Simulations Plus, Inc. — Q2 FY2020 Form 10-Q
Reporting period: Quarter and six months ended February 29, 2020; unaudited. Simulations Plus develops pharmaceutical modeling and simulation software and provides related consulting services. Comparisons are with the corresponding prior-year periods.
Financial performance
| Metric | Q2 FY2020 | Q2 FY2019 | Six months FY2020 | Six months FY2019 |
|---|---|---|---|---|
| Revenue | $10.35m | $8.47m | $19.75m | $16.01m |
| Gross profit / margin | $7.68m / 74.2% | $6.26m / 73.9% | $14.44m / 73.1% | $11.60m / 72.5% |
| Operating income / margin | $2.83m / 27.3% | $2.73m / 32.2% | $5.54m / 28.1% | $4.82m / 30.1% |
| Net income | $2.15m | $2.10m | $4.21m | $3.64m |
| Diluted EPS | $0.12 | $0.12 | $0.23 | $0.20 |
- Growth and mix: Q2 revenue rose 22.2%; software and software-related sales increased 13.2%, while consulting and analytical study revenue grew 33.6%. Six-month revenue increased 23.4%, led by consulting growth of 36% and software growth of 13.1%. All three divisions reported higher revenue; North Carolina/DILIsym had the fastest growth.
- Costs and margins: Gross margin improved in both periods. However, SG&A rose 46.3% in Q2 and 37.9% year to date, outpacing revenue growth; operating margin and net margin consequently declined year over year. Management cited acquisition-related legal and consulting fees, higher headcount and compensation, stock compensation, payroll taxes, insurance, and contract labor. Q2 net margin was 20.8%, versus 24.8% a year earlier.
- Cash flow: Six-month operating cash flow was $3.83m, down from $5.69m. Net income increased, but cash generation was affected in part by higher receivables ($2.22m increase) and revenue in excess of billings ($0.88m increase). Investing outflow was $1.20m, including $1.13m of capitalized software development. Financing outflow was $1.81m, mainly $2.12m of dividends. Cash increased $0.81m to $12.25m.
- Liquidity and obligations: Current assets were $24.68m and current liabilities $5.48m at period end; total liabilities were $8.34m. The filing reports no conventional borrowings at February 29, 2020, but includes a $1.76m DILIsym earn-out liability, expected to be paid in August 2020, and operating lease liabilities of $0.64m. The board declared two $0.06-per-share dividends during the first half.
Material changes, outlook, and risks
- Q2 revenue growth was broad-based, but operating income rose only 3.5% and net income 2.4% as operating expenses increased. For the first half, operating income increased 15.1% and net income 15.8%.
- The company reported approximately $3.9m of remaining performance obligations, expected to be recognized over the next two and a half years. No quantitative full-year financial guidance is provided. Product development commentary includes a planned DILIsym X release in summer 2020 and targeted 2021 releases for RENAsym and IPFsym.
- Post-quarter acquisition: On April 1, 2020, the company completed its acquisition of Lixoft. The agreement provided for up to $16.5m aggregate consideration, including cash, newly issued restricted shares, and potential earn-out payments. At closing it paid $9.46m cash and issued approximately $3.67m in shares; part of the consideration is held back for indemnification claims. This acquisition occurred after the balance-sheet date.
- Financing: On March 31, 2020, the company entered into a secured $3.5m line of credit, with interest at prime or, at the company’s option, LIBOR plus 1.75%; amounts are due April 15, 2022.
- COVID-19: Management said the pandemic’s effects were uncertain and that much of the significant economic disruption occurred after the quarter. The company was monitoring the situation; the filing does not quantify any impact on results.
- Other risks and contingencies: The company identifies competition, dependence on pharmaceutical customers, international sales and foreign-exchange exposure, and potential business disruption from COVID-19. It does not hedge currency exposure. International sales were 33% of six-month revenue. Cash deposits exceeded FDIC-insured limits by $10.99m. The company reported no pending legal proceedings and no impairment charges.
Important facts for investors to verify
- Whether consulting-led growth and the reported remaining performance obligations convert to revenue on schedule.
- Whether SG&A growth moderates and operating margins recover after acquisition-related and staffing costs.
- The final Lixoft purchase-price adjustments, earn-out obligations, and effect on cash, share count, and financing needs.
- The impact of COVID-19 on customer demand, project delivery, and results after February 29, 2020.
- Timing and payment of the $1.76m DILIsym earn-out and the company’s exposure to uninsured bank deposits and foreign-currency movements.