Simulations Plus, Inc. — Q1 FY2021 Form 10-Q
Reporting period: Three months ended November 30, 2020; comparative period is the three months ended November 30, 2019. Unaudited results. The company develops pharmaceutical simulation software and provides consulting services. Its April 2020 acquisition of Lixoft added the Monolix Suite and a fourth reporting segment.
Financial performance and position
| Metric | Q1 FY2021 | Q1 FY2020 |
|---|---|---|
| Revenue | $10.701 million | $9.401 million |
| Gross profit / margin | $8.268 million / 77% | $6.758 million / 72% |
| Operating income | $3.051 million | $2.718 million |
| Net income | $2.479 million | $2.058 million |
| Diluted EPS | $0.12 | $0.11 |
| Operating cash flow | $5.333 million | $2.634 million |
Revenue grew 14%; management attributed the increase primarily to a $1.6 million (35%) rise in software-related revenue, partly offset by a $0.3 million (6%) decline in consulting and analytical-study revenue. Software licenses accounted for $6.212 million of revenue and consulting services for $4.489 million. Gross margin expanded five percentage points. SG&A rose 25% to $4.408 million and R&D expense rose to $0.809 million; management cited higher salaries, headcount, payroll taxes, insurance, and professional fees as SG&A drivers. The effective tax rate was 17.3%, versus 24.7%.
By segment, revenue increased 10% at Simulations Plus and 12% at Cognigen; DILIsym revenue declined 34%, mainly due to lower consulting revenue. Lixoft contributed $1.229 million in revenue following its acquisition. Lixoft represented 95% software sales and 5% consulting revenue for the quarter.
At November 30, 2020, cash and cash equivalents were $27.651 million and short-term investments were $91.115 million, totaling $118.766 million, compared with $116.011 million at August 31, 2020. Cash declined $21.556 million, primarily reflecting net investment purchases; short-term investments increased. Current assets were $131.232 million versus current liabilities of $5.477 million. Total liabilities were $12.439 million. The company had no borrowings on its $3.5 million revolving credit facility. Acquisition-related Lixoft holdback and earnout liabilities totaled $6.185 million; the earnout was a Level 3 fair-value estimate. No conventional long-term borrowing balance is reported.
Changes, outlook, and risks
- Investing cash flow was negative $25.874 million, including $30.959 million of short-term investment purchases, partly offset by $6.018 million of investment-sale proceeds. Financing cash flow was negative $1.015 million, including a $1.195 million dividend payment.
- Management said existing capital and anticipated operating cash flows should meet working-capital and capital-expenditure needs for the foreseeable future. The filing provides no numerical revenue or earnings guidance. Remaining performance obligations outside applicable disclosure expedients were approximately $2.7 million, expected to be recognized within 12 months.
- Risks include software-industry competition and rapid change, uncertainty about COVID-19’s effects on pharmaceutical customers and spending, customer concentration, and foreign-exchange exposure. International sales were 33% of revenue. Three customers contributed 17%, 7%, and 5% of revenue. The company does not hedge currencies.
- Cash at financial institutions exceeded insured limits by $13.8 million. Held-to-maturity investments had $48,000 of gross unrealized losses at quarter-end. The company said it was investigating ways to reduce bank concentration exposure.
- The former Lixoft owners may receive earnout payments of up to $5.5 million based on revenue growth over two years; the recognized earnout liability increased by $121,000 during the quarter. The company reported no pending or threatened legal proceedings and no impairment charges.
- The prior August 2020 public offering raised approximately $107.7 million net. A $0.06-per-share dividend was declared in January 2021 for distribution in February. A December 2020 lease amendment extended the Lancaster office lease to January 2026, reduced space and rent, and allowed an early opt-out.
- The company’s Metabolite Database license terminated in September 2020; it was arranging a replacement database. The board also approved a proposed increase in shares reserved under the equity plan, subject to shareholder approval.
Important facts for investors to verify
- How much of revenue growth and improved margins reflects Lixoft acquisition effects versus comparable organic performance, particularly given the DILIsym decline.
- Whether software growth and the $2.7 million remaining performance obligations convert into sustained revenue, and the timing and cost of replacing the terminated database license.
- The assumptions and potential cash/share impact of Lixoft earnout payments, and the status of the $1.333 million holdback.
- The quality and liquidity of the short-term investment portfolio, uninsured bank balances, and the reason operating cash flow improved year over year.
- The impact of the proposed equity-plan share increase and continuing stock-based compensation on dilution.