Simulations Plus Inc (SLP) 2010 Q2 法說會逐字稿

Thank you and welcome to the Simulations Plus second quarter of fiscal year 2010 financial results and earnings conference call. Our call today will be hosted by Walt Woltosz, CEO, and we will have a question-and-answer session after the prepared remarks. For those interested in asking a question, you will need to register from the link provided in the earnings announcements press release to receive an audio pass code, which will be issued when you log on to the webcast. In addition, there will also be slides to accompany the webcast online.

At this time I would like to turn the call over to Walt Woltosz, CEO, for opening remarks. Walt, the floor is yours.

Thank you. All right; I think we got past our technical glitch there, and I hope everyone is able to hear me. Welcome to our second quarter of fiscal year 2010 conference call and webinar. I'll being with the safe harbor statement, make our attorneys happy.

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 the current levels of productivity. Further information on the Company's risk factors is contained in the Company's quarterly and annual reports filed with the Securities and Exchange Commission.

We are getting some feedback. If the other people who are staff would mute their microphones, I think that will take care of that. Okay.

Highlights for the second quarter and the first half ended February 28. You can see the pie chart on the right, the revenue distribution between the pharmaceutical side of the business, the software and consulting services, and the Words+ subsidiary in blue. This has increased significantly in the pharma as a percentage. We had been running around 70/30; and now as of second quarter the [environment] has increased to about 75/25, as you see.

This was our 10th consecutive profitable quarter and another record quarter. This is a record second quarter. First time we hit $3 million, rounded off, $2.95 million; up from the $2.5 million second quarter of last year.

Third quarter tends to be our largest quarter, as you will see in the bar chart coming up. So this time the second quarter now has exceeded any of our third quarters.

The second-quarter sales were up 21.1% on a consolidated basis and up 25.2% on the pharmaceutical and services side of the business. The recurring revenue from our annual software licenses, about $1.5 million. So good recurring revenue but also good new sales coming in as well.

Six months is also a record, to $5.4 million from $4.6 million in the first half of last year; and pharmaceutical, software, and services sales up 23.5% in the first half over the first half of last year.

The balance sheet remains strong. $8.6 million in cash at the end of February, no debt, and shareholder equity continues to increase, now up to $11.5 million.

Our consolidated revenue, you can see about the last 10 quarters here. As you see, right here, our new second-quarter record at $3 million, is the same as the third quarter in '08 rounded off to the nearest million. But this is a very good trend; we are very pleased with this.

You can see there tends to be a low in the fourth quarter the last couple of years; and then increasing first, second, and third quarter. This trend is probably going to continue. We expect a good third quarter and fourth quarter, but whether we will get the same drop in the fourth quarter we will just have to wait and see. We have got some new things coming out that I will be telling you about that we think may change that a little bit.

You can see the revenue history here between the pharmaceutical side of the business in green, and the dark blue, the Words+ side of the business, for quarterly revenues and annual revenues. Then year to date on the right, the first half of course of this fiscal year, compared to full years for the other years, the other four years there.

Then in just the pharmaceutical side, the quarterly growth as you can see. The second quarter here has exceeded any of the previous quarters including the third quarters which were usually our highest quarter.

Operating income. You can see from the pharmaceutical side of the business -- you can see the margin, the effect of the high margin on the pharmaceutical side of the business here. When revenues go up a certain amount, earnings go up, income goes up quite a bit more because of the high margins.

So if you go back to the first quarter of '10, let's say, we went from 1.7 to 2.2 between the first quarter and the second quarter, so an increase there of, what, around 30% or so. Yet earnings, or operating income almost doubled. So a small increase or a certain increase, I should say, in revenues produces percentagewise a significantly higher increase in income because of the high margins. Once we get past breakeven it is a very profitable business.

Gross margin you can see here. Similar trends to the revenues in terms of stepping up, going first, second, and third quarter; and then back down in the fourth quarter. Summertime is our fourth quarter. As you know, our fiscal year ends August 31; and summertime (technical difficulty) holiday and things like that tend to slow down the business a bit.

