Simulations Plus, Inc. — Q3 FY2020 Form 10-Q
Reporting period: Three and nine months ended May 31, 2020; comparisons are with the same periods in 2019. The quarter is unaudited. Simulations Plus develops pharmaceutical modeling and simulation software and provides consulting services. Results include Lixoft from its April 1, 2020 acquisition, contributing two months of activity.
Key financial metrics
| Metric | Three months ended May 31 | Nine months ended May 31 |
|---|---|---|
| Revenue | $12.30 million, up 23.8% | $32.05 million, up 23.5% |
| Gross profit / margin | $9.63 million / 78.3%, versus 76.6% | $24.07 million / 75.1%, versus 74.0% |
| Operating income / margin | $3.86 million / 31.4%, versus $3.88 million / 39.1% | $9.40 million / 29.3%, versus $8.70 million / 33.5% |
| Net income | $2.94 million, up 1.6%; diluted EPS $0.16 | $7.14 million, up 9.5%; diluted EPS $0.39 |
| Operating cash flow | Not presented separately for the quarter | $6.10 million, versus $8.58 million |
For the nine months, software license revenue was $16.85 million and consulting services revenue was $15.20 million. At May 31, cash and cash equivalents were $7.35 million, compared with $11.44 million at August 31, 2019; current assets were $22.18 million and current liabilities $7.79 million. The company had no borrowings on its $3.5 million revolving credit facility. Acquisition-related contract liabilities totaled $7.70 million, including current liabilities of $3.76 million; these include earn-out and holdback obligations. Operating lease liabilities totaled approximately $1.01 million.
Changes and material developments
- Quarterly revenue growth reflected increases in Lancaster, Cognigen/Buffalo and DILIsym/North Carolina, plus $622,000 of Lixoft revenue. Consulting and analytical study revenue rose 32.4%; software and related sales rose 17.7%.
- Nine-month growth included higher revenue across the existing divisions and Lixoft’s two-month contribution. DILIsym revenue grew 55.9% year over year for the nine-month comparison.
- Profitability did not rise as quickly as revenue. Quarterly SG&A increased 62.7% to $5.02 million, including $1.04 million of acquisition-related legal and consulting costs, higher staffing and compensation expenses, and increased vacation accruals. Nine-month SG&A rose 46.8% to $12.65 million.
- Quarterly gross margin improved to 78.3%, while operating margin declined to 31.4%. Nine-month operating margin was 29.3%, below 33.5% a year earlier.
- Operating cash flow fell to $6.10 million from $8.58 million, with accounts receivable increasing $5.27 million as a use of cash. Investing cash outflow was $7.51 million, including acquisition spending; financing cash outflow was $2.67 million, principally dividends.
- Lixoft was acquired for preliminary total consideration of $18.73 million, including assumed liabilities, with acquired technology, customer-related intangibles and goodwill recorded. The agreement also provides for earn-outs of up to $5.5 million and a $2.0 million holdback arrangement. Acquisition-related fair values and future payments depend on estimates and performance.
Outlook, commentary and risks
The filing provides no formal revenue or earnings guidance. Management stated that cash and expected operating funds should meet anticipated working-capital and capital-expenditure needs for the foreseeable future; the undrawn credit line is an additional potential funding source. Management also described continued product development and planned releases, including DILIsym X in late summer or early fall 2020, IPFsym in late 2020 and RENAsym in summer 2021; these are stated targets, not financial guidance.
The company said the effect of COVID-19 on its business could not yet be estimated. It identified potential disruption to business activity and adverse effects from broader economic conditions. COVID-related travel limitations contributed to higher vacation accruals, while travel and trade-show costs declined. Other risks noted include competition and rapid technology change, reliance on pharmaceutical customers, customer and receivables concentration, international exposure and foreign-exchange fluctuations. The company does not hedge currency exposures. It reported no pending legal proceedings and no impairment charges; management concluded disclosure controls were effective.
Most important facts for investors to verify
- Whether the elevated accounts receivable balance is collected and operating cash flow improves.
- Whether SG&A growth, including acquisition costs and compensation-related expenses, moderates and operating margins recover.
- Lixoft’s continuing revenue and profitability, the final purchase-price allocation, and the amount and timing of contingent earn-out and holdback payments.
- The impact of COVID-19 on customer demand, consulting activity, project timing and future results; the filing does not quantify that impact.
- Whether the company’s stated product-development timelines and expected liquidity remain achievable.