Renee Bouche Walter S. Woltosz - Co-Founder, Chairman, Chief Executive Officer, President and Chairman of Words+ Inc John Anthony DiBella - Vice President of Marketing and Sales Momoko A. Beran - Chief Financial Officer and Principal Accounting Officer

Good afternoon. It is Tuesday, November 19, 2013, and on behalf Simulations Plus, I welcome you to our Fourth Quarter and Fiscal Year 2013 Financial Results Conference Call and Webinar. Chairman and Chief Executive Officer, Walt Woltosz will be presenting this afternoon. Joining Walt as panelist 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, Renee, and welcome, everyone, to our fourth quarter and fiscal year 2013 conference call and webinar. I would like to keep the lawyers happy, so I'll just read this. 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 highlights of fiscal year '13. Sales up 6.6%, we announced that back in early September, right after the close of the fiscal year and at the end of August. Preliminary revenue estimate was quite accurate. It was the new fiscal year record, $10.7 million up from $9.45 million in the fiscal year '12. Gross profit was up 6.1%, a little over $8.4 million, from just about -- under $8 million in fiscal year '12. SG&A increased 5% to the lower $3.5 million around about $3.38 million, but as a percentage of revenue, SG&A decreased to 35.2% from 35.8%. R&D expense increased -- or decreased, sorry, 15.3% to about $800,000 from about $950,000 and that was because last year, in the second quarter of FY '12, we had about $150,000 in R&D expenditures that went toward our malaria NCE project. So that was paying…

Just waiting for your -- sorry, your screen to refresh on mine. So I know what it is what I'm talking about here. I'm bringing it up on mine.

I can't tell what the leg is in go to meeting here.

Okay. So with respect to conferences and scientific meetings, these tend to still be the largest driver for us in terms number of leads. And during Q4, which is traditionally a slow period, the June, July, August, summer period, we did attend 13 scientific meetings and conferences throughout the U.S. and Europe and our scientists did a very nice job of presenting some of the technical work with the software, presenting 12 posters and oral podium presentations. For the trainings and workshops, in Q4, again, that 3-month period during the summer, we conducted 6 on-site training courses at various customer sites throughout the U.S. and Europe. And in total, for the entire fiscal 2013 year, we did 24 such trainings. And then we also ended up hosting 4 workshops in North America and Europe during the fiscal year. And also just finished the first successful workshop in Japan to hosting to an overflow crowd, and I think Walt might mention that a little bit more in the last slide. With respect to strategic digital marketing initiatives, these do continue -- we've been very successful hosting our webinar series and it's been focused mostly on the cheminformatics products to date. So we've hosted 1 every 2 months, and in total, we've had over 900 registrations. Usually on average, somewhere between 50 to 100 people attending each webinar and it's been a very good source of leads for us. And also continuing to very aggressively try and get the message out through LinkedIn, Facebook and Twitter accounts that have been established over the last year or 2. And also finish the website redesign, which has helped us communicate some messages a little bit better, getting some more kind of up-to-date marketing programs in the faces of prospects and customers. The collaborations, the…

Thank you, John. So I mentioned the malaria new chemical entity project that we had done last year, and that was quite successful. The new sales that resulted from that have already repaid the investment that we made. It was about $150,000 worth of it. We've now started a science project, and molecules are now at the synthesis contractor, I should say, the drawings of the molecules are there, so that the synthesis contractor can develop a way to synthesize these molecules and get us a large enough sample and maturity that we need to go on to do the testing against the target. The target [indiscernible] after looking at the product number was COX-2. And COX-2 is the target for Celebrex. You probably know that Celebrex is the only drug left on the market that is a COX-2 inhibitor. The other, such as Vioxx, and a couple of others were pulled from the market due to cardiotoxicity, so heart problems. As we read the literature, the scientific literature, following where Vioxx was hold and other areas of a number of research projects that went on and were reported in scientific literature, and it appears that when you inhibit COX-2, you also need to inhibit COX-1 at the same time, and COX-1 is an enzyme, as is COX-2. COX-1 also needs to be inhibited, but not at maximum [ph] level at a lesser level. [indiscernible] Celebrex. Well, the problem is the half life on the aspirin against COX-1 is not going to match the half life of Celebrex against COX-2, so you really like to have a single molecule that have the right ratio of activity against the 2 enzymes and of the same half life against the 2 enzymes. So that's our goal. We did use our newest versions…

The first question I see from Howard [indiscernible] will the full $180,000 related [ph] revenues from Q4, that you realized in Q1. If so, this represents about 8% of Q1 2012 revenue. Do you expect next Q1 growth year-over-year to be north of 20%? John, I'm going to let you answer that. I don't remember the $180,000 number, but you probably do.

