a micro cap software company targeting research scientists in the pharmaceutical, biotechnology, and drug development sectors.

Overview Simulations Plus, Inc., based in Lancaster, California, employs 16 Ph.D.s and six with one or more Master’s degrees. In FY16 net sales consisted of annual site license revenue from pharmaceutical software ADMET Predictor™, DDDPlus™, GastroPlus™, and MembranePlus (see table on next page for details) and consulting services provided by the company’s life sciences team. In August 2016 the company its PKPlus software that provides user-friendly analysis enabling scientists to model and predict complex in vitro experiments. The company’s aim is to market this new product in order to make it one of its leading sources of revenues and earnings within the next five years. The company’s software (see description middle of page 3) assists pharmaceutical scientists in rapidly predicting certain key potential drug dynamics and compound properties, thereby reducing the risk of multi-million dollar clinical trial failures, and reducing the time to market of effective new medications. Pharmaceutical software and consulting services sales growth is driven by SLP’s technical and research and development staff, which increased to 48 at August 31, 2016 from six in FY06. The company aims to add at least six new professionals to its technical and research and development staff in FY17. In FY15 the company’s Buffalo, NY division (Cognigen) was acquired. Founded in 1992, Cognigen was the first contract research organization to offer pharmacokinetic (the study of the bodily absorption, distribution, metabolism, and excretion of drugs) and pharmacodynamic (the study of the action or effects of drugs on living organisms) modeling simulation services to that clinical pharmacology sector. This division has provided active



modeling and simulation support for 107 projects in FY16. This division generates revenue from services provided to customer during Phase I through IV of clinical drug development. Over the last five years approximately 25% of its projects have resulted in direct regulatory interaction. Cognigen’s new product is KIWI (the process pictured on right), which will enable customers’ access to its internally developed robust computing and modeling simulation system that allows for submission of complicated modeling runs. The KIWI platform obtained its first large scale contract in April 2016. The $4.7 million five-year contract with a major (undisclosed) research foundation provides KIWI’s cloud-based collaboration platform for the foundation’s global teams engaged in model based drug development.

Source: company reports

Offerings Description Updated Developments

ADMET* Predictor™/ ADMET Modeler™

The predictor component (molecular property prediction program) enables pharmaceutical researchers to rapidly estimate a number of ADMET properties of new chemical entities. The modeler component allows researchers to build artificial neural network ensembles or support vector machine ensemble models from their own data to rapidly calculate quantum level descriptors. Prediction of sites of metabolism, new atomic level descriptors, adds skin permeability, transporter, and toxicity models that includes air/water partition coefficient and an improved mutagenicity models in toxicity module, and integrates with its MedChem Designer program. On January 12, 2017 version 8.1 was released. This new version adds a new graphical interface, a MedChem Studio module (enables the mining of data to design new drug-like molecules), and updated toxicity models.

*absorption, distribution, metabolism, elimination, and toxicity

DDDPlus™

DDDPlus (dose disintegration & dissolution) enables formulation scientists to predict how changes in formulation or experimental setup affect dissolution rate in laboratory experiments. April 2016 version provides easy integration with ADMET Predictor and new dosage form options for immediate and controlled release formulations. Customers in the US use DDDPlus with multiple licenses used at FDA, and in Europe, and Japan. Includes parameter sensitivity analysis, a virtual trial capability, immediate release capsule dosage form, and new input/output functions.

By August 2017 version 5.5 should be released and include new dosage form options and closer integration with GastroPlus.

GastroPlus™

GastroPlus simulates absorption, pharmacokinetics (the process by which a drug is absorbed, distributed, metabolized, and eliminated by the body), and pharmacodynamics (the combination of therapeutic and adverse effects on the body) for orally dosed and injected drugs. In the drug development phase it aids researchers in dosage formulation by allowing the adjustment of formulation variables (solubility, particle density, dose, and radius) versus time, in order to achieve a target plasma concentration. GastroPlus is also capable of providing drug interactions for ocular, nasal, dermal, and pulmonary drug delivery, as well as drug interactions with transporter and induction capabilities. Recent additions include a precipitation model, an infant PBPK physiologies model, built-in enzyme expression levels, and biologics from large molecules. Customers are located in the US (including multiple licenses at the FDA), Europe, and Asia.

