Walt Woltosz - Chairman, CEO Ted Grasela - President John Kneisel - CFO John DiBella - VP Marketing and Sales

Welcome to the webinar. You have entered as an attendee in listen-only mode. Presenting this afternoon will be Chairman and CEO, Walt Woltosz; President, Ted Grasela; Chief Financial Officer, John Kneisel and Vice President of Marketing and Sales, John DiBella. An opportunity to ask questions will follow today's presentation. [Operator Instructions] This call is being recorded for playback and our Web site www.simulaitons-plus.com. Now before we begin our presentation Safe Harbor statements. 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 as filed with the U.S. Securities and Exchange Commission. 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 third quarter fiscal 2015 conference call. For background for those of you that maybe new to the company Simulations Plus is a major provider of software and consultant services for our pharmaceutical research and development all the way from earliest drug discovery, when chemists are just drawing molecules that they might have in mind all the way through all the clinical trial phases and even beyond patent life to supporting generic companies. And in addition to being a brilliant very recognized primary leader in model-based drug development, we’re also developing now some new applications in aerospace and general healthcare based on the machine learning technologies that we developed over about the last 16 years. We've had a very, very fine third quarter. Our revenue is increased by 58.9% to 5.9 million that of course is comparing the combined entity of Simulations Plus and Cognigen this year to last year in the third quarter only Simulations Plus. Both growth in Simulations Plus and the addition of the Cognigen revenue sales helped to boost that up to almost 60% growth. Our total revenues through the end of the third quarter were 48.6 million and that’s up to 54% over last year. Our diluted earnings per share increased 36.5% to $0.11 a share compared to the same period last year and the Board just recently met this past week and voted to continue distributing the $0.05 per quarter dividend that we've been paying since about 2012. Our software renewal rates continue to be very, very high, 99% based on fees, based on actual number of licenses that would be slightly lower but typically when we lose a license its an academic license or something that is not being full retail price, so in terms of…

Great, thanks Walt. Good afternoon to everyone. Financially it was a very good quarter for both Simulations Plus and its subsidiary Cognigen. I'm going to go over the results for the third quarter and then the nine month periods and then go over some of the graphs. Walt, the slide isn't changing. Can you see if we can move it down? Thank you, Walt. The revenues increased in this third quarter by 58.9 or $2.2 million to about $5.9 million from the prior year. Cognigen revenues were 64% or $1.4 million of this increase and they were up over 10% by $130,000 from the second quarter of the fiscal year. Simulations Plus revenues increased 21.4% or $801,000 in the third quarter '15 compared to the same quarter in 2014. Software sales increased by 21.8% aided by an order that carried into this last fiscal quarter from the second quarter before. Our analytical study revenues have increased 49% for the quarter or $52,000. Gross margin are good, they increased 37.3% or $1.3 million to $4.8 million this quarter in compared to last year. 69% of that increase or $903,000 came from Cognigen which showed a robust 64.6% gross profit in the quarter. Simulations Plus margin for the quarter was 86.4%, it was 7.9% from a year ago at 93.3% in 2014. However last year the company posted $165,000 royalty expense benefit associated with the renegotiation of our royalty agreement and we only amortized 25,000 of cost of the new agreement in the third quarter last year. The current year, the same amortization was $150,000. Those two items account for the majority of the change in margin that’s in plus. Basically last year was higher than what would normally been expected. Consolidated gross margin decreased to 81.2% from that high of 93.9%…

Thank you John K, thank you Walt and hello everyone. Good afternoon. I will be giving a relatively short update on some of the highlights of the sales and marketing efforts for this third quarter. As Walt alluded to earlier in the presentation it was quite the busy quarter for product releases. GastroPlus the flagship product had a major release come out in May. We're really excited to get this one out into customer and prospect hands. This release included several new optional add-on modules that serve as additional revenue opportunities for us and also allow us to penetrate new market that we couldn’t reach last year or with previous versions of GastroPlus. Some of those new features, again Walt mentioned them briefly at the beginning include PBPK models for biologics for large molecules. This is going to help us penetrate a little bit further into the biopharmaceutical market. Also new models for dermal drug delivery and intraoral or oral cavity drug delivery which should help us reach out a little bit better to some drug development groups. One of the other highlights is also kind of tied in with the release that came out in May also for ADMET Predictor. This was a relatively minor but really important release for the program. What we were able to do here is upgrade some of the models that work very closely with GastroPlus and what we did in the GastroPlus program is integrate those models and incorporate them as part of an additional add-on module. We see this driving revenue for both products as we continue to promote this really strong marriage that we can offer between quantitative structure activity relationship modeling, QSAR modeling and the PDPK technology in GastroPlus. A major release of ADMET Predictor is expected in the fall…

