Simulations Plus, Inc. — Q1 FY2016 Form 10-Q
Business context and period. The unaudited quarter ended November 30, 2015 (the three months ended November 30, 2015) covers Simulations Plus’s pharmaceutical simulation software and consulting businesses, including Cognigen, acquired in September 2014. Comparisons are with the three months ended November 30, 2014.
Key financial results
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Revenue | $4.839 million | $4.086 million |
| Gross profit / margin | $3.755 million / 77.6% | $3.088 million / 75.6% |
| Operating income / margin | $1.728 million / 35.7% | $749,000 / 18.3% |
| Net income / margin | $1.106 million / 22.9% | $529,000 / 12.9% |
| Diluted EPS | $0.06 | $0.03 |
| Operating cash flow | $(360,000) | $227,000 |
- Revenue increased 18.4%. Lancaster revenue rose 15.6% to $3.410 million; Buffalo revenue rose 25.9% to $1.428 million.
- Cash and cash equivalents were $7.155 million at November 30, down from $8.551 million at August 31, 2015. Current assets were $12.364 million and current liabilities $3.897 million.
- Accounts receivable increased to $4.042 million from $1.594 million at fiscal year-end; the $2.449 million increase was the principal working-capital drag on operating cash flow.
- Investing cash outflow was $269,000, including $267,000 of capitalized software development. Financing cash outflow was $768,000, primarily the $850,000 quarterly dividend, partly offset by $82,000 from option exercises.
- No bank borrowings are reported. Contracts payable totaled $3.604 million: $2.604 million current and $1.000 million long term, related to the TSRL agreement and Cognigen acquisition.
Changes and management explanation
- Net income more than doubled, increasing 109.2%, reflecting revenue growth and lower SG&A. Q1 FY2015 included about $400,000 of one-time financial-adviser and broker costs related to the Cognigen acquisition; those costs did not recur.
- Gross margin improved as revenue grew faster than cost of revenue. SG&A fell 19.4% to $1.676 million; R&D expense rose to $351,000 from $260,000. Total R&D spending was approximately $618,000, of which $267,000 was capitalized.
- The effective tax rate rose to 35.6% from 29.1%, which management attributed to higher income and a lower proportion of permanent R&D and other tax deductions.
Outlook, risks, and unusual items
- No formal revenue or earnings guidance is provided. Management said existing capital and anticipated operating funds should meet working-capital and capital-expenditure needs for the foreseeable future.
- Management anticipated future dividends of $0.05 per share per quarter, subject to Board approval and change or cancellation. The quarter’s $0.05-per-share dividend was paid in November 2015.
- Product plans included a DDDPlus upgrade expected in Q2 FY2016, ADMET Predictor 8.0 expected in early calendar 2016, and PKPlus, announced in October 2015 and described as nearing completion. The filing gives no quantified revenue outlook for these releases.
- Two FDA research collaboration agreements are funded at up to $200,000 per year each; a separate FDA collaboration is unfunded. The ocular-model agreement was renewed for a second year in September 2015.
- Risks include rapid technological change and competition, dependence on pharmaceutical-industry customers, and international revenue exposure: international sales were 45.9% of quarterly revenue. Four customers represented 11%, 9% (a Japanese dealer account serving over 40 customers), 6%, and 6% of sales.
- An IRS audit of the 2014 return began in October 2015 and was ongoing; management did not expect a significant financial impact. The company also reported a wrongful-death lawsuit from which it had been dismissed without prejudice and was preparing final dismissal with prejudice. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Reconcile the reported share count: the cover page states 16,966,001 shares outstanding on January 14, 2016, while the balance sheet reports 16,996,001 issued and outstanding at November 30, 2015.
- Monitor collection of the sharply higher accounts receivable balance and the effect of collections on operating cash flow.
- Confirm timing and cash requirements for the $2.604 million of current contract-payable obligations, including the Cognigen-related payment and TSRL installment.
- Track delivery and commercial adoption of PKPlus, the DDDPlus upgrade, and ADMET Predictor 8.0, as well as the outcome of the IRS audit.