Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
SLP > SEC Filings for SLP > Form 10-K on 15-Nov-2012All Recent SEC Filings

Show all filings for SIMULATIONS PLUS INC

Form 10-K for SIMULATIONS PLUS INC


15-Nov-2012

Annual Report


Item 7 - Management's Discussion and Analysis oF FINANCIAL CONDITION AND RESULTS of OperationS

The following discussion and analysis should be read in conjunction with the Financial Statements and related notes included in this Annual Report on Form 10-K.

Management Overview

Fiscal year 2012 highlights:

· We signed two funded collaboration agreements with top-5 pharmaceutical companies to extend the capabilities of our flagship GastroPlus™ software with an enhanced oral cavity absorption model and to add the ability to simulate dosing through the skin.

· We successfully completed the first year of our five-year renewable collaboration with the Center for Food Safety and Nutrition of the FDA to develop predictive toxicity models for food additives and contaminants

· On November 30, 2011, we completed the sale of Words+, Inc. for $1,973,000 in cash. Words+ operations are now presented as discontinued operations in this Form 10K

· We completed a drug design process targeting the malaria parasite, including data mining of a large public domain database, design of new molecular structures, synthesizing a selected set of molecules, and testing them against the parasite. Every molecule we designed and synthesized inhibited the growth of the parasite.

· We attempted to acquire certain assets of Entelos through their bankruptcy proceeding. We were unsuccessful in that offering.

· We expanded our technical staff, adding three new Ph.D. scientists to the Life Sciences department and one new scientist to our marketing and sales department.

· We reinitiated the development of the MembranePlus™ software program for simulation of in vitro permeability experiments. This project had begin in 2004 but was postponed for more pressing activities. With our expanded scientific staff, we have now been able to continue the development of this new product. We expect to release it during calendar year 2013.

· The Board of Directors declared an ongoing quarterly cash dividend of $0.05 per share ($0.20 per year). We made dividend distributions in March, May, and August and the board declared the next distribution for November 13, 2012, which is in fiscal year 2013. The total cash distribution each quarter is just below $800,000, so we paid out approximately $2.4 million in dividends in fiscal year 2012.

· Our cash position remained strong, with cash at the end of the fiscal year of $12.7 million, compared to $10.2 million at the end of fiscal year 2011.

Fiscal year 2012 Financial Summary:

· Gross revenues increased 8.1% to $9,449,000 from $8,739,000 in fiscal year 2011

· Selling, General and Administrative expenses increased 6.1% to $3,379,000 from $3,186,000 in fiscal year 2011

· Research and Development expenditures increased 50.7% to $1,900,000 from $1,261,000 in fiscal year 2011. Approximately $140,000 of this increase was for outside services to synthesize and test the new molecules we designed to inhibit the growth of the malaria parasite.

· Income from continuing operations increased 5.6% to $2,812,000 from $2,663,000 in fiscal year 2011

Strategy Going Forward:

· Continue to advance our software offerings through both our in-house developments and our funded and unfunded collaborations with our industry and government customers

· Continue to seek acquisition and partnership possibilities to broaden our offerings of products and services

· Continue our aggressive marketing and sales campaign including attending and exhibiting at numerous scientific conferences and meetings, expanded use of social media, and expanded advertising

· Increase our marketing and sales efforts with respect our consulting services in both pharmacokinetics and in small molecule design

· Seek partners for our malaria new chemical initiative to take it further into development

· Select a new target and repeat our drug design, synthesis, and test activities as we did for malaria to further demonstrate the capabilities of our ADMET Design Suite to generate high-quality lead compounds in a fraction of the time and cost normally required

Fiscal year 2012 was a record year comprised of four record quarters. We believe the continued growth of our pharmaceutical software and services business segment is the result of increasing adoption of simulation and modeling software tools such as those we produce, as well as the expertise we offer as consultants to assist companies involved in the research and development of new medicines, which has resulted in a continuing series of study contracts with pharmaceutical companies ranging from several of the largest in the world to a number of medium-sized and smaller companies in the U.S. and Europe.

During fiscal year 2012 we released upgrades to three of our five pharmaceutical software offerings, as well as to our software product called MedChem Designer. Our financial performance enabled us to continue to increase our cash deposits, remain debt-free, and continue to invest in the marketing and sales activities we began in early 2009 in order to reach a wider customer base.

