Simulations Plus' CEO Discusses F2Q2014 Results - Earnings Call Transcript

| About: Simulations Plus, (SLP)

Simulations Plus, Inc. (NASDAQ:SLP)

F2Q2014 Results Earnings Conference Call

April 09, 2014, 04:25 PM ET


Renee Bouche - Investor Relations

Walter S. Woltosz - Chairman, President and CEO

John Kneisel - CFO

John DiBella - VP of Marketing and Sales


Renee Bouche

Good afternoon. It is Wednesday, April 9, 2014, and on behalf of Simulations Plus, I welcome you to our Second Quarter Fiscal Year 2014 Financial Results Conference Call and Webinar. Chairman and Chief Executive Officer, Walt Woltosz, will be presenting this afternoon. Joining Walt, as panelists, are Chief Financial Officer, John Kneisel; and Vice President of Marketing and Sales, John DiBella.

An opportunity to ask questions will follow Walt's presentation. [Operator Instructions] This call is being recorded for playback at our website,

It's now my pleasure to turn the presentation over to Walt Woltosz, Chairman and CEO of Simulations Plus.

Walt Woltosz

Thank you, Renee. And welcome everyone to our Second Quarter Fiscal Year 2014 Conference Call and Webinar. Always like to keep the attorneys happy, so I'll read the safe harbor statement.

With the exception of historical information, the matters discussed in this presentation are forward-looking statements that involve a number of risks and uncertainties. The actual results of the company could differ significantly from those statements.

Factors that could cause or contribute to such differences include, but are not limited to, continuing demand for the company's products, competitive factors, the company's ability to finance future growth, the company's ability to produce and market new products in a timely fashion, the company's ability to continue to attract and retain skilled personnel and the company's ability to sustain or improve current levels of productivity.

Further information on the company's risk factors is contained in the company's quarterly and annual reports and filed with the Securities and Exchange Commission.

So our highlights for the three months that were ended February 28, our second fiscal quarter, compared to 2Q of '13 was our 26th consecutive profitable quarter. So doing quite well over 6.5 or about 6.5 years of continuous profit and earning.

Our sales were just over $3 million -- $3.081 million. This was a small decrease, 1.2% decrease of $37,000 from $3.118 million in 2Q '13, and as we had announced in our preliminary revenues press release about a month ago, approximately $350,000 of revenues were delayed until the current quarter, 3Q '14, because one of our larger customers decided to move one of their -- part of their order which was a renewal into the third fiscal quarter to synchronize it with their other orders and their internal budget timelines.

And at the same time, the consulting project, which was pretty far along almost completed, was delayed for final approval in the customer's new review process. Both of those orders have been received and booked already in the third quarter.

Gross profit was $2.589 million versus $2.619 million, a decrease of only 1.1% considering the $350,000 that moved was more than 10% of last year’s revenues for the second quarter. SG&A increased 10.6% to $1.104 million from $855,000, and as a percent of revenues, that increased to about 35.8% from 27.4%, and that was due in for a combination of reasons, but it was a combination of marketing, travel, professional fees, sales, commissions, and increases in salaries and wages as well as expanded staff.

The R&D expense increased 43% to $354,000 from $248,000. In 2Q '14, we had R&D expenditures for our second NCE project, that’s our New Chemical Entity project with the target be in COX-2 and COX-1 enzymes, and we didn’t have such an expense last year.

Our net income decreased 34.6% to $810,000 from just over $1 million last year, again the $350,000 that moved, and of course with that $350,000 this would have been a record second quarter, but that moving had affected everything going down the line here.

Diluted earnings per share $0.05, a decrease $0.01 from $0.06 over last year, and we did distribute a cash dividend of $0.05 per share during the second quarter in February. We anticipate that again in May, but the Board has not yet met to approve that. I really see no reason they won't, but I can’t guarantee you.

Our strong balance sheet, cash as of the end of quarter was $9.7 million. Cash today just under $11 million at $10.9 million. Our shareholders equity on February 28th was $14.4 million and of course we continue to have no debt.

The income statement as shown here, I’ve just covered most of these numbers, but you can see them side by side, a little bit easier to compare prepare the quarters from last year and this year.

You see that we did maintain our 84% gross profit margin, and the software business is a very good business in that respect. You will also notice that although we have that $350,000 moved into the current quarter, we almost made all of that up with new sales, and you'll see in the couple more slides that we actually had a record number of new customers during the quarter.

You can see the other expenses here, and the other income is primarily due to exchange rates between other countries and the United States, and so that end interest -- we don’t get much interest rate money, but those two will come over there.

For the six months compared to six months last year, the total sales for six months increased by $314,000 or 5.8% to $5.722 million from a little over $5.4 million. Gross profit increased 5.7%, as you can see almost the same as the increase in revenues.

SG&A increased 21.8%, again for the same reasons that we had earlier due to various factors that affected the quarter also affected the six months. R&D expense increased, it should be (inaudible) increased 23.7% to $516,000 from $428,000, and again in this year’s six month, we did have expenditures for our second NCE project and we did not have such expenditures last year.