In early calendar 2017 version 9.5 with an intramuscular dosing model and antibody-drug conjugate model(s) for biologics will be released.

MembranePlus™

MembranePlus, launched in 4Q14, simulates laboratory experiments for measuring permeability of drug-like molecules through various membranes, including several different cell cultures, as well as artificially formulated membranes. MembranePlus will integrate with GastroPlus. Clinical research departments should be the primary customers of this offering.

Update to be released by mid-2017 that will include the ability to model multiple compounds to optimize in-vitro drug interactions and parameters.

PKPlus™

PKPlus launch in 4Q16 provides a complete level of functionality needed by pharmaceutical industry scientists to generate the analyses and the output needed to satisfy regulatory agency requirements for both noncompartmental and compartmental pharmacokinetics analysis. During the first two months after its release, the company obtained a number of orders, and continues to have numerous ongoing and planned evaluations.

By August 2017 an update will be released that will address issues identified by initial customers. Source: company reports/presentations



R&D Budget Pressures – Simulation Tools to the Rescue? A strategic shift in drug development should drive the use of simulation software tools. In its winter (March) 2016 R&D funding forecast the Industrial Research Institute and R&D Magazine projects 2016 R&D spending in the Life Sciences Industry to increase 1.8% globally and by $400 million to $71.1 billion in the US (see chart at right – latest available). The report observes that technologies employed by the scientists and engineers in laboratories are expected to continuously evolve over the next several years. Two research and development areas that are forecast to growth though 2015 are software analysis and software simulation. Combined through two areas are forecasted to growth by 29% and 27%, respectively. The biosimulation market (use of computer aided simulation of biological processes and systems) growth reflects the cost and time spent on drug discovery and development programs and the failures of drug candidates. Regulatory agencies in the US and Europe are using and promoting the use of predictive technologies in order to streamline the drug approval process, reduce R&D costs, and potentially eliminate late stage drug failures. In April 2016 (latest available) consulting firm Stratistics MRC indicated that the global biosimulation technology market is had sales of $1 billion in 2015, which should grow 16.6% annually to $3 billion by 2022. Bioimulation market growth is helping to drive the reduction in the cost of drug discovery and lessen development, as well as risk of failure of drug molecule. The analysis by Industrial Research Institute and the biosimulation market forecast point to sales gains by SLP’s simulation software tools such as GastroPlus, ADMET Predictor/Modeler, DDDPlus, and ClassPharmer. In the very early stage of drug development these tools can help determine whether or not to proceed with continued development of a potential drug candidate. SLP software tools that enable clinicians to meet clinical trial endpoints could potentially save millions of dollars, especially if a simulation software tool detects a failure prior to Phase III testing. Pharmaceutical and biotechnology companies continue to seek innovative alternatives to lower the cost of drug development. Simulation software should be increasingly important in reducing costs and increasing productivity as R&D budgets shrink. Simulations Plus software can increase productivity and reduce the risk of failure in late stage clinical trials. In silico technologies (those performed on computer or via computer simulation) are highly cost effective decision-making tools in the early stages of drug discovery. Simulation prediction and data mining models can provide the researcher with a better understanding of drug reactions in the human body, enabling a more informed go/no-go decision. Simulations Plus software tools are being validated. Over the past two fiscal years, four of SLP’s customers used GastroPlus modeling results as part of their regulatory submissions. Those submissions were accepted as part of regulatory reviews. Over the past five years, the recently acquired Cognigen has successfully supported 25 regulatory filings. In addition, consulting firm Grand View Research issued a 2014 report (latest available) that projects the global market for computational biology to reach $4.3 billion by 2020, with five key companies – Accelry, Certara, Entelos, Schrodinger, and Simulations Plus. The company has two funded FDA collaborations. SLP completed the second of a three-year research collaboration agreement (RCA) with the FDA to enhance the Ocular Compartmental Absorption and Transit model within the additional dosing routes module of GastroPlus to provide a tool for generic companies and the FDA to assess the likely bioequivalence of generic drug formulations dosed to the eye. In September 2015 the company 2015 began the first of a three-year RCA with the FDA in order to expand the capabilities of GastroPlus to simulate the dosing of long-acting injectable microspheres.

