Business context and reporting period
Simulations Plus, Inc. filed this unaudited Form 10-Q for the quarter and six months ended February 28, 2013, its fiscal second quarter and first half of fiscal 2013. Its continuing business develops pharmaceutical research software and provides related consulting and contract research services; its former Words+ subsidiary was sold in November 2011 and is reported as discontinued operations.
Financial performance and liquidity
| Metric | Three months ended February 28, 2013 | Six months ended February 28, 2013 |
|---|---|---|
| Net sales | $3.118 million | $5.408 million |
| Gross profit / margin | $2.619 million / 84.0% | $4.523 million / 83.6% |
| Operating income / margin | $1.517 million / 48.7% | $2.309 million / 42.7% |
| Net income | $1.062 million | $1.649 million |
| Diluted EPS | $0.06 | $0.10 |
First-half operating cash flow was $584,127, versus $2.164 million from continuing operations in the prior-year period. Investing activities used $589,760, including $582,080 of capitalized software development costs. Financing activities used $2.941 million, primarily reflecting $3.039 million of dividends. Cash fell to $9.755 million at February 28, from $12.701 million at August 31, 2012.
Total assets were $15.642 million and shareholders’ equity was $13.921 million. Current assets were $12.759 million versus current liabilities of $844,000. The balance sheet reports no debt; total liabilities were $1.721 million, including $877,000 of long-term deferred income taxes. The company reported no interest expense for the six-month period.
Changes versus prior comparable periods
- Quarterly sales rose 11.8% year over year; management attributed approximately $248,000 of growth to software and $81,000 to services. Net income increased 26.6%.
- Quarterly gross margin declined to 84.0% from 85.8%, as cost of sales grew faster than sales. Management cited higher software amortization, royalties, and workshop and training costs. Operating expenses fell 9.7%, with lower SG&A and R&D expense.
- First-half sales increased 7.4%; management attributed approximately $187,000 to software sales and $184,000 to services. Continuing-operations income rose 3.4% to $1.649 million.
- First-half net income declined from $1.810 million to $1.649 million because the prior-year comparison included $215,922 of discontinued-operations results, including a $465,820 after-tax gain on the Words+ sale. The current period had no discontinued-operations income.
- First-half cash from operations was substantially lower, reflecting working-capital movements, including increased receivables and lower accrued income taxes, as well as the prior period’s discontinued operations.
Outlook, commentary, and risks
Management said existing capital and anticipated operating cash flows should meet working-capital and capital expenditure needs for the foreseeable future. It gave no quantified revenue or earnings guidance. It expected releases of ADMET Predictor 6.2, MedChem Studio 3.1, and GastroPlus 8.5 during the third fiscal quarter, and planned to continue seeking suitable acquisitions, with no suitable transaction identified to date.
Management reported promising activity in its malaria drug-design demonstration project, but said further work depended on obtaining outside funding. It also noted that pharmaceutical-industry consolidation and downsizing could affect future revenue and earnings, and that software competition and rapid technological change create risk. International sales represented 53% of first-half revenue; two customers each represented 11% and 10% of sales. Foreign exchange exposure had not been material to date.
The California tax authority’s audit had expanded to fiscal 2009 and 2010 and included review of earlier R&D credits; the IRS completed its examination of the 2007 filing, reducing the refund by $36,868. The filing reports no pending litigation. PRC gave notice in February 2013 that it was cancelling the month-to-month Words+ sublease following Words+’s closure. Management concluded disclosure controls were effective and reported no material quarterly change in internal controls over financial reporting.
Most important facts to verify
- Whether revenue growth and the company’s planned product releases translate into sustained sales and margins, given rising royalties and software amortization.
- Cash conversion and working-capital trends: first-half operating cash flow was $584,127 despite $1.649 million of net income.
- Dividend policy and cash needs: the company paid $3.039 million in dividends during the half, including an accelerated $0.14-per-share distribution.
- Outcomes of the state tax audit and any effect on tax assets, liabilities, or cash refunds.
- Customer and geographic concentration, pharmaceutical-sector consolidation, and progress in securing funding for the NCE project.