Simulations Plus, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended August 31, 2021. This is an annual report; the filing also provides unaudited fourth-quarter results. Simulations Plus develops drug discovery and development modeling and simulation software and provides pharmaceutical consulting services.
Financial performance
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Revenue | $46.5 million | $41.6 million | +11.7% |
| Gross profit / margin | $35.9 million / 77.2% | $30.9 million / 74.4% | Profit +15.9%; margin +2.8 percentage points |
| Operating income | $11.3 million | $11.6 million | -3.0% |
| Net income | $9.8 million | $9.3 million | +4.8% |
| Diluted EPS | $0.47 | $0.50 | -6.0% |
| Operating cash flow | $19.2 million | $10.9 million | +$8.3 million |
Software revenue rose 28% to $27.7 million and represented 60% of sales; consulting revenue fell 6% to $18.8 million. Software gross margin was 88%, versus 61% for services. Overall gross-margin expansion reflected software growth and relatively stable cost of revenue. Operating expenses increased 27%, led by higher salaries, bonuses, stock compensation, headcount and payroll taxes; SG&A rose to 44% of revenue from 39%.
The effective tax rate fell to 11.8% from 18.0%, principally reflecting stock-compensation tax effects, R&D credits and foreign-tax items. The share count increased following the August 2020 public offering, contributing to lower diluted EPS despite higher net income.
Liquidity, debt and capital allocation
At August 31, 2021, cash and cash equivalents were $37.0 million and short-term investments were $86.6 million, for $123.6 million combined. Current assets were $139.3 million and current liabilities $11.6 million. The company reported no borrowings under its $3.5 million revolving credit facility, which was available through April 15, 2022. Management said cash and expected operating cash flows should cover working capital, capital expenditures and contractual obligations for the foreseeable future.
Investing activities used $26.7 million, mainly reflecting purchases of short-term investments and $2.9 million of capitalized software development. Financing activities used $4.7 million, primarily dividends and Lixoft earnout payments. The company paid $4.8 million in dividends, or $0.24 per share, and declared a subsequent quarterly dividend of $0.06 per share. Short-term investments were classified as held-to-maturity; their disclosed fair value was $86.5 million versus $86.6 million amortized cost.
Material changes and unusual items
- Revenue growth was driven mainly by software, including GastroPlus and ADMET Predictor, and a full year of Lixoft ownership; FY2020 included only five months of Lixoft results. Cognigen and DILIsym revenue declined 5% and 12%, respectively.
- Operating income declined even as gross profit rose, as operating expenses grew faster. FY2020 operating income included $1.4 million of one-time Lixoft acquisition costs.
- Operating cash flow increased substantially, supported in part by noncash charges and higher accrued payroll and other expenses; accounts receivable also increased.
- The fourth quarter had revenue of $9.8 million and net income of $0.3 million, compared with FY2021 third-quarter net income of $3.8 million. The filing notes seasonal softness in the first and fourth quarters but does not clearly explain the size of the fourth-quarter earnings decline.
- On June 1, 2021, the company issued Lixoft sellers shares valued at $0.7 million as part of a $2.0 million first-year earnout payment. A further Lixoft earnout remained contingent on performance.
Outlook, commentary and risks
Management described FY2021 as a record year and attributed continuing industry adoption to the perceived productivity benefits of modeling and simulation and regulatory support for these tools. Its stated priorities include product collaborations, sales and marketing expansion, recruiting scientific staff, and pursuing complementary acquisitions. No quantified revenue or earnings guidance is provided in the filing.
Management reported that renewals and existing service work were not materially affected by COVID-19, while new licenses and service contracts faced pressure from customer focus on pandemic-related work and disruption or cancellation of other drug-development programs. PKPD services were affected by customer delays, holds and cancellations. Management cautioned that continued disruption could hurt revenue and earnings.
Key risks include intense competition and pricing pressure; dependence on pharmaceutical R&D spending and clinical-trial activity; customer and project concentration; recruiting and retaining specialized personnel; contract cancellations, delays and fixed-price overruns; cybersecurity, customer-data protection and reliance on internal hosting and AWS; foreign-currency exposure; acquisition integration and goodwill or intangible-asset impairment; and seasonality and operating-result fluctuations. The company said it had no pending legal proceedings. Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management also assessed controls as effective.
Important facts for investors to verify
- Whether software growth can persist and offset lower consulting revenue, particularly in Cognigen and DILIsym.
- The cause and sustainability of the sharp fourth-quarter net-income decline; the filing does not clearly identify a specific cause.
- How much operating-cash-flow growth reflects recurring earnings versus working-capital timing and noncash items.
- The amount and timing of remaining Lixoft earnout and holdback obligations, and the performance conditions attached to them.
- Whether the quarterly dividend and acquisition plans remain supportable while maintaining the company’s substantial cash and investment balance.
- Exposure to customer concentration, COVID-related project disruption, foreign exchange, and hosting or cybersecurity incidents.