Simulations Plus, Inc. — Q3 FY2022 Form 10-Q
Business context and period: Simulations Plus develops drug-discovery and development modeling and simulation software and provides scientific consulting. This unaudited report covers the quarter and nine months ended May 31, 2022; comparisons are with the corresponding 2021 periods. Amounts below are in U.S. dollars.
Financial performance
| Metric | Three months ended May 31, 2022 | Year-over-year change | Nine months ended May 31, 2022 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $15.0 million | +17% | $42.2 million | +15% |
| Gross profit / margin | $12.4 million / 83% | +$2.1 million; margin up from 81% | $34.0 million / 81% | +$5.2 million; margin up from 79% |
| Operating income | $4.9 million | +9% | $14.2 million | +28% |
| Net income | $4.1 million | +8% | $11.5 million | +22% |
| Diluted EPS | $0.20 | Up from $0.18 | $0.56 | Up from $0.46 |
Revenue mix and margins: For the nine-month period, software revenue rose 20% to $26.8 million, while services revenue increased 8% to $15.4 million. Software and services gross margins were 92% and 62%, respectively. Consolidated operating expenses rose 12% to $19.8 million; SG&A increased 16% to $17.4 million, while R&D expense declined 12% to $2.4 million. The nine-month effective tax rate rose to 19% from 13%.
Cash flow and liquidity: Nine-month operating cash flow was $10.0 million, versus $10.9 million a year earlier; management attributed the principal working-capital outflow to higher accounts receivable. Investing activities provided $2.0 million, largely reflecting net investment maturities and purchases. Financing activities used $6.6 million, including $3.6 million of dividends and $3.7 million of Lixoft-related payments. At May 31, cash and cash equivalents were $42.4 million, short-term investments were $80.1 million, and working capital was $138.9 million. The current ratio was 24.5. The company reported no drawn debt; its $3.5 million credit line expired April 15, 2022 and was not renewed. Operating lease liabilities totaled $1.5 million.
Material changes and unusual items
- Quarterly revenue growth reflected increases in both software (+16%) and services (+19%). Nine-month software growth was led by GastroPlus, MonolixSuite, and ADMET Predictor.
- SG&A growth included higher personnel costs, insurance, and travel. Management cited inflationary wage pressure and a tight labor market for quarterly personnel-cost increases.
- The final Lixoft acquisition holdback and earnout were settled in April and May 2022. The May earnout included $2.3 million cash and $1.2 million in shares; no related contracts payable remained at quarter-end.
- Quarterly other expense was $112,000, including a reported currency-exchange loss; nine-month other income was $6,000. The nine-month period also included the $283,000 change in contingent-consideration valuation.
- The board declared a $0.06-per-share quarterly dividend after quarter-end, payable August 1, 2022.
Outlook, commentary, and risks
The filing gives no specific revenue or earnings guidance. Management said existing capital and anticipated operating cash flows should meet working-capital and capital-expenditure needs for the foreseeable future, and that it continues to consider strategic acquisitions. It sees ongoing demand for modeling and simulation tools but cautions that new products and expansion into new markets may not produce material growth.
Risks discussed include inflation and rising labor and other costs, uncertainty from the Russia-Ukraine conflict and market disruption, possible pharmaceutical-industry consolidation or downsizing, and potential continuing COVID-19 effects on customers and spending. Management said the conflict had not materially affected the business to date, but future effects were uncertain. International sales represented 30% of nine-month revenue; four customers individually represented 5%, 4%, 3%, and 3%. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The company reported no pending or threatened legal proceedings.
Important facts for investors to verify
- Whether receivables collection and operating cash generation improve; receivables increased $8.7 million during the nine-month period.
- Whether software and services growth, and the reported gross-margin improvement, persist while SG&A costs rise.
- How inflation, foreign-exchange movements, geopolitical disruption, and pharmaceutical customer concentration affect results.
- Whether management pursues acquisitions or obtains replacement financing; the former credit line has expired.
- The treatment and effects of stock-based compensation and share issuance, including Lixoft consideration and employee options.