Simulations Plus, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended May 31, 2021; comparative periods ended May 31, 2020. Unaudited consolidated results. The company develops drug discovery and development modeling and simulation software and provides related consulting services.
Financial performance
Amounts below are in millions of dollars, except per-share data. Changes are year over year.
| Metric | Three months | Nine months |
|---|---|---|
| Revenue | $12.777; +4% | $36.625; +14% |
| Gross profit / gross margin | $10.306 / 81% (78% prior year) | $28.810 / 79% (75% prior year) |
| Operating income | $4.542; +18% | $11.079; +18% |
| Net income | $3.787; +29% | $9.477; +33% |
| Diluted EPS | $0.18 (prior year $0.16) | $0.46 (prior year $0.39) |
| Operating cash flow | Not reported separately for the quarter | $10.930 (prior year $6.104) |
For the quarter, software-related revenue rose $1.4 million, partly offset by a $1.0 million decline in consulting and analytical study revenue. For the nine months, software revenue increased $5.4 million, while consulting and analytical study revenue declined $846,000. Software represented 61% and consulting 39% of nine-month revenue.
Cash and cash equivalents were $58.811 million at May 31, 2021, and short-term investments were $60.948 million. Current assets were $138.698 million against current liabilities of $7.340 million; reported working capital was $131.4 million. The company had no borrowings under its $3.5 million credit line. Acquisition-related holdback and earnout liabilities totaled $6.428 million, including $3.333 million current. Nine-month dividends paid were $3.603 million.
Material changes versus prior period
- Nine-month revenue growth reflected higher software sales, including the contribution of Lixoft, acquired April 1, 2020. Comparisons therefore include Lixoft for only two months in the prior-year nine-month period.
- Simulations Plus segment revenue increased 14% for nine months, led by GastroPlus and ADMET software. Lixoft revenue was $3.827 million for the period.
- Cognigen revenue declined 2% and DILIsym revenue declined 15% for nine months, primarily due to lower grant revenue at Cognigen and lower consulting revenue at DILIsym.
- Nine-month operating expenses increased 21%, including higher SG&A (up 18%) and R&D expense (up 37%). R&D costs incurred were about $5.1 million, of which $2.3 million was capitalized.
- Effective tax rates decreased to 15.7% for the quarter and 13.1% year to date, which management attributed primarily to disqualified dispositions of exercised options.
Outlook, commentary, and risks
- No specific revenue, earnings, or other quantitative guidance is provided. Management expects existing capital and anticipated operating cash flows to cover working capital and capital expenditure needs for the foreseeable future, while cautioning that forecasts rely on assumptions and actual results may differ.
- Management sees continued demand for modeling and simulation tools as pharmaceutical R&D seeks greater productivity, but notes that product acceptance and resulting revenue growth are not assured. The company will continue to consider strategic acquisitions.
- Management reported no substantial COVID-19-related sales impact to date, but said effects remain uncertain. Pharmaceutical-industry consolidation or downsizing could adversely affect revenue and earnings.
- Other stated risks include competition and rapid technological change, dependence on pharmaceutical customers, customer credit and cash balances above insured limits, and the judgment involved in valuing contingent consideration and capitalized software. International sales were 31% of nine-month revenue.
- The Lixoft earnout liability was valued at $5.095 million at May 31, 2021. A $2.0 million earnout payment was made in June 2021. The board also declared a $0.06-per-share dividend payable August 2, 2021.
- The filing reports no pending legal proceedings and no material change in market-risk exposure. Management concluded disclosure controls were effective as of May 31, 2021.
Important facts for investors to verify
- Whether software growth continues and offsets weaker consulting results, particularly at Cognigen and DILIsym.
- How comparable future results are after the full-period inclusion of Lixoft, and whether Lixoft’s expected growth and synergies materialize.
- Whether elevated SG&A and R&D spending, stock-based compensation, and capitalized software development costs affect future profitability and cash generation.
- The ultimate Lixoft earnout and holdback payments, including the cash and share components, and the assumptions underlying contingent-consideration valuations.
- Whether customer concentration, pharmaceutical-industry consolidation, COVID-19 effects, or collection timing materially change revenue, receivables, or liquidity.