Renee Bouche Walter S. Woltosz - Co-Founder, Chairman, Chief Executive Officer, President and Chairman of The Board - Words+ Inc - Sub John R. Kneisel - Chief Financial Officer John Anthony DiBella - Vice President of Marketing and Sales

Good afternoon. Today is Thursday, January 9, 2014, and on behalf of Simulations Plus, I welcome you to our First 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, 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.

Thanks, Renee. Welcome everyone to the First Quarter Fiscal Year 2014 Conference Call and Webinar for Simulations Plus. This is the first time that John Kneisel will be participating as Chief Financial Officer. Tomorrow is Momo's last day. She's been walking around with a big smile on her face. She's retiring. But she is with us today, for this last call. I always like to read the Safe Harbor statement just to make sure our attorneys are happy. With the exception of historical information, 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. The highlights for the first quarter, which ended November 30 are: that sales were up 15.3%, setting a new first quarter record of $2.64 million from $2.29 million in FY '13 first quarter. Gross profit was up a similar amount 15.2% to $2.193 million from $1.903 million in 2013. SG&A increased 15% to $1.07 million from about $931,000. As a percent of revenues, SG&A decreased slightly to 40.6% from 40.7%. R&D expense decreased 10.1% to $162,000 from $180,000, this was primarily because more time was spent on capitalized software activities, and so those don't show up as an…

We're sitting, we just come up and down -- sorry about that. We've just been going up and down with the revenues, and revenues create certain -- that drives the P&L and it's really our P&L that does it. We're also increasing our amortization of software cost as we go, so that has an impact, too.

Okay. Thank you. Net income by quarter, of course, tends to follow the similar ups and downs as EBITDA, and you can see, about $700,000 rounded off here for the first quarter. New customers by quarter, the new customers we consider to be either brand-new companies or government agencies or universities that have never licensed anything from us before, or contracted for consulting services or new departments within very large organizations that we have not done business with before. So it can be just as challenging, perhaps, to take on a new department at some location within a large pharmaceutical company as it would be to find a small company doing a similar type of activity that might be across town and in the same city as that large company. So both of those, we consider new customers, based on the kind of interaction that it takes to get them signed up and get them to become a customer. Selected balance sheet items. Again, I mentioned cash was up after the dividend distribution of 640-plus thousand dollars. We increased the cash position from August 31 to November 30, as you can see there from $10.18 million to $10.56 million, roughly, rounding off a little bit. And you can see the cash per diluted share. Shareholder's equity, increased, it's always impacted when we do a dividend distribution, of course, because we decrease cash and we have to grow that back. But you can see shareholders' equity also up multiple quarters. And equity per diluted share up as well. Now this shows the effect of the dividends that we've had. We've now distributed about $7 million in dividends since the very first dividend, which was in fiscal second quarter of fiscal year '12. So it was 2 years ago in February, in…

Sure. The conferences and the scientific meetings continue to still be the primary source of leads, so I think we averaged, in Q1, about 4 conferences per month, and also presented a number of scientific posters, gave a number of oral podium presentations as well. So we -- very active in U.S. and Europe with the conferences. Trainings, we continued with the education efforts, hosting on-site trainings in Europe, Japan and the U.S., 7 of those at client sites in Q1. And then, we also hosted our first workshop over in Japan, in Tokyo. A full house, we had attendees come in from Thailand, Australia and Japan. And I think it was very well received. We also decided to make a fairly large investment in traveling over to Asia. We spent several weeks doing some client visits in China and in Japan. I think, in total, visiting over 20 companies. I think, that, that was very good. The strategic digital marketing initiatives continue. So we did host 3 webinars over the course of the 3 months, and 2 of those were co-hosted with some of our clients, which was a nice little twist, to discuss some case studies and also collaboration efforts, and in total, we had over 500 registrations for those 3 webinars. And then, we continue to be still really active with regards to social media, LinkedIn, Facebook, Twitter accounts and also the website redesign has helped. We've been able to upload a number of new marketing materials, which I think helps us with regards to getting the message out. From a collaborations-consulting-grants perspective, so we've continued, I believe, we're going into year 2 or 3 of the 5-year collaboration with the FDA on developing toxicity models with ADMET Predictor and ADMET Modeler. And they're also utilizing some…

