Simulations Plus, Inc. — Q3 FY2019 10-Q
Reporting period: Quarter and nine months ended May 31, 2019; comparisons are with the corresponding 2018 periods. Simulations Plus develops pharmaceutical simulation software and provides consulting services, primarily to pharmaceutical and biotechnology customers.
Financial performance
| Metric | Q3 FY2019 | Q3 FY2018 | Nine months FY2019 | Nine months FY2018 |
|---|---|---|---|---|
| Revenue | $9.94 million | $8.55 million | $25.94 million | $22.98 million |
| Gross margin | $7.61 million; 76.6% | $6.53 million; 76.4% | $19.21 million; 74.0% | $17.10 million; 74.4% |
| Operating income | $3.88 million; 39.1% of revenue | $3.42 million; 40.0% | $8.70 million; 33.5% | $8.40 million; 36.5% |
| Net income | $2.89 million; diluted EPS $0.16 | $2.41 million; diluted EPS $0.13 | $6.52 million; diluted EPS $0.36 | $7.60 million; diluted EPS $0.43 |
| Operating cash flow | Not separately provided for the quarter | $7.51 million | $5.78 million |
Q3 revenue increased 16.2% year over year, led by consulting and analytical study revenue, up 39.0%; software and related sales rose 4.1%. Nine-month revenue grew 12.9%, with consulting and analytical study revenue up 20.3% and software-related sales up 7.8%. In Q3, Buffalo/Cognigen revenue grew 30.7% and North Carolina/DILIsym revenue grew 43.5%; Lancaster grew 6.6%.
At May 31, cash was $10.31 million, current assets $21.26 million, and current liabilities $5.07 million. Total assets were $45.50 million and shareholders’ equity $35.97 million. The filing reports no conventional bank borrowings; acquisition-related contracts payable, including DILIsym earn-out obligations, totaled $3.44 million ($1.70 million current and $1.74 million long-term). Cash increased $0.91 million from August 31, 2018. Nine-month investing outflow was $1.49 million and financing outflow was $5.12 million, including $3.14 million of dividends and $2.56 million of contract-payable payments.
Material changes and unusual items
- Quarterly net income rose 20.1%, while operating margin eased to 39.1% from 40.0%, reflecting operating expenses growing faster than revenue. Nine-month operating margin fell to 33.5% from 36.5%, with SG&A and R&D increasing as a share of revenue.
- Nine-month net income declined 14.1%, primarily because the prior-year period included a one-time $1.5 million deferred-tax benefit associated with the 2017 Tax Act. Management said net income would have declined about 7% excluding that benefit. The effective tax rate was 23.9%, versus 8.5% in the prior-year period.
- The company adopted ASC 606 on September 1, 2018 using the modified retrospective method, reducing opening retained earnings by $692,944. For the nine months, adoption reduced reported net income by $110,011 compared with results without adoption; the 2018 comparative figures were not restated.
- Nine-month operating cash flow improved despite lower reported net income. Accounts receivable increased $2.22 million and revenue in excess of billings increased $0.70 million, both uses of operating cash.
Outlook, risks and contingencies
- No quantitative revenue or earnings guidance is provided. Management said existing capital and anticipated operating cash flows should meet foreseeable working-capital and capital-expenditure needs.
- Remaining performance obligations subject to disclosure were approximately $3.3 million, expected to be recognized within the next two and a half years; this excludes certain contracts of one year or less.
- Management cited product development and market expansion initiatives, including a new two-year, $2.7 million collaboration to develop a QSP model for idiopathic pulmonary fibrosis. GastroPlus version 9.7 was released in June 2019. The company is also exploring AI applications beyond its core markets; RENAsym development is funded by an NIH small-business grant, with an initial release expected in fall 2020.
- Key risks include competition and the need to sustain product development, reliance on the pharmaceutical industry, customer concentration, foreign-exchange exposure, and collections. International sales were 36% of nine-month revenue. Three customers each represented 7%–9% of nine-month sales. Approximately $9 million of cash exceeded FDIC-insured limits.
- The company reported no pending legal proceedings and no impairment charges. The DILIsym earn-out is measured using Level 3 inputs, so changes in estimates could affect recorded expense. A $0.06-per-share quarterly dividend was declared after quarter-end, payable August 1, 2019.
Important facts for investors to verify
- Whether revenue growth, particularly consulting growth, is recurring and translates into cash collection; monitor receivables and unbilled revenue.
- How operating margins and expenses develop as staffing, R&D, and product investment increase.
- The comparative effect of ASC 606 and the prior-year $1.5 million tax benefit when evaluating earnings trends.
- Future DILIsym earn-out payments and the assumptions underlying the remaining $3.44 million contingent consideration liability.
- Customer and international exposure, uninsured bank deposits, and foreign-currency sensitivity.