So we did have a price increase earlier this year, which is also helping out a little bit on some of the renewals. We reduced the renewal discount and increased the base price of some of the products. It's the first price increase we have had in five years.

We've had very little pushback on that. I think people realize after five years just things like normal increases in salaries and healthcare costs and rent and stuff like that justify a price increase after that many years.

Income before income taxes. You can see again the similar trend, stepping up with a peak in the third quarter normally and then back down in the fourth quarter.

Then net income. Again you can see the split here between Words+ and Simulations Plus. Not a good quarter income-wise for Words+; but fortunately the Simulations Plus, the pharmaceutical side of the business, very, very strong and more than offset the loss there on paper for Words+.

We did have a good cash flow in Words+, but paper-wise we had some increases in expenses that were booked and pulled that blue bar down below the line there as you see.

Consolidated income statement. You can see here now for the second quarter and first half, comparing this year and last year, significant improvements. I am not going to read all of these, but you can see again nice improvements across the board. Words+ was also up in revenues both for the quarter and for the half.

Gross profit you can see up nicely, and profit margins increasing. SG&A up a little bit, but not too much considering we are putting quite a bit into marketing and sales. Doing an awful lot of shows, and I will talk about that again here in a few minutes.

Earnings per share, you can see $0.04 for the quarter and $0.06 for the first half. Doubling last year's second quarter in earnings per share and a 50% increase overall for the first half.

Cash continues to grow. Got excellent cash flow. You can see at the end of February about $8.6 million. Haven't checked with Momoko to see where we are today, but would kind of guess we're probably pushing 9, if not over it.

Total current assets you can see up over $1 million since -- over the last year; and total assets over $1.3 million.

Current liabilities and total liabilities, you can see there. Shareholder's equity once again increasing to now rounded off to $11.5 million.

We announced a second share repurchase program back in January or so, February, and this began in February. The purpose of the program is to use some of our excess cash to increase shareholder value by reducing the number of shares outstanding and increasing the per-share metrics, like earnings per share, sales per share, and so on, cash per share.

Our goal is not to support any particular stock price. We don't have a price that we have set as a limiting price. The Board has authorized up to 1 million shares to be repurchased over that one-year time frame. As of today, we have only repurchased a little over 22,000 shares, as you can see, at an average price of about $1.85.

We don't announce when and if we will make any further repurchases. We may not make many, but we may make the whole million shares. So that is not something that we put out to the public, and we don't have a price range determined or published.

I mentioned our marketing and sales. We have really pushed quite hard on this over about the last year, starting a little over a year ago, I guess. Spring conference season last year we got very aggressive, started doing many, many more conferences and scientific meetings.

We are doing about 15 in the third quarter, which is the March, April, May time frame. That is probably 3 times what we did a few years ago.

And we see the effect of that. We are known. We already have an outstanding reputation in terms of the science of the products certainly with people that have known us for many years. But we are finding many, many new companies, smaller companies, and different departments in the large companies. There is a significant growth potential in both areas for us.

We see a fundamental shift in how the industry is recognizing and using simulation and modeling tools now. With the consolidations going on, productivity is even more important than ever, and two things are happening. The tools as they are used and as people in industry publish and present and show the results they get, like with any new technology, the more other people see their competitors using technologies, the more they think they better get onboard and get with the program and find out how to use the stuff.

And the second part of that is the software tools continue to evolve. Every time you release a version you start working on the next version. So technology keeps advancing, new capabilities attract new users, and we will have very shortly GastroPlus 7.0 will be released with the ocular and nasal pulmonary delivery capabilities.

So now companies who deal in delivery of drug to the eye or through nasal sprays or inhalers will have a very sophisticated capability, and that will be available to them in GastroPlus. Some of those companies already use GastroPlus in other areas, in oral dosing or intravenous dosing. But now the departments that deal with ocular and nasal pulmonary will also be potential users of the software.

A major change coming in Gastro 7 is the drug-drug interaction capability as well, and we will talk about that again in another slide or two.