Source: R&DMagazine Winter 2016



Strong Growth Prospects We project sales and net income growth through FY18 due to the Cognigen acquisition, new software offerings MembranePlus and PKPlus, funded collaborations with the FDA, the first large scale KIWI contract, and potential for smaller KIWI contracts (total number of contracts in 1Q17 was six), as well as the continuing pressure on pharmaceutical and biotechnology companies’ R&D budgets and increasing usage of simulation tools by global regulatory agencies. Strategic Opportunities The company is evaluating cloud computing as a means of providing its software and services to customers. If implemented, it would provide the company with recurring monthly revenue and the potential to enhance margins. In 1Q17 the company resumed work on its aerospace application (AEROModeller™), which predicts aerodynamic force coefficients for arbitrary missile shapes at any mach (speed) number and angle of attack and its MRIModeler™ project that uses SLP’s artificial neural network technology to analyze magnetic resonance imaging data to classify patients into various disease categories. Industry Dynamics Total R&D spending in the US through 2023 is forecast to grow 2.1% annually reaching $408.5 billion, up from $345.3 billion in 2015 (see chart on right). IBISWorld predicts future R&D spending will lead to more outsourcing to companies with specialized skill sets. Fundamentals SLP’s sales growth is driven primarily by participation of its life science and market teams in large and small conferences around the world. Making in excess of 45 presentations at global conferences resulted in the company’s database of over 2,000 potential customers, which grows by approximately 20% annually. We project annual customer additions should reach 150 in FY18 (see chart at right). Along with customer additions, we anticipate more complex, higher value consulting projects due to the collaborative efforts between SLP and Cognigen science teams. Customers frequently evaluate software and then obtain approvals from multiple decision makers prior to the purchase, a process that can take up to six months. Company data suggests that once a customer purchases a license, the account renewal rate in the following year is approximately 87% with the revenue renewal rate of at least 94%. In 1Q17 the company’s Cognigen subsidiary had 60 projects from 26 companies, of which five commenced in 1Q17 with two projects expanding. Partly offsetting the progress made by Cognigen was two projects being delayed due to slow enrollment. Cognigen had 25 outstanding proposals with 19 companies Operations We project FY17 sales of $22 million, up 10.2% from $20 million in FY16, or $133,000 higher than our prior forecast, reflecting 1Q17 results. We project the Simulations Plus division to grow 6.2% to $15.3 million. Simulations Plus division growth should be supported by a 95% revenue renewal rate on a 86% account renewal rate (number of sites renewing their annual license), increased usage of the company’s consulting services by existing customers, new customers (see graph above) attracted by marketing efforts at conferences and meetings worldwide, the acceptance of its MembranePlus software tool, and the 4Q16 launch of PKPlus designed for scientists to model and predict complex in vitro experiments. We project Cognigen division sales growth of

Source: IBISWorld - October 2016



20.6% to $6.7 million due primarily to revenue from the five-year $4.7 million KIWI contract being recognized as milestones are reached. For FY18, we project 11.3% sales growth to $24.5 million (up $100,000 from our prior forecast), reflecting a rebound in Cognigen division sales due to its broader range of services that incorporates simulation modeling, acceptance and usage of its PKPlus regulatory software tool, the addition of 150 customers, and advanced/entry level training workshops for GastroPlus, ADMET Predictor/ADMET Modeler, MembranePlus, and PKPlus software offerings. Sales grow should be supported by recognition of revenue from the $4.7 million five-year KIWI contract as milestones continue to be met. The table below outlines the cost structure we anticipate for fiscal years 2016 and 2017 vs. 2015 results.

