Simulations Plus, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended February 29, 2016. The interim financial statements are unaudited; comparisons are with the corresponding periods ended February 28, 2015.
Business context
Simulations Plus develops pharmaceutical simulation and modeling software and provides consulting and contract research services. Its Lancaster division primarily delivers software and related services; its Buffalo division (Cognigen) provides consulting and analytical study services. The company also described exploring applications in aerospace and healthcare beyond its traditional markets.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Revenue | $5.164 million, up 12.9% | $10.002 million, up 15.5% |
| Gross profit / margin | $3.900 million / 75.5% | $7.655 million / 76.5% |
| Operating income / margin | $1.716 million / 33.2% | $3.443 million / 34.4% |
| Net income | $1.145 million, up 18.0% | $2.252 million, up 50.2% |
| Diluted EPS | $0.07, versus $0.06 | $0.13, versus $0.09 |
| Operating cash flow | $652,412 for six months, versus $1.808 million |
Quarterly software and software-related sales increased 14.8%; consulting and analytical study revenue increased 9.1%. For the six months, these categories rose 13.5% and 19.8%, respectively. International sales were 42.6% of six-month revenue, compared with 39.8% a year earlier.
Liquidity, liabilities and cash flow
At February 29, 2016, cash was $7.063 million, down from $8.551 million at August 31, 2015. Current assets were $12.514 million and current liabilities $3.537 million (approximately 3.5 times current-liability coverage). Total assets were $27.903 million; shareholders’ equity was $20.311 million.
Cash from operations declined despite higher earnings, principally alongside a $2.214 million increase in accounts receivable. Investing used $548,000, including $545,000 of capitalized software development costs. Financing used $1.593 million, including $1.701 million in dividends; ending cash was $7.063 million.
The filing reports no conventional bank borrowing. Contractual payments payable totaled $3.604 million: $2.604 million current and $1.000 million long-term. The current amount includes payments related to the TSRL agreement and the Cognigen acquisition.
Material changes and management commentary
- Six-month revenue increased $1.342 million. Management attributed growth to both divisions, including increased software sales and consulting work.
- Six-month gross margin improved to 76.5% from 74.9%. Operating expenses declined modestly overall: lower SG&A, including the absence of approximately $400,000 in prior-year Cognigen acquisition advisory costs, was partly offset by higher R&D spending.
- R&D expense was $813,000 for six months, while $545,000 of software development costs was capitalized. Management said it expected GastroPlus 9.5 before fiscal year-end and expected DDDPlus 5.0 and ADMET Predictor 8.0 in the third fiscal quarter. PKPlus was also nearing completion, with release and early sales anticipated in that quarter.
- Management said existing capital and anticipated operating funds should meet working-capital and capital-expenditure needs for the foreseeable future. It anticipated dividends of $0.05 per share per quarter, subject to board approval; two such dividends totaling $1.701 million were paid in the six-month period.
Risks, contingencies and unusual items
- Management identified rapid technological change and competition, dependence on pharmaceutical and biotechnology customers, and possible industry consolidation or downsizing as business risks. Three customers represented 10%, 6% and 6% of six-month sales; two customers represented 12% and 11% of receivables at period-end.
- An IRS audit of the company’s 2014 tax return began in October 2015 and remained incomplete. Management did not expect a significant effect on financial position or results, but tax returns for multiple years and jurisdictions remain open to examination.
- A wrongful-death lawsuit naming the company in connection with a 2012 aircraft accident had been dismissed without prejudice. The company reported no notice of new evidence and said it was preparing documents for final dismissal with prejudice.
- Foreign-exchange exposure had not been material to date, according to management. The company reported a six-month currency-exchange loss of $43,224.
- Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether receivables convert to cash and operating cash flow recovers; receivables rose to $3.808 million from $1.594 million at August 31, 2015.
- Progress and commercial uptake of the planned product releases, particularly PKPlus and the cited third-quarter software updates.
- Timing and funding of the $2.604 million current contractual payments, alongside continued dividend distributions and investment in software development.
- Outcome of the IRS audit, final status of the lawsuit dismissal, and customer and international-sales concentration.
- The filing provides no quantified full-year revenue or earnings guidance; management’s product timing and dividend comments are expectations, not guarantees.