Good afternoon. It is Thursday, July 12, 2012. And on behalf of Simulations Plus, I welcome you to our Third Quarter Fiscal Year 2012 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, Momoko Beran; 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, www.simulations-plus.com. It's now my pleasure to turn the presentation over to Walt Woltosz, Chairman and CEO of Simulations Plus.

Thank you very much, Renée. And just to make sure, are you seeing the full-screen display, or are you seeing the PowerPoint with the small slides on the side?

PowerPoint with the small slides on the side.

All right. Well, welcome, everyone, to our Third Quarter Fiscal Year 2012 Conference Call and Webinar. Just to keep our attorneys happy, I'll read the Safe Harbor statement as usual. 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. Okay, highlights for the third quarter ended May 31, 19th consecutive profitable quarter. I think it makes about the 39th or 40th out of the 41 or 42. That's about a 10-year time period. And I think without the Words+ subsidiary, it would be 100% profitable throughout in all of those quarters over 10 years or more. Sales increased 5%. It is a record third quarter at $2.77 million compared to $2.64 million last year. That's not a huge increase. But again, we've been making up for collaboration and consulting work that we had last year that we did not have this year, and we're making up for that with software licenses, which are annual licenses rather than short term as the consulting collaboration regimen tends to be. So that's a good thing. That means with our renewal rate always well above 90%, we can…

First question, malaria drug, how substantive is this? Well, I think I've explained that already. These are lead molecules. And the point is we've generated these lead molecules at a small fraction of the time and cost that would normally be required. And every single one of them inhibited the parasite to some degree, some of them at a very healthy potency that would be the kind required for a drug, some of them not quite so strong. But the fact that 9 out of 9 molecules that were tested inhibited the target is quite remarkable, especially for a small software company that's never done this before. To give you an idea, we began with a database that was produced by GlaxoSmithKline. That database was generated by testing over 2 million molecules against the malaria parasite, out of which, about 13,000 or about 0.7% inhibited the growth of the target at a reasonable level. So 0.7% out of 2 million and we hit it with a 100% of the molecules that we designed and built. Next question. The quarter was a bit light. Are there any signs of a broader sales slowdown occurring in your markets? No, I wouldn't say that. I mean, there are -- in the industry, as you well know, there are changes going on. But what we've typically seen is even with the companies that are consolidating, the license fees go up. They're adding more modules, they're adding more programs. There is one site that was announced it's going to be closing, the Roche Nutley site in Nutley, New Jersey. I don't know yet when that's going to exactly take place and where those folks will go. One of the good things about something like that is sometimes we get to pick up some good employees and bring them on to Simulations Plus. But they may relocate to other locations on the East Coast. What were consulting revenues in the quarter? And what, if anything, can you do to grow that business? I'm going to need some help on that one, either Momo or John.

The consulting revenue, as a percentage of the total revenue, was only around -- approximately 0.3%.

Okay. So that's one of our lowest quarters for consulting. Consulting is a cyclical business. When someone -- it's kind of like the restaurant business. You never know when someone is going to walk through the door and place an order. And so we are continuing with our shows. One of the banner ads that we use -- the pull-up displays that we use emphasizes our consulting capabilities. And so it's one of those things. You just keep going out there and getting the message out that you do this sort of thing. And sooner or later, you get people to call you. It's very difficult to predict the consulting level of the business because it is an on-demand kind of business. Let's see. In the past, you mentioned auxiliary revenue opportunities coming from your basic training courses. Are you making any traction here? Yes, we are. Every one of our training courses has been well attended. We did -- let's see, we did our first GastroPlus in Cambridge, Massachusetts, across the river from Boston in March. We did 2 -- was it 2 or 3 in China, John?

Two.

Two?

Yes, one in Beijing, one in Shanghai.

Yes. And then we did advanced training courses in Germany, as well as in Durango, Colorado, all in the last 12 months. So yes, we are definitely making traction. And although we started out with the advanced GastroPlus training courses to make sure that those who obtained this software knew how to use it and knew which modules they needed, we began that way. But we quickly realized that, gee, we're bringing in folks who already have licensing software. Maybe we should also bring in folks who haven't licensed it and give them the basic training so they would want to license it. And so yes, we're gaining traction there, not only making a profit off the training, but also increasing our licenses. When you see these new licenses, new customers, 13 in the last quarter, for example, and I think similar numbers in previous quarters, some of those are coming from training courses. Any progress being made in terms of receiving funds for malaria research from the Bill & Melinda Gates Foundation? No, we are actually in a process now of putting together a proposal. We'll be going to the Gates foundation, undoubtedly to GlaxoSmithKline, maybe to 1 or 2 other groups and seeing if -- now that we've demonstrated what can be done with these tools and with our internal chemistry expertise, seeing if we can get some of that external funding. I feel pretty optimistic about that, but you never know until you actually get together with the folks, make your presentation and your proposal and then see where you go from there. Organic growth rate of licensing has been about 15%. Will this continue or accelerate? Well, I think my guess, and it's strictly a guess, is that it is going to at least continue. And…

