Simulations Plus, Inc. — Q2 FY2014 Form 10-Q
Reporting period: Three and six months ended February 28, 2014. Interim financial statements are unaudited. The company develops pharmaceutical research software and provides contract research services.
Financial performance and liquidity
| Metric | Q2 FY2014 | Q2 FY2013 | Six months FY2014 | Six months FY2013 |
|---|---|---|---|---|
| Revenue | $3.081 million | $3.118 million | $5.722 million | $5.408 million |
| Gross profit | $2.589 million | $2.619 million | $4.782 million | $4.523 million |
| Gross margin | 84.0% | 84.0% | 83.6% | 83.6% |
| Operating income | $1.132 million | $1.517 million | $2.091 million | $2.309 million |
| Net income | $810,000 | $1.062 million | $1.495 million | $1.649 million |
| Diluted EPS | $0.05 | $0.06 | $0.09 | $0.10 |
Q2 revenue decreased 1.2%, while six-month revenue increased 5.8%, reflecting higher software sales that more than offset lower service revenue. Operating expenses rose to $1.458 million in Q2 (up 32%) and $2.691 million for six months (up 22%), reducing operating income and net income in both comparisons. Six-month operating margin declined to 36.6% from 42.7%; net margin declined to 26.1% from 30.5%.
Cash flow and balance sheet: Operating cash flow was $1.651 million for the six months, versus $584,000 a year earlier. Investing cash outflow was $752,000, primarily $733,000 of capitalized software development. Financing cash outflow was $1.377 million, including $1.450 million in dividends. Cash declined $478,000 from August 31, 2013 to $9.701 million at February 28, 2014. Current assets were $13.294 million and current liabilities $944,000. Total liabilities were $2.294 million; the filing reports no borrowings or debt balance.
Material changes and business developments
- Six-month software sales increased approximately $512,000, while service revenues declined approximately $197,000.
- Management attributed Q2 revenue softness partly to a large global software renewal moving from Q2 FY2013 to Q3 FY2014 to match the customer’s budget cycle, and a consulting contract delayed by legal review. It estimated the combined revenue timing impact at approximately $350,000.
- Higher SG&A reflected increased commissions in Asian markets, marketing and travel, consulting and professional fees, and salaries, including costs related to the CFO transition. Six-month research and development spending, including capitalized amounts, rose 23.7% to approximately $1.250 million.
- International sales represented 61% of six-month revenue, up from 53%. One Japanese dealer account represented 10% of six-month sales. Two customers accounted for 24% of period-end receivables.
- The company released GastroPlus version 8.5 during the period. It expected GastroPlus 8.6 shortly and planned MembranePlus 1.0 for Q3 FY2014. ADMET Predictor 7.0 was released after quarter-end; MedChem Designer 3.0 and MedChem Studio 4.0 were in development.
Outlook, risks, and other notable matters
- Management said existing capital and anticipated operating funds should meet working-capital and capital-expenditure needs for the foreseeable future. No numeric revenue or earnings guidance was provided.
- Management anticipated a $0.05-per-share quarterly dividend, but each payment remains subject to board approval and could change or be eliminated. The company paid $1.450 million in dividends during the six months.
- Management cited competition and rapid technological change, dependence on pharmaceutical customers, and possible effects of industry consolidation and downsizing. Foreign-exchange exposure had not been material; overseas sales and customer concentration remain relevant risks.
- The company reported no pending litigation. Disclosure controls were considered effective, and no material change in internal control over financial reporting was reported.
- Product development and new applications—including aerospace and MRI modeling—were exploratory or under development; commercial outcomes are uncertain. Management also noted that interim results may not indicate full-year results.
Important facts for investors to verify
- Whether the delayed renewal and consulting work occurred in Q3, and whether the reported approximately $350,000 timing impact reversed.
- The MD&A states Q2 gross profit decreased by $7,000, but the financial statements show a decrease of approximately $30,000 ($2.619 million to $2.589 million).
- Whether the increased operating and R&D spending is translating into recurring software sales, and how much development spending continues to be capitalized.
- Dividend sustainability, given the $1.450 million six-month payout compared with $1.651 million of operating cash flow.
- Revenue and receivables concentration, especially international and Japanese dealer exposure, and execution of stated product-release plans.