Cost Structure Margin Analysis 2016A 2017E 2017E 2018E 2018E

Actual Prior Current Prior Current Gross Profit 77.0% 76.0% 75.8% 76.0% 75.9% SG&A expenses 33.5% 33.8% 33.4% 31.7% 31.0% R&D expenses 7.2% 6.8% 5.7% 6.3% 5.7% Operating income 36.2% 37.8% 36.6% 39.1% 39.2% Tax rate 36.2% 32.5% 31.6% 33.0% 32.0% Pre-tax income 31.1% 37.9% 36.8% 39.2% 39.2%

Source: Taglich Brothers estimates and company reports Our gross margin projection reflects 2017 and 2018 Cognigen margins of 57.6% and 57%, respectively, vs. 83.7% and 83.8%, respectively for SLP. For SLP our gross margin forecast reflects the May 2014 acquisition of intellectual property from TSRL. While the acquisition eliminated royalty payments to TSRL on sales of GastroPlus, SLP will incur $600,000 in annual amortization costs due to the purchase of those rights for $6 million. Cognigen’s gross margins reflect the $4.7 million five-year KIWI contract that will diminish margins over the first two years (through FY18) of the contract due to infrastructure requirements. For the next two fiscal years, we project SG&A and R&D margins in the range of 33.4% to 31% and 5.7%, respectively (see table above). Our forecast is based on marketing initiatives that should add and support new customers, expand the functionality of SLP’s software programs, and grow the Cognigen division. Also SLP will increase its support for workshops and training sessions in Germany, Korea, India, New Jersey, and at customer sites. The company should maintain its global participation in scientific meetings, conferences, and poster presentations, as well as look to hire qualified scientists to increase its scientific team. We forecast operating expense margin of 39.2% and SG&A and R&D expenses of $7.4 million and $1.3 million, respectively, in FY17. The 9.9% increase in SG&A expense reflects the costs associated with the company’s transition to accelerated filer status and its first Sarbanes Oxley internal control audit. We forecast FY17 operating income growth of 11.4% to $8.1 million due primarily to revenue growth and ability to leverage operating expenses, partly offset by gross margin compression. Operating income growth will drive operating margin to 36.6% from 36.2%. In FY18 SG&A expense should increase 3.3% to $7.6 million with R&D expense increasing by $135,000 to $1.4 million. We project operating expense margin decreasing to 36.7% from our forecast of 39.2% in FY16 due to increasing productivity of scientists. We project 19.1% operating income growth to $9.6 million with operating margin of 39.2%. We project FY17 and FY18 net income of $5.5 million or $0.32 per share (unchanged) and $6.5 million or $0.37 per share (unchanged), respectively, after income tax expense rates of 31.6% and 32% for each period. Finances For FY17, we project cash earnings of $8 million and an increase in working capital of $33,000 due to an increase in receivables and decrease in accruals, partly offset by an increase in payables. Cash from operations of $8