We have not been successful in identifying and completing any acquisitions during this reporting period in spite of a number of investigations and due diligence activities. In every case, either our due diligence activities revealed undesirable aspects of the potential acquisition, or terms and conditions agreeable to both sides were not able to be reached. It is our intent to continue to search for acquisition opportunities that would be compatible with our current businesses and that would be accretive, i.e., adding to both revenues and earnings.

In the past, we have used some of our cash to repurchase shares of our common stock because we believe that reducing the number of fully diluted shares provides greater value to our shareholders than receiving a low interest rate on our cash deposits, and because we believe that our cash deposits after such repurchases remain sufficient to accomplish any reasonable potential acquisitions as well as to maintain sufficient cash reserves to ensure meeting operational needs for the foreseeable future. Although there are no stock repurchase programs pending, the board of directors may consider additional repurchases at any time at prices and under conditions set by the board.

Results of Operations

The following sets forth selected items from our statements of operations (in thousands) and the percentages that such items bear to net sales for the fiscal years ended August 31, 2012 ("FY12") and August 31, 2011 ("FY11").

                                                   Fiscal years ended
                                        8/31/12                           8/31/11
Net sales                   $      9,449             100%     $      8,739             100%
Cost of sales                      1,510             16.0            1,559 *           17.8
Gross profit                       7,939             84.0            7,180             82.2
Selling, general and
administrative                     3,379             35.8            3,186 *           36.5
Research and development             948             10.0              464 *            5.3
Total operating expenses           4,327             45.8            3,650             41.8
Income from operations             3,612             38.2            3,530             40.4
Other income                         343              3.6              168              1.9
Net income before taxes            3,955             41.9            3,698             42.3
(Provision) for income
taxes                             (1,143 )          (12.1 )         (1,035 )          (11.8 )
Income from continuing
operations                         2,812            29.8%            2,663             30.5
Results of discontinued
operations, net of tax               216              2.3               52              0.6
Net income                  $      3,028            32.1%     $      2,715            31.1%

* Numbers in the prior year have been reclassified to conform to the current year's presentation.

FY12 Compared with FY11

Net Sales

Net sales increased $710,000, or 8.1%, to $9,449,000 in fiscal year 2012 from $8,739,000 in FY11. We attribute the increase in pharmaceutical software sales to increases in the number of licenses with new and existing customers, as well as licensing of new modules to existing customers, especially for our GastroPlus line of products because it has more modules than other products we offer. In addition, in the 4th quarter we began two funded collaborations that will expand the capabilities of our GastroPlus software.

Those increases outweighed the decreases in net sales from previously large funded collaborations and analytical studies (large collaboration contracts were completed by August 2010), workshops, and a Small Business Innovation Research Grant (2-year grant from NIH ended in March 2011.)

The revenue from software licenses resulted in an increase of $8,002,000, or 12.4%, while the revenue from services, such as funded collaborations contracts, grant, and analytical study contracts, resulted in a decrease of $281,000, or 38.2%.

Cost of Sales

Cost of sales decreased $49,000, or 3.1%, to $1,510,000 in FY12 from $1,559,000 in FY11. As a percentage of net sales, cost of sales also decreased by 1.8%.

A significant portion of cost of sales is the systematic amortization of capitalized software development costs, which is an independent fixed cost rather than a variable cost related to sales. This amortization cost increased approximately $7,000, or 1%, in FY12 compared with FY11.

Royalty expense, a variable cost related to sales of our GastroPlus core program as well as royalties from the agreement with Accelrys, Inc. (the original agreement was with Symyx Technologies which merged with Accelrys, Inc. in 2010) Metabolite/Metabolism, decreased approximately $26,000, or 5%, in FY12 compared with FY11. We also incurred royalty expense on the Enslein Metabolism Module; however, we signed an agreement to buy out this royalty agreement from Enslein Research of Rochester, New York on February 28, 2012 for $75,000, and as a result, we no longer had this royalty expense beginning March 2012.

Service cost, such as labor costs for trainings/workshops, analytical studies, and technical support, decreased approximately $85,000, or 26%, in FY12 compared with FY11 as a result of a lesser number of person-hours allocated to those services during FY12 compared with FY11.

