Simulations Plus, Inc. — Q2 FY2017 Form 10-Q
Reporting period: Quarter and six months ended February 28, 2017. The company develops pharmaceutical simulation software and provides pharmaceutical and biotechnology consulting services. Figures below compare with the corresponding 2016 periods unless noted.
Financial performance and position
| Metric | Three months | Six months |
|---|---|---|
| Revenue | $5.706 million, up 10.5% | $11.124 million, up 11.2% |
| Gross profit / margin | $4.152 million / 72.8%, versus 75.5% | $8.234 million / 74.0%, versus 76.5% |
| Operating income / margin | $1.795 million / 31.5%, versus 33.2% | $3.723 million / 33.5%, versus 34.4% |
| Net income | $1.196 million, up 4.4%; diluted EPS $0.07 | $2.557 million, up 13.6%; diluted EPS $0.15 |
- Revenue mix and growth: Six-month software and software-related sales rose 7.9%; consulting and analytical study revenue rose 18.0%. Lancaster revenue increased 9.6% and Buffalo revenue increased 15.0%.
- Costs and margins: Six-month cost of revenue grew faster than sales, increasing to $2.890 million from $2.347 million. Management cited labor on increased studies and contracts, training, software amortization, and direct contract costs. SG&A increased 12.1%, including higher professional fees and compensation; R&D expense declined to $699,000 from $813,000, while capitalized software development costs increased to $584,000 from $545,000.
- Cash flow: Six-month operating cash flow was $1.725 million, investing cash outflow was $690,000, and financing cash outflow was $1.638 million, mainly due to $1.723 million of dividends. Cash declined $603,000 from fiscal year-end to $7.427 million.
- Liquidity and obligations: Current assets were $13.989 million and current liabilities $2.140 million; total liabilities were $4.896 million. The company reported no borrowed debt. The remaining $1.0 million payment under the TSRL agreement was classified as current and due in April 2017. Deferred income taxes were $2.756 million.
- Shareholder returns: Two quarterly dividends of $0.05 per share were paid during the six-month period. Approximately 17.24 million common shares were outstanding on April 10, 2017.
Changes, outlook, and notable items
- Revenue growth was accompanied by lower gross and operating margins, reflecting higher cost of revenue. Net income nevertheless increased in both the quarter and six-month period.
- Management said existing capital and expected operating cash flows should cover working capital and capital expenditures for the foreseeable future. No specific revenue, earnings, or margin guidance was provided. The company anticipated future dividends of at least $0.05 quarterly, subject to board approval and change or cancellation.
- GastroPlus version 9.5 was released in April 2017, after the reporting period. Management described it as a major upgrade. A next PKPlus release with additional requested features was expected during fiscal Q3; management characterized PKPlus as having potential to become a significant revenue product, not as assured guidance.
- Two FDA research collaborations, each providing up to $200,000 annually, were renewed through September 2017; further renewal was not assured. The company also cited opportunities to apply its machine-learning technology in other markets, while indicating that it was exploring those opportunities.
- Management stated that disclosure controls were effective as of February 28, 2017. The company continued remediation of previously identified material weaknesses in IT general controls and said substantially all remedial steps had been implemented and tested during the six months.
- Key disclosed risks include pharmaceutical-industry consolidation and R&D spending, customer and contract concentration, competition, contract overruns or cancellations, foreign exchange exposure, cybersecurity and hosting reliance, software defects, and retention of specialized personnel. International sales were 36% of six-month revenue, down from 42.6%.
- The company denied responsibility in a wrongful-death case related to a 2012 plane crash; it had been dismissed without prejudice and was preparing documents for final dismissal with prejudice. Management reported no other pending legal proceedings of which it was aware.
Filing data note: The six-month MD&A table reports cost of revenue at 26.0% of revenue, while the narrative states 27.2%; the financial statements imply approximately 26.0%. The filing text does not provide a clear reconciliation of this inconsistency.
Important facts for investors to verify
- Whether margin pressure persists as consulting and contract-study activity expands, and how the revenue mix develops.
- Collection and conversion of revenue-in-excess-of-billings and receivables, which rose to $1.224 million and $4.668 million, respectively.
- Payment of the remaining $1.0 million TSRL obligation in April 2017 and the subsequent cash and amortization effects.
- Progress in remediating IT general-control weaknesses, despite management’s conclusion that disclosure controls were effective.
- Renewal of FDA collaborations after September 2017 and commercial adoption of GastroPlus 9.5 and PKPlus updates.
- Whether quarterly dividends continue; future distributions remain at the board’s discretion.