I don't have exact numbers, but it's a very healthy pipeline. There's no question. And I do know that it has increased by about maybe 20% over the past year. So going to these conferences has definitely helped us to fill and maintain a very healthy pipeline. But I don't have the number of potential customers. There's a lot.

Okay. I'm sure it's in the thousands, whether it's in the tens of thousands, I wouldn't know.

I don't think it's that many.

Yes, but certainly in the thousands. Okay, how many new customers were added in the quarter? 13. I covered that. Can you achieve double-digit revenue growth in fiscal year '13, given the addition of the 2 new collaboration agreements? I believe, without a doubt, double-digit growth in earnings. Whether we can get double-digit growth in software, I think so, because we're hitting about 15% already in software growth. So I'd say, absolutely I would expect that. We're doing it already. It's just that it's not reflected in the top line because we had to make up the collaboration and the consulting revenue that we didn't have in previous like quarters. Do you anticipate R&D expense to remain in the $230,000 to $260,000 per quarter? Probably up and down. It's one of these things when you're doing something like the malaria project, you generate your molecules, you go out for quotes, you select your contractor and depending on their success rate, they may hit you with a bill in a certain quarter or they may delay until they're their successful and hit you in the next quarter. So you may have a quarter that dips down and another one that several bills come in at once. So -- but I think that's a reasonable number. What is the next step for the NCE program and what might it cost? Well, the next step right now is to put together a proposal of some sort and go to the Gates Foundation, go to GSK, go to -- we pick our targets, whoever we think might be interested in funding this type of project, whether it's for malaria or TB or Parkinson's or any number of other diseases. And there are quite a number of foundations that deal with various diseases. And then…

Actually, 20%.

20%. Oh, my gosh. Well, it's -- what are you going to do? Either don't sell there, thumb your nose at them or you just take your 80% and be happy that you got a -- at least, you got a sale in India. It's a very -- it's the only country that's doing that to us. But what can you do? What is your view on how drug development may be impacted by implementation of the health care law? I really don't know. That's something I've been trying to discern whether it's going to have a significant effect or not. Certainly, if the drug companies are not able to recoup their R&D costs because -- or to some level because of lower drug costs. Already we're at a point where a blockbuster drug, a really good drug like Lipitor or Viagra or think of other blockbuster drugs, has to pay for all of the other drugs that failed in development. And you've probably seen publications that say the average drug development program is $1 billion to $1.5 billion in 10 to 15 years. But it turns out that -- I believe it was Forbes did a study and said, "Well, rather than looking at what it costs to develop drug X, let's look at how much each company spent over 1.5 decade or 2 decades," I think it was. And then -- more than that, I think it was maybe 20 or 30 years. And then how many new drugs actually got to market? And what they found was that the smallest cost was on the order of $3.5 billion to $4 billion. And that was, I think, Amgen or Genentech, one of them. The largest cost, as I recall, was AstraZeneca. The average cost for a new AstraZeneca…

That sounds right, yes.

Okay. And that's the last question I have. Okay. We'll hold 1 minute and see if any other questions come in. Do we still have attendees? I still see 29 attendees are listed. I'm looking to see if anybody has got their hand raised on line. I don't see any. And we've gone about an hour now. So -- well, thank you, all, those who did hang in for the hour. It was a long call this time. And I appreciate your interest in Simulations Plus. The company remains financially strong, scientifically very strong, very well respected. You're going to see the growth. I think we're quite confident that we're doing the right thing at the right time for what the pharmaceutical industry needs. And we're starting to get into some other industries like the food industry, cosmetics and chemistry. This recording will be available online, and I think Renée has a summary now that will give you the information. Thank you very much.

Actually, I'm filling in for Renée. Thank you, Walt. That concludes today's conference call and webinar. If you missed any part of today's presentation, the playback will be available at our website, www.simulations-plus.com. Thanks so much for joining and have a great day.