Good afternoon everyone. This is Ted Grasela, President of the combined Simulations Plus and Cognigen. And I wanted to give you an overview of Cognigen itself and then also some information about some of the other activities within Simulations Plus. So I think the most important message that I have to deliver is that we’re beginning to realize the strategic and synergistic benefits of the Cognigen acquisition. It’s been mentioned already that some of our scientists have been trained in GastroPlus, and we've recently completed training of computer program NONMEM that we use for our analysis and that there has been excellent collaborations between the scientists from the two companies and it's very important as part of those collaborations they have been identifying new and innovative ways of using modeling in Simulations to solve client problems and this is allowing us to tackles projects in ways that are different than we would have done in the past, and certainly our clients are appreciating the new ways in which we’re thinking about issues that they have and helping them to advance their research and development programs. One of the things that we've concentrated more on since the acquisition is our social media presence and use of email blasts and we have found them to be quite helpful in simulating interest focusing particularly on modeling in simulations, our data assembly services and then also KIWI functionality. We've also had an enhanced presence at national, international scientific meetings and I'll talk a little bit about that in the context of KIWI on the next slide. So to just give you first an update on Cognigen sales. In the third quarter of fiscal year 2015 at the end of the quarter we have about 48 active projects in this quarter we've acquired two new…

Hi Ted, we have a few questions in from Howard [Halpern][ph]. The first question, as the larger company what do you see as your opportunities for growth?

Thank you, Howard. Well, certainly just in terms of -- there is lot of different answers to that question, so just in terms of having two groups of scientists one, who has focused on pre-clinical model development and a little bit into clinical development and the scientist from Cognigen who have focused primarily on clinical development. We are seeing the world through two different sets of eyes now and that has allowed us to see the potential to answer these problems that we really didn’t know how to tackle in the past with these different tools and it’s allowed us to really think differently when clients contact us and propose a problem to us. We have a bigger and expanded tool kit and of course that leads to in the very least new consulting revenue but then also the opportunity to have introduced them to our software products and lead to the company to buy the software so that they can solve these problems for themselves in the future. For many new clients who approach us now about projects we have had a Simulations Plus scientist and a Cognigen scientist sit on the presentation of the idea and this has really further enhanced our ability just to see things in different ways and to propose different ideas to the client.

Okay. Howard has another question, considering that regulatory agencies worldwide are increasing their adoption of Simulation software products has there been any changes in your sales cycle for ADMET Predictor and GastroPlus?

John DiBella would you like to answer that?

I’d be happy to. I think overall the sales cycles itself, it still remained relatively the same as what we have historically seen I believe that the shift maybe in that the budget approval tends to be a little bit easier, however there is still an issue with respect to management wanting scientist to go through the evaluation process to make sure that they feel comfortable utilizing the tools to identify if there are any gaps in the types of data that the company is currently generating and to see what might be lacking in terms of training or understanding of the tools themselves. So that evaluation process that needs assessment process is still relatively the same, but there is definitely an acceptance of what this technology can do and so from a budgetary standpoint those approvals tend to be a little bit faster than what we’ve seen previously.

Thank you, John. Howard’s next question is for an update regarding Cognigen penetrating the clinical pharmacology departments using ADMET Predictor and GastroPlus.

Yes, this is going to continue to be an important focus for us and we’ve begun to line up the clinical pharmacology meetings that we’re going to be attending during this upcoming fiscal year and developing strategies for highlighting the value of ADMET Predictor for example and helping to predict drug-drug interactions and other sorts of concerns that are important to clinical pharmacologist, but also as we’ve talked about in the past this marriage of ADMET Predictor and GastroPlus we think is going to be an important and unique marketing point for the company. So we continue to get interested, we continue to propose the use of this software for different issues that arise in the clinical pharmacology group.

Thank you, Ted. Howard’s next question is whether there are any acquisition or assets purchases to enhance our growth opportunities?

Walt, would you like to take that one?

Sure, we're always shopping. We've got money in the bank. We're always looking, there's nothing on the near horizon at the moment but we’re certainly keeping our eye out for something that is of the right size, the right technology, the right personal chemistry with the principles. Nothing I can talk about publicly at this point though, sorry.

Thank you Walt, Kevin Tracey has a question, a comment actually. First congratulations on the great performance, in the past you've talked about the pricing of GastroPlus being substantially below competitive products, despite your belief you have a superior product. You also mention on the first quarter call that you're experimenting with pricing for new customers. Can you give us an update on how you're thinking about pricing?

John DiBella would you like to tackle that one?

Absolutely. We continue to track the competitors and get as much intelligence as we can on how much they're charging for software. We did identify that a price change was warranted and did introduce a very small one, really starting at the beginning of this calendar year. And our plan is to assess the software license fees, really on an every other year basis. We've come to learn that purchasing agents do appreciate some stability in license fees at least across a two year period, so we've respected some of their wishes and will continue to investigate pricing and analyze where we're going to go on an every other year basis.

Okay, thank you John, Kevin Tracey's next question is concerning how the software renewals are priced. He asks if they're priced at consistent or discounted or are there price increases on the renewals?

Did you want to take that again, John?

Absolutely. So one thing with the software licensing model that we've had since day one is that there is no perpetual license or main license package which is purchased and then companies have a decision to purchase maintenance or upgrades on an as needed basis. Our software is really a subscription based model that’s licensed usually on an annual basis. When customers come back and renew the software before their current licenses expire we do offer typically a 10% to 15% discount on the post year fees and those then tend to be fixed during the duration of their license term.