Gross Profit

Gross profit increased $759,000, or 10.6%, to $7,939,000 in FY12 from $7,180,000 in FY11. We attribute this increase to the increased sales of pharmaceutical software and a decrease in the cost of goods sold.

Selling, General and Administrative Expenses

Selling, general and administrative ("SG&A") expenses increased $193,000, or 6.1% to $3,379,000 in FY12, compared to $3,186,000 in FY11; however, as a percentage of sales, SG&A decreased to approximately 35.8% in FY12 from approximately 36.5% in FY11. The increase in SG&A expenses is due to an increase in the amount of our office rent to $293,000 from $144,000, because we now pay the entire office lease following the sale of our former subsidiary, Words+, on November 30, 2011. Although we continue to sublease approximately 20% of the office space to Words+, the income from the sublease is recorded as Other Income and so does not directly offset the increase in SG&A. Other increases in SG&A expense were due to increases in the costs associated with advertising, trade shows, marketing and labor, as we attended more trade shows and conferences in FY12, we also contracted additional labor, were subject to a new tax on sales generated in India which the Indian government regulates, and had additional payroll-related expenses, such as payroll taxes, 401k and insurances. These increases outweighed decreased consulting fees, equipment rental, and recruiting costs.

Research and Development

We incurred approximately $1,900,000 of research and development costs during FY12. Of this amount, $952,000 was capitalized and $948,000 was expensed. In FY11, we incurred $1,261,000 of research and development costs, of which $797,000 was capitalized and $464,000 was expensed. The increase of $639,000, or 50.7%, in total research and development expenditures from FY11 to FY12 was due to laboratory experimental costs of $140,000 for our NCE (new chemical entity) malaria project, staff increases, and salary increases for existing staff.

Income from operations

During FY12, we generated income from operations of $3,612,000, as compared to $3,530,000 for FY11, an increase of 2.3%. We attribute this increase to increases in gross profit and decreases in the cost of goods sold which outweighed increases in SG&A expense and research and development expenses.

Other Income and (Expense)

Net other income (expense) increased by $175,000, or 104.2%, to $343,000 in FY12 from $168,000 in FY11. This is due to gains from Japanese Yen and Chinese Yuan currency exchanges and sublease payments we received from Words+ for their rented space.

Provision for Income Taxes

Provision for income taxes for FY12 increased by $108,000, or 10.4%, to $1,143,000, compared to $1,035,000 for FY11 due to the increase in net income. The tax rate used in this report is lower than the standard rate because of various tax credits generated during the reporting period for this Annual Report on Form 10-K.

Income from Continuing Operations

Net income from continuing operations for FY12 increased by $149,000, or 5.6%, to $2,812,000, compared to $2,663,000 for FY11. We attribute this increase in net income to increased gross profit and other income, which outweighed increases in SG&A expenses and taxes.

Seasonality

Sales in our business segment exhibit some seasonal fluctuations, with the fourth fiscal quarter (June-August) generally having the lowest sales over the past three fiscal years because of summer vacations and reduced activities at our customers' sites. This unaudited net sales information has been prepared on the same basis as the annual information presented elsewhere in this Annual Report on Form 10-K and, in the opinion of management, reflects all adjustments (consisting of normal recurring entries) necessary for a fair presentation of the information presented. Net sales for any quarter are not necessarily indicative of sales for any future period; however, because our pharmaceutical software is licensed on an annual basis, renewals are generally within the same quarter year after year.

Net Sales (in thousands)

        First        Second       Third        Fourth
 FY    Quarter      Quarter      Quarter      Quarter       Total

2012      2,248        2,789        2,772        1,640       9,449
2011      2,050        2,622        2,640        1,427       8,739
2010      1,735        2,227        2,325        1,334       7,621
2009      1,430        1,779        1,985        1,107       6,301
2008      1,438        1,550        1,975        1,092       6,055
2007        824        1,808        1,659        1,465       5,756
2006        199          884        1,096        1,007       3,186
2005        524          410          662          473       2,069
2004        642          742          603          869       2,856
2003        507          582          614        1,403       3,106
2002        390          554          504          595       2,043
2001        221          373          305          282       1,181
2000        151          467          143          174         935
1999         87           93          117          164         461
1998         11           11           13           27          62

Liquidity and Capital Resources

Our principal source of capital has been cash flow from our operations. We have achieved continuous positive operating cash flow over the last nine fiscal years. We believe that our existing capital and anticipated funds from operations will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for the foreseeable future. Thereafter, if cash generated from operations is insufficient to satisfy our capital requirements, we may open a revolving line of credit with a bank, or we may have to sell additional equity or debt securities or obtain expanded credit facilities. In the event such financing is needed in the future, there can be no assurance that such financing will be available to us, or, if available, that it will be in amounts and on terms acceptable to us.