The full $180,000 will not be recognized in this first quarter, and that's because a portion of that is from government agencies in the U.S. and because of the shutdown in October that has further kind of delayed the finalization of a few agreements and orders. The orders will come in, but the full $180,000 will not be recognized in Q1.

Okay, thank you. And the amount that will be is not a public number yet, so I guess, we can't talk about that. How many new consulting contracts were started in the fourth quarter? And how are [indiscernible] completed. I think you could answer that, John [indiscernible].

Yes. So we had started 3 different consulting contracts in that summer period. One of those is completed. Two of them are still ongoing, and then I know Howard, you didn't ask this question, but in this quarter that we're currently in right now, there are additional 2 studies which were started, and several more are in the proposal stage.

Thanks, John. Also from Howard, can you provide your view of the market potential and acceptance of your software tools in Asia? John?

I think one of the things that we mentioned in the press release today was that the Asian territories. So that would be, really, China, Japan, Korea, Singapore, Thailand. Those are the 5 main countries over there, which have licenses to the software. Revenue was up around 30% or so compared to last year, and we think that there's real progress that's being made in China and Korea, and this is, I think, due to the licenses that are being secured by the local regulatory agencies over there, and also some key licenses being purchased by some of the large CROs. I think we announced in a press release a few weeks back about how WuXi PharmaTech, the largest CRO in China, has now secured licenses to ADMET Predictor for supporting some of their in vitro services for toxicity. It's a big deal. And in Japan, which is -- which some people considered maybe a mature market, as Walt mentioned, he's been going over there now for 15 years, usually 2 to 3 times per year, we're still seeing more and more companies signing up for software licenses in Japan as well, especially now we're starting to penetrate the generic industry over there. So I think that market potential and acceptance is -- well, market potential is very high. Acceptance is also very high over there. There's a lot of momentum that were starting to generate, and I think that's going to be one of the reasons why we'll make some dedicated visits to Asia, several of them next year, especially to attend local meetings, host some more workshops over in Asia, et cetera.

Thank you, John. Next question from Howard also. If the large upgrade order was included in 4Q '13 results, how much would annual sales growth exceed the 6.6% reported for fiscal year '13? Well, if the whole $180,000 from the ordering [indiscernible] industry were added, I think you can just add the number there. I don't have the slide in front of me. Let's see if I can find that. So...

It would be somewhere around 9% for the year. And I think one of the other points, there is no maybe real benefit to crying over spilled milk, but between that and also what had happened in Q1 with regards to that perfect storm of site closures and reorganizations, if we had just performed at our historical levels with regards to the renewal rates in Q1 and then also added in the revenue that is going to be coming, but because of external factors, it wasn't received in Q4. You're looking at the year-over-year top line growth to be somewhere around 12% to 13%. So with that $180,000 that Walt mentioned, we'd be somewhere around 9% factoring in historical rate for renewal back in Q1. It would have been somewhere around 12% to 13% for the year.

Thanks, John. Walter Ramsley -- it's not really a question, just a statement. Cash taxes paid are equal to a $1,964,545. We asked [indiscernible]. Howard asked, are you increasing price this fiscal '14? John, do you want to comment on that?

We are increasing prices for some products for calendar year, starting in calendar year '14. So there were too many early requests for quotations and so forth coming in for this particular quarter, but starting in calendar -- at the beginning of the calendar year 2014, there will be some price changes for some of the products.

Thank you. We haven't announced which products or how much yet so [indiscernible]. It hasn't been settled. From Donald [indiscernible], is the status of malaria constitute NCEs? I believe I answered that. Malaria is complete for now unless someone else outside the company wants to pay us to continue that work. We don't see putting anymore of our money into that. It's not an area where you're going to make a lot of money. It was a target [indiscernible] in the sense that there was a substantial amount of public domain data that we could use to begin our analysis and to design our new molecules. We've demonstrated we can hit the target, and we're happy with that. The past 2, as I've mentioned, the molecules design [indiscernible] the press release [indiscernible] announcing that the molecule design phase was done and that we were going out for quotes for synthesis. We have now contracted with a group out of Birmingham, Alabama that does this type of thing, and the synthesis process has been [indiscernible], as we speak. And Walter Ramsley, this was a -- it actually was a question. You mentioned that the cash taxes paid was about $1.96 million. The taxes for the financial reporting period $1.37 million. What explains the difference? Well our taxes are flat on a calendar year basis, but our fiscal year begins September 1 and ends August 31. I believe that's the explanation. Is that correct, Momo?