million should cover software development costs and common stock dividends, increasing cash by $1.5 million to $9.6 million at the end of FY17. For FY18, we project cash earnings of $8.8 million and an increase in working capital of $565,000 due to increases in receivables and decrease in payables, partly offset by an increase in accruals. Cash from operations of $8.2 million should cover software development costs and common stock dividends, increasing cash by $2.7 million to $12.2 million at the end of FY18. Based on our cash flow projections through FY18, the company should have the cash to maintain its cash dividend and expand operations (through asset purchases and acquisitions) for at least the next two fiscal years. 1Q17 Results In 1Q17 sales increased 12% to $5.4 million due to a $218,000 increase in software and software-related sales stemming from 28 new customers consisting of 14 commercial clients and 14 nonprofit groups. Sales growth was enhanced by a $349,000 increase in consulting and analytical study revenues due primarily to the company’s Buffalo subsidiary (Cognigen) that reflects revenue from the company’s $4.7 million five-year contract for its KIWI product. Gross profit increased 8.7% to $4.1 million due primarily to higher sales, partly offset by gross margin compression to 75.3% from 77.6%. The 23.3% increase in the cost of revenues to $1.3 million was due primarily to labor costs related to increased studies and contracts ($124,000), increased costs associated with training programs ($45,000), increased software amortization ($37,000), and direct contract related expenses ($38,000). Gross margin for software and services division was 81.5% versus 83.7%, while SLP’s Cognigen division had gross margin of 62% compared to 63.29% in the year-ago period. Operating expense margin decreased to 39.8% from 41% due to a sales growth of 12%, which exceeded the 6.2% increase in operating expenses to $2.2 million. SG&A increased 11.2% to $1.9 million due primarily to a $152,000 increase in professional fees stemming from the company’s transition to accelerated filer status and the cost of the its first Sarbanes Oxley internal control audit, as well as audit related cost. Restraining the growth in operating expenses was a 17.4% decrease in R&D expense to $290,300 due mostly to how labor related costs were allocated. Operating income increased 11.6% to $1.9 million due to higher sales and leveraging of operating expenses, partly offset by gross margin contraction. Operating margin was 35.6% from 35.7% in the year-ago period. Other income was $39,385 compared to an expense of $10,430 in the year-ago period. The positive change in other income stems from a swing to a currency gain of $34,928 from a currency loss of $14,895 in 1Q16. Income tax expense was flat at $606,000 but the effective tax rate dropped to 30.8% in FY16 from 35.6%. The income tax rate decreased due to the use of tax credits. 1Q17 net income was $1.4 million or $0.8 per share compared to $1.1 million or $0.06 per share. We projected EPS of $0.07 on sales of $5 million.

Finances In 1Q16 cash earnings were $2 million and working capital increased $30,000 resulting in cash from operations of $1.9 million. Cash from operations covered capital expenditures and common stock dividends. Cash increased by $814,000 to $8.8 million. Strategy SLP aims to increase its visibility and customer leads by having their life science team members attend conferences and scientific meetings worldwide. In FY16, the company attended 54 meeting, presented 51



posters and oral podium presentations, as well as a number of per-reviewed publications’ citing software offerings of SLP. We anticipate the company will maintain or exceed the levels achieved in FY16 through FY18. The company will expand its contract research, consulting, and workshop services offered to the industry. In 1Q16, Simulations Plus was engaged with 13 new clients on projects and had consulting work coming in from existing customers. Contract research and consulting is a marketing tool since it demonstrates the capabilities of the company’s life sciences team and simulation tools, which often lead to site licenses for its software offerings. The Cognigen subsidiary had 25 outstanding proposals with 19 companies. Simulations Plus will continue to seek funded research consulting agreements with government agencies and commercial pharmaceutical companies. SLP has a five-year collaboration agreement with the Food and Drug Administration Center for Food Safety and Applied Nutrition. SLP is entering the fourth year of the agreement that enables them to build toxicity models and avoid the cost of creating it own database. This collaboration enables SLP to generate revenue from fully developed toxicity models sold to additional consumer staple companies such as Unilever NV. SLP has a five-year agreement with the FDA’s Office of Generic Drugs to evaluate mechanistic in-vitro/in-vivo correlations, and an approach to determine whether mechanistic absorption modeling correlates laboratory dissolution experiments with the in-vivo behavior of dosage forms better than traditional empirical methods. The company has a research collaboration agreement with the FDA to enhance the Ocular Compartmental Absorption and Transit model within the Additional Dosing Routes Module of GastroPlus to provide a tool for generic companies and the FDA to assess the likely bioequivalence of generic drug formulations dosed to the eye. In 1Q16 SLP entered into a research collaboration agreement with the FDA to expand the capabilities of GastroPlus to simulate the dosing of long-acting injectable microspheres. Simulations Plus will work on expanding its software and service offering. The FDA and other regulatory agencies have an interest in bringing physiologically based pharmacokinetics (a core strength of Simulations Plus) into clinical pharmacology (a core strength of Cognigen – acquired in FY15). This acquisition will enable the combined entities to offer a model-based drug development simulation and consulting tool platform. Competitive Landscape Pharmaceutical companies conduct drug discovery and development efforts through internal development staffs and by outsourcing some of this work. Smaller companies need to outsource a greater percentage of this research. SLP also competes with the in-house development teams at some pharmaceutical companies. According to IBISWorld Pharmaceutical Manufacturing report (November 2016) healthcare reform has established a regulatory pathway for generic biologic drugs, or biosimilars, which is changing the industry landscape. This change has resulted in brand name pharmaceutical manufacturers moving toward including biologic and biosimilar production in their product portfolio. Drug makers have turned to innovative drug treatments that serve an unmet need in order to get regulatory approval. In 2015, the FDA approved 45 novel drugs, four more than in 2014 and the most since the all-time record of 53 set in 1996. In 2016 FDA approvals fell to 22, the lowest number since 2010. The low number in 2016 is due to five new drugs winning an early approval at the end of 2015, a decline in drugs being filed for approval, and the FDA rejected or delayed more applications than in the previous two years. The company’s pharmaceutical software and services business competes against companies that provide more extensive and higher cost screening, testing, and research services, and products that are not based on simulation software. There are also software companies whose products do not compete directly, but are related. We are unable to find other companies that might pose a competitive threat to GastroPlus, DDDPlus, and/or MembranePlus. Those simulated software offerings appear to be unique. ADMET Predictor/ADMET Modeler