Diluted earnings per share for the six months was $0.09 per share, a decrease of $0.01 from the $0.10 last year, and altogether during the six months, we distributed $0.09 per share, that was $0.04 per share distributed back in November which was twice the amount that we had planned and because we had already paid $0.03 of the $0.05 that was planned in December of 2012, when we did our advanced dividend -- accelerated dividend.

So the normal distribution in November would have been $0.02 a share, instead (inaudible) we distributed $0.04 and then we went back to the normal $0.05 a share in February, expect that to be going forward again subject to Board approval.

Again the cash at the end of April 4th was $10.96 million, today its $10.9, in fact we had to pay (inaudible) $60,000 of shareholder's equity. The same is after the three months slide and of course no debt.

And here the same numbers again, gross profit margin, you can see from the six month period, the same for both years. And again in spite of the $350,000, which would have put us at almost $6 million or over $6 million would have put us at almost $6.1 million for the six months, which of course would have been record.

Even without that, we made up, so substantial not in new sales and we see an increase for the six months. Taxes have gone up a bit, so we see effective increase in income taxes.

Revenues by quarter, again you can see our third quarter here, it should be over this $3.1 this is the third quarter -- and I think second quarter, sorry. And again let’s say, $350,000 that would have been up over last year and would have been new record.

Gross profit, again down just slightly from last year, again $350,000 would have kicked that up and kept the increase slow, pretty constant. And then EBITDA always jumps around subject to a lot of different things that you can see was still at a very healthy position on EBITDA.

Net income by quarter, once again we were (inaudible) $350,000 little bit, higher taxes took us down a little bit, but overall still very, very healthy. And new customers as I mentioned, this is a new record, (inaudible) 21 new customers in one quarter.

And that was in Q2 two years ago about in 2012 and you can see prior to that around 18 -- 17 or 18 was our best performance. So this was a very substantial part of making up for that $350,000 and it's a reason that the quarter came out as well as it did.

Now balance sheet items, you can see here, cash as of the end of the quarter and the beginning of the first year or the end of last fiscal year, which was August 31st, you can see that it was going down the line. Shareholder's equity has increased. Shareholder’s equity per diluted share, a small increase there other than cash today just on the $11 million.

Now this just shows the dividend distributions that we've had since we started the first one. The first one was in the fourth quarter of fiscal '11. You can see it -- I am sorry, its $1.97 million was paid in that year. So it looks strange to me. Generally runs around $800,000 per quarter when we are paying the $0.05 per share.

And so I think the payments were delayed and fell into a different quarter here because at the time the Board said, let's meet and going through the -- about 10-day approval process through NASDAQ and other things that were actually due to distribution, so kind of falls into quarters here that sometimes confuse me, sorry.

So this is actually two quarters worth and then $800,000 number that you see here and here and then again in February of this year, will be the $0.05 a share. In December of 2012, I mentioned we paid an accelerated dividend, so we noticed at that time that the number of companies were accelerating their dividends because they knew the tax rates on capital gains are going to go up as of January 1st, which would be then between our Q1 and our Q2.

And so we said, all right, we are going to go ahead and pay the -- or distribute the February $0.05 per share, all of it. And then we are going to distribute $0.03 of the $0.05 for the next three quarters and pay that all in December, and so that amounted to $0.05 plus three times $0.03, $0.09, so $0.14 a share was paid in December of 2012.

When February came around, we said, we’ve already paid that one just a few weeks ago. So we didn’t distribute anything in February. When May came around, we said, you know, we are doing really well, about a third, it’s about $320,000. And we said -- the Board said, we are doing well. Let’s kick it up from $0.02 to $0.03.

We did again in August and then in November of last year, we said, we are really doing well, let’s kick it up from $0.02 to $0.04. And then this year it came around, we said, let’s go back to the $0.05 now.

Our general plan here is to try to keep around $10 million in the bank. So we always want to have a war chest or in some case, we find something worth acquiring, we would like to have some cash, we want a healthy cash reserve, if any other investment opportunities come up and so we're very comfortable with the amount of cash we have and no debt and paying the dividend then basically operates off the cash flow that we have with us, still putting a little bit up in the sink in the year.

Going to our products and services, we remain the same as we have over the last few quarters. The range of our products and services goes from the earliest part of discovery where our chemists are drawing molecules like this on their computers or using computer programs that can generate 100s of thousands or even millions of molecules like this automatically.

And then they are looking at how to screen those down to take a small number then forward into pre-clinical work. So here we're doing laboratory work, animal testing and so on before we finally go into human in Phase 1 trials and beyond.

So our products span this entire range. In the discovery side, it's mostly chemistry and that would be the ADMET Predictor, MedChem Studio and MedChem Designer products.

GastroPlus is also used in some of this early work. GastroPlus, our flagship product is the simulation of how drugs are absorbed and how they distribute in your body and how they get cleared out and that is the flagship product for the company. It's also the gold standard of the new industry. We have more GastroPlus licenses than any of our competitors.

DDDPlus is a simulation of how dosage forms, tablets, capsules dissolve and the rate at which they dissolve in vitro experiments, so in the laboratory experiments.