Our consulting services have continued to grow. We have really had a very good response to our marketing and sales emphasis on consulting that we started pushing strongly last year. We have seen repeat Big 5 customers, so this is very interesting, because these customers already have the software. But in many cases they are either too busy or we are dealing with departments who are not using the software yet, particularly clinical pharmacology departments who have not yet used software that is as detailed and mechanistic in its science as GastroPlus.

So we are seeing Big 5 customers coming back for repeat studies, and I think that's an evidence of the quality of the Consulting Services. They wouldn't come back if they didn't like what we had done for them earlier.

You'll notice the presentation today is quite different. We are emphasizing more of the business aspects and getting less involved in all the technical jargon and detail. So all of the programs are discussed here on a single slide and I am really going to address just what is coming soon.

Version 7.0 of GastroPlus is a major, major new capability that we will be releasing here very shortly. It is actually in beta tests. Each one of these three areas -- the drug-drug interaction, ocular drug delivery, and nasal and pulmonary drug delivery -- all of these are in test at customers who funded the development of them with us. Drug-drug interaction from Roche, ocular from Pfizer, and nasal pulmonary from GSK. Those have been fantastic collaborations.

Drug-drug interaction is still going on in order to complete (technical difficulty). The fact that the customer is willing to come in and fund us to add these capabilities to our flagship programs has been one of the reasons that our R&D expenses have not been coming out of our own cash to a significant extent.

So we have added very nice capabilities here which expand our markets and our capabilities in sharing the costs with the customer. We do have a part of it ourselves, but (technical difficulty) quite a bit is covered by the customer.

For ADMET Predictor our SBIR grant, which is a little over $0.5 million, it is about halfway through Phase 2. This is funding a major effort towards very rapid calculation of quantum-level descriptors. This gets a little technical again. But just again to give you a comparison, the typical software that calculates these numbers, these quantum-level calculations, could take as much as one day to calculate all of the things that we calculate for one molecule.

We do about 200,000 an hour on a laptop computer. So you can see it is an incredible increase in speed; and the accuracy is quite adequate for what we want to do. We measure the charges in terms of electron charges, the equivalent charge of an electron. And our accuracy ranges on average about 0.05 electron charge, which is quite acceptable for the purpose we're using here.

We're also working on predicting sites of metabolism, which basically means if you draw a molecule and you know that molecule is metabolized by a certain enzyme, that we want to be able to predict where on that molecule, which atoms, are affected by that particular enzyme.

That is a very important capability to have in analyzing drugs that are in early discovery and even in early preclinical development. If we can predict which enzymes will attack that molecule, where they will attack it, that is valuable information for the chemists to have.

We are also working on additional toxicity models. We have moved strongly into the area of toxicity prediction. And also in that same vein, moving into environmental toxicology.

So about a year ago we started attending some of the conferences that deal with environmental toxicology. Recently completed an effort with the Air Force related to that.

ClassPharmer, some major enhancements to the graphical user interface are in development; and significant speed improvements are also being seen in that same development version. We expect a new release in the fourth quarter.

ClassPharmer has evolved significantly over the past several years under the guidance of David Miller, who has taken what used to be two different programs a few years ago, merged them together. We have the best of both worlds now, significant speed even before the newest speed improvements, and moving into the area of drug design. So we are now able to give a chemist tools that allow him or her to very quickly generate large numbers of new molecules based on information from existing molecules.

With the algorithms in the ClassPharmer, some very logical ways of generating new molecules that make sense, then closely linked with ADMET Predictor, so that when we generate these new molecules in the computer ADMET Predictor can tell us a lot about them. How soluble will they be? How permeable? Would they be toxic in different ways? Are they going to be metabolized by different enzymes? And so on.

So this is a very powerful capability. The combination of ClassPharmer and ADMET Predictor has really become something quite exciting to us in terms of the area of drug design.

DDDPlus, a pretty stable product right now. We have been fine-tuning some capabilities. We haven't had a major push for new capabilities.

We do have a growing customer base. This is a unique product. There is nothing else like it. No one else has even attempted to make a program like this.

