Simulations Plus, Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended August 31, 2013. The filing is annual, not a standalone Q4 report; it reports fourth-quarter sales for June–August. Simulations Plus develops pharmaceutical research software and provides consulting and contract research services. Words+ was sold in 2011 and is reported as discontinued operations.
Financial performance and liquidity
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net sales | $10.071 million | $9.449 million |
| Gross profit / margin | $8.424 million / 83.6% | $7.938 million / 84.0% |
| Operating income / margin | $4.072 million / 40.4% | $3.612 million / 38.2% |
| Income from continuing operations, per statements of operations | $2.887 million / 28.7% | $2.812 million / 29.8% |
| Net income | $2.887 million | $3.028 million, including discontinued operations |
| Operating cash flow | $2.562 million | $3.784 million |
| Cash and cash equivalents at year-end | $10.179 million | $12.701 million |
Revenue grew 6.6%. Software sales increased about $254,000, while funded collaborations and analytical studies increased about $368,000. Cost of sales rose 9.0%, slightly reducing gross margin; lower expensed R&D helped operating margin improve. SG&A rose 5.0%, while total R&D spending rose 1.3% to $1.931 million, of which $1.129 million was capitalized.
Cash declined by $2.522 million, principally reflecting $4.001 million of dividends, partly offset by operating cash generation. The company reported no debt, current assets of $12.972 million and current liabilities of $626,000. It said operating cash flow and existing capital should cover foreseeable working-capital and capital-expenditure needs. No material capital-expenditure commitments were reported.
Fourth-quarter sales were $1.568 million, versus $1.640 million in FY2012 Q4. Management said Q4 is typically the company’s weakest quarter because of summer vacations and reduced customer activity.
Material changes and business developments
- Revenue increased 6.6%; operating income increased 12.7%, while income from continuing operations in the audited statement increased about 2.7%.
- Operating cash flow fell from $3.784 million to $2.562 million. The company attributed cash-flow variability in part to working-capital movements and FY2012 proceeds from the Words+ sale.
- FY2013 dividends totaled $4.001 million, compared with $2.383 million in FY2012. The December 2012 payment was accelerated for shareholder tax considerations; May and August payments were increased to $0.03 per share.
- International sales were 48% of revenue, compared with 49% in FY2012. Asia revenue increased to $1.882 million from $1.633 million; management reported a 27% increase in license revenue in selected Asian territories.
Outlook, risks and unusual items
Management planned to continue product development, collaborations, marketing, consulting, and acquisition efforts. MembranePlus was nearing release, with version 1.0 planned by March 2014; ADMET Predictor version 7.0 was expected before the end of calendar 2013. These are stated plans, not financial guidance; the filing gives no numerical revenue or earnings forecast. Management said acquisition efforts had not produced a completed deal and sought acquisitions it expected to be immediately accretive.
Key risks include pharmaceutical-industry consolidation and customer downsizing, competition, dependence on successful product development and market adoption, and the ability to attract and retain specialized employees. Two customers (one dealer representing multiple customers) accounted for 9% and 6% of FY2013 sales; two customers accounted for 27% and 22% of year-end receivables. Cash balances at banks often exceeded FDIC-insured limits. Capitalized software development costs were $2.891 million net, and management’s estimates of recoverability depend on future revenues and product life.
The company disclosed $1.024 million of future minimum operating lease payments, no pending litigation, and no off-balance-sheet arrangements. It said disclosure controls and internal control over financial reporting were effective at year-end. A subsequent-event dividend of $0.04 per share was declared for November 2013; the board reserved the right to discontinue future dividends.
Important reporting inconsistency: The MD&A highlights say continuing-operations income was $3.141 million, while the audited statements of operations report $2.887 million. The EPS note also gives $3.141 million as its numerator, although the reported $0.18 EPS appears consistent with the lower statement amount. The filing text does not reconcile these figures.
Important facts for investors to verify
- Reconcile the $3.141 million continuing-income/EPS-note figure with audited net income of $2.887 million and reported EPS of $0.18.
- Review the decline in operating cash flow and the cash impact and sustainability of dividends.
- Assess customer and receivables concentration, international exposure, and cash held above insured limits.
- Track MembranePlus launch timing, product adoption, collaboration revenue, and the recoverability of capitalized software costs.
- Confirm whether acquisition plans, lease obligations, and the board’s discretionary dividend policy change after the reporting date.