Simulations Plus, Inc. — Q3 FY2018 Form 10-Q
Reporting period: Quarter and nine months ended May 31, 2018; interim statements are unaudited. The company develops pharmaceutical simulation software and provides consulting and analytical services. DILIsym, acquired June 1, 2017, is included in current-period results but not the comparable prior-year results.
Financial performance
| Metric | Q3 FY2018 | Q3 FY2017 | Nine months FY2018 | Nine months FY2017 |
|---|---|---|---|---|
| Revenue | $8.55 million | $6.75 million | $22.98 million | $17.87 million |
| Gross margin | 76.4% | 78.6% | 74.4% | 75.8% |
| Operating income | $3.42 million | $3.10 million | $8.40 million | $6.82 million |
| Net income | $2.41 million | $2.08 million | $7.60 million | $4.64 million |
| Diluted EPS | $0.13 | $0.12 | $0.43 | $0.27 |
| Operating cash flow | Not separately presented | Not separately presented | $5.78 million | $4.76 million |
Q3 revenue rose 26.7%; software and related sales increased 17.4%, and consulting and analytical study revenue increased 49.1%. Nine-month revenue grew 28.6%, with software and related sales up 13.3% and consulting and analytical study revenue up 59.8%. The acquired DILIsym contributed $0.96 million of Q3 and $3.01 million of nine-month revenue.
Gross margin declined year over year in both periods, reflecting higher labor and direct contract-study costs, including DILIsym costs and acquired-technology amortization. Nine-month SG&A was $7.35 million and R&D expense was $1.35 million; the company also capitalized $1.63 million of software development costs. Nine-month net income includes a one-time $1.5 million deferred-tax benefit related to the 2017 Tax Act. Excluding that benefit, management reported nine-month net income growth of 31.5%.
Financial position and liquidity
- At May 31, 2018, cash and cash equivalents were $7.22 million, up from $6.22 million at August 31, 2017. Current assets were $17.33 million and current liabilities were $5.21 million.
- Operating cash flow of $5.78 million was offset in part by $1.72 million of investing outflows, including $1.63 million of capitalized software development, and $3.05 million of financing outflows, including $3.12 million in dividends. Ending cash increased by $1.01 million.
- Total liabilities were $11.77 million. The filing reports no conventional borrowings; acquisition-related contracts payable totaled $5.85 million, including $4.85 million of estimated DILIsym earn-out consideration and a $1.00 million holdback. Approximately $2.48 million was classified as current.
- Shareholders’ equity was $31.11 million. The company paid three quarterly dividends of $0.06 per share during the nine months and declared another $0.06 dividend after quarter-end.
Outlook, commentary, and risks
- Management said existing capital and anticipated operating cash flows should cover working capital and capital expenditures for the foreseeable future. The company anticipated future quarterly dividends of $0.06 per share, subject to Board approval; no specific financial guidance was provided.
- Product development included GastroPlus 9.6, released in May 2018, and ADMET Predictor 9.0, released in June. GastroPlus 9.7 was expected in early 2019. Management also described continued development of PKPlus, KIWI, DILIsym, and other products, and exploration of machine-learning applications beyond life sciences.
- Risks noted include rapid technological change and competition, dependence on pharmaceutical-industry customers, customer and international-sales concentration, foreign-exchange exposure, and cash balances exceeding FDIC-insured limits. International sales were 41% of nine-month revenue; cash exceeding insured limits was $6.25 million. The company does not hedge foreign currency exposure.
- DILIsym earn-out payments depend on earnings and are valued using significant unobservable assumptions; changes in estimates may affect earnings. No pending legal proceedings or impairment charges were reported. The company identified no material change in internal controls and concluded disclosure controls were effective.
- Subsequent event: Shawn O’Connor was appointed CEO on June 26, 2018, replacing founder Walter S. Woltosz, who remained Board Chair.
Important facts for investors to verify
- Reconcile the Q3 net-income figure: the statements of operations report $2,406,037, while the EPS note lists net income attributable to common shareholders of $2,406,927.
- Check the MD&A’s statement that Q3 operating income increased 34.7%; reported figures of $3.42 million versus $3.10 million imply a materially different growth rate.
- Assess underlying earnings excluding the $1.5 million tax benefit and the effect of DILIsym’s acquisition on year-over-year comparisons.
- Monitor DILIsym earn-out assumptions, payment timing, and the resulting current and long-term obligations.
- Evaluate cash conversion, capitalized software spending, margin trends, customer concentration, and the sustainability of dividends.