Simulations Plus, Inc. — Q2 FY2022 Form 10-Q
Reporting period: Quarter and six months ended February 28, 2022; comparisons are with the corresponding 2021 periods. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise. The interim financial statements are unaudited.
Business context
Simulations Plus develops modeling and simulation software for drug discovery and development, including AI- and machine-learning-based molecular property prediction, and provides related consulting services. Customers include pharmaceutical and biotechnology companies and other industry, academic, and regulatory organizations. Effective September 1, 2021, Cognigen and DILIsym were merged into the parent company; the filing says the mergers did not affect shareholder rights.
Financial performance and liquidity
| Metric | Three months ended Feb. 28 | Six months ended Feb. 28 |
|---|---|---|
| Revenue | $14.796m, up 13% from $13.147m | $27.213m, up 14% from $23.848m |
| Software revenue | $9.758m, up 25% | $17.120m, up 23% |
| Services revenue | $5.038m, down 5% | $10.093m, up 2% |
| Gross profit / gross margin | $11.966m / 81%, versus $10.236m / 78% | $21.627m / 79%, versus $18.504m / 78% |
| Operating income | $5.480m, up 57% | $9.271m, up 42% |
| Net income / diluted EPS | $4.409m / $0.21 | $7.435m / $0.36 |
| Operating cash flow | Not separately reported for the quarter | $6.179m, versus $6.634m |
Software growth was led by GastroPlus and MonolixSuite. In the quarter, software gross profit rose 28%, while services gross profit fell 8%; the filing attributes the services revenue decline mainly to lower PKPD work. Six-month services costs rose 10%, contributing to a 2% decline in services gross profit. Six-month SG&A increased 7% to $10.572m, while R&D expense decreased 15% to $1.784m. The six-month effective tax rate was 20.8%, compared with 11.4% in the prior-year period.
At February 28, cash and cash equivalents were $60.373m and short-term investments were $64.192m. Working capital was $134.6m, and the current ratio was 16.0. Total liabilities were $12.468m; the company had no borrowings under its $3.5m credit facility, which was scheduled to terminate April 15, 2022. The balance sheet includes $4.793m of current contracts payable, principally Lixoft acquisition-related holdback and earnout liabilities, as well as lease liabilities.
For the six months, cash increased $23.389m to $60.373m. Operating activities provided $6.179m; investing activities provided $19.089m, mainly reflecting net sales of short-term investments; financing activities used $1.879m, mainly dividends. Accounts receivable increased $5.188m, a significant operating cash-flow use.
Changes, outlook, risks, and unusual items
- Year-over-year change: Growth was concentrated in software, while quarterly services revenue declined. Overall gross margin expanded to 81% for the quarter and 79% for the six-month period.
- Revenue visibility: Remaining performance obligations were approximately $7.3m; about 90% was expected to be recognized within 12 months. This is not presented as formal revenue guidance.
- Management outlook: Management said existing capital and anticipated operating cash flows should cover working capital and capital expenditure needs for the foreseeable future. It expects continued demand for modeling and simulation tools but cautions that product acceptance and resulting revenue growth are not assured. The company continues to consider strategic acquisitions.
- Acquisition obligations and subsequent events: On April 1, 2022, the company released the $2.0m Lixoft holdback, paid with approximately $1.3m cash and $0.7m in restricted shares. The second-year earnout amount, if any, had not yet been determined; the agreement allows up to 90 days after April 1 to calculate it. On April 6, the board declared a $0.06-per-share dividend, approximately $1.2m, payable May 2.
- Risks: The filing identifies uncertainty from COVID-19 and possible pharmaceutical-industry consolidation, as well as potential business and market effects from the Russia-Ukraine conflict and inflation. It notes exposure to customer and receivable concentrations, international operations, and rapid competition and change in software markets. Management said the conflict had not materially affected the business to date.
- Other items: The company reported no pending legal proceedings and no impairment charges. Management concluded disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Most important facts for investors to verify
- Whether software growth continues and services performance improves, particularly in PKPD consulting.
- Whether the $7.3m of remaining performance obligations converts to revenue on the expected schedule.
- The final amount and cash/share composition of the second-year Lixoft earnout, in addition to the holdback already released after quarter-end.
- Whether receivables growth and lower operating cash flow relative to net income persist; monitor customer concentration and collections.
- The effect of higher taxes, inflation, geopolitical disruption, and pharmaceutical-sector consolidation on margins and demand.
- The credit facility’s status after its April 15, 2022 termination date and the company’s liquidity after acquisition payments, dividends, and any future acquisitions.