Business context and reporting period
Simulations Plus, Inc. develops pharmaceutical research software and provides contract research services. This unaudited Form 10-Q covers the quarter and nine months ended May 31, 2014 (fiscal 2014 Q3), compared with the corresponding 2013 periods.
Financial results and position
| Metric | Three months ended May 31 | Nine months ended May 31 |
|---|---|---|
| Net sales | $3.741 million, up 20.9% from $3.095 million | $9.463 million, up 11.3% from $8.503 million |
| Gross profit / margin | $3.513 million / 93.9%; prior year $2.643 million / 85.4% | $8.295 million / 87.6%; prior year $7.165 million / 84.3% |
| Operating income / margin | $2.074 million / 55.4%; prior year $1.533 million / 49.5% | $4.165 million / 44.0%; prior year $3.841 million / 45.2% |
| Net income | $1.308 million, up 31.6% from $0.993 million; diluted EPS $0.08 vs. $0.06 | $2.803 million, up 6.1% from $2.642 million; diluted EPS $0.17 vs. $0.16 |
| Operating cash flow | Not presented separately for the quarter | $3.335 million vs. $1.579 million |
At May 31, cash was $7.758 million, down from $10.179 million at August 31, 2013. Current assets were $12.385 million and current liabilities $1.621 million. The company reported no interest expense; the main payment obligation was the non-interest-bearing TSRL contract payable of $2.5 million, of which $750,000 was current and $1.75 million long term. Shareholders’ equity was $15.965 million.
Nine-month investing cash outflow was $3.573 million, including $2.5 million cash paid for acquired intellectual property and $1.052 million of capitalized software development. Financing cash outflow was $2.183 million, principally $2.259 million of dividends, partly offset by $75,000 from option exercises.
Material changes and unusual items
- Software sales drove growth: up about $692,000 in Q3 and $1.204 million for the nine-month period. Q3 included approximately $300,000 from a major customer moving its global renewal order into the quarter; management said it expected that customer’s renewal timing to remain in Q3 going forward.
- On May 15, 2014, the company acquired TSRL intellectual property for $6 million, ending the related royalty arrangement. It paid $2.5 million cash and issued 164,745 shares valued at $1 million; the remaining $2.5 million is due through 2017. Management expects fixed amortization of $150,000 per quarter once fully applicable. The agreement reduced royalty costs, while the acquisition increased assets and liabilities.
- Q3 SG&A rose 33.3% to $1.204 million, including higher commissions, marketing and travel, consulting, and professional fees. Nine-month R&D spending was $1.803 million, of which $1.052 million was capitalized; total R&D expenditures rose 22.8% year over year.
- International sales represented 53% of nine-month revenue, versus 42% a year earlier. Three customers accounted for 28% of revenue in the period; three customers represented 51% of receivables at May 31.
Outlook, commentary, and risks
Management said existing capital and anticipated operating cash flows should cover working capital and capital expenditures for the foreseeable future. It gave no numerical earnings or revenue guidance. The company planned to release MembranePlus 1.0 and GastroPlus 8.6 in fiscal Q4, and expected ADMET Predictor 7.1 during that quarter. A GastroPlus 9.0 release was in development.
Management anticipated a $0.05-per-share quarterly dividend, subject to board approval; it cautioned that dividends could be changed or discontinued. Risks discussed include rapid competition and technology change, dependence on pharmaceutical customers and industry consolidation, customer and receivables concentration, international sales and currency exposure, and reliance on continued product development. Management reported disclosure controls were effective and no material quarterly change in internal controls.
A lawsuit served around June 26, 2014 alleges wrongful death and seeks unspecified damages relating to a 2012 plane crash, asserting the company owned the aircraft. The company denied the allegations, including aircraft ownership, and said it would vigorously defend itself. Management did not expect the separate litigation referenced in the notes to materially affect financial position.
Investor facts to verify
- Whether the Q3 renewal-order timing shift and the major customer’s expected future renewal timing persist.
- The realized impact of ending TSRL royalties versus the scheduled $2.5 million remaining payments and quarterly amortization.
- Cash conversion and receivables collection, given the increase in receivables and significant customer concentration.
- Delivery and commercial uptake of planned product releases, and the sustainability of higher software sales and gross margins.
- Developments in the newly disclosed lawsuit and any effect on the company.
- Future dividend declarations and the board’s ability to adjust or discontinue distributions.