Now I would like to add cash tax paid, $1.96 million using the cash flow actually we paid. In other words, to cash basis, we paid $1.96 million during the FY '13, while $1.37 million tax is booked as your tax expense for the fiscal year.

So was that $1.96 million taxes that we paid for income?

This is in cash, if you include the payment we made when we filed the extension of previous tax year, plus [indiscernible]...

Okay, yes, that was my question. Yes, the question was $1.96 million is taxes not only on income for this fiscal year, but also for a part of the previous fiscal year. Is that correct?

That's correct.

Yes, thank you, okay. From Howard, how much closer do you think Simulations software tools are gaining a wider acceptance for drug development in the [indiscernible] for engineers and drug designers? No, I should have been aware of that, but I wasn't aware the [indiscernible] providers was granted to that, where we the recipients and no one told if we were [indiscernible] technical sessions that went on. When we first started this business 15 years ago, you could hardly attend the session that talked about more than a very limited type of software that was used [indiscernible] file data or to do what we call a doctor study [ph]. And now there's been really an enormous explosive growth there, recession after recession after recession, covering the various ways that modeling and simulation is used from all the way from the earliest discovery efforts like you do with ADMET Predictor, MedChem Designer, MedChem Studio, onto how clinical [indiscernible] trial data are efficiently collected and analyzed and reported on. There are companies that specialize in just that, and so it's really a wide ranging area. The systems biology area where companies are looking at what's going on inside of the cells that causes certain proteins to control certain functions and then try to identify which ones are the likely good targets for the next drug to treat a particular disease. All of this work is going forward, and there's a lot of work being done. And companies are using it more and more. So I think it's an inevitable trend. Someday, it will long after I'm gone, I think the number of experiments are going to be need to be run and will be reduced drastically and more and more will be able to be predicted in a computer. We have a long, long way to go, but 100 years ago, nobody thought [indiscernible] and we certainly did. Q4 sales $1.58 million, what explains the slow collections? Well, you have to remember that orders come in almost always, there's a burst of orders in the last couple of weeks, and also companies are now extending their payment terms to 60 days [indiscernible]. Momoko, are you there?

Yes, I am.

Yes, that was...

The tax rate of $2 million [ph], one of the reasons is that timing over the collection on the large account receivable. Last year, same customer, we received the payment by the end of August 31. This year, that same customer large order, the collection came in to early September. That will skew the receivable balance. Another reason is this is the industry trend I've been seeing lately, most of the largest pharmaceutical companies joining to outsource PO invoices[indiscernible] and customer joined to [indiscernible] the receivable cycle standard is a 90-day, which is some customer with the 30 days that now trying into 90 days. We [indiscernible] if we pay some discounts [indiscernible].

Thank you. From Walter Ramsley, how large was the order that slowed down of Q4? I don't think we identified separate orders, but it was a series of orders booked in the industry that totaled $180,000. From Walter Ramsley, [indiscernible] increasing customer [indiscernible] rate, aren't profits [indiscernible] becoming shorter? Well, actually, no. The amortization is based on the useful life with the maximum. I think it's 5 years on software, when in fact, GastroPlus has been out now for 15 years, and there's [indiscernible]. So the product cycles are not [indiscernible] these are product life cycles, and there's no thought towards increasing amortization rate. How large is the install base? From Walter Ramsley, what percentage of that is a candidate for new membrane [indiscernible] product? John, do you want to talk to that one?

There are, right now, a little over 200 companies that have paid licenses to the software. So this is going to include both industry commercial companies and nonprofit organizations as well. The number of licenses is somewhere around the order of 800 to 1,000. So you can kind of do the math to see what would be the average number of licenses per organization. And then it's just important to remember that 99% of the customers, they will install these licenses onto a network server and, essentially, treat these licenses as a floating seat available for use by people at their specific site. So the number of people who actually have the software installed and can access these concurrent floating licenses is in the thousand. The percentage of those customers that might be candidate for new MembranePlus product, it's going to be focused on those folks who are used to running in vitro studies for permeability, who may have some interest in learning or analyzing some of their in vitro results to get better information out and be able to then provide that as input into the GastroPlus simulations. We're really trying to promote this synergy between MembranePlus and GastroPlus. I would say that's probably about 1/3 of the clients who would have interest in the MembranePlus product. I don't know, Walt, if you have any other thoughts on that.

No. I'd say that sounds in line with what I would understand. Thank you. Walter Ramsley again, what percentage of GastroPlus users have also other products [ph]? John?