We are not aware of any trends or demands, commitments, or uncertainties that are reasonably likely to result in a decrease in liquidity of our assets. The trend over the last ten years has been increasing cash deposits from our operating cash flows, and we expect that trend to continue for the foreseeable future. We have no material commitments for capital expenditures as of the end of the latest fiscal period.

We continue to seek opportunities for strategic acquisitions. If one or more such acquisition is identified, a substantial portion of our cash reserves may be required to complete it; however, we intend to maintain sufficient cash reserves after any acquisition to provide reasonable assurance that outside financing will not be necessary to continue operations. If we identify an attractive acquisition that would require more cash to complete than we are willing or able to use from our cash reserves, we will consider financing options to complete the acquisition, including obtaining loans and issuing additional securities.

Because we have not been able to find suitable acquisitions for several years, the board of directors decided to distribute a portion of our cash reserves to our shareholders, declaring an ongoing $0.05 per share per quarter cash dividend beginning with the second quarter of FY12. Quarterly dividend payments were made on March 1, May 8, and August 10, 2012 during FY12. There can be no assurances that our Board of Directors will continue the dividend distributions for any specified number of quarters; however, there is no current plan to discontinue the quarterly dividend distributions.

UNUSUAL OR INFREQUENT EVENTS

On November 30, 2011, we sold our entire interest in our former wholly-owned subsidiary, Words+, an augmentative and alternative communication device manufacturer, for aggregate gross proceeds of $1.97 million. We recognized a gain of approximately $465,820, net of tax, from the sale of Words+, which is included in discontinued operations in our statement of operations for the fiscal year ended August 31, 2012. The difference between the sales price and the net gain is a result of adjustments to net working capital from August 31, 2011, until the closing on November 30, 2011, legal fees, auditing fees, tax specialist's fees, and severance compensation for terminated employees.

KNOWN TRENDS OR UNCERTAINTIES

Although we have not seen any significant reduction in revenues to date, we have seen consolidation in the pharmaceutical industry during the current economic downturn. This trend has not had a negative effect on our total sales to that industry; however, these consolidations and downsizing in the industry could have an impact on our revenues and earnings going forward.

We believe that the need for improved productivity in the research and development activities directed toward developing new medicines will continue to result in increasing adoption of simulation and modeling tools such as those we produce. New product developments in the pharmaceutical business segments could result in increased revenues and earnings if they are accepted by our markets; however, there can be no assurances that new products will result in significant improvements to revenues or earnings. For competitive reasons, we do not disclose all of our new product development activities.

Our continued quest for acquisitions in the pharmaceutical business segment could result in a significant change to revenues and earnings if one or more such acquisitions are completed.

INFLATION

We have not been affected materially by inflation during the periods presented, and no material effect is expected in the near future.

OFF-BALANCE SHEET ARRANGEMENTS

As of August 31, 2012, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

We do not have relationships or transactions with persons or entities that derive benefits from their non-independent relationship with us or our related parties.

RECENTLY ISSUED or Newly adopted ACCOUNTING STANDARDS

In September 2009, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2009-14 which amends Statement of Position ("SOP") 97-2, "Software Revenue Recognition", to exclude tangible products containing software components and non-software components that function together to deliver the product's essential functionality. ASU 2009-14 applies to revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early application permitted with EITF 08-1 (as defined below). We adopted this standard in the first quarter of fiscal 2011. We believe adoption did not have a material effect on our financial statements.

In September 2009, the FASB issued ASU 2009-13, "Revenue Arrangements with Multiple Deliverables" ("EITF 08-1"). EITF 08-1 amends Emerging Issues Task Force ("EITF") 00-21, "Revenue Arrangements with Multiple Deliverables", to require an entity to use an estimated selling price when vendor-specific objective evidence or acceptable third-party evidence does not exist for any products or services included in a multiple element arrangement. The arrangement consideration should be allocated among the products and services based upon their relative selling prices, thus eliminating the use of the residual method of allocation. EITF 08-1 also requires expanded qualitative and quantitative disclosures regarding significant judgments made and changes in applying the guidance. EITF 08-1 applies to fiscal years beginning after June 15, 2010, with early application permitted. We adopted this standard in the first quarter of fiscal 2011. We believe adoption did not have a material effect on our financial statements.

