Simulations Plus, Inc. — Q1 FY2013 Form 10-Q
Reporting period: Three months ended November 30, 2012; comparative period is the three months ended November 30, 2011. The company’s business is pharmaceutical software and contract research. Words+, its former assistive-technology subsidiary, was sold on November 30, 2011 and is reported as discontinued operations.
Financial highlights
| Metric | Q1 FY2013 | Q1 FY2012 | Change / context |
|---|---|---|---|
| Net sales | $2.290 million | $2.248 million | Up 1.9%; services revenue rose about $103,000, offsetting a $61,000 decline in software licenses. |
| Gross profit / margin | $1.903 million / 83.1% | $1.896 million / 84.3% | Gross profit up 0.4%; margin narrowed. |
| Operating income / margin | $792,000 / 34.6% | $944,000 / 42.0% | Operating income declined as operating expenses increased. |
| Continuing-operations net income | $587,000 | $755,000 | Down 22.3%; diluted and basic EPS were $0.04 versus $0.05. |
| Net income | $587,000 | $971,000 | Prior-year result included $216,000 of net discontinued-operations income, including a $466,000 after-tax gain on the Words+ sale offset by a $250,000 discontinued-operations loss. |
| Operating cash flow | $(262,000) | $1.479 million | Negative this quarter, including cash tax payments and increased receivables. |
| Cash and cash equivalents | $11.379 million | $12.701 million at August 31, 2012 | Declined $1.322 million during the quarter. |
| Total assets / liabilities | $16.530 million / $1.559 million | $17.347 million / $2.204 million at August 31, 2012 | Liabilities were primarily current operating liabilities and deferred income taxes. |
Capitalized software development costs were $262,000 for the quarter, compared with $202,000 in the prior-year quarter. Research and development spending, including capitalized costs, increased 50% to approximately $442,000. The filing reports no interest expense for Q1 FY2013 and no borrowings or debt balance; it does not describe a credit facility as currently drawn.
Changes and management commentary
- Software-license revenue was unusually low, which management attributed partly to the announced closure of a Roche facility in New Jersey and a customer merger. Increased collaboration and analytical-services revenue more than offset the decline.
- Operating expenses rose to $1.111 million from $952,000. SG&A increased 8.3%, with dealer commissions and the presentation of consulting fees associated with the Words+ sale contributing to the increase. R&D expense rose to $180,000 from $92,000.
- Cost of sales increased 9.8%, faster than revenue, and gross margin declined to 83.1% from 84.3%. Management cited higher software amortization and workshop costs, among other factors.
- Other income declined to $104,000 from $120,000, reflecting lower interest income and currency gains. The effective tax rate was approximately 34%, versus 29%, partly because Q1 FY2013 had no tax deduction for stock-option exercises.
Outlook, risks, and unusual items
- No formal revenue or earnings guidance is provided. Management said it expected GastroPlus version 8.5 to be released in early 2013 and continued to seek acquisition opportunities. Management stated that cash and expected operating funds should meet foreseeable working-capital and capital-expenditure needs, while noting that future financing, if required, might not be available on acceptable terms.
- The board declared a regular $0.05-per-share dividend in November. After quarter-end, it declared an accelerated $0.14-per-share dividend, distributed December 28, 2012. Management anticipated—but did not guarantee—additional dividends of $0.02 per share in each of the remaining three fiscal quarters; future distributions require board approval.
- International sales were 55% of quarterly revenue, versus 41% a year earlier. Four customers accounted for 56% of Q1 FY2013 sales; the filing identifies one as a Japanese dealer representing multiple customers. Management warned that pharmaceutical-industry consolidation and downsizing could affect future revenue and earnings.
- California tax examinations cover fiscal 2009 and 2010, with a review of certain carried-forward R&D credits. The IRS completed its 2007 examination, reducing the expected refund by $36,868. The potential outcome of the California examinations is undetermined.
- The company reported no pending litigation. It identified competition, rapid industry change, product development and distribution, and foreign-exchange exposure as risks. Management said exchange-rate exposure had not been material to date.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. Five company-designed malaria-compound leads showed activity in testing; management described the work as a demonstration of its software, not a company claim to have developed a treatment.
Important facts for investors to verify
- Whether software-license revenue recovered after the customer closures and merger cited for the unusually weak quarter, and whether services growth continued.
- Drivers of the negative quarterly operating cash flow, especially income-tax payments and receivables, and whether cash generation returned to positive levels in subsequent periods.
- Customer and geographic revenue concentration, including the Japanese dealer account, and the effect of continuing pharmaceutical-industry consolidation.
- Results and potential financial impact of the California tax examinations, including the R&D credit review.
- Whether subsequent dividends matched the anticipated amounts, and the effect of the accelerated distribution on liquidity and capital allocation.
- The filing reports 93,503 shares issued from option exercises between December 1, 2012 and January 11, 2013; investors should verify updated share counts and dilution.