Simulations Plus, Inc. — Q1 FY2014 10-Q
Reporting period: Three months ended November 30, 2013; unaudited. Comparisons are with the three months ended November 30, 2012 unless otherwise noted. The company develops pharmaceutical and research software and provides contract research services.
Key financial results
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Net sales | $2.641 million | $2.290 million | +15.3% |
| Gross profit / margin | $2.193 million / 83.0% | $1.903 million / 83.1% | +15.2% profit |
| Operating income / margin | $959,373 / 36.3% | $791,829 / 34.6% | +21.2% income |
| Net income / margin | $685,155 / 25.9% | $586,986 / 25.6% | +16.7% |
| Diluted EPS | $0.04 | $0.04 | No change at reported precision |
| Operating cash flow | $1.351 million | $(262,000) | Improved |
| Cash and cash equivalents | $10.555 million | $11.379 million at Nov. 30, 2012 | Lower year over year |
Cash increased $375,409 from August 31, 2013. Investing activities used $383,047, including $373,204 of capitalized software development costs; financing activities used $592,611, primarily for a $642,956 dividend, partly offset by $50,345 from option exercises. Current assets were $13.136 million and current liabilities $791,125 at November 30, 2013. The filing reports no borrowings or debt balance. Total liabilities were $2.055 million, including $1.220 million of long-term deferred income taxes.
Material changes and management commentary
- Management attributed the $351,000 sales increase primarily to approximately $435,000 higher software-license revenue. Analytical-study revenue increased $53,000; study and collaboration revenue declined $58,000, and training revenue declined $26,000.
- SG&A increased 15.0% to $1.071 million, with higher commissions, salaries, trade-show, marketing and travel costs partly offset by lower acquisition-consultant fees and advertising. R&D expense fell to $162,116, but total R&D spending rose 19.2% to approximately $535,000; $373,204 was capitalized.
- Other income fell to $32,735 from $103,786, mainly due to lower interest income and foreign-exchange gains. The effective tax rate decreased to approximately 31% from 34%, which management attributed to higher permanent R&D and other tax deductions.
- International sales represented 52% of revenue, versus 55% a year earlier. Four customers accounted for 53% of current-quarter sales, including a Japanese dealer representing multiple customers.
Outlook, risks and other notable items
- No quantified revenue or earnings guidance was provided. Management said existing capital and expected operating cash flows should fund working capital and capital expenditures for the foreseeable future.
- Management anticipated a $0.05-per-share quarterly dividend going forward, but emphasized that each payment requires board approval and may change or be discontinued. The November 2013 quarter included a $0.04-per-share dividend.
- Product plans included ADMET Predictor 7.0, expected early in calendar 2014; MembranePlus 1.0, planned by March 2014; and further GastroPlus releases. These are plans, not guarantees.
- The company continued to seek acquisitions, but stated it had not identified suitable targets. It highlighted competition and rapid technology change, dependence on pharmaceutical customers, possible effects of industry consolidation, and customer/revenue concentration. Foreign-exchange exposure had not had a material impact to date.
- The company reported no pending litigation. Disclosure controls were assessed as effective, and no material changes to internal control over financial reporting were reported. A proposed increase of 1,000,000 shares in the 2007 stock-option plan was subject to shareholder approval at the meeting scheduled for February 25, 2014.
Investor facts to verify
- Whether license-sales growth and planned product releases translate into sustained revenue and earnings growth.
- The amount and recoverability of capitalized software development costs, which increased to $3.073 million net.
- Customer concentration, international sales exposure, and the effects of pharmaceutical-industry consolidation.
- Whether the anticipated quarterly dividend is approved and maintained, and whether shareholders approve the proposed option-plan expansion.
- That the strong quarter’s operating cash flow is repeatable; the prior-year comparison was negative, and cash flows can be affected by working-capital and tax-payment timing.