Simulations Plus, Inc. — Q1 FY2018 10-Q
Business context and period: The filing covers the unaudited three months ended November 30, 2017, compared with the three months ended November 30, 2016. Simulations Plus develops pharmaceutical simulation and prediction software and provides consulting services. The quarter includes DILIsym, acquired June 1, 2017; the prior-year reported results do not.
Financial results
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Revenue | $7.07 million | $5.42 million | +30.5% |
| Gross profit / margin | $5.33 million / 75.4% | $4.08 million / 75.3% | +30.7% gross profit |
| Operating income / margin | $2.56 million / 36.3% | $1.93 million / 35.6% | +33.0% |
| Net income / margin | $1.72 million / 24.3% | $1.36 million / 25.1% | +26.0% |
| Basic and diluted EPS | $0.10 | $0.08 | — |
| Operating cash flow | $2.64 million | $1.94 million | +36.0% |
Reported revenue growth included $1.11 million from DILIsym, which was absent from the prior-year reported period. Lancaster revenue rose 9.4% to $4.04 million and Buffalo (Cognigen) revenue rose 11.1% to $1.91 million. Software and related sales increased 10.0%; consulting and analytical study revenue increased 65.3%. On a pro forma basis, assuming DILIsym had been included in the prior-year quarter, revenue was $7.07 million versus $5.96 million and net income was $1.72 million versus $1.27 million.
Cash and cash equivalents were $7.05 million at quarter-end, up from $6.22 million at August 31, 2017. Current assets were $13.99 million and current liabilities $5.65 million. Total assets were $39.75 million; total liabilities were $13.07 million. The filing reports acquisition-related contracts payable of $5.78 million, including $3.15 million classified as current and $2.63 million long-term. No separate conventional bank debt balance is reported. Cash flow from investing was negative $554,000, including $507,000 of capitalized software development costs; financing cash flow was negative $1.26 million, including $1.04 million of dividends and $247,000 of contract-payable payments.
Changes, outlook, and risks
- Operating expenses increased 28.6% to $2.77 million. SG&A rose 29.2% to $2.41 million, with cited increases in marketing, compensation, insurance, and acquisition-related amortization. R&D expense was $361,000; total R&D incurred was approximately $868,000, of which $507,000 was capitalized.
- Cost of revenue rose 29.9%, broadly in line with revenue growth. Gross margin was nearly unchanged. Net margin declined from 25.1% to 24.3%, partly reflecting a higher effective tax rate of 31.8% versus 30.8%.
- Management said existing capital and expected operating cash flows should meet working-capital and capital-expenditure needs for the foreseeable future. It anticipated future quarterly dividends of $0.06 per share, subject to board approval; $0.06 per share was paid in November 2017.
- Management expected GastroPlus version 9.6 and PKPlus version 2.0 in early calendar 2018. DDDPlus 6.0 and MembranePlus 2.0 were in final development testing. These are stated expectations, not formal financial guidance.
- DILIsym consideration includes a $1.0 million holdback and an earn-out of up to $5.0 million based on earnings over three years. The recorded contingent consideration was $4.78 million; management estimated substantial payments beginning in 2019. Its fair value uses significant unobservable assumptions.
- Key risks cited include competition and rapid technology change, dependence on pharmaceutical customers, customer and receivables concentration, and foreign-currency exposure. International sales were 35.6% of revenue. Cash at banks exceeded FDIC-insured limits by $5.95 million. The company does not hedge currency exposure. It reported no pending legal proceedings and no impairment charges in the quarter.
- As a subsequent event, the December 2017 U.S. tax law was enacted after quarter-end. The company was evaluating its effects and elected to use the SEC’s extended measurement period. The filing also states it was evaluating the effects of new revenue-recognition and lease accounting standards.
Important facts to verify
- Assess how much reported growth reflects DILIsym’s inclusion, and compare with the filing’s pro forma figures and subsequent segment performance.
- Review the timing and assumptions for the $5.78 million acquisition-related payable, particularly the current classification and estimated 2019 payments.
- Reconcile diluted weighted-average shares: the statements of operations report 17,859,683, while the EPS note reports 17,871,683.
- Reconcile the SG&A ratio for the prior-year quarter: the MD&A table reports 34.4%, while its narrative gives 29.2%.
- Monitor cash collection and customer concentration, uninsured bank deposits, capitalized software investment, and the eventual tax-law impact.