Thank you, John. I mentioned our new chemical entity or NCE project. We did start the new project using COX-2 as the selected target for this second project. Our first one, I mentioned earlier, was the malaria project, which was very successful. In fact, it paid for itself in less than a year with just new software licenses. We finished the molecular synthesis very recently and we're in the final process of selecting the contractor to run the experiments to test these compounds, to see if they do get COX-2 and COX-1 at the ratio that we're looking for. So what we're looking for is significant potency against COX-2, but a lesser potency against COX-1. And this comes from research that was done after Vioxx was pulled from the market and Celebrex became the only remaining COX-2 inhibitor in the market. The research indicated that cardiotoxicities that were being caused by these other COX-2 inhibitors were largely because COX-1 was not being inhibited and it needs to be, but not nearly at the level that COX-2 is. So this is a much more challenging design problem that we have. I won't say it's easy to design to hit any one target, but it's certainly is harder to hit 2 targets and hit them at a certain ratio of potency. And so that's our goal here. It's a very ambitious goal. Hopefully, we don't fall flat on our face. We'll find out here probably in another 6, 6 to 8 weeks or so, when we get our results back. COX-1 is inhibited by aspirin. You might say, "Well, why don't you just take an aspirin with your Celebrex or Vioxx and everything will be great." The problem is, the half-life's are not the same, so you'd run out of the COX-1…

So I'll begin with the first one. Donald Borsi [ph]. "Soon to be selection of a contractor to test the synthesized molecules to determine their activities against their COX-2 and COX-1 enzyme targets? Will there be a press release?" Well, I haven't thought about it, but yes, we'll do a press release, why not? Howard Halpern. "You anticipate 1Q '14 SG&A as a good run rate for the rest of the year?" I think so. John Kneisel or Momo, any comment on that?

Yes, that's probably a -- it's probably a fair statement. The numbers were up a little bit over a quarter last year, mostly because of salary changes, but that's probably a fair rate going forward.

Yes. As a percentage of revenues, it was virtually flat. I think it was down 0.1% or something. So it seems that there's a consistency there. Howard Halpern. "What was the revenue contribution of the 15 new customers?" John DiBella?

Yes, the revenue breakdown for Q1, it would have been about 18% of the revenue coming from new customers, maybe about 6% from the consulting side. And then the rest, mostly coming from our newer revenue.

Thank you. Donald Borsi[ph]. "What value the selected contractor for the COX inhibitor work? Approximately, what are the expected cost to perform that task?" I'll just say it's still in competition phase. I'll just say the overall cost of the COX-2 project is probably going to be only about 1/3 to 1/2 of what it was for malaria. Malaria was about $150,000 total that we spent over the entire period for all of the synthesis and all of the experiments. The experiments will run at 2 different locations, and that may be the case again here that we split the experiments between 2 different ones. But we haven't made the selection yet, so I don't think it's appropriate yet for me to put a dollar value on that, other than to give you a ballpark range. But it will be significantly less than malaria. Lamar Melvin. "There's a recent article which indicated that 1 month of [indiscernible], oh, yes, Faruqi & Faruqi LLP was conducting an investigation on the Board of Directors of SLP. Please explain the following conditions, which lead to this investigation." And what this is, is we, in our proxy, announced that we want to add another million options to the 2007 stock option plan. There is no intended use at this point in time for the options. It's just that the reserve from that plan is getting low and we wanted to have enough to cover the next number of years, and so we picked a round number of a million. This firm is known to go out fishing to find someone, some shareholder who wants to bring a class action suit and they hope to settle and gain a little bit of money on the side knowing that they have no case. We haven't dealt…

The majority of that new revenue came from completely new organizations. I think it's going to be somewhere probably around 70%, 75% of that new license revenue coming from new organizations.

Great, thank you. Jack Wallace. "Of SLP's existing client base, what percent is a likely target for MembranePlus? John DiBella?

That's a good question. If we think of a nice round number of, let's say, 200 companies, which are licensing the software. Walt mentioned some of those companies are going to be generic firms. They wouldn't be targets necessarily for MembranePlus. Some of the divisions within some of the existing large pharmaceutical companies like formulation groups probably are not targets for MembranePlus. This is going to be, I think, aimed at DMPK scientists, modeling and simulation scientists. I would say it's fair to put a percentage anywhere from 40% to 60% maybe.

Okay. Thank you, John. And last question I see. Jack Wallace. "What is the approximate pricing for MembranePlus?" We haven't set the pricing yet other than to say very likely $120,000 per year, so it will be on annual license model like all of our other software. So that will be $20,000 per year for the first user at the first geographic location. How much under, we're still kicking that around, and we'll probably do a little price testing to settle on a final price. Okay, there's a couple more questions just appeared. "Would it be safe to model a tax rate of 32% to 34% in FY '14?" John Kneisel?

