Simulations Plus, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended May 31, 2012. Interim financial statements are unaudited. Following the November 30, 2011 sale of Words+, the company’s continuing business is primarily pharmaceutical software and consulting services.
Financial performance
| Metric | Three months ended May 31, 2012 | Nine months ended May 31, 2012 |
|---|---|---|
| Revenue | $2.772 million, up 5.0% year over year | $7.809 million, up 6.8% |
| Gross profit / margin | $2.334 million / 84.2% (82.8% prior year) | $6.622 million / 84.8% (83.0%) |
| Operating income / margin | $1.214 million / 43.8% (down from 49.5%) | $3.330 million / 42.6% (down from 46.9%) |
| Continuing-operations income | $869,333, down 16.8% | $2.463 million, down 1.0% |
| Net income | $869,333, versus $1.054 million | $2.679 million, versus $2.529 million; includes a $465,820 after-tax gain on the Words+ sale |
Q3 growth came mainly from software licenses, which increased about $253,000, partly offset by lower consulting and grant revenue. For the nine-month period, software license revenue rose about $769,000; services declined about $117,000 and the prior-year period included about $155,000 of grant revenue. Q3 diluted EPS was $0.05 versus $0.07; nine-month diluted EPS was $0.16 in both periods.
Cash flow, liquidity and capital
- Cash and cash equivalents were $12.889 million at May 31, 2012, up from $10.181 million at August 31, 2011. Total assets were $18.412 million and shareholders’ equity was $15.604 million.
- Nine-month operating cash flow was $2.905 million, compared with $2.993 million in the prior year. Continuing-operations operating cash flow increased to $3.594 million from $2.761 million; discontinued operations used $689,000.
- Investing activities provided $1.088 million, including $1.973 million of Words+ sale proceeds, offset in part by $719,000 of capitalized software development costs and other investment spending. Financing activities used $1.285 million, including $1.587 million in dividends.
- Current liabilities were $1.935 million against current assets of $15.777 million. No borrowings or interest-bearing debt are reported on the balance sheet.
- The board declared quarterly dividends of $0.05 per share; two payments totaling approximately $1.587 million were made during the nine months. The company stated that existing capital and expected operating cash flows should meet foreseeable working-capital and capital-expenditure needs.
Material changes and management commentary
- Operating expenses rose 27.5% in Q3 and 24.6% for the nine-month period, with higher SG&A and R&D. Management attributed increases to staffing and compensation, marketing and trade shows, office costs after the Words+ sale, and malaria-project research. Nine-month R&D spending was approximately $1.464 million, of which $719,000 was capitalized.
- The company released new versions of ADMET Predictor, MedChem Designer, MedChem Studio and GastroPlus during the period. Its malaria new-chemical-entity project reported activity in five tested molecules; results for two additional molecules were expected in July 2012.
- The company bought out the Enslein Research royalty agreement for $75,000 in February 2012 and began amortizing the acquired intellectual property over 10 years.
- Management continues to pursue organic growth and acquisitions, and said it expected the next quarterly dividend distribution in early August. No quantified revenue or earnings guidance was provided. Management estimated a fiscal 2012 tax rate of approximately 33%–36% and reported that it was seeking suitable acquisitions.
Risks, contingencies and unusual items
- International sales were 48% of nine-month revenue, up from 34% a year earlier. Customer concentration is notable: three customers represented 47% of receivables at May 31, 2012. The filing also notes software-industry competition and potential effects from pharmaceutical-sector consolidation.
- Foreign-exchange gains contributed to other income; management said exposure had not had a material impact to date. Results may be affected if foreign-currency transactions increase.
- Tax authorities were examining prior-year tax matters. The filing describes ongoing California Franchise Tax Board review of fiscal 2007–2010 matters and IRS examinations, but gives inconsistent IRS tax years in different sections (2008 in the accounting note and 2007 in the later disclosure). Outcomes could change tax liabilities or refunds.
- The company reported no pending litigation and stated that disclosure controls were effective, with no material change in internal control over financial reporting during the quarter.
- Interim results are not necessarily indicative of full-year results. The company’s statements about future cash sufficiency, acquisitions, dividends, and project results are subject to uncertainty.
Investor facts to verify
- Reconcile the IRS examination year discrepancy (fiscal 2007 versus fiscal 2008) and assess possible tax exposure, including the California audit.
- Track whether license growth continues to offset lower consulting and grant revenue, and whether rising operating expenses pressure margins.
- Review the conversion of capitalized software development costs into future amortization expense and the commercial progress of new products and the malaria project.
- Confirm the sustainability of operating cash flow and the quarterly dividend, particularly alongside acquisition plans and continuing R&D investment.
- Monitor international revenue, foreign-exchange effects, and customer concentration in receivables.