Simulations Plus, Inc. — Q1 FY2020 Form 10-Q
Reporting period: Three months ended November 30, 2019, compared with the three months ended November 30, 2018. The company develops pharmaceutical simulation software and provides consulting services. Results are unaudited.
Key financial metrics
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Revenue | $9.40 million | $7.54 million | +24.8% |
| Gross profit | $6.76 million | $5.34 million | +26.7% |
| Gross margin | 71.9% | 70.8% | +1.1 percentage points |
| Operating income | $2.72 million | $2.09 million | +30.3% |
| Net income | $2.06 million | $1.54 million | +34.0% |
| Diluted EPS | $0.11 | $0.09 | Up |
| Operating cash flow | $2.63 million | $2.61 million | Nearly unchanged |
Net margin was 21.9%, compared with 20.4%. Cash and cash equivalents were $12.61 million at November 30, 2019, versus $11.44 million at August 31, 2019. Total assets were $47.76 million and shareholders’ equity was $39.19 million. The company reported no conventional borrowings; liabilities included a $1.76 million DILIsym earn-out payable, expected to be paid in August 2020, and operating lease liabilities of $768,127. Cash dividends paid during the quarter totaled $1.06 million.
Performance and material changes
- Revenue increased $1.87 million. Lancaster revenue rose 12.9% to $4.93 million, Buffalo/Cognigen rose 15.6% to $2.39 million, and North Carolina/DILIsym rose 88.7% to $2.09 million.
- Software and software-related sales increased 13.1%; consulting and analytical study revenue increased 38.6%.
- Cost of revenue rose 20.1%, slower than revenue growth, lifting gross margin. SG&A increased 29.2% to $3.51 million, driven chiefly by compensation, director fees, insurance and professional fees. R&D expense was $526,352; the company also capitalized $506,871 of software development costs.
- Revenue growth was accompanied by higher receivables: accounts receivable increased to $6.35 million from $5.03 million at fiscal year-end. Operating cash flow remained similar year over year.
Outlook, risks and notable items
- Management stated that cash, existing capital and anticipated operating funds should cover working capital and capital expenditure needs for the foreseeable future. No specific revenue or earnings guidance was provided.
- The company described continuing product development and new funded collaborations, including projects with pharmaceutical companies. It also said it was developing RENAsym, with an initial release expected toward the end of 2020, and IPFsym, targeted for 2021; these are plans, not assured outcomes.
- Revenue depends substantially on pharmaceutical and biotechnology customers. Management cited competitive and rapidly changing software markets, potential pharmaceutical-industry consolidation, and the need to develop products and distribution channels.
- Four customers accounted for 33% of quarterly sales in aggregate, including a Japanese dealer representing multiple customers. International sales were 30% of revenue. Cash exceeding FDIC insurance limits was $11.39 million.
- Dassault Systèmes indicated it would no longer make a database available for purchase; the company was arranging a replacement. The related Metabolism Module royalty expense was $53,309 for the quarter.
- The company adopted lease accounting standard ASC 842 on September 1, 2019, recognizing right-of-use assets and lease liabilities; prior periods were not retrospectively adjusted. No goodwill or long-lived-asset impairment charges were recorded, and no pending legal proceedings were reported.
- A $0.06-per-share quarterly dividend was declared in January 2020, payable in February to shareholders of record January 27.
Important facts for investors to verify
- Whether strong DILIsym and consulting growth can continue, and how much revenue growth comes from recurring software licenses versus project-based services.
- Collection and timing of receivables and unbilled revenue, given the increase in accounts receivable and operating cash flow that did not rise with net income.
- Payment timing and final amount of the $1.76 million DILIsym earn-out due in 2020, as well as lease obligations.
- Progress and cost of replacing the Dassault database, and any effect on the Metabolism Module.
- Customer and international revenue concentration, exposure to uninsured bank deposits, and the company’s stated risks relating to competition and pharmaceutical-industry changes.