MembranePlus is nearing final development. They are in final development. The documentation is being prepared. We contracted with a company out of England to run a number of experiments to give us very detailed measurements of drug absorption through layers and cells. These are in vitro experiments that measure the permeability, how well does a drug go through a layer of cells that is supposed to stimulate the intestinal wall.

By stimulating that, we can analyze the data that comes from these experiments and provide more information out of those experiments. It costs a fair amount of money to run these and you would really like to interpret them as accurately as possible to take that experimental data and translate it to the humans. So that before we go into human, in that first clinical trial, we have a pretty good idea of how the drug is going to be absorbed.

So this simulation of both GastroPlus and DDDPlus are simulation programs, MembranePlus will be our third. So, all of these programs on the right hand side here involve differential equations that are solved by the programs to generate something that's dependent on time.

ADMET Predictor, MedChem Studio and MedChem designer are chemistry programs that look at more static operations. So, there is a module within ADMET predictor that can call -- we call it gastro light, it's a miniature version of GastroPlus with a basic absorption equation in it.

But primarily this is not a GastroPlus program. This is a chemistry program. And so in this program we're looking at structures and structural drawings like this and trying to predict about 145 different properties of these molecules.

And so you can take a module that's never existed in the chemistry and draw it and then run it through ADMET Predictor or run a 1,000 or a 100,000 or minimum through ADMET Predictor and say how soluble are they? Will they dissolve? Will they dissolve in a glass of water? How much will dissolve in a glass of water? Is it one milligram, 10 milligrams or 100 milligrams? How permeable will they be? Will they be expected to be permeable? How toxic might they be?

And so, ADMET Predictor does that, MedChem Studio and MedChem Designer are tools for data mining and for design of the modules. And I'll talk more about this combination of these three programs, which we call our ADMET Design Suite in a few more slides when we'll talk about our NCE projects.

And finally our consulting services and collaborations span from all the way from early discovery, where we can be working with chemist, customer company to help designing molecules all the way up in the clinical trial to looking at what's going on in the clinical trial that maybe difficult to explain. When you see the data coming out of certain clinical trials, it sometimes requires a very detailed mechanistic model such as we have in GastroPlus to figure out what's really going on.

GastroPlus was updated here. Back in Q4 2013 last summer, we released version 8.5. We actually improved and added in very unique precipitation model. Drugs can be dissolved, but then they can precipitate. That can go back into solid form under the right conditions and knowing when that happens and how much it happens is important.

Infant physiologies, is of very high interest in the FDA and in the industry and infant physiologies and how do you take drugs that were approved by the way of an adult clinical trial and figure out how much to dose in infant if you need to dose an infant.

You just can’t go out and find 2,000 babies to run a clinical trial and even if you could, their physiologies change so quickly that what you would get maybe at the end of two years might not be the same thing that you get in the first two months of that trial. So being able to stimulate that is a very important capability.

We added a built-in method to look at transporter proteins and how they affect drugs, so that we can look at an in vitro experiment that measures transporter effects and better predict what’s going to happen in vivo and in the body of a human or a laboratory animal and we added a number of additional built-in enzyme expression levels.

ADMET Predictor Version 7 is finally out and I forgot to update a little graphic here. Ben, our art director, I am sorry, he send it to me and I forgot to put it on slide. But we do have new art volunteers.

The biggest part of this was a couple year collaboration with Bayer HealthCare in Germany where our pKa model, and I’m sorry it gets a little technical, but basically some drugs when they get into the body will ionize and that just means that they get an electrical charge and they could be charged positively or negatively and that can happen in more than one place on the molecule or you can have shifting of hydrogen atoms from one part of the molecule to another, so the charge may remain the same across several different points of the molecule, but the place where the charges are located will change, trying to keep that in layman's terms.

But being able to predict that is important because when a drug ionizes, it generally gets more soluble and it also get less permeable, so it’s kind of trade-off here and in affects many of the other properties.

So in ADMET Predictor and knowing the ionization level at different pH's is a very important key to being able to predict all the other properties that we predict.

And so, with this new model we’ve almost doubled the size of the database, in fact, I think it was more than double the size of the database that was used and retrain and came up with a new pKa model that is absolutely state-of-the-art.

It’s so good that the Bayer scientists have been going out and making presentations and scientific meetings in addition to our scientists. They are quite proud of this collaboration, which was initiated at their request, but now that model is available to other companies as well.

All of our property models were retrained because all of the ionization calculations have changed and affected some of those and so we have even more accurate predictions and we are already ranked number one in every published comparison study.

We added some more models for our new transporter proteins and the types of toxicity and we also did quite a bit of work improving and expanding on metabolism predictions, very important in early discovery.

We want to know what enzymes are going to attack your drug molecule and if it attacks it too fast, you have such a short half life that you don’t have a practical drug. So if you can eliminate those that are not going to be practical upfront, you don't waste your time, trying to simplifies and tested.

For MedChem Studio and MedChem Designer, we are working on Version 4.0 and MedChem Designer 3.0, these necessarily have to follow a new release of ADMET Predictor because its tight integration between the two and now that Version 7 of ADMET Predictor is out, we’re finalizing the last touches on Version 4 of MedChem Studio and Version 3 of MedChem Designer, we expect those to be released next month.

