Simulations Plus, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended February 29, 2012; comparative periods ended February 28, 2011. Interim statements are unaudited.
Business context
The company develops pharmaceutical research software and provides consulting and contract research services. It sold Words+, its augmentative communication business, on November 30, 2011; Words+ is reported as discontinued operations. The ongoing business centers on pharmaceutical software, including GastroPlus, ADMET Predictor, MedChem products, and DDDPlus.
Financial performance and position
| Metric | Three months ended Feb. 29, 2012 | Six months ended Feb. 29, 2012 |
|---|---|---|
| Revenue | $2.789 million; up 6.4% | $5.037 million; up 6.4% |
| Gross profit and margin | $2.393 million; 85.8% (84.2% prior year) | $4.288 million; 85.1% (83.6% prior year) |
| Operating income and margin | $1.172 million; 42.0% | $2.115 million; 42.0% |
| Continuing-operations income | $839,000; down 3.7% | $1.594 million; up 10.4% |
| Net income, including discontinued operations | $839,000 | $1.810 million |
| Operating cash flow | Not presented for the quarter | $1.475 million total; $2.164 million from continuing operations |
Six-month net income includes a $465,820 after-tax gain on the Words+ sale and a $249,898 loss from discontinued operations. Cash and equivalents were $13.241 million at February 29, 2012, versus $10.181 million at August 31, 2011. Total liabilities were $3.312 million, including a $790,692 dividend payable; the filing reports no material borrowings. Current assets were $16.159 million and current liabilities $2.573 million.
Changes and notable items
- Software license revenue was the main growth driver: up approximately $256,000 in the quarter and $517,000 for the six-month period. Service, workshop, and grant revenue declined in aggregate.
- Quarterly SG&A rose 43.7% to $956,000, including final Words+ sale advisory fees, higher marketing and personnel costs, and the company bearing more of the office lease. Six-month SG&A increased 22.5% to $1.656 million, also including one-time transaction and acquisition-consulting costs.
- Operating margins were lower year over year despite improved gross margins, reflecting higher operating expenses. Six-month continuing-operations income increased as gross profit and other income more than offset those expenses.
- Other income included larger foreign-exchange gains; the company attributed the increase partly to invoicing in U.S. dollars rather than Japanese yen. It paid $75,000 to buy out the Enslein Metabolism Module royalty agreement, reducing royalty expense by approximately $38,000.
- The board declared an ongoing quarterly cash dividend of $0.05 per share; the first payment was made March 1, 2012.
Outlook, risks, and contingencies
- Management expected ADMET Predictor 6.0, MedChem Designer 2.0, the next MedChem Studio release, and GastroPlus 8.0 in fiscal Q3 2012; release timing was subject to extensive integration and testing. No quantified revenue or earnings guidance was provided.
- Management said cash and anticipated operating funds should meet working-capital and capital-expenditure needs for the foreseeable future. It continued to seek acquisitions and described potential growth in software and consulting.
- Management estimated a fiscal 2012 tax rate of approximately 31%–34%. California tax authorities were auditing fiscal 2007 and 2008; IRS examination years are described inconsistently in the filing. Audit outcomes could change claimed refund amounts.
- International sales were 50% of six-month revenue, versus 34% a year earlier. Customer concentration, foreign-exchange exposure, rapid software-industry change, and the need to develop products and distribution channels are disclosed risks.
- The company reported no pending litigation and assessed disclosure controls as effective. Management cautioned that controls provide reasonable, not absolute, assurance.
Important facts for investors to verify
- Whether the announced Q3 software releases occurred on schedule and translated into license sales and renewals.
- The sustainability of revenue growth and gross-margin gains, given higher SG&A and the impact of transaction-related costs.
- The treatment and cash-flow effects of the Words+ divestiture, including the continuing sublease arrangement and dividend payments.
- The tax examination years and potential refund or tax-liability exposure; the filing identifies different IRS years in different sections.
- Foreign-exchange gains, international revenue exposure, and customer concentration in revenue and receivables.