Simulations Plus, Inc. — Q3 FY2013 Form 10-Q
Reporting period: Quarter and nine months ended May 31, 2013. The interim financial statements are unaudited. Simulations Plus develops pharmaceutical research software and provides related consulting and contract research services. Its former Words+ business was sold in November 2011 and is reported as discontinued operations.
Financial performance and position
- Q3 revenue: $3.095 million, up 11.7% year over year. Management attributed the increase to approximately $150,000 more software sales and $173,000 more services revenue.
- Q3 gross profit: $2.643 million; gross margin was 85.4%, versus 84.2% a year earlier. Operating income was $1.533 million, versus $1.214 million.
- Q3 net income: The condensed statement of operations reports $993,230, versus $869,333. However, the MD&A reports $1.013 million and gives a different tax provision; the filing does not reconcile this discrepancy. Statement-reported diluted EPS was $0.06, versus $0.05.
- Nine-month revenue: $8.503 million, up 8.9%. Gross profit was $7.165 million and gross margin was 84.3%, compared with 84.8% a year earlier. Operating income was $3.841 million, versus $3.330 million.
- Nine-month net income: $2.642 million, versus $2.679 million. The prior-year figure included a $465,820 after-tax gain on the Words+ sale and a $249,898 discontinued-operations loss. Nine-month diluted EPS was $0.16 in both periods.
- Cash flow: Nine-month operating cash flow was $1.579 million, down from $2.905 million, including prior-year discontinued operations. Investing used $853,224, including $833,965 of capitalized software development costs. Financing used $3.421 million, primarily reflecting $3.520 million of dividends.
- Liquidity and debt: Cash was $10.005 million at May 31, down from $12.701 million at August 31, 2012. Current assets were $13.442 million and current liabilities $1.030 million. No debt is presented on the balance sheet; interest expense was zero for the nine-month period.
Changes, outlook, and risks
- Q3 operating expenses were nearly flat year over year; nine-month SG&A rose 5.6%, while R&D expense fell 14.8%. Management said total nine-month R&D spending, including capitalized costs, was approximately flat.
- International sales represented 42% of nine-month revenue, down from 48%. Three customers accounted for 23% of revenue in the period; three customers made up 35% of period-end receivables.
- No quantified financial guidance was provided. Management expected to release MembranePlus around the November 2013 AAPS conference and GastroPlus 8.5 and MedChem Studio 3.5 in fiscal Q4. ADMET Predictor 6.5 was released in June 2013, after quarter-end.
- Management cited pharmaceutical-industry consolidation and downsizing as risks to growth, alongside competition, rapid technology change, customer concentration, and foreign-exchange exposure. The company said existing capital and anticipated operating funds should cover foreseeable working-capital and capital-expenditure needs; future financing availability is not assured.
- The board said quarterly dividends were currently expected to continue but reserved the right to discontinue them. A May 2013 lease amendment provides three months of free base rent and extends the lease through February 2017, with extension options. Words+’s sublease ended after the new owner gave notice in February 2013.
- The company reported no pending litigation. Tax matters include IRS examination activity and California tax years that may be audited in the future; the California FTB said in May 2013 it would not audit the specified years at that time, subject to possible future review.
Important facts for investors to verify
- Reconcile the Q3 net-income and income-tax figures in the financial statements against the MD&A.
- Assess whether higher receivables and lower operating cash flow reflect timing or a lasting change in collections and cash conversion.
- Track delivery and commercial impact of the announced software releases and the company’s plans to seek outside funding for its drug-design research.
- Review dividend sustainability, lease costs after the free-rent period, and any material developments in tax examinations.