A number of changes here, I’d like to read them. Very important is this 64-bit versions that are now available to screen very large libraries. The 32-bit versions were limited in the amount of memory they could use in a computer. By having 64-bit versions, we’re able to hit much, much larger images for the libraries there.

DDDPlus Version 4 has been out for a while. We did add virtual trials, which let us show the kind of variances and experiments. When you run an experiment, you are generally dealing with a container that has some sort of buffer solution in it. The tablets or capsules are put into that solution and perhaps there is a paddle that stirs it or there is a basket that cycle through the filler, but not everything is perfectly constant. If you run the experiment multiple times, you get slight differences in the results.

And tablet themselves are not exactly the same. The experiment is not exactly the same. It’s very close and so this gives the scientist an idea of what sort of spread they might expect to see when they actually run the experiment.

We are also adding an ADMET Predictor module that we have in GastroPlus already for example. So if you import a structure through the ADMET Predictor module and it will calculate the inputs that are needed to run the DDDPlus simulation and similarly for GastroPlus, you can import it from molecular structure or drawings of the structure and have it calculate a large number of the inputs needed to run GastroPlus.

Our customer base continues to be grow. Both DDDPlus and GastroPlus probably have more licenses in the FDA than any single company. They are widely used in the FDA and also by quite a number of companies around 200 companies around the world are using one or the other or more than one of our software products.

MembranePlus again kind of finishing that one up now, it basically looks at again how drugs permeate cell layers, what happens to the drug when it gets into the cell of those in between the cells. How does the number of days that you grow the cell affect the outcome, how does the pH of the solution on the donor side and the receiver side affect these and so on.

And so the experimental setup greatly changes the results and the initiative for this or the impedes for this some years ago was a study done in Japan where 26 companies ran these experiments on the same compounds and got drastically different results from company to company.

And, it’s the same drug. It’s a same type of cells. You would think the results would be very similar, but they didn’t even rank order and say in terms of the most permeable to the least permeable. And so we said, you know it’s all in the experimental setup, if we can simulate that and you can better deduce what’s going on in the similar in the actual experiment and then you have a better idea of how to translate the in vitro experiment to an in vivo permeability.

Marketing and sales, conferences and scientific meetings continue to be our primary source of leads. We do a lot of shows. In the second quarter, which is December, January, February and we had four scientific meetings and conferences in U.S. and Europe and we had two posters and presentations that's over the holidays, so the meeting scheduled in the winter, schedule tends to be a little slower. You will see that on an annual basis, we do something about 50 or 60 shows as I recall.

We did do six onsite training courses at client sites. So we actually go to the client’s company and conduct the training and we also spend several weeks in Japan and India presenting at more than 10 companies there. In fact in Japan alone I think I spend about 10 days in February in Japan and we saw about 15 companies in Japan, so I think in India about 10 companies that's referred to here.

We continue to use our digital marketing initiative. So we are looking at Linkedin, Facebook, Twitter. We have hosted three webinars on our new software updates and applications with over 500 registrations. Our collaborations and consulting and grants continue. We are continuing our five-year collaboration with the FDA center for Food Safety and Applied Nutrition and we are almost into our third year there and it’s a five-year renewable.

They are using ADMET Predictor and its build in modeling program called ADMET Modeler daily. This is a very powerful tool we had accomplished and running it today and we are quite excited about the results we are getting and are very pleased with the performance of the program for both the new toxicity models, both food additives and contaminants.

We just announced recently a new five-year collaboration with the FDA’s office in test and research and this one will be providing GastroPlus licenses as well as consulting and interaction collaboratively with the FDA scientist to look at the value of the very detailed science-based absorption modeling that we do in GastroPlus and how that contributes to better in vitro, in vivo correlations. And so what we mean again, if we take an in vitro experiment like the dissolution experiment we know how fast does the tablet dissolve in the lab.

And try to compare it to what's really going on when we dose it to a human being we try to correlate that. And sometimes the dissolution in human is nearly the same as it is in the lab but many, many times it is not and trying to understand how it actually dissolved and being able to figure that out using GastroPlus and then correlate that the solution profile in vivo in the body with what happened in the lab is the goal here.

Our consulting studies continue. We got five active products to our projects right now, two in the proposals stage, they just keep coming in and we have a new partnership agreement that we announced with a contract research organization in China where we will provide in silico that's in the computer modeling and simulation services to compliment their offerings, which are the laboratory experiments. So they do the lab work. We will do the modeling and simulation work to provide a combined offering to customers in China.

Now we continue to believe that there is a fundamental industry shift and greater and greater use of simulation and modeling. We attended a meeting at the FDA here a few ago where the emphasis was doing the kind of modeling that we do in GastroPlus called physiologically-based pharmacokinetics or PBPK and moving that farther downstream in clinical trials to the clinical trial analysis and thanks to Phase 3, which was done using much simpler empirical models to the greatest extent.

A lot of that has been done for decades and the models have had to be kept simple, simply because the amount of computer time required to run the more mechanistic models was prohibitive. Well, we are now getting into a time when we can use parallel processing. We have a better understanding of how to build good mechanistic models and physiologically based pharmacokinetics.