Thank you John, Kevin Tracey's next question is on whether we can elaborate on what our new head of business development is working on.

John?

Three for three. I'd be happy to. So Michael Wallace again was mentioned in the press release has transitioned over from his former role as team leader of ChemInformatic Studies where he provided quite a bit of assistance to marketing actually back then in his old role while also leading the team that was responsible for building a lot of the models in the ADMET Predictor software, travelling to conferences and presenting work and so on. Since he's been in the marketing and sales group officially for the last six weeks or so his primary task besides getting up to speed on the sales process, negotiations, contracts and so on has really been on the messaging aspect. So he is critically analyzing what it is that we promote on the website and the brochures, at the exhibit booths with respect to our individual products but more importantly he's been tasked to try and identify where we should be highlighting the synergies especially in that ChemInformatics package really highlighting the bundling aspects. So that's his primary responsibility at this time.

Thank you John, Donald Borcea has a couple of questions. His first question is are the results from the malaria and Cox 2 experiment still being used as promotional tools and are there any other plans for these results.

Walt, would you mind taking that question?

I was just about to, thank you. Yes, we still talk about it, we don't have any plans to further develop the molecules that we had there. Again we're not a pharmaceutical company, the purpose of these two experiments was to illustrate what could be done very quickly and very cost effectively using basically our ADMET design suite which is ADMET Predictor, MedChem Studio, MedChem Designer and also supported by GastroPlus. So we talk about it, I talk about it almost everywhere I go and I'm sure the other folks do as well. But right now we’re saying, we’ve spent the money on making investment, we proved that the software works and now having our new business development person fulltime in marketing and sales we hope to continue to push that and make sure people understand what can be done with these products.

Thank you, Walt. Donald's next question is what level of security exists regarding potential of pirating the software programs?

Walt do you want to take that one as well, please?

We switched our licensing software about two years ago. I guess we began with some of the programs and now we've got all of the programs migrated over to an industry standard program that's a little more expensive than what we’re using in the past but quite secure, very flexible, it's known as Flexera. So it's a very flexible system in terms of allowing us to license different numbers of different modules to a customer. So this is helping on the sales side, is where our customer might say I want GastroPlus but I only need two of the metabolism modules and one of the IVIVC module but I want three of the optimization module and things like that. In the past we just had to say sorry, you have to take the same number of optional modules for all of them which was restriction on sales because people did not pay as much, so they figured they’d just take fewer licenses and get along. But that is -- I would say level of security, I can't put a new numerical number on that for certain level of confidence but this is an industry standard security system and licensing system that's used throughout. On our ADMET Predictor software, all of the models that we build internally are encrypted model, so they are in encrypted files. Certainly the NSA can break through any of this stuff, but I don’t think any of the pharmaceutical customers or competitors have the capability to get through it.

Thank you Walt. And what appears to be our last question is from Tom [Steren][ph]. He asks, do any universities currently use your tools in training its students. And if not, do you see any opportunity in such an approach?

Let me take that one. Tom [Steren] is someone that I have known since I was in high school back in Rochester, New York assuming this is the same Tom [Steren] and I believe it probably is. John DiBella can give us an actual count, but yes we have quite a few universities we provide software to. I know it's over a 100 or so and John D can give us a better count on that, universities around the world. The training was supplemented by us actually paying visits to some of these universities I have done a couple of this year myself, one in the University of Florida and one at a university in Tennessee. And so we support the universities, some of the universities are reference sites, so they actually use the software in graduate research and publish their results in the peer review journal which is a very helpful. John D, you want to comment on that a little more?

No I think you've kind of hit it where the number of universities that do utilize it for teaching had or researches probably over or around a 100 and one thing that we certainly do is offer free teaching licenses. So if a professor is interested in utilizing the tools as part of a class, we definitely work with them to try and get licenses in place and in some cases work with them a little bit on the syllabus, provide them some examples that they can utilize to get some of the lessons across to the students.

Thank you John. And we have another question from this may be a pseudonym, I am not sure, Adam [Stockmeister][ph] and his question is with regards to the legacy Simulations Plus revenue growth, is this due to an increase in market penetration or a growth in the cost of the average license or both?

John DiBella would you like to answer that one?

Sure. Thanks for the question Mr. [Stockmeister]. The increase in license fees this year is really small to be perfectly frank. Not all module saw price increase and those did saw a low single digit percentage increase. So the increase in software license revenue is primarily driven by market penetration and market penetration some of it due to the changes in the license fees. And then a third aspect is some of the new features that we've added. We have seen a few sales of that biologics module of the dermal delivery module and also MembranePlus. So it's going to be really a combination of those three items. But the changes in the license fees themselves I think it's going to be the smallest component.

Well thank you John. That appears, there's got one, oh, Adam [Stockmeister] has sent his thanks as well. It appears to be the last question. Any comment.

Okay. Thank you everyone for attending and we look forward to talking with you again at the end of the next quarter.

Thank you Ted. 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 www.simulations-plus.com. Again thank you for joining us and may you have a wonderful afternoon and summer.