This is the one that predicts or simulates the experiments in the lab for dissolution of tablets and capsules and controlled-release dosage forms. So quite a unique technology. The FDA uses it, a number of large top 5, top 10 companies using it, a few smaller organizations.

Okay. So with that, I will take questions now and let's see if we can manage this question-and-answer thing properly. We're still having a little growing pain I think with using this. Let me look down here on the questions. I don't see any questions yet.

How do I tell if someone wants to ask a question? I know Howard does. Howard always wants to ask a question. I'm going to try unmuting you, Howard, and see.

Okay. I'm here.

Okay. Go ahead.

Great quarter.

I assume you had a question.

Yes. I have a few. I have a few, but it was a great quarter. Great to see.

Thank you.

How many new licenses were signed during the quarter and how many did not renew their licenses, if you have that information?

I don't have that. Let's see. John, do you have that?

I do, yes. We are looking at seven new organizations that signed up for licenses and also four companies that expanded licenses. There were two companies that did not renew for the quarter.

Okay. I mean you talked about now the cycle, the quarterly cycle. There was no, I guess, third quarter that came into the second quarter at all?

No, no. We're doing a very good job of trying to make sure that the sales can be booked in same quarters going forward. So there was no shuffling of sales from one quarter to the next.

Okay. Then, Walt, about -- because I saw in January you were able to monetize a data set. Is that something you are going to try to do for other data sets? Or if you could just talk a little bit about the one that you did monetize and then what your future plans are.

Okay, yes. This was a -- what Howard is talking about is a data set of 160 drugs and drug-like molecules where we contracted with Northeastern University to measure the solubility of these molecules in three different fluids that mimic the fluids in the body. So it was fasted state gastric fluid, so basically the fluid in your stomach when you have not eaten for some time; fasted state intestinal fluid; and fed state intestinal fluid. These are all simulated.

So each of these fluids has different things in them. When you eat a meal your gallbladder will basically squirt bile salts into the intestine which helps to solubilize many drugs, especially things that are fatty.

So the composition of what is in your stomach, what is in your intestine when you have not eaten for a while, and what is in your intestine right after you have eaten is quite different. And the behavior of these molecules, the dosage forms, is sometimes quite different.

So we measured 160 of these. And we really did that for the purpose of developing predictive models for ADMET Predictor. Right now in ADMET Predictor we have a water solubility model. Pure water with nothing else in it. That is a valuable solubility prediction, but the solubility of these drugs can change significantly from pure water into these other environments.

So we measured that again for the purpose of building models with ADMET Predictor. Then we realized after we had that that, gee, you know, there's probably a lot of companies out there that rather than spending $100,000 or $200,000 to measure these themselves, they might be willing to spend -- say, I think $15,000 is the price we put on it -- to have this data, to look at it inhouse.

Because you can see some pretty insightful things from this. So that is the first one.

We may end up contracting for other similar kinds of measurements and selling that data as well as using it for building our own models. There are no particular plans yet.

We do have a project that we are kicking around that kind of relates to that one, related to precipitation; but we have not yet contracted for it. We are still in early discussions with some groups that might be able to help us do that.

Okay. One final one. Could you give us, I guess, an update on what the prospects are for maybe making either an asset purchase or acquiring another company by, I guess, calendar year-end?

Okay, well, it's been a difficult time and we have pursued a number of leads. We have done due diligence with a number of places. All I can say that is public is that we continue to work on it. It is a high priority.

It is not easy at our size to find basically smaller fish. We are a small public company. People have probably read about the recent merger or proposed merger of Accelrys and Symyx. Well, both of those companies have on the order of $80 million in cash and considerably higher market caps, even though our earnings are better.

But those would be too big for us to take on. It would be the small fish trying to swallow the big fish.

So we have got to find companies that are small enough to fit our budget; that are scientifically good and in an area of science that we can absorb and manage properly. We don't want to jump into a whole new area where we have no expertise and be completely dependent on someone else telling us what to do business-wise. We would like to have at least a good understanding.

With the staff have now, we cover an awful lot of the areas of science in pharmaceutical and now a little bit into the environmental tox area.