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement ("ASU 2011-04"), which amended Accounting Standard Codification ("ASC") 820, Fair Value Measurements ("ASC 820"), providing a consistent definition and measurement of fair value, as well as similar disclosure requirements between U.S. generally accepted account principals and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles, clarifies the application of existing fair value measurement and expands the disclosure requirements. We adopted this standard in the first quarter of 2012. We believe adoption did not have a material effect on our financial statements.

In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income ("ASU 2011-05"). ASU 2011-05 requires the presentation of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. We adopted this standard in the first quarter of 2012. We believe adoption did not have a material effect on our financial statements.

In September 2011, the FASB issued ASU 2011-08, Testing Goodwill for Impairment ("ASU 2011-08"), which amends the guidance in ASC 350-20, Intangibles-Goodwill and Other - Goodwill. ASU 2011-08 provides entities with the option of performing a qualitative assessment before calculating the fair value of the reporting unit when testing goodwill for impairment. If the fair value of the reporting unit is determined, based on qualitative factors, to be more likely than not less than the carrying amount of the reporting unit, the entities are required to perform a two-step goodwill impairment test. We adopted this standard in the first quarter of 2012. We believe adoption did not have a material effect on our financial statements.

In December 2011, the FASB issued ASU No. 2011-11, "Disclosures about Offsetting Assets and Liabilities." The amendments in this update require enhanced disclosures around financial instruments and derivative instruments that are either (1) offset in accordance with either ASC 210-20-45 or ASC 815-10-45 or
(2) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with either ASC 210-20-45 or ASC 815-10-45. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The amendments are effective during interim and annual periods beginning after February 28, 2012. We adopted this standard in the third quarter of 2012. We believe adoption did not have a material effect on our financial statements.

In July 2012, the FASB issued ASU 2012-02, "Testing Indefinite-Lived Intangible Assets for Impairment", which amended the guidance in ASU 2011-08 to simplify the testing of indefinite-lived intangible assets other than goodwill for impairment. ASU 2012-02 becomes effective for annual and interim impairment tests performed for fiscal years beginning on or after September 15, 2012 and earlier adoption is permitted. We adopted this standard in the first quarter of fiscal year 2013. We believe adoption did not have a material effect on our financial statements.

Revenue Recognition

We recognize revenues related to software licenses and software maintenance in accordance with the FASB ASC 985-605, "Software - Revenue Recognition". Software products revenue is recorded when the following conditions are met: 1) evidence of arrangement exists; 2) delivery has been made; 3) the amount is fixed; and 4) collectability is probable. Post-contract customer support ("PCS") obligations are insignificant; therefore, revenue for PCS is recognized at the same time as the licensing fee, and the costs of providing such support services are accrued and amortized over the obligation period.

As a byproduct of ongoing improvements and upgrades for the new programs and new modules of software, some modifications are provided to our customers who have already purchased software at no additional charge. Other software modifications result in new, additional cost modules that expand the functionality of the software. These are licensed separately. We consider the modifications that are provided without charge to be minimal, as they do not significantly change the basic functionality or utility of the software, but rather add convenience, such as being able to plot some additional variable on a graph in addition to the numerous variables that had been available before, or adding some additional calculations to supplement the information provided from running the software. Such software modifications for any single product have typically occurred once or twice per year, sometimes more, sometimes less. Thus, they are infrequent. The Company provides, for a fee, additional training and service calls to its customers and recognizes revenue at the time the training or service call is provided.

Generally, we enter into one-year license agreements with customers for the use of our pharmaceutical software products. We recognize revenue on these contracts when all the criteria are met.

Most license agreements have a term of one year; however, from time to time, we enter into multi-year license agreements. We generally unlock and invoice software one year at a time for multi-year licenses. Therefore, revenue is recognized one year at a time.

We recognize the revenue from collaboration research and the revenue from grants . . .

  Add SLP to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for SLP - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.