Right now, it's relatively small. I think it's about 20% of the companies which license GastroPlus have licenses to some of the other software. One of the things that we don't -- we didn't talk about so much in this presentation, but our plans for 2014 is to tighten the integration of ADMET Predictor with GastroPlus, and that's specifically related to some of the new metabolism kinetic models that ADMET Predictor 6.5 now has. And I think some of the presentations that we've done highlighting what can be achieved with the combination of these 2 products is really going to drive some additional licenses for ADMET Predictor for these customers of GastroPlus. I think we're really excited about this. So right now, it's still relatively small, but I think that's with some of the things that we're doing as far as, again, tightening this integration, we'll see some new license sales for other products coming through to the GastroPlus client base.

Thank you, John. Walter Ramsey again, what is the company's pricing strategy? Well I'd say we look at the competition, and we look at the value [indiscernible] software. We look at long-term [indiscernible]. We look at the volume of the software that customers are getting if it's a single license at a single site versus multiple licenses at multiple sites. And we try to price very fairly to [indiscernible] in a way that [indiscernible]. Aren't there any third-party products the company could leverage with this technology platform and distribution network? Also from Walter Ramsley. We look at those all the time. We [indiscernible]. They're difficult to find with the right size and technology [indiscernible] profitable and willing to sell at a price that makes business sense for us. That's something we tend to continue to look for. From James [indiscernible], do you think MembranePlus is a significant part in the [indiscernible] industry will it take a little longer to gain back? Thank you. John?

We've done a number of scientific posters at several conferences over the last few months for MembranePlus, so we've started to do some demonstrations, and there has been some very good interest expressed so far. The learning curve may be a little bit steep because the audience for this particular product may be a little bit different in the audience that is going to be utilizing GastroPlus. I think we'll try and learn from our experiences with the DDDPlus software. When we first released that product, we realized that the audience for it, the formulation and the analytical scientists did not historically utilize any sort of computational tools to assist with some of their research. So the learning curve was steep. We had to make sure that we spend a lot of time with them really understanding how things are set up and they needed a lot of training and things like that. We've learned from those experiences, it might be somewhat similar with MembranePlus, but I think that provided we can get the software released early in 2014, that would still give us a couple of quarters to try and recognize some sales. I think the full breadth of the product is going to be realized though going more into fiscal year 2015.

Thank you, John. Can you please give some more information and how much you choose to raise prices on GastroPlus? Does the competitive environment and your ability to raise price [indiscernible]? Thank you. I would say, right now, nothing's been settled on. And until we make a decision, we wouldn't want to speculate usually on that. Walter Ramsley, what is being referred to by the comp, the earnings increased by 12.7% in fiscal 2013? That was earnings on [indiscernible] continuing operations as opposed to the other income category that you see here at the slide and opposed to the sale of Words+ in 2012. So looking only at continuing operations. That's software licenses, consulting contracts and funded collaborations. So on those activities, the earnings, which is a majority of our business, of course. That's been heart and soul of our business, if earnings increased by 12.7%. And so only my mic [indiscernible] doesn't come in nearly as clearly or consistently as any speakers [indiscernible] getting an external microphone. Walter. So there was a potential of a cost to NCE project actually hits? Well, again, we ended up with -- from the malaria project, we ended up more than recovering our investment in 1 year. So it actually hits the real drug [indiscernible] a lot of money and a lot of time before we'd ever reach that stage and we don't have to go through all of the preclinical trials, which take years, then the clinical trials which take years. So if it becomes something where we can license that molecule and then have milestone payments as the molecules [indiscernible] development, and the potential [indiscernible] I don't know how to put a number on that. I know there are small companies who are in the business of designing molecules, but not in the business of developing drugs. And so what they do is get beyond that first barrier and come up with something that a large [indiscernible] would like and things [indiscernible] and they make a soft front payment and the numbers I've seen have been as much as 7 and 8 figures on occasion. And then you get milestone payments and perhaps, with the drug becomes -- if the molecule becomes a real drug someday, then we'll get a little percentage of the national sales. That's the last question there [indiscernible]a little over an hour. So I'm going to draw this to a close. Thank you, all, for attending, and we look forward to seeing you at the end of Q1 and probably around mid-January when we have the next conference call. Have a great Thanksgiving and holiday season and nice New Year. Talk to you soon.

Just one final note. Thank you, all. We will be presenting at a few upcoming investor conferences. We'll be presenting at the LD Micro Investor Conference in Los Angeles on December 3. And the following week, we'll be presenting in Chicago at the Benchmark Micro Cap Investor Conference that takes place on December 11. And in January, we'll be at the Sidoti Micro Cap Semiannual Investor Conference that takes place January 13, 2014 in New York City. So this 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. Thank you, again. From Simulations Plus, have a great afternoon.