And so there is an interest now on the part of the -- not only the FDA, that meeting also included folks from the MHRA, the medical, I'm not going to get it right, medical health and something agency, anyway it's the U.K. equivalent to the FDA in England. So it was there as well.

So very strong interest there and the fact that the regulatory agencies want to do this is extremely important because anyone whose is submitting a drug application to a regulatory agency wants to do what the regulatory agency expects and so we believe this is going to continue to feed our growth.

Again 22 new customers was a new record and that included new companies in India, Japan, Korea and China.

I've already talked about the two FDA collaborations that we’re going to have there, but again both -- the first one going now into its third year, almost complete with the third year and the second and just now beginning and we're very excited to be working closely with FDA scientists in these two areas.

I mentioned our new chemical entity project, our first project, those who have been following us for a while, now that we chose Malaria as our first project and that one our synthesis company was able to synthesize four of the molecules that we wanted, plus three pre-cursors that are almost the design that we wanted, but they couldn't quite get the molecules exactly the same as what we requested, but we tested them all anyway. And lower -- we hold all seven, we're able to inhibit the growth of the Malaria parasites, so it was quite a homerun.

Now to prove that we didn't just get lucky, we said, we need to do another one of these and we chose the COX-2 cyclooxygenase if I'm getting that right, too in COX-1 enzymes as a target. So, we actually had two targets.

And so our goal then was to design several molecules that would bind the two different targets and of course that’s naturally more challenging than having one and kind of rare. I'm not sure how often that's happened in the pharmaceutical industry usually relative with a single target.

We did use the newest versions of our ADMET Design Suite. So we had our version of ADMET Predictor that eventually was released at 7.0 and the newer versions of the Studio and designer as well as our GastroPlus software.

And our goal again out of these projects, we're not a pharmaceutical company. Our goal is not to design new drugs. It would be very nice if we could do that, but there’s an awful lot that goes into that. Its way beyond what a company like ours could get involved with.

So our goal is to show that the software works, that you can generate good lead compounds, compounds that are not quite the drug in general, but very, very close and then the chemist can take those lead compounds and tweak them a little bit and hopefully home them on something that would actually be a drug that could be taken forward into clinical trials and hopes it trying to become a valuable product.

Well, again, our second project was a home run, all four of the molecules that synthesis company was able to synthesize, get both COX-2 and COX-1 and one of them had the desirable property that the affinity for COX-2 was much higher than for COX-1. And we believe than this repeat success, clearly demonstrates the power of the ADMET Design Suite and that this should help us to more produce sales.

The malaria project basically paid for itself within one year with increased sales. That was -- it was about $150,000 investment. This one turned out to be only about $40,000. So we believe now with both of these that we’re going to be going out and presenting to the world that we should get even a better return on investment.

Our growth opportunities, MembranePlus, again new software, brand new product, similar concept to the DDDPlus and that it stimulates something going on in the lab rather than something going on in humans or animals, and this will be a unique capability in the industry.

We continue of course, to enhance our current software products. We’ve finished the dermal dosing collaboration that we had with a major pharmaceutical company that will be coming out later this year in Version 9.0.

And we’re looking at additional large animals. There’s an interest to model horses and swine, pigs, food animals because these animals are dosed with antibiotics some times, ansate non-steroidal anti-inflammatory drugs sometimes and other drugs and it's important to know to be able to predict when those drugs are going to clear up.

If you have a food animal such as the swine and you ship it to countries that tests and use in very sensitive testing methods and they discover that there is still antibiotics present or ansates present that can reject the shipment and in general that just means that the animals are slaughtered and disposed out and so it’s a big waste.

So if you can tell ahead of time when that particular dose is going to clear down to a low that is beyond the technicality than its very valuable, capable to have.

We’re testing on the cloud now using the cloud-computing to offer our software and services using it for evaluation in animals. If someone wants to evaluate one of our software, we can set it up, so we can do that through this cloud.

Our aeromodeller program continues to evolve. This is one area where we are looking at it and slightly different area to apply a technology that we've developed and it turns out to be quite powerful and that is the artificial neural network modeling capability that we have in the ADMET Predictor program and the ADMET Modeler portion of our software.

We pull that out and generated a prototype product that allows us to predict aerodynamic force coefficients from missiles. Now this is of interest to a number of military, defense and intelligent agencies as well as contractors and so we can, with this capability predict these co efficient to feed very quickly compared to using other methods that require much longer competition and time.

The same technology, we’re also looking at analyze magnetic resonance imaging data. Both of these initiatives come out of my own new model, Auburn University, some contacts there with a few professors who were using artificial neural networks and getting some results, but not exactly what they wanted all the time and I said, well, why don’t you send me some of your data and let’s see if our methods work well and on the aeromodeller they work extremely well and it's quite exciting.

The MRI Modeller has been very new effort. We are just getting into that, but we hope that, that we also see work out well.

And then finally, I mentioned the FDA meeting a few weeks ago, where our clinical pharmacology departments and particularly clinical pharmacologists in the FDA want to see a type of more detailed mechanistic model that we have in GastroPlus upside in clinical trial data analysis.

