Simulations Plus, Inc. — Q1 FY2012 Form 10-Q
Reporting period: Three months ended November 30, 2011, compared with the three months ended November 30, 2010. The ongoing business develops pharmaceutical research software and provides contract research and consulting services. Words+, the assistive-technology subsidiary, was sold on November 30, 2011 and is reported as discontinued operations.
Financial performance and liquidity
| Metric | Q1 FY2012 | Q1 FY2011 | Change / context |
|---|---|---|---|
| Net sales | $2.248 million | $2.050 million | Up 9.6% |
| Gross profit / margin | $1.896 million / 84.3% | $1.697 million / 82.8% | Gross profit up 11.7% |
| Operating income from continuing operations | $944,000 | $810,000 | Margin 42.0% vs. 39.5% |
| Income from continuing operations | $755,000 | $577,000 | Up 30.9% |
| Net income | $971,000 | $567,000 | Includes $466,000 after-tax gain on Words+ sale and $250,000 discontinued-operations loss |
| Net earnings per diluted share | $0.06 | $0.03 | Continuing-operations diluted EPS was $0.05 vs. $0.03 |
| Cash from operating activities | $790,000 total; $1.479 million from continuing operations | $632,000 total | Discontinued operations used $689,000 in the current period |
| Cash and cash equivalents | $12.662 million | $10.038 million at Aug. 31, 2011 | Period-end balance |
| Total liabilities | $1.872 million | $1.831 million at Aug. 31, 2011 | No debt is reported |
Investing cash flow was $1.691 million, including $1.973 million of proceeds from the Words+ sale, offset in part by software development and equipment spending. The filing reports no material borrowing or credit facility. Management said existing capital and anticipated operating cash flows should cover foreseeable working-capital and capital-expenditure needs. Current assets were $14.586 million against current liabilities of $1.100 million.
Material changes versus the prior period
- Revenue increased by about $198,000, primarily from approximately $261,000 more software-license revenue from new and existing customers. The prior-year quarter included about $67,000 of grant revenue, with no grant revenue in the current quarter.
- Gross margin improved as cost of sales remained nearly flat while revenue rose. Software-development amortization declined about $20,000, while royalty expense increased about $16,000.
- Research and development expense rose to $252,000 from $201,000; total R&D spending, including capitalized costs, increased 15% to about $454,000.
- Other income increased to $120,000, largely due to a $98,000 foreign-currency gain; the prior-year quarter had no currency gain.
- Words+ was sold for $1.973 million in cash. Its operating results are presented as discontinued operations, and its sale generated a $466,000 after-tax gain.
Outlook, commentary, and risks
- No formal financial guidance is provided. Management expected releases of ADMET Predictor 6.0, MedChem Designer 2.0, MedChem Studio updates, and GastroPlus 8.0 in February 2012.
- The company was pursuing an internal malaria-compound research project; designed molecules were being synthesized by an outside contractor. The filing describes this as a demonstration project, not a commitment to develop a cure or a quantified commercial opportunity.
- Management continued to seek acquisitions after an unsuccessful attempt to acquire Entelos assets; it declined to bid against a secured creditor prepared to bid more than $10 million. Possible future share repurchases or dividends were under consideration, with no assurance either would occur.
- International sales were 41% of revenue, versus 34% in the prior-year quarter. Four customers accounted for 52% of current-quarter sales, including a Japanese dealer representing multiple customers; customer concentration also affected receivables.
- Management cited competition and rapid change in software, dependence on developing products and distribution channels, and potential foreign-exchange exposure. It stated that exchange-rate exposure had not been material to date.
- The quarter included about $54,000 of legal fees related to the Entelos acquisition attempt. Stock-based compensation was higher partly because unvested options of employees who left due to the Words+ sale were fully vested and expensed.
- The filing reports no pending litigation. Management concluded disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether the February 2012 product releases occurred on schedule and supported subsequent license growth and renewals.
- The continuing business’s cash generation and margins after Words+ disposal, separating ongoing operations from sale proceeds and discontinued-operation cash flows.
- Whether customer and international-sales concentration changed, and whether foreign-exchange gains or losses remain material.
- How much R&D spending is capitalized and whether capitalized software costs remain recoverable as products and markets evolve.
- Any subsequent acquisition, dividend, or repurchase decision; the filing provides no assurance of these actions.