Business context and reporting period
Simulations Plus, Inc. filed this unaudited Form 10-Q for its fiscal first quarter ended November 30, 2021, comparing the three months with the quarter ended November 30, 2020. The company develops drug discovery and development modeling and simulation software, including AI/ML-based tools, and provides consulting services. Effective September 1, 2021, wholly owned subsidiaries Cognigen and DILIsym merged into Simulations Plus; the company said the mergers did not affect stockholder rights.
Financial performance
Unless noted otherwise, amounts are in millions of dollars. Revenue and income statement amounts are for the three months ended November 30.
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Software revenue | $7.362 | $6.212 | +19% |
| Services revenue | $5.055 | $4.489 | +13% |
| Total revenue | $12.417 | $10.701 | +16% |
| Gross profit / margin | $9.661 / 78% | $8.268 / 77% | +17% |
| Operating income | $3.791 | $3.051 | +24% |
| Net income | $3.026 | $2.479 | +22% |
| Diluted EPS | $0.15 | $0.12 | +25% |
| Operating cash flow | $3.582 | $5.333 | Down $1.751 |
Software gross margin was 90% versus 87%; services gross margin was 60% versus 64%. Operating margin was approximately 30.5% versus 28.5%. Management attributed software growth principally to GastroPlus and MonolixSuite, and services growth mainly to QSP/QST consulting and analytical studies. Services cost of revenue rose 25%, faster than services revenue.
Financial position and liquidity
At November 30, 2021, cash and cash equivalents were $41.680 million and short-term investments were $82.660 million, compared with $36.984 million and $86.620 million, respectively, at August 31, 2021. Working capital was $130.3 million, up from $127.7 million; the current ratio was 14.6, versus 12.0. Total liabilities were $12.538 million and shareholders’ equity was $168.456 million. The company reported no borrowings on its $3.5 million revolving credit line, available through April 15, 2022. Contracts payable, including Lixoft acquisition holdback and earnout liabilities, totaled $4.671 million and were classified as current.
Operating cash flow was $3.582 million, with management citing net income and noncash charges, partly offset by working-capital outflows, particularly increased accounts receivable. Investing activities provided $1.951 million, chiefly reflecting net proceeds from short-term investments; financing used $0.837 million, primarily for $1.209 million of dividends, partly offset by option exercises. The board declared a subsequent quarterly dividend of $0.06 per share, payable February 7, 2022.
Material changes, outlook, and risks
- SG&A increased 13% to $4.988 million, driven mainly by compensation, payroll taxes, insurance, and commissions. R&D expense was $0.882 million; an additional $0.838 million of software development costs was capitalized.
- Other income was $0.065 million, compared with other expense of $0.055 million in the prior-year quarter. The change primarily reflected higher foreign-exchange gains. The company also recorded a $0.121 million expense from the revaluation of Lixoft contingent consideration.
- The effective tax rate increased to 21.5% from 17.3%. No goodwill or long-lived-asset impairment was recorded.
- No specific financial guidance was provided. Management said existing capital and anticipated operating cash flows should meet foreseeable working-capital and capital-expenditure needs, and described continued interest in strategic acquisitions. Remaining performance obligations not covered by disclosure expedients were approximately $3.5 million, with most expected to be recognized within 12 months.
- Management cited uncertainty from COVID-19 and pharmaceutical-industry consolidation, and noted prior disruption and cancellations affecting PKPD services. Growth also depends on new product acceptance and expansion into new markets; outcomes are not assured.
- Four customers represented 7%, 5%, 5%, and 5% of quarterly sales; international sales were 31% of revenue. Cash balances sometimes exceeded insured limits. The company reported no pending or threatened legal proceedings, and said disclosure controls were effective with no material quarterly change in internal controls.
Important facts for investors to verify
- Whether software growth and improved consolidated gross margin persist, given the decline in services gross margin and faster growth in services costs.
- Accounts-receivable collection and operating cash conversion, which weakened year over year despite higher net income.
- Timing and final amounts of the $4.671 million current Lixoft-related contracts payable, including earnout valuation assumptions.
- Portfolio composition and valuation of the $82.660 million held-to-maturity investments, including the disclosed $0.296 million gross unrealized loss.
- Potential effects of COVID-19, industry consolidation, customer concentration, and acquisition or product-development plans on future results; the filing provides no quantified forecast.