To summarize then, for the second quarter, revenue in earnings continued our six year plus profitable trend. We did have the delay of large renewal order and one study contract that had about a minus $350,000 impact that both of those orders have now been received and booked.

We continue to grow. We had a [3P14] (ph). We had one new Ph.D. started Monday, with about 10 years experience. Very excited to have him on Board. We are continuing to seek and interview additional scientists and engineers. And as a reminder, our life science’s teams strengthened and support marketing and sales, and so we would like to get our scientists out.

We like to meet -- have them meet customers face to face to do some of the shows to do trainings on site and we find that the reputation we have when we recently had a PR study done by our PR group, we contacted a number of folks out in the industry and as we suspected Simulations Plus is known for providing the strongest support after the sale to our customers. So we are very pleased to hear that.

We continue our conference tradeshow and workshop schedule, we have workshop this year scheduled for North America, Europe and Asia. We've offered some new courses to focus in and more specific research functions for folks that work in their own specific areas such as formulation or drug metabolism and pharmacokinetics.

We have trips to Japan, China, Korea and Australia to visit clients and also we got seminars. Interest is growing in Asia and so that’s a potential significant growth market for us.

We continue again strong cash, no debt and paying a nice dividend. I again expect the dividend to remain, but won’t guarantee anything because the Board has to hold on that and you never know. So we’ve paid out already about $7 million over the years and yet our cash remains at nearly $11 million as of today.

And now I’ll go through the list of questions here. I have a little bit [chop] (ph) handle that kept popping up here. So I think we got a number of them.

Question-and-Answer Session

Walter S. Woltosz

Now our first question is Howard Halpern and can you provide some perspective as to how long it takes a new hire to reach full on learning the simulation software and integrate into the sales and marketing process? From the hires over the last few years, how many are at full capacity?

Well, it all depends. A number of our new hires fortunately were already using Plus before they came to us. Most of our new hires in recent years have been on the GastroPlus side, little bit on the cheminformatic side.

The cheminformatics side to say, they came up to speed very, very quickly because they -- they know what the product is all about, and it’s fairly easy for them to come up to speed on what the chemistry type software is doing.

On the simulation side, particularly GastroPlus, in terms it is such a multi-disciplinary program, for someone coming in completely cold, I would say it takes one to two years depending on you know the background that that person has, how much exposure they get to using the program while they are here and focus on just one particular module or they work with all the different things.

And then one of our training methods is to take advantage of the old adage that you learn by teaching. So when we go out and we do our training in our workshops, we will give someone who is new to the company one section and say right, we present this section for this particular section, and then maybe the next time they do a different section and then after they’ve done a few of these, they’ve covered a number of the sections and have started to develop a very good expertise.

So very good question. How many were at full capacity? I am not sure what’s full capacity is because we are all learning. Those of us who've been using the software for 15 years, we are constantly learning, but I would say almost everybody now is at a very high level, the new hire that just joined us on Monday, has -- already has 10-years experience and had been using GastroPlus at his pharma company. So, again we are at a pretty good level here.

Next question also Howard. So far in 3Q '14, have you seen any customers from last year postponing their renewal date?

John DiBella, can you answer that?

John DiBella

Yes, right now I would say that any orders that have historically been in the third quarter seem like they are on track to be recognized in this third quarter as well. There is always -- I always anticipate there being some clear falls with any new contractual proceeding that a company might have, but right now everything seems like it’s going to fall into the quarter as normal.

Walter S. Woltosz

Thank you, John. Next question from Howard for FY '15, what is your perspective on (inaudible) potential in Asia generally and China specifically?

Well as you know Howard, we don’t give guidance but just the climate in general in Asia and China. John DiBella?

John DiBella

You know we've been able to form some key partnerships with several leading universities and CROs over in China, Korea, and we've had a nice presence in Japan for a number of years. We've also started to again form these kind of alliances of partnerships.

And that's helping with the exposure of the products overall to newer clients. I'm bullish on Asia in general for us, and that's why I think we’ve dedicated some time to visiting Korea, China, and Japan a couple of times this year hosting workshops over there as well. So I would say that long term that's going to be a key territory for us.

Walter S. Woltosz

Thank you, John. Next question again from Howard, what's next for the NCE program in COX-2 project specifically?

Well I would say what's next is telling the world making sure we get the message out there about what we've done, we will publish these results. We might approach companies that are interested in COX-2. We are not sure of what the general feeling in the industry is yet, but Merck pulled Vioxx from the market on their own some days ago whether they want to even consider getting them back into that area, we just don’t know.

Again these are lead compounds. Most likely, they would not be the final drug that would be quite certain, but our goal here is to sell software to show that these tools really work. And we hit two out of two homeruns here.

We don’t expect to do another NCE program, at least not right now. I don’t think that we need to . We've pretty well proven that the methods and the software works to do what we set them to do, and that is to generate high quality of lead compounds in a very short period of time and at much less investment than is traditionally required.

Again from Howard, what was Q2 '14 renewal rate and what was the revenue contribution of new customers. John Di, I'll ask you for that one.

John DiBella

Yeah, the renewal rate was strong as it always is, little over 92%, and the revenue contribution from new license sales was between 18% and 19%.