Yes, that looks like a good rate. We are a little lower than normal this quarter because of R&D credits, but that 32% to 34% should be in the ballpark.

Thank you. Walter Ramsley. "Are there specific plans to create a service bureau operation like the 3D printing companies have? Customers would hire you to perform jobs for them, leverage their personnel, get better results." Well, in fact, that's what our consulting business does now. John mentioned we have 4 consulting projects underway right now. Seems like at any time we have anywhere from 3 to 6 going. And we cycle through those. Consulting, I always call it a restaurant-style business. You don't know who's going to walk through the door, and when they do if they're going to order a steak or just order a salad. So it's one thing we continue to promote the consulting services, we continue to get consulting business. I think when I looked at I think our fourth quarter results, the growth was something like 300% over the previous year's fourth quarter. Again, the fourth quarter is the summertime and things tend to be slow, so that's probably a little bit disproportion. But the point is, the consulting work is continuing to grow. The acceptance of simulation and modeling capabilities in the industry continues to grow, not every company has the staff that they can dedicate to learn how to run, say, a GastroPlus software, which is a very sophisticated piece of software. In general, when we have a new PhD who joins the company, it takes about 1.5 years to 2 years before they are able to really go out on their own and demonstrate the software to someone with all the different modules and defend why we do things the way we do. And it really amounts to that. Marketing presentation on something like GastroPlus is like a PhD dissertation defense except it's much more multidisciplinary. So many of these companies don't have the staff to do that and that's why they hire us. The ability to have this offered via the cloud, where access to the -- us and the software, secure access to their own data seems to be something that is well worth looking into. So that's why we're looking into the possibility of a cloud-based offering. Jack Wallace. "What caused the difference of $11,000 between preliminary revenue and the figure reported today?" I think it went up a little bit, didn't it? Was that consulting project?

Yes, well, I think it did. And it was related to one of the consulting contracts when the final numbers came in. We're a little higher on the income.

Thanks. Walter Ramsley. "Is the acquisition methodology similar to Oracle's and most other American companies, or is amortization of acquired intangibles still considered when evaluating earnings accretion?" What language is that written in? Okay, I've got to read that again. "Is the acquisition methodology similar to Oracle?" I don't know what theirs is. "And most other American companies." Or contrasting to that, "Is amortization of acquired intangibles still considered when evaluating earnings accretion?" All right. One of you CFOs are going to have to answer that one for me.

I'm not really sure how to answer the question. We are -- I'll answer it this way for right now. Our intangibles on the books are basically our software cost, and they're being amortized out over 5 years on a straight-line basis. So hopefully, Walter, you could ask to get clarification if you need more than that, I think, at this point.

Yes, Jack, I'm scratching my head here to see if I can figure out a better way to answer that or understand the question a little better. Well, you mentioned acquisitions, so first of all, when we look to acquire, we look to acquire something that technologically is reasonably close to what we do, but not 100% overlap. And I say that because on the GastroPlus side, there really isn't any opportunity for acquisition. There are only 2 other competitors, one in England, one in Germany. The one in England was recently acquired by Certara and, the one in Germany probably would not be appropriate for an acquisition because they're part of a larger company; Bayer. On the cheminformatics side, where we have MedChem Studio, ADMET Predictor, and MedChem Designer, acquiring one of our competitors there when there are so many, there's 15 or 20 at least, would simply take some market share from that competitor and probably split it between ourselves and the other 14 or 19 that would be left. So I'm not sure we'd be doing ourselves any favor unless there was a specific scientific capability that we could gain in doing that. So as we look for technologies that are close to ours but not duplicating ours and then look at companies that are the right size, we are a small fish, we can't swallow a whale, we're pretty small ourselves, so you've got to have a technological match. You've got to have a size match. You've got to have a personal chemistry match between our staff and the staff of a potential acquisition, and you've got to have someone who's willing to sell at a reasonable price where the post deal status makes sense and becomes a win-win for both partners. And because we're that…

Okay, very good. Thank you, Walt. One last thing before we let you go this afternoon. We want to remind you that on Monday, January 13, we'll be presenting at the Sidoti Micro-Cap Conference in New York City. Both Walt and John DiBella will be present. So please stop by estate 3 at 2:10 p.m. in the Grand Hyatt and see their presentation. And for those of you who are on the West Coast, we'll be presenting at the 15th Annual B. Riley Investor Conference taking place at the Loews Santa Monica Beach Hotel, May 19 to 21. We'll have more details on that as the date approaches. But for now, 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 so much. Happy New Year, and have a great afternoon.