Simulations Plus, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended August 31, 2017; comparison is principally with FY2016. The company develops pharmaceutical modeling and simulation software and provides consulting and contract research services. DILIsym Services became a wholly owned subsidiary on June 1, 2017, so reported FY2017 results include three months of its operations.
Financial performance and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $24.14 million | $19.97 million |
| Gross profit / margin | $17.83 million / 73.9% | $15.37 million / 77.0% |
| Operating income / margin | $8.26 million / 34.2% | $7.23 million / 36.2% |
| Net income / margin | $5.79 million / 24.0% | $4.95 million / 24.8% |
| Diluted EPS | $0.33 | $0.29 |
| Operating cash flow | $6.88 million | $5.42 million |
| Cash and cash equivalents at year-end | $6.22 million | $8.03 million |
| Working capital at year-end | $10.63 million | $10.57 million |
Investing activities used $4.36 million, including $4.52 million paid to acquire DILIsym and $1.38 million of capitalized software development costs. Financing activities used $4.34 million, including $3.45 million in dividends and $1.00 million in contract-payable payments. Cash decreased by $1.81 million during the year. The company reported no borrowed debt, but had $5.99 million in acquisition-related contract payables, including a $4.74 million estimated DILIsym earn-out liability. Management said existing capital and expected operating cash flows should cover foreseeable working-capital and capital-expenditure needs.
Changes versus FY2016 and notable items
- Revenue increased 20.9% ($4.17 million). Cognigen revenue increased 31.4% to $7.30 million; the Lancaster division grew 8.2% to $15.60 million; DILIsym contributed $1.24 million after acquisition. Software-license sales rose $1.07 million and consulting revenue rose $3.1 million.
- Gross margin declined from 77.0% to 73.9%, primarily reflecting higher consulting labor costs and a greater consulting share of revenue. Cost of revenue increased 37.1% to $6.31 million.
- SG&A rose 22.5% to $8.20 million, including approximately $620,000 of one-time DILIsym acquisition costs. Stock-based compensation increased to $585,000 from $347,000. R&D spending was approximately $2.74 million, of which $1.38 million was capitalized.
- Net income increased 16.9% despite acquisition costs and higher stock compensation. The effective tax rate declined to 29.8% from 31.6%.
- DILIsym acquisition consideration was estimated at approximately $10.46 million, including up to $5 million of earn-out payments based on future earnings. Goodwill increased to $10.39 million; the company reported no impairment charges.
- FY2017 fourth-quarter revenue was approximately $6.27 million and net income was $1.15 million, versus $3.96 million and $0.79 million, respectively, in FY2016’s fourth quarter. Management attributed the stronger quarter partly to DILIsym and Cognigen growth; the fourth quarter is usually seasonally weaker.
Outlook, commentary, and risks
No quantified revenue or earnings guidance is provided. Management described FY2017 as a record year and cited broader pharmaceutical adoption of modeling and simulation, regulatory interest in these methods, and consulting demand as growth drivers. Its stated priorities include product development, funded and unfunded collaborations, sales and marketing expansion, complementary acquisitions, and exploring machine-learning applications outside life sciences. GastroPlus 9.6 was expected in early calendar 2018; PKPlus 2.0 was in final testing. Management cautioned that new products, acquisitions, and adjacent-market opportunities may not generate meaningful growth.
- Key risks include customer and pharmaceutical-industry consolidation, reduced customer R&D spending, competition and pricing pressure, contract delays or cancellations, and fixed-price project overruns.
- International sales were 38% of revenue; foreign-currency exposure, particularly to the yen and renminbi, is not hedged. Three customers represented 7%, 7%, and 5% of FY2017 sales.
- Cloud-service dependence, cybersecurity and customer-data protection, software defects, and reliance on specialized personnel could affect operations or customer relationships.
- Acquisition integration and valuation risks are material: DILIsym was excluded from management’s FY2017 internal-control assessment. Goodwill and other intangibles totaled about $10.39 million in goodwill plus $10.82 million in net intellectual property and other intangibles.
- The company had $5.23 million of cash above insured limits at year-end. It also reported that the prior plane-crash lawsuit was dismissed with prejudice in June 2017 without company liability.
- The board expected quarterly dividends of $0.06 per share, subject to declaration; FY2017 dividends were $0.20 per share. A $0.06 dividend was declared after year-end.
The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Management and the auditor excluded DILIsym from the internal-control assessment following its acquisition; the auditor noted DILIsym represented 35.8% of consolidated assets and 5.1% of sales, while management reported 24.5% of assets and 5.1% of sales. The filing does not reconcile the differing asset percentages in the presented text.
Important facts for investors to verify
- How much of revenue growth and future earnings is organic versus attributable to the acquired DILIsym business, and how acquired operations affect margins.
- The timing, amount, and assumptions behind DILIsym’s earn-out and other acquisition obligations, including the $4.74 million estimated earn-out liability.
- Whether operating cash flow can sustain product investment, acquisition plans, and dividends while cash declined during FY2017.
- How unbilled contract revenue, receivables, and fixed-price consulting engagements convert into cash and affect margins.
- Integration progress and the adequacy of DILIsym’s financial controls, given its exclusion from the year-end control assessment.
- The eventual effects of the new revenue-recognition standard; management had not selected a transition method or quantified its impact.