operates in a more competitive environment; however, independently published product comparisons have been very favorable, with ADMET Predictor consistently ranked first in predictive accuracy. Risks Technology The software industry is highly competitive and changes rapidly. The company's operating results could be significantly affected by its ability to maintain and increase acceptance of its products. Shareholder Control Walter Woltosz, co-founder, chairman of the board, president, and CEO, and Virginia Woltosz, co-founder, corporate secretary, and treasurer, owns 33.7% of the outstanding voting stock (based on SEC filing in December 2016). Walter and Virginia Woltosz might greatly influence the outcome on all matters requiring stockholder approval in ways that may not be in the best interests of the other shareholders. Intellectual Property Rights Third parties may infringe on or misappropriate IP rights, or otherwise independently develop substantially equivalent products and/or services. The loss of intellectual property protection or the inability to secure or enforce intellectual property protection could harm its business and/or ability to compete. Foreign Exchange While nearly all of SLP’s transactions are denominated in US dollars, approximately 17.2% of sales are to Asian customers. In Japan and China the company receives payment in Yen and Yuan, respectively. If foreign currency transactions increase significantly, the company may engage in hedging in order to mitigate risk. So far exchange rate exposure has had no material impact. Internal Controls As of November 30, 2016 (latest available) the company’s disclosure controls and procedures were not effective at the reasonable assurance level due to material weaknesses in internal control over financial reporting. SLP is takings measures to remediate the underlying causes of the material weaknesses related to its information technology, which will include enhancing internal documentation and monitoring approach to ensure procedures are in place to restrict access to applications and data to the appropriate internal personnel. Management implemented the majority of the remedial and expects that all steps will be substantially implemented and tested by February 28, 2017. Legal In June 2014, SLP was served with a civil action alleging wrongful death and seeking unspecified damages arising out of a 2012 plane crash in Nevada. In November 2014 a stipulation of dismissal was signed and as long as the plaintiff does not discover evidence by August 31, 2015 to bring back the litigation. SLP has not received notification of discovery and has prepared documents for the plaintiff’s final dismissal with prejudice. Miscellaneous Risk The company’s financial results are subject to other risks and uncertainties including competition, operations, financial markets, regulatory risk, and/or other events. These risks may cause actual results to differ from expected results. Trading Volume Liquidity is a potential concern. Based on our calculations, the average daily-volume during calendar 2014 was 21,902 a day. In 2015, average daily volume increased to 34,089, and over the last three months (ending January 12, 2017) was 32,887. SLP has 17.2 million shares outstanding and a float of approximately 11 million, so investor should by aware that a thinly traded equity could experience price volatility.