So finding the right size. Typically what we find is companies that are willing to sell have a problem. There is a reason they are willing to sell. And the companies we would like to buy who are small enough and doing well don't have a reason to sell. Many of them, almost all of them, are private. It's a little more difficult to get good financial information out of a private company compared to a public company.

So we are dealing with all those issues. But we certainly have not given up. We're always in discussions with several potential acquisitions and trying to work out something where we can get a deal that makes sense for everybody.

I will not rush into a deal. It takes a lot of patience sometimes and it can be pretty frustrating. But every deal we have done so far has been a good deal both for us and for the person or companies that sold to us.

So patience pays off, and we will do deals as soon as we can and as many as we can, but we're not going to jump into a deal just for the sake of saying we did one.

Okay. Well, keep up the good work.

Thank you, Howard. Okay. I think this is Walter Ramsley. It's Walter somebody, and you're the only other Walter I know on here besides me. Let's see if I can find you in the list here and unmute you. Okay, Walter. You should be live. Walter Ramsley, are you there?

Okay, well, I will just read the question then. Congratulations on the excellent results in Q2. How much of the growth in pharmaceutical software revenue came from price increases and how much from higher unit volume?

Do you know that, John?

Yes, we instituted the price increase sometime around the middle of that second quarter. So when I took a look at the numbers there were only eight companies that were actually affected by the price increase. By my calculations we only saw approximately $60,000 increase due to the price changes.

So the majority of any increase in revenue for this quarter would definitely be due to the increase in unit volume sales as opposed to any increase in the price. It will probably be felt at a greater extent going forward here into the third and fourth quarters.

Okay. I think that answers the second question. Also it was when it went into effect.

What was the pharmaceutical software renewal rate in Q2? Also from Walter Ramsley.

90%, 26 out of 29.

Okay. Ron Creeley -- how do you ask questions?

Well, you just did. Just type it in, and I will read it off.

Carl -- how are sales of the biorelevant solubility database? What is the price point? How many customers would you expect?

The price point was set at $15,000. We've had a number of companies express interest. I don't know that any have actually purchased yet; have they, John?

No, we have not sold any copies of the database yet.

As far as how many customers, very difficult to say. This is a specialty area. I would guess potential customers would be in the hundreds; but I can't you who exactly, how many that might be.

Let's see. Tax rate, also from Walter. Tax rate was 34.5% for the six months. What do you expect the full year figure to be?

Momo, can you answer that one?

Yes, probably anywhere between 34% to 37%.

From Carl. Besides the Air Force, are there other customers buying licenses for environmental toxicity purposes?

No; I would say not yet. John may correct me on that if you know of anybody. This is an area we are just getting into.

There are companies that are interested in what we do in ADMET Predictor; there are companies that are interested in what we do in GastroPlus. One of the things we learned as we started to attend these meetings last year was that companies in environmental toxicology do physiologically based pharmacokinetics, or PBPK we call it, which is the forte of -- one of the fortes of GastroPlus.

The efforts that we have seen in that industry are not as sophisticated as what we see in the pharmaceutical industry. So we do expect that they will adopt GastroPlus for PBPK purposes as well.

Next question. Have there been any changes in the competitive landscape?

Well, I imagine the merger of Accelrys and Symyx. They are not direct competitors. Actually we are partnering with Symyx, as you saw the recent release where we are collaborating with them on metabolism, extending metabolism predictions in ADMET Predictor.

The merger of those two companies I don't see as any significant effect on us. Their products tend to be operating mostly in different areas and serving different purposes.

So other than that merger, which I guess is still proposed -- I know there are a few attorneys that are looking into it; I guess they always do that. But other than that I don't know of any significant change in the competitive landscape that has taken place.

One that will take place very shortly is when we release GastroPlus version 7.0 with the drug-drug interaction capability, that will take away the one capability we have not had that our only significant competitor that we have seen -- Simcyp out of England -- has had for several years.

We have leapfrogged the technology of Simcyp. And we believe because virtually every Simcyp customer is also a GastroPlus customer already, and GastroPlus tends to be the production tool -- we are told -- in these companies, where Simcyp was used just for the drug-drug interaction, we believe that having the drug-drug interaction capability in GastroPlus at a more sophisticated level will give us a significant advantage there.