Walter S. Woltosz

Thank you. Walter, in Q3 last year, the company generated revenue of $3.09 million, a 15% increase from here and we get them up to $3.55 million revenue. (inaudible) with $350,000 delayed revenues, we are bringing the total to $3.9 million, is that a reasonable expectation for the current period?

Again we don't give guidance. I will let everybody else do their own math. I found that whenever I try to get guess the future, I tend to be wrong. I either underestimate or overestimate, but I would say your math is probably in the ballpark, but I would want to bring it down more accurately than that.

What is the outlook for the aerospace project?

We have had a scientific poster presentation accepted for a Missiles and Space Conference in Huntsville Alabama in June. This is a restricted access conference, not for classified but there is restricted access and we'll have some military folks there from various agencies and contractor and employees in the aerospace area and we'll be showing off what we're doing and trying to generate some interest there to see if we can get funded to take this to the next level.

Our goal here was to develop a prototype teaser that would at least show people what might be done or what can be done using the mathematical engine. Now the next step is to polish it to allow it to take in input data in whatever format the customer might want and output reports in whatever format they might want.

And there is a second application that we've discovered and that is, it's called stores separation and what it refers to is when an airplane drops something, it could be a fuel tank, it could be a bomb, it could be a missile, you want to make sure that dropping gets away from the airplane, so they call it a store and their separation problem can be very complicated in terms of a simulation solution.

And so again we're looking at the potential of using the artificial narrow network engine that we have, that’s done so well in the chemistry field in some of these other areas.

Walter Ramsley. Are there any employees based outside of California?

Walter S. Woltosz

Not at present. We do have one of our former employees who now works a contractor out of North Carolina, but no employees currently are based outside of California. In years passed we did have some for the Words+ subsidiary. We had some field sales personnel, but that’s been many, many years ago.

James Morato, last year you mentioned potential price hikes on your main products for 2014, can you please give an update on this? Thank you.

Walter S. Woltosz

John DiBella will talk to that.

John DiBella

Yes, we did an analysis of our prices compared to the competition and identified a few products and modules of those products that were underpriced. So we did increase the fees essentially taking effect March 1st and it was about a 5% increase.

The goal I think going forward is to have these smaller more frequent price increases, but I couldn’t tell you what the future is going to hold. But yes, we did introduce the 5% hike on several modules of a couple of different programs.

Walter S. Woltosz

Thank you, John.

Walter Ramsley. Is there a plan to increase R&D spending to develop large molecule simulation technology for the biotech sector of the market?

Walter S. Woltosz

Actually it’s already been implemented. I mentioned the former employee who is now working as a contractor in North Carolina and her entire effort is directed towards the biologics, the large molecules for the biotech sector and that will be added into the GastroPlus program in the future.

[Donald Borsi] (ph). I hope I am pronouncing that right. Has the company received any inquires from entities regarding either of the two entities?

Walter S. Woltosz

Unfortunately, no, it’s not something we pursued a lot. We did try to make a few contacts on Malaria and we had some supposedly promising contacts, but nothing pinned out from that.

Walter Ramsley. Q4 is usually a seasonally low, are there plans…

Walter S. Woltosz

Well, Q4 for us of course is June, July and August and that’s summer time. If you go back and look at when we go back to our revenue slide, revenues by quarter -- revenues by quarter, so if you look at Q4, that we’re kind of covering up that part and you remove that, you’ll see that last two year’s Q4 around $1.6 million is about where Q1 was a few years back even Q2 we had a 1.8 the oldest year I know, sorry I dropped the year scale up slight here at the bottom.

So Q4 has been going up last year again we had shift of one of the orders as you recall, we had a similar thing that we had in the second quarter, we had an order that shifted from quarter into the first quarter of this fiscal year and so that bumped this up a little bit and about this time a little bit.

But in general, all of the quarters tend to go up unless you have one of these things that jumps, sits into the next quarter. It is a summer quarter and much of the world you know the vacation policies are far more generous that we are see in the United States. In general in much of Europe, in Japan for example, it’s not exactly a shut down, but it really slows down.

To accelerate growth in that period, I’d say, you fighting an uphill battle. The real strong quarters are second and third year-after-year. First quarter now has become stronger and stronger. You can see first quarter here at 2.6 is better than second and third quarter so just a few years ago and equal to are just three years ago.

Donald Borsi, what if any progress on using this progress on using the software for the aeronautical application mentioned in the previous conference call?

Walter S. Woltosz

Well I think I mentioned that already it’s a prototype program. We have not gone up to a customer yet. We are still doing some testing. We put it on the cloud for example. We've got a graduate student at Albury who is using it as part of his Master thesis and research work.

We also have couple of professors there. That student was actually here yesterday for an interview and we are very likely to hire him. I think he is going to join us. He seems quite interested.

[What are] (ph) tax rate is 30% is at the expected full year rate, John can I so, I'm going to have to ask you, I don't know that one? You there?

Well, his office is next to mine and I think I hear him talking through the wall, but it's not coming through the computer. I would say that it's probably a little on the low side. We tend to run more like 32 or 33. This time we ran around 29, I think 29 point something for the quarter, which surprised me. I don’t know why. It's already tax credits and various things like that, that affect us. It's quite complicated.

