Simulations Plus, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2019, the three months ended November 30, 2018. Results are unaudited and compared with the three months ended November 30, 2017. The company develops pharmaceutical simulation software and provides scientific consulting services.
Financial performance
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Revenue | $7.536 million | $7.069 million | Up $467,000; approximately 6.6% based on reported amounts |
| Gross profit / margin | $5.336 million / 70.8% | $5.333 million / 75.4% | Gross profit nearly flat; margin down 4.6 percentage points |
| Operating expenses | $3.249 million | $2.769 million | Up 17.3% |
| Operating income / margin | $2.087 million / 27.7% | $2.564 million / 36.3% | Down $477,000 |
| Net income / margin | $1.536 million / 20.4% | $1.716 million / 24.3% | Down 10.5% |
| Diluted EPS | $0.09 | $0.10 | Down $0.01 |
| Operating cash flow | $2.612 million | $2.641 million | Down $30,000 |
- Revenue growth came from software and software-related sales, up $365,000 or 9.7%, and consulting and analytical studies, up $46,000 or 3.1%. Lancaster revenue was $4.365 million, Buffalo $2.065 million, and North Carolina $1.106 million.
- Cost of revenue rose $465,000, mainly from labor-related costs (+$310,000), direct contract costs (+$80,000), and software amortization (+$54,000). SG&A increased $311,000 and R&D expense increased $169,000.
- The effective tax rate fell to 24.0% from 31.8%; the filing attributes the lower rate mainly to changes following federal tax legislation. The tax reduction partly offset weaker operating income.
- Investing cash outflow was $416,000, including $365,000 of capitalized software development and $50,000 for intellectual property. Financing cash outflow was $2.244 million, including $1.045 million in dividends and $1.557 million in DILIsym acquisition-related payments.
Financial position and liquidity
- At November 30, 2018, cash and cash equivalents were $9.352 million, total current assets $17.401 million, and total assets $41.948 million. Current liabilities were $5.080 million; total liabilities were $9.625 million; shareholders’ equity was $32.323 million.
- No bank borrowings are identified in the presented balance sheet. Acquisition-related contracts payable totaled $4.372 million, of which $2.750 million was current and $1.622 million long-term. This includes a $1.000 million holdback and a $3.372 million estimated DILIsym earn-out liability.
- Cash declined $48,000 from August 31, 2018. Management said operating cash flow and existing capital should be sufficient for anticipated working capital and capital expenditures for the foreseeable future; it noted possible future financing needs if operating cash flow proves insufficient.
- The company paid a quarterly dividend of $0.06 per share during the quarter. On January 8, 2019, the board declared another $0.06-per-share dividend, payable February 1, 2019.
Material changes, outlook and risks
- The company adopted ASC Topic 606 on September 1, 2018 using the modified retrospective method. Adoption reduced opening retained earnings by $692,944. For this quarter, it increased reported revenue by $56,822 versus the unaudited presentation without adoption, while reducing net income by $12,488. The filing says the principal timing effect concerned a payment contract, with revenue recognized as time is expended.
- Remaining performance obligations not covered by practical expedients were approximately $3.3 million, expected to be recognized over the next two and a half years. The filing gives no formal company-wide revenue or earnings guidance.
- Management described continued product development and market expansion, including GastroPlus 9.7 expected in early 2019, NAFLDsym 2A planned for Q1 2019, and RENAsym’s first release expected in fall 2020. It also reported a new FDA-funded collaboration awarded in September 2018, worth $250,000 per year for up to two years.
- Management said consulting demand had been increasing and teams had been expanded. The company was approximately halfway through a five-year, nearly $5 million Bill & Melinda Gates Foundation contract.
- Risks highlighted include competition and rapid technology change, dependence on pharmaceutical and biotechnology customers, potential industry consolidation, foreign-exchange exposure, customer concentration, and cash balances above insured limits. International sales were 35% of revenue, versus 31.8% a year earlier; $8.273 million of cash exceeded FDIC insurance limits. The company does not hedge currency exposure.
- Four customers accounted for 13%, 9%, 7%, and 6% of quarterly sales (the 6% represented a Japanese dealer serving multiple customers). The company reported no pending legal proceedings, no impairment charges, and effective disclosure controls as of quarter-end.
Important facts for investors to verify
- The MD&A states revenue increased 5.8%, while the reported figures of $7.536 million and $7.069 million imply approximately 6.6% growth. Verify the intended growth rate.
- Review the gross-margin decline and increased operating costs, particularly labor, consulting-contract costs, and amortization, for persistence in subsequent quarters.
- Track DILIsym earn-out and holdback payments, their valuation assumptions, and the resulting cash requirements.
- Assess whether the reported $3.3 million of remaining performance obligations convert to revenue on schedule and whether anticipated product releases and research collaborations support growth.
- Monitor customer and international revenue concentration, uninsured cash exposure, and the effect of foreign-exchange movements.