Because someone already licensing GastroPlus will only have to add the cost of that module rather than the entire cost of another supplier, which would be significantly higher.

So again it's one of the reasons I said fourth quarter this year might actually turn out pretty good compared to earlier years where we see a slow fourth quarter, because that capability will be out there by then.

Another question from Walter Ramsley. Has the Company given up on any potential acquisition targets? What is the current prognosis as far as completing one or more?

Well, I think I already addressed that. We have given up on one or two that just didn't make sense as we got into the due diligence. Just didn't make sense, but others took their place almost immediately.

[Carl Hoffman]. If you were to make a purchase of another Company, would you rather offer shares or cash?

I would rather use cash to a reasonable extent. We certainly want to keep a healthy cash reserve. Last year we put about $2.5 million of cash into the bank and then spent about $1 million of that buying back shares.

So our cash flow tends to run in that neighborhood, $2.5 million, which should better this year from the looks of things. Positive cash flow, which would put us well over $10 million by the end of the fiscal year if things continue as they have.

So we would rather use the cash and not use too many shares. Shares are good from the standpoint that, if you're going to keep the people that you are buying from, you want them to have a vested interest more than just walking away with cash and getting lazy. You want them to have basically shares that they would like to see grow, or at least options that they would like to see grow, and so they work to help you make that happen.

Renee says Ron wants -- okay, we will make Ron a speaker. Okay, you are live, Ron.

Can you hear me?

Yes.

Okay, well in December last year you made a big splash with a press release about entering Simulations Plus in an entirely new consumer market, that being the iPhone, with Abbreviate! for the iPhone. Can you give us an update as to the profits the Company has seen from that product?

Yes, it's been a disappointing venture. We thought we would be able to persuade Apple to allow us to take the Abbreviate! software and underlie other applications, as we do on the PC and as some companies do you on the Mac. But after a number of negotiations back-and-forth, they just basically became adamant. And they said we are not going to allow any application to run underneath other applications.

Basically the problem as I understand it is that, because the iPhone is a telephone as well as a computer, they don't want to risk the liability of someone needing to make, say, a 911 call or an emergency call and having another application somehow interfere with that capability. So they did say they might consider embedding it in their operating system and licensing it from us. But that was the last conversation a few weeks ago.

So you rushed into the marketplace without fully understanding what the ramifications of the product were. I mean that just sounds like -- it sounds to me as though the venture has been a waste of shareholders' money.

It may have been a bad investment. It is hard to make everything perfect. And you were involved in it and thought it was a good project too at the time.

Tell me, I wasn't privy to any market research that had been done prior to that launch. Was there any?

Well, you were in charge of marketing. Did you do any?

No, because you wanted to rush the product into market within two weeks.

All right. Well let's not drag out the webinar with that. Any other questions?

Yes, I have another question as far as the acquisition strategy that you have. This has being going on for well -- more than two and a half years, where money has been -- you have told investors that you have been accumulating money in order to make an acquisition. Along the way you picked up a senior executive whose responsibility was acquisitions. What has he done thus far?

We have looked at probably a dozen companies and had discussions with each of them. Again, as I outlined earlier, and as you know from being here for many years, it is not easy to find a good fit, being our size and having the resources that we have.

We have got to find something small enough to buy without risking everything we have. And in a technology area that has something that is at least tangential to what we do.

Okay. Well is that executive still responsible? Is his principal responsibility still acquisitions?

It is. However, there are some changing developments there that are not public, so I'm not going to talk about them just yet.

Well, you continue on with the strategy. And from my perspective as an investor, at some point you have got to call this a failed strategy. I mean you are putting away a lot of money and holding on to a lot of money that could be better spent investing into the business, as opposed to hopefully at some point maybe -- you never know when -- you might be able to pick up a company or a product.

At what point do you pull the plug on it?

And do what instead?

Invest the money into hiring qualified people, which you yourself have said takes a long time to find these people and get them institutionalized so that they can be of benefit to the organization.

