Simulations Plus, Inc. — Q2 FY2019 Form 10-Q
Reporting period: Three and six months ended February 28, 2019; fiscal year ends August 31. Interim financial statements are unaudited. The company develops pharmaceutical simulation and prediction software and provides consulting services.
Financial performance
| Metric | Q2 FY2019 | Q2 FY2018 | Six months FY2019 | Six months FY2018 |
|---|---|---|---|---|
| Revenue | $8.472 million | $7.357 million | $16.008 million | $14.425 million |
| Gross profit / margin | $6.264 million / 73.9% | $5.241 million / 71.2% | $11.601 million / 72.5% | $10.574 million / 73.3% |
| Operating income | $2.730 million | $2.417 million | $4.817 million | $4.981 million |
| Net income | $2.099 million | $3.475 million | $3.635 million | $5.191 million |
| Diluted EPS | $0.12 | $0.19 | $0.20 | $0.29 |
| Operating cash flow | — | $5.688 million | $4.070 million |
Q2 revenue increased 15.2% year over year; six-month revenue increased 11.0%. For the six months, software and related sales rose 9.8%, while consulting and analytical study revenue rose 18.2%. Operating expenses increased, with higher staffing, compensation, recruiting, and R&D spending among the cited drivers.
At February 28, cash and cash equivalents were $9.894 million, current assets $18.905 million, total assets $43.361 million, and shareholders’ equity $33.753 million. Current liabilities were $5.133 million. The company reported no conventional borrowings; acquisition-related contingent consideration payable was $3.411 million ($1.750 million current and $1.661 million long term). Six-month investing cash outflow was $1.023 million and financing cash outflow was $4.171 million, including $2.094 million of dividends and $2.557 million of acquisition-liability payments.
Changes, outlook, and risks
- Profit comparison affected by tax item: FY2018 included a one-time $1.5 million tax benefit from remeasurement of deferred taxes following the 2017 Tax Act. Management attributed most of the year-over-year net-income decline to that benefit; excluding it, management said six-month net income would have declined about $100,000, or 2%.
- Margins: Q2 gross margin improved to 73.9%, while six-month gross margin decreased to 72.5%, principally as cost of revenues grew faster than revenue over the six-month period. Six-month operating income declined 3.3% as operating expenses rose.
- Revenue accounting: ASC 606 was adopted September 1, 2018 using the modified retrospective method. It chiefly changed timing for one payment contract and reduced reported six-month operating income by about $124,000 and net income by about $78,000 versus the company’s presentation without adoption. Prior-year results were not recast.
- Management outlook: No numerical earnings or revenue guidance is provided. Management expects existing capital and anticipated operating funds to meet working-capital and capital-expenditure needs for the foreseeable future, while noting future financing might be needed if operating cash flows prove insufficient.
- Business developments: The filing describes a two-year, $2.7 million pharmaceutical-company collaboration on an idiopathic pulmonary fibrosis model, new FDA-funded work, and planned product development. It does not quantify the expected financial contribution of these initiatives.
- Risks and contingencies: The company cites competition and rapid technology change, dependence on pharmaceutical customers and potential industry consolidation, foreign-exchange exposure (without hedging), and customer/revenue concentration. International sales were 38% of six-month revenue. Cash deposits exceeded FDIC insurance limits by $8.891 million. No pending litigation was reported; certain tax years remain open to audit. Contingent consideration valuation uses significant Level 3 assumptions.
Investor verification points
- Check how much revenue growth and backlog conversion depend on software licenses versus consulting, and whether growth is sustained across divisions.
- Review operating-expense growth, six-month gross-margin pressure, and the impact of capitalized software development costs.
- Separate recurring operating performance from the prior-year $1.5 million tax benefit and assess the ASC 606 comparability effects.
- Verify the timing and amount of remaining DILIsym earn-out payments and the assumptions behind the contingent-consideration valuation.
- Monitor customer and international revenue concentration, uninsured bank deposits, currency exposure, and the stated liquidity outlook.