Simulations Plus, Inc. Consolidated Balance Sheets

FY2014 –FY2018E (in thousands)


Source: Company reports and Taglich Brothers estimates

Simulations Plus, Inc. Annual Income Statement Model

FY2014 – 2018E (in thousands)



Simulations Plus, Inc. Quarterly Income Statement Model

FY2016 to 2018E (in thousands)



Simulations Plus, Inc. Cash Flow Statement FY2014 – FY2018E

(in thousands)





Price Chart

Taglich Brothers Current Ratings Distribution

Investment Banking Services for Companies Covered in the Past 12 Months Rating # % Buy 3 12 Hold 1 100 Sell Not Rated



Important Disclosures

As of the date of this report, we, our affiliates, any officer, director or stockholder, or any member of their families do not have a position in the stock of the company mentioned in this report. Taglich Brothers, Inc. does not currently have an Investment Banking relationship with the company mentioned in this report and was not a manager or co-manager of any offering for the company within the last three years. All research issued by Taglich Brothers, Inc. is based on public information. The company paid for the first year of distribution a fee of $21,000 (USD) on May 2004, and since August 2005 continues to pay a monthly monetary fee of $1,750 (USD) to Taglich Brothers, Inc. for the creation and dissemination of research reports.

General Disclosures

The information and statistical data contained herein have been obtained from sources, which we believe to be reliable but in no way are warranted by us as to accuracy or completeness. We do not undertake to advise you as to changes in figures or our views. This is not a solicitation of any order to buy or sell. Taglich Brothers, Inc. is fully disclosed with its clearing firm, Pershing, LLC, is not a market maker and does not sell to or buy from customers on a principal basis. The above statement is the opinion of Taglich Brothers, Inc. and is not a guarantee that the target price for the stock will be met or that predicted business results for the company will occur. There may be instances when fundamental, technical and quantitative opinions contained in this report are not in concert. We, our affiliates, any officer, director or stockholder or any member of their families may from time to time purchase or sell any of the above-mentioned or related securities. Analysts and members of the Research Department are prohibited from buying or selling securities issued by the companies that Taglich Brothers, Inc. has a research relationship with, except if ownership of such securities was prior to the start of such relationship, then an Analyst or member of the Research Department may sell such securities after obtaining expressed written permission from Compliance.

Analyst Certification

I, Howard Halpern, the research analyst of this report, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities and issuers; and that no part of my compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report.

Public Companies mentioned in this report:

None



Meaning of Ratings Buy – The growth prospects, degree of investment risk, and valuation make the stock attractive relative to the general market or comparable stocks. Speculative Buy – Long-term prospects of the company are promising but investment risk is significantly higher than it is in our BUY-rated stocks. Risk-reward considerations justify purchase mainly by high risk-tolerant accounts. In the short run, the stock may be subject to high volatility and could continue to trade at a discount to its market. Neutral – Based on our outlook the stock is adequately valued. If investment risks are within acceptable parameters, this equity could remain a holding if already owned. Sell – Based on our outlook the stock is significantly overvalued. A weak company or sector outlook and a high degree of investment risk make it likely that the stock will underperform relative to the general market. Dropping Coverage – Research coverage discontinued due to the acquisition of the company, termination of research services, non-payment for such services, diminished investor interest, or departure of the analyst. Some notable Risks within the Microcap Market Stocks in the Microcap segment of the market have many risks that are not as prevalent in Large-cap, Blue Chips or even Small-cap stocks. Often it is these risks that cause Microcap stocks to trade at discounts to their peers. The most common of these risks is liquidity risk, which is typically caused by small trading floats and very low trading volume which can lead to large spreads and high volatility in stock price. In addition, Microcaps tend to have significant company-specific risks that contribute to lower valuations. Investors need to be aware of the higher probability of financial default and higher degree of financial distress inherent in the microcap segment of the market.

From time to time our analysts may choose to withhold or suspend a rating on a company. We continue to publish informational reports on such companies; however, they have no ratings or price targets. In general, we will not rate any company that has too much business or financial uncertainty for our analysts to form an investment conclusion, or that is currently in the process of being acquired.

Update - Taglich Brothers | Brokerage Firm | MicroCap Market · The biosimulation (model-based...

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