Well, if you are concerned with the salary that Michael has been getting, he has also spent probably as much or more of his time -- including a tremendous amount of donated overtime -- helping to do a consulting study. So his efforts have not been solely on acquisitions, because there just aren't enough opportunities.

Okay, so again, to put it in perspective, though, for the investor then, there is very little on the acquisition front that is coming along. Yet a lot of money is being saved that could be put into the business to grow it organically.

When do you pull the plug on the focus of the acquisition strategy?

Okay, there is a misconception there, Ron. We have grown the staff. We have hired more people as we can find -- and you may remember. We are interviewing probably two or three people a month on average, some months more than others. It is very difficult to find people that fit with what we do.

But we do have two new scientists in the last six months who are working in studies. One in [Vera's] group, who also can program; and one that we hired out of NASA in Houston here just last month, who is in the studies group. So we are growing organically as well.

But we are very selective. We have got quite an elite team. As you know, the life sciences team is an extremely talented group of people, and it is because we have been selective. We don't just hire everyone that walks in the door. It's got to be a good fit.

So we're growing both organically and continuing very diligently to look for acquisition opportunities that fit.

Okay. Last question. I as an investor would encourage you to put less emphasis on an acquisition and more on growing this Company internally, and getting the right people that are necessary now with the loads of cash that you have on hand.

Last question has to do with Contract Services. I am not convinced personally that this is a good business to get into for the Company. There is no high reorder value. He there are some minor number of companies at least of my experience that have come through and actually purchased licenses as a result of having contract services performed for them.

Now certainly Simulations Plus scientists are world-class at doing that. But my question is, have you ever done a P&L on the product line? Is it profitable?

Furthermore, have you done P&Ls on ClassPharmer as well as DDDPlus? I don't believe that those product lines are profitable. Can you speak to that?

Well, we don't reveal -- for competitive reasons, we don't reveal the profitability of specific products, but I can assure you that (multiple speakers).

Okay, then my question is -- have you, as a company, have you run and are you cognizant of the profitability contribution of each of your, let's say, five now major product lines? Do you run P&Ls on your product lines?

Momo, do you want to talk to that?

We don't have each product -- I have never done the analysis yet. However, we have the idea of the scientists working and revenue; that level it is profitable.

I don't understand that. I mean the question is (multiple speakers). It is fairly straightforward from a financial standpoint, Momo, that you have got five significant product lines here that the Company consists of. I'm interested in knowing that let's say financial tools are in place that allow you to monitor the profitability of each of these five product lines. Do you have that in place?

Right. [Scientist] expense is considered; and revenue is recovering the scientist cost. However, the overhead analysis I have not done yet.

Okay. So you have got five major product lines and you really don't know which of those are contributing to profit other than guessing or at least having an educated guess. You don't know specifically.

Well --

I can tell you, Ron. Let me answer that, Momo. I can tell you that every one of the products is more than paying for its cost.

DDDPlus as you know, is the lowest priced product, but it also requires the least amount of effort. It's a stable product. As I mentioned, it is basically a little fine tuning now and then. We have far less than probably one or two man-months a year going into that product; and the revenues are probably more equivalent to close to a fulltime person per year. So even that one, which would be the least profitable.

Yes, but you know, I think Ron's suggestion is a really good idea. I do have the direct cost of the basically scientists who are involved developing a product. And I can tell the revenues. So that part I have, Ron.

But overhead analysis, probably it's a good idea to keep monitor, and I will do that.

Okay. Thank you, Momo. From an investor standpoint, quite frankly, I can't -- I have a real problem with your trying to run the business without having -- without being quite intimate with the profitability of each one of your product lines. And having run that analysis I think is certainly good for each of your product managers to have, to know where they stand. And I would encourage you to do that and thank that you are willing to do so.

Yes. Thank you for a good suggestion.

Lastly, I had mentioned at the annual meeting that presenting numbers in constant dollars rather than inflated dollars I think would be quite helpful for investors. I again encourage that you try to do that so that we have an understanding of the impact of inflation or certainly we are able to take a look at trended data of the Company's results over time using constant dollars. Thank you very much.

