Simulations Plus, Inc. — Q2 FY2015 Form 10-Q
Reporting period: Quarter and six months ended February 28, 2015. Interim financial statements are unaudited. Simulations Plus develops pharmaceutical research software and consulting services; results now include Cognigen, acquired September 2, 2014, so reported year-over-year growth is not fully comparable.
Financial results
| Metric | Three months ended Feb. 28 | Six months ended Feb. 28 |
|---|---|---|
| Revenue | $4.574 million, up 48.4% | $8.660 million, up 51.3% |
| Gross profit / margin | $3.449 million / 75.4%; prior 84.0% | $6.537 million / 75.5%; prior 83.6% |
| Operating income | $1.475 million, up from $1.132 million | $2.224 million, up from $2.091 million |
| Net income | $970,233, up 19.8%; EPS $0.06 | $1.499 million, nearly flat versus $1.495 million; EPS $0.09 |
| Operating cash flow | Not separately reported for the quarter | $1.808 million, versus $1.651 million |
- Simulations Plus’s own revenue rose 7.2% in Q2 and 9.3% for the six-month period; Cognigen contributed $1.271 million and $2.406 million, respectively.
- Cash and equivalents were $6.103 million at February 28, versus $8.615 million at August 31, 2014. The six-month cash decrease was $2.512 million, including $2.080 million paid for Cognigen, $1.685 million of dividends, and software development spending.
- Current assets were $10.732 million and current liabilities $1.468 million. Contract payables totaled $4.354 million, of which $750,000 was current; the balance included a future Cognigen payment. No interest was paid in the period, and the filing reports no conventional borrowings.
- Total assets were $27.063 million, including $4.789 million of Cognigen goodwill and $5.578 million of intellectual property. Total liabilities were $8.380 million.
Changes, outlook, and risks
- Revenue growth primarily reflects the Cognigen acquisition. Consolidated gross margin declined as Cognigen’s consulting services carry lower margins than Simulations Plus’s software business.
- Six-month net income was held back by approximately $398,000 of one-time financial-advisor and business-broker costs related to Cognigen. Management estimated that, excluding those costs, six-month net income would have been about $1.780 million, up 18.7% year over year.
- A roughly $250,000 software renewal was delayed until the first week of Q3, shifting revenue out of the reported period. Management said the Cognigen acquisition was expected to add approximately $5 million to FY2015 revenue.
- Management expected future dividends of $0.05 per share per quarter, subject to board approval and change. The company believed cash and operating funds would meet foreseeable working-capital and capital-expenditure needs; no earnings guidance was provided.
- Foreign-exchange losses were $34,684 in Q2 and $42,475 for six months, attributed mainly to a stronger U.S. dollar. International sales were 39.8% of six-month revenue, down from 53% in the prior-year period.
- Key risks include competition and rapid technology change, dependence on pharmaceutical and biotechnology customers, customer concentration, and uncertainty in integrating Cognigen. Cognigen’s purchase-price allocation remained provisional and could change. The company was dismissed without prejudice from a wrongful-death lawsuit; the plaintiff had through August 31, 2015 to identify evidence supporting its return to the case.
- Management stated disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether the delayed renewal was recognized in Q3 and whether Simulations Plus’s underlying software and services growth continued.
- Final Cognigen acquisition valuations, integration costs, operating contribution, and the scheduled future consideration, including the $1.854 million liability due in the 12-month period ending February 2016.
- Margin and cash-flow trends after accounting for Cognigen’s lower-margin consulting mix, software amortization, and continued development spending.
- Future dividend approvals and the company’s capacity to meet contract-payable obligations while maintaining cash reserves.
- Developments in customer concentration, international and currency exposure, and the lawsuit’s status after the stated dismissal period.