So I am going to have to differ on that one. I just don’t know. But I would expect it certainly be below 30s, if it's consistent with the past behavior.

James Morato. What kind of revenues or impact on your company do you expect the China partnership to bring long term?

Walter S. Woltosz

Well that's something we’re just going to have to see. We know the company that we partnered with. There is a major contract research organization that do a lot of in vitro work. Combining it was their initiatives to say how about working with us and providing the software analysis that would go along with our in vitro studies and they see this as a way of selling more of their in vitro work because they could offer this combined capability of a single package.

So people just have to see how that plays out. It's a big market over there. They are ready for this combined capability, I'm going to have to see that the company over there believes that if that the case.

Walter Ramsley, has the company worked up a business plan to increase revenues to $50 million over the next three to five years? If that’s to high, what is the goal?

Walter S. Woltosz

No we have not. I think looking at $50 million over the next three to five years is high in the sky maybe there is a way to do it. I don’t see that’s a huge increase, that’s five times what we are doing right now.

Growth is going to come in two ways as I've said on the conference call after conference call. Organically we continue to hire people. We continue to look at new products. Expanding the capabilities of existing products. Expanding our consulting services and then the other way is acquisition. We continue to look for acquisitions.

We've got a nice war chest in the bank. $10 million, $11 million and if the right opportunity comes along and survives the due process, then those of you that have been following us, know we've been through this a number of times in recent years and unfortunately none of them have worked out since about 2005, I believe it was the last acquisitions we did. But we are on the hunt and sooner or later, we're going to find exactly what fits.

James Morato. Is there any chance to sell or license any of these NCE created for COX-2?

Walter S. Woltosz

No, maybe, it's a long shot, I wouldn't want to make any promises or set any expectations there. That’s a pretty tough sale, but I think the fact that we've done what we've done speaks for itself.

I don't know if any other software company that have basically stood up and put the money where their mouth is and said we believe in our software so much that we're going to go out, design new molecules and tell the world before we get the test results that we've done it and we're going to report the results and let the chips go where they may.

We were threatening this one because we're trying to hit two targets of the same molecules and fortunately it did work out.

James Morato. Do you have any plans to start a third NCE project or do you feel like you've shown the proof of concept?

Walter S. Woltosz

I think, I've already answered that, but right now, no expectation is starting for the project. I think we have proven what we set out to prove.

Jack Wallace. Are the dealer cost associated with selling into Asian markets, one time in nature are those variable selling expenses. Are the dealer cost associated with selling into Indian markets, one time in nature or are these variable selling expense and growth? The costs are in flat commission, each sale from the dealer gets a certain percentage of the sale.

In supporting our dealers in Asia, whether it's Japan, China, India, Korea; we will go over there and help present the products and do trainings. This has been very successful in Japan. Japan probably runs around, I am guessing right now, 15% to 20% of our business and that's -- those are a result of relationships that we bought since 1998.

I've personally been in Japan 44 times, going again next month, again in October. It's a country that you cultivate relationships as much as you show what you do and we've got a very strong presence there.

China, India, Korea are equivalent to our early years in Japan and Japan investment paid off nicely, it’s a very good market, very good customers, good companies going to work with.

John DiBella

Walt, can I just…

Walter S. Woltosz

Well, is the company planning to maintain the aggressive selling and marketing campaigns for the rest of the year?

Yes, you will actually see more meetings going on in other quarters, again with the second quarter being December and January, that's a time when not too many people are going to schedule its conferences and February begins to pick up a little bit, but now this time of year, we’ll see quite a bit more activity in Q3.

Jack Wallace has the strong Q2 -- has a strong 2Q in terms of new client wins straight over into 3Q. Well we haven't said anything public yet and we generally don’t until the quarter is over. I would say everything feels very good on this end and that's I just leave it at that.

[Omar] (ph) Can you discuss the law that's played on the software offerings?

Walter S. Woltosz

No. That's not a subject I am prepared to discuss right here. And that is the last question I see.

John DiBella

Waltm can I just clarify something this is John Di.

Walter S. Woltosz

Yeah. We are up to our hour -- so go ahead.

John DiBella

Okay. Yeah, just, we only have formal dealership agreements in place with China and Japan territories. So, we handle all of the sales activities in India and Korea. Now we've got some memorandum of understandings and partnership agreements with universities over there, but we are responsible for all the selling activities in India and Korea.

Walter S. Woltosz

Okay. Thanks John, thanks for clarifying that. Well, our hour is up, lot of questions this time. I appreciate everyone attending. If you have any other questions, you can contact the company if there is public information and we'll be happy to share it with you if it's not public and obviously we're not able to do that. Thank you very much for attending. Renee?

Renee Bouche

Thank you, Walt. We have one announcement before we sign off. We'll be presenting at the B. Riley 15th Annual Investor Conference taking place May 19 to May 21 at the Loews Santa Monica Hotel and we hope to meet you there.

So, this concludes today's conference call and webinar. If you missed any part of today's presentation, a replay will be available at our website Thank you for joining us everyone and have a wonderful afternoon.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: Thank you!