Simulations Plus, Inc. — Q2 FY2021 10-Q
Reporting period: Three and six months ended February 28, 2021; comparisons are to periods ended February 29, 2020. Amounts below are in millions of dollars unless noted. The company develops drug-discovery and development software and provides related consulting services. Lixoft, acquired April 1, 2020, is included in current-period results but not the prior-year reported comparison.
Financial performance
| Metric | Q2 FY2021 | Q2 FY2020 | Six months FY2021 | Six months FY2020 |
|---|---|---|---|---|
| Revenue | $13.15 | $10.35 | $23.85 | $19.75 |
| Gross profit | $10.24 | $7.68 | $18.50 | $14.44 |
| Gross margin | 77.9% | 74.2% | 77.6% | 73.1% |
| Operating income | $3.49 | $2.83 | $6.54 | $5.55 |
| Net income | $3.21 | $2.15 | $5.69 | $4.21 |
| Diluted EPS | $0.15 | $0.12 | $0.27 | $0.23 |
- Q2 revenue grew 27% and net income 49%; six-month revenue grew 21% and net income 35%. Six-month software revenue rose 40%, while consulting revenue was comparatively steady.
- Operating expenses rose 39% in Q2 and 35% for six months, faster than revenue. SG&A growth reflected higher compensation, headcount, payroll taxes, insurance and professional fees; R&D expense also increased.
- Operating margin was approximately 26.5% in Q2 (27.3% prior year) and 27.4% for six months (28.1% prior year). Net margin increased to approximately 24.4% in Q2 and 23.9% for six months, helped by lower effective tax rates.
- Reported growth includes Lixoft. For context, company-provided pro forma prior-year revenue and net income were $11.49 million and $2.78 million for Q2, and $22.01 million and $5.29 million for six months; current-period reported figures were $13.15 million/$3.21 million and $23.85 million/$5.69 million, respectively.
Cash, liquidity and obligations
- At February 28, 2021, cash and cash equivalents were $42.4 million and short-term investments were $75.4 million, versus $49.2 million and $66.8 million at August 31, 2020. Working capital was $129.0 million; the current ratio was 20.7.
- Six-month operating cash flow was $6.6 million, up from $3.8 million. Investing used $11.9 million, mainly reflecting purchases of short-term investments, partly offset by investment maturities/sales; financing used $1.6 million, including $2.4 million of dividends.
- The company reported no borrowings under its $3.5 million credit facility. It reported a debt-to-equity ratio of 0.1; liabilities include Lixoft acquisition holdback and earnout obligations and lease liabilities. Total liabilities were $14.3 million.
- Management said cash, cash equivalents and expected operating funds should meet working-capital and capital-expenditure needs for the foreseeable future, subject to forecast uncertainty.
Outlook, risks and notable items
- No numerical revenue or earnings guidance was provided. Remaining performance obligations not covered by practical expedients were approximately $3.8 million, with a majority expected to be recognized within 12 months.
- Management attributed growth to software sales, including GastroPlus and ADMET, and to the addition of Lixoft. DILIsym six-month revenue declined 8%, primarily on lower consulting revenue; its Q2 revenue rose 25%.
- Key risks cited include the fast-changing and competitive software market, reliance on pharmaceutical customers, potential industry consolidation, and uncertain COVID-19 effects on customer spending and payment capacity. Two customers represented 13% and 5% of six-month sales.
- Cash and investments include funds held at financial institutions; $12.7 million of cash exceeded insured limits. The company noted it was investigating ways to reduce this exposure.
- Lixoft earnout fair value increased $0.243 million to $4.974 million; valuation depends on significant unobservable assumptions. The acquisition agreement permits earnout payments up to $5.5 million over two years, subject to revenue growth.
- The company said termination of its Dassault database license had not adversely affected revenue, but arrangements to replace the database were expected to be completed by fiscal year-end 2021. A $0.06-per-share quarterly dividend was declared after quarter-end for payment May 3, 2021.
- No legal proceedings were reported, and management concluded disclosure controls were effective. No impairment charges were recorded in the reported periods.
Investor verification points
- Separate Lixoft acquisition contribution from underlying organic growth, particularly for software revenue and margins.
- Track receivables and cash conversion: accounts receivable rose to $11.3 million from $7.4 million at fiscal year-end and contributed to operating cash-flow movements.
- Monitor expense growth, especially SG&A and R&D, against revenue growth and product investment.
- Review Lixoft earnout assumptions, payment timing, and potential cash and share dilution; also note the current $1.333 million holdback liability.
- Confirm progress and business continuity for the replacement metabolite database and monitor customer concentration, COVID-19 exposure, and uninsured bank balances.