Simulations Plus, Inc. — Q3 FY2016 Form 10-Q
Reporting period: Quarter and nine months ended May 31, 2016; interim financial statements are unaudited. Simulations Plus develops pharmaceutical simulation and modeling software and provides pharmaceutical consulting services through its Lancaster and Buffalo divisions.
Financial performance
| Metric | Three months ended May 31, 2016 | Nine months ended May 31, 2016 |
|---|---|---|
| Revenue | $6.012 million, up 1.2% year over year | $16.015 million, up 9.7% |
| Gross profit / margin | $4.817 million / 80.1% (prior year: $4.809 million / 80.9%) | $12.473 million / 77.9% (prior year: $11.294 million / 77.3%) |
| Operating income | $2.788 million (prior year: $2.854 million) | $6.232 million (prior year: $5.078 million) |
| Net income | $1.909 million, up 3.1%; diluted EPS $0.11 | $4.161 million, up 24.2%; diluted EPS $0.24 |
| Operating cash flow | Not provided for the quarter | $2.749 million (prior year: $3.943 million) |
For the quarter, Lancaster revenue rose 2.7%, while Buffalo revenue fell 3.8%; management attributed Buffalo’s weakness to consulting contract cancellations following drug trial failures and sponsor trial delays. For the nine-month period, software and related sales increased 8.9%, and consulting and analytical study revenue increased 11.5%.
Cash, liquidity and obligations
- At May 31, cash and cash equivalents were $7.280 million, down $1.272 million from August 31, 2015. Total assets were $28.798 million; shareholders’ equity was $21.506 million.
- Current assets were $13.589 million and current liabilities $4.028 million. The company reported no interest expense or long-term contracts payable at period-end.
- Current contracts payable totaled $2.854 million: $1.000 million due to TSRL and $1.854 million related to the Cognigen acquisition, both due in 2017. The Cognigen payment includes cash and stock consideration.
- Operating cash flow was reduced by a $2.989 million increase in accounts receivable. Investing used $0.848 million, mainly for capitalized software development. Financing used $3.172 million, including $2.552 million in dividends and $0.750 million in contract-payable payments.
Changes, outlook and risks
- Nine-month operating performance improved, with revenue growth and lower SG&A. The comparison benefited from approximately $400,000 of Cognigen-acquisition advisory costs incurred in the prior-year period. Research and development expense rose to $1.161 million from $0.982 million; $0.816 million of software development costs was capitalized.
- Management said existing capital and anticipated operating cash flows should cover working capital and capital expenditure needs for the foreseeable future. No specific revenue or earnings guidance was provided. Management anticipated quarterly dividends of $0.05 per share, subject to future board approval.
- Management expected GastroPlus 9.5, PKPlus, and ADMET Predictor 8.0 releases in FY2016’s fourth quarter. The company had submitted proposals for two FDA projects and anticipated award decisions by September; awards were uncertain.
- Key risks include pharmaceutical-industry consolidation, competition, product-development and commercialization uncertainty, and dependence on customers’ drug-development programs. International sales were 43.8% of nine-month revenue, versus 39.5% a year earlier; four customers represented 24% of current-period sales. Two customers represented 26% of period-end receivables.
- The IRS was auditing the company’s 2014 tax return; management did not expect a significant financial impact. In a wrongful-death action, the company had been dismissed without prejudice and was preparing documentation for final dismissal with prejudice. Management reported disclosure controls were effective and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether Buffalo consulting demand and the associated cancellations and trial delays persist, and whether software growth can offset that weakness.
- Collection timing for the sharply higher accounts receivable balance and its effect on operating cash flow.
- Whether expected software releases and potential FDA awards occur on the stated timetable and generate meaningful revenue.
- The timing and form of the $2.854 million in 2017 contractual payments, and the board’s decisions on future dividends.
- Updates on the IRS audit, the pending final litigation dismissal, and customer and international revenue concentrations.