Business context and reporting period
Simulations Plus, Inc. filed this Form 10-K for the fiscal year ended August 31, 2019. The company develops pharmaceutical research and drug-development software and provides scientific consulting through Simulations Plus, Cognigen, and DILIsym. Revenue comes primarily from software licenses and consulting services.
Management characterized FY2019 as another record year, citing increased adoption of modeling and simulation and regulatory interest in these tools. The filing also presents fourth-quarter results; its fiscal fourth quarter was June–August.
Financial performance and liquidity
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Revenue | $33.97 million | $29.67 million | +14.5% |
| Gross profit | $24.94 million | $21.67 million | +15.1% |
| Gross margin | 73.4% | 73.1% | +0.3 percentage points |
| Operating expenses | $14.30 million | $11.37 million | +25.7% |
| Operating income | $10.65 million | $10.30 million | +3.4% |
| Net income | $8.58 million | $8.93 million | -3.9% |
| Diluted EPS | $0.48 | $0.50 | -4.0% |
| Operating cash flow | $11.64 million | $9.29 million | +25.3% |
Consulting revenue increased 19.0% to approximately $15.5 million; software and related revenue increased 11.0% to approximately $18.5 million. Gross margin improved slightly, while operating margin declined to 31.5% from 34.7%, reflecting faster growth in SG&A and expensed R&D. SG&A rose 23.1%, with increased staffing, recruiting, insurance, and other growth-related costs among the drivers.
FY2019 net income included an income-tax provision of $1.97 million and an 18.7% effective tax rate. FY2018 included a one-time $1.5 million deferred-tax benefit from the 2017 Tax Act, helping explain why FY2019 net income declined despite higher operating income.
At August 31, 2019, cash and cash equivalents were $11.44 million, working capital was $16.38 million, total assets were $45.20 million, and shareholders’ equity was $37.68 million. The company reported no borrowed debt. Total liabilities were $7.52 million, including $1.76 million of current DILIsym contingent consideration. Cash increased $2.03 million during the year after $11.64 million of operating cash flow, $1.96 million of investing cash outflow, and $7.65 million of financing cash outflow. Dividends paid were $4.20 million.
FY2019 fourth-quarter revenue was $8.03 million, gross profit $5.74 million, and net income $2.06 million, compared with $6.69 million, $4.57 million, and $1.34 million, respectively, in FY2018’s fourth quarter.
Material changes versus the prior comparable period
- Revenue grew 14.5%; Cognigen and DILIsym revenue increased, and consulting grew faster than software-related revenue.
- Operating income grew more slowly than revenue as operating expenses increased 25.7%. Expensed R&D rose to $2.50 million from $1.79 million; total R&D spending was approximately $4.30 million, of which $1.77 million was capitalized.
- Operating cash flow improved to $11.64 million from $9.29 million. Cash rose to $11.44 million from $9.40 million.
- The DILIsym acquisition earn-out liability fell from $4.89 million to $1.76 million after payments; the company estimated a final payment of approximately $1.76 million in August 2020.
- The company adopted ASC Topic 606 using the modified retrospective method, reducing opening retained earnings by $493,279. The filing reports a $152,735 reduction in FY2019 net income versus the amount calculated without adoption.
Outlook, management commentary, risks, and unusual items
No quantified revenue or earnings guidance is provided. Management’s stated priorities include product and service collaborations, sales and marketing expansion, recruiting, scientific publishing, and pursuing complementary acquisitions. It noted uncertainty around new-market growth and the effect of potential acquisitions. Remaining performance obligations not covered by practical expedients were approximately $6.84 million, expected to be recognized within two and a half years.
Product developments included new releases of GastroPlus, ADMET Predictor, DDDPlus, PKPlus, DILIsym, NAFLDsym, and KIWI. The company also reported a two-year, $2.7 million IPF modeling collaboration and an FDA award of $250,000 per year for up to two years for dermal-model work. RENAsym development had NIH grant support; management expected an initial release toward the end of 2020. These are development plans, not earnings guidance.
Key risks include customer and pharmaceutical-industry consolidation or reduced R&D spending; competition and pricing pressure; cancellations, delays, or cost overruns on consulting contracts; reliance on key scientific staff; software defects and cybersecurity or hosting interruptions; international and foreign-exchange exposure; and potential goodwill or intangible-asset impairment. International sales were 34% of revenue. Three customers or dealer accounts represented 8%, 8%, and 7% of revenue, and one customer accounted for 10% of year-end receivables. Cash balances exceeded FDIC-insured limits by $10.22 million. The company does not hedge foreign currencies and reported no pending litigation.
The company paid quarterly dividends of $0.06 per share during FY2019 and said future dividends remain subject to board approval. It reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Assess whether FY2019 revenue growth, especially consulting growth, is sustainable and how the business mix affects margins.
- Reconcile reported FY2019 earnings and cash flow with the ASC 606 adoption impacts and understand the prior-year $1.5 million tax benefit.
- Track the remaining DILIsym earn-out payment, acquisition-related obligations, and future acquisition plans.
- Review customer concentration, international revenue and currency exposure, and the security and continuity of hosted services.
- Monitor product-development milestones, remaining performance obligations, and the board’s quarterly dividend decisions.