Simulations Plus, Inc. — Fiscal 2017 First Quarter 10-Q
Reporting period: Three months ended November 30, 2016; compared with the three months ended November 30, 2015. Unaudited interim results. The company develops pharmaceutical simulation software and provides pharmaceutical and biotechnology consulting services, including through its Cognigen subsidiary.
Financial performance
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Revenue | $5.418 million | $4.839 million | +12.0% |
| Gross profit / margin | $4.082 million / 75.3% | $3.755 million / 77.6% | Profit +8.7%; margin down 2.3 percentage points |
| Operating income / margin | $1.928 million / 35.6% | $1.728 million / 35.7% | Income +11.6% |
| Net income / margin | $1.362 million / 25.1% | $1.106 million / 22.9% | +23.1% |
| Diluted EPS | $0.08 | $0.06 | Increased |
| Operating cash flow | $1.943 million | $(0.360) million | Improved |
Revenue growth comprised a $285,000 increase in Lancaster and a $294,000 increase in Buffalo; Buffalo reported record quarterly revenue. Software and software-related sales rose 6.8%, while consulting and analytical study revenue increased 21.1%. Gross margin declined as cost of revenue grew faster than revenue, including higher labor for studies, training costs, increased software amortization, and direct contract expenses. SG&A rose 11.2%, including $152,000 of additional professional fees associated mainly with accelerated-filer status and the first Sarbanes-Oxley internal-control audit. Research and development costs were approximately $525,000, of which $235,000 was capitalized.
Balance sheet, liquidity and cash flows
- Cash and cash equivalents were $8.845 million at November 30, 2016, versus $8.030 million at August 31, 2016. Total assets were $28.503 million; shareholders’ equity was $23.355 million.
- Current assets of $13.612 million compared with current liabilities of $2.244 million. The company reported no borrowed debt; however, $1.0 million of contracts payable to TSRL remained current and was due in April 2017. The company’s total TSRL consideration was $6.0 million, with the final payment outstanding.
- Quarterly operating cash flow of $1.943 million was offset by $293,000 of investing cash outflow and $835,000 of financing cash outflow. Financing included $861,000 of dividends. Cash increased by $814,000.
- The Board declared and paid a $0.05-per-share quarterly dividend. Management anticipated future quarterly dividends of $0.05 per share, subject to Board approval and with no assurance of continuation.
Outlook, commentary and notable risks
- No numerical full-year financial guidance was provided. Management said existing capital and expected operating cash flows should meet anticipated working-capital and capital-expenditure needs for the foreseeable future.
- Management expected GastroPlus version 9.5 and ADMET Predictor version 8.1 to be released in the second fiscal quarter of FY2017. PKPlus was a recently launched product; management described its potential as significant but gave no quantified forecast.
- Disclosure controls were deemed ineffective at the reasonable-assurance level because of material weaknesses in IT general controls. Remediation was underway; management expected substantial implementation and testing by February 28, 2017, but the weakness would not be considered remediated until controls operated for a sufficient period and passed testing.
- International sales were 31.8% of revenue, down from 45.9% in the prior-year quarter. The company cited exposure to yen and RMB exchange-rate fluctuations and did not hedge currencies. A foreign-exchange gain of $35,000 compared with a $15,000 loss in the prior-year quarter.
- Three customers represented 9%, 7% and 6% of quarterly revenue. The filing also identifies risks from pharmaceutical-industry consolidation and R&D spending, competition, contract delays or cost overruns, cybersecurity and service interruptions, and dependence on key personnel.
- A wrongful-death lawsuit naming the company was dismissed without prejudice; the company said it was preparing documents for final dismissal with prejudice. The filing reports no other pending legal proceedings of note.
- The company early adopted accounting standards on deferred-tax classification and employee share-based payments; the latter had no material financial-statement impact. The company was evaluating the impact of the new revenue-recognition and lease standards.
Most important facts to verify
- Whether the IT-control remediation was completed and independently tested as planned, and whether the company subsequently reported effective controls.
- Whether revenue growth and the Buffalo consulting contribution continued, and whether gross margin stabilized after declining to 75.3%.
- Whether operating cash flow remained positive after working-capital movements and the $1.0 million TSRL payment due in April 2017.
- Whether expected product releases occurred and generated material licensing revenue; the filing provides no quantified product-level outlook.
- Whether the anticipated $0.05 quarterly dividend continued, and whether customer concentration, international exposure, or the litigation status changed.