Thank you. Okay. Next question was from Carl. Has the Board reconsidered paying a dividend?

The Board has considered. For now, there has been a decision that we will not pay a dividend right away. It is something that we may be able to reconsider at some point in the future.

But the recent discussions have been that we think we should continue to try to use the cash reserves that we have both for the share repurchase program in small part; but in largest part for potential acquisitions.

Another question here. Walt, have you been approached to be bought by other companies? I can only read a little bit of this at a time. Are you considering that option?

Well, I guess, anything is for sale if the price is right; but I don't think we are anywhere close to anything that I or the Board would consider in terms of a share price. I think we are well below anything. If we get up to $10 a share and someone offers that, maybe we will have a Board meeting and consider that.

Let's see. Carl -- has anyone expressed interest in another -- same question. All right.

Is there any risk that the Words+ operation will experience greater losses in upcoming periods?

Momo, can you talk about that? Was this quarter an anomaly, or can we expect more?

For the future Words+ profitability? That was the question?

Yes.

The Words+ revenue is -- its increase is not as much as the Simulations Plus side of the business. However, we are expecting a new product to come in. And according to the Sales and Marketing Manager, that new product will get into ALS population and trying to get some market share back.

So if that project is successful -- and probably we are expecting not huge profit -- but maybe 3% to 5% profit every quarter.

Which is much better than a loss of $200,000 in one quarter, so.

Right, and it --

Yes, we just submitted a -- we just came to an agreement with a company for redistribution of a product in a particular area that is especially used a lot with ALS patients. We also recently submitted our first patent application from either company, and this is a Words+ patent.

We haven't talked about it publicly yet. But we think there is significant problems there with a project that is going on. And that product will be on the market hopefully by around this fall.

There was another question here related to that, and this is also from Walter Ramsley. Is there a high likelihood that bad debts previously written off in connection with the Words+ operation will be recouped?

Keep in mind that we don't really write off these old accounts receivable. We make an allowance for bad debts; that is different than writing it off.

If we write it off, we will say -- all right, we are giving up on that one. We are never going to collect that one, so we just write it off.

But the majority of these old accounts receivable are from state Medicaid agencies, from Medicare, from private insurance, and that sort of thing. They should be collectible. They take a lot of diligence, and we have increased our staff in that funding department. And we are getting some of these old receivables in.

So the answer to that is we are not giving up on these. The person that has come in has done a good job. She is collecting more than it takes to pay her to do it, so we are coming out ahead on that.

It just takes a lot of work, especially with state budgets being the way they are right now. It is pretty hard to get people to take the time to go back and look at something that is a year or two old when they have got the current day's paperwork to do.

So we have to just be diligent, keep pushing them, and we are getting some collections.

Walter had another question here. If new prices had been in effect on every pharmaceutical software license during the quarter, how much would revenue have been?

That is not an easy question to answer. I'm not sure we can answer that one.

John, can you take a cut at that? If new prices had been in effect on every pharmaceutical software license during the quarter, how much different would the revenue have been?

I would say again a very rough estimate would be maybe adding an additional $150,000 to $200,000.

Okay. So going forward, I guess the follow-up question that I will ask, that probably Walter would ask, is -- going forward could we expect that that would be the proportional increase we might see in price increases going forward?

I would say so. The combination of the change in license fees and the better management of discounts -- we have seen for those customers in the second quarter about a 15% on average increase over what the fees would normally be. So I would say that that's probably a fair percentage to consider going forward now, placed across all of the companies in the third and fourth quarters.

Thank you, John. That is the last question I see. If there are any other questions I will wait just a few seconds here. But I don't see any others coming in. Okay.

Unfortunately I have another appointment that started about a minute ago. So with no other questions I want to thank everyone for your attendance and your interest. It has been a great quarter, a great first half of the year.

The business is strong. We are looking for acquisition opportunities. Ron's comments, there are some good suggestions there. We will take those into consideration. And so, thank you, everyone, and we will see you next quarter.