Business context and reporting period
Simulations Plus, Inc. filed this Form 10-K for the fiscal year ended August 31, 2018. It develops pharmaceutical research and drug-development modeling software and provides scientific consulting through Simulations Plus, Cognigen, and DILIsym. The filing is annual; fourth-quarter figures below are unaudited.
Financial results and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $29.67 million | $24.14 million |
| Gross profit / margin | $21.67 million / 73.1% | $17.83 million / 73.9% |
| Operating income / margin | $10.30 million / 34.7% | $8.26 million / 34.2% |
| Net income / net margin | $8.93 million / 30.1% | $5.79 million / 24.0% |
| Diluted EPS | $0.50 | $0.33 |
| Operating cash flow | $9.29 million | $6.88 million |
- Revenue grew 22.9%; management attributed growth to higher software and consulting sales and a full year of DILIsym results, compared with only three months in FY2017. Consulting revenue rose $4.49 million year over year, including $3.2 million from DILIsym; software license revenue rose $1.03 million.
- Gross margin declined 0.8 percentage points as cost of revenue grew faster than sales, reflecting consulting labor and revenue mix. SG&A was $9.58 million, up 16.9%; R&D expense was $1.79 million. Total R&D spending was $3.94 million, of which $2.15 million was capitalized.
- Net income included a one-time $1.5 million deferred tax benefit from the 2017 Tax Act; the effective tax rate was 11.9%, versus 29.8% in FY2017.
- FY2018 cash flows: investing activities used $2.33 million, including $2.15 million of capitalized software development; financing activities used $3.77 million, including $4.16 million in dividends. Cash increased $3.18 million to $9.40 million.
- At year-end, working capital was $13.00 million, total assets $43.28 million, total liabilities $11.36 million, and shareholders’ equity $31.92 million. The company reported no borrowed debt. Acquisition-related contract payables were $5.89 million, including $2.56 million current and $3.33 million long-term.
- FY2018 fourth-quarter revenue was $6.69 million, gross profit $4.57 million, and net income $1.34 million; diluted EPS was $0.07.
Material changes versus the prior period
Revenue, operating income, and operating cash flow increased year over year. Comparability is affected by DILIsym, acquired in June 2017 and included for a full year in FY2018. The tax benefit materially boosted reported earnings growth. Quarterly dividends increased from $0.05 to $0.06 per share; total FY2018 dividends were $4.16 million.
Outlook, commentary, risks, and unusual items
- Management described FY2018 as a record year and cited growing adoption of modeling and simulation, regulatory interest in these methods, and demand for consulting. Its stated priorities include product development, sales and marketing, recruiting, collaborations, and accretive acquisitions. No quantified financial guidance was provided.
- Product plans included GastroPlus 9.7, expected in early 2019; NAFLDsym 2A, expected in October 2018; and RENAsym, with an initial release expected in fall 2020. These are plans, not guaranteed outcomes.
- Management expected existing capital and operating cash flows to cover foreseeable working-capital and capital-expenditure needs. The board’s stated intention was to continue quarterly dividends of $0.06 per share, subject to quarterly approval.
- Key risks include reliance on pharmaceutical R&D spending and customer contracts, competition, customer concentration, international sales (39% of revenue), foreign-exchange exposure, fixed-price project overruns or cancellations, cybersecurity and cloud-service interruptions, software defects, key-personnel retention, and potential impairment of acquisition-related goodwill and intangibles.
- One Japanese dealer account representing multiple customers accounted for 9% of revenue and 17% of year-end receivables. Cash exceeding FDIC-insured limits was $8.45 million. The DILIsym earn-out and holdback contributed to acquisition-related payables; a $1.56 million earn-out payment was made after year-end in September 2018.
- The company reported no pending legal proceedings or off-balance-sheet arrangements. The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting; management also reported effective controls.
Important facts for investors to verify
- How much of the revenue and earnings increase reflects underlying growth versus the full-year consolidation of DILIsym; compare with the filing’s pro forma data.
- Reported earnings excluding the one-time $1.5 million deferred tax benefit and the sustainability of the effective tax rate.
- Timing and amount of remaining DILIsym earn-out and holdback payments, and their effect on cash available for dividends or acquisitions.
- Renewal trends, customer concentration and collections, especially the significant Japanese dealer receivable; also monitor international and foreign-exchange exposure.
- Progress against product-release plans and the potential impact of adopting the new revenue-recognition and lease-accounting standards, which the filing said remained under evaluation.