Simulations Plus Inc (SLP) 2010 Q4 法說會逐字稿

Good afternoon. It is Tuesday, November 30, 2010 and on behalf of Simulations Plus, I welcome you to the fourth quarter fiscal year 2010 financial results conference call and webinar. Our Chairman and Chief Executive Officer Walter Woltosz will be presenting this afternoon. Joining Walt as panelist, our Chief Officer Momoko Beran and Director of Sales and Marketing John Dibella. A question and answer period will follow Walt's presentation. (Operator Instructions) This call is being recorded for playback on our website, simulations-plus.com. It is my pleasure to turn the presentation over to Walter Woltosz, Chairman and CEO of Simulations Plus.

Well, apparently I need to start this over again. Okay. Welcome everyone to the fourth quarter fiscal year 2010 conference call and webinar. Let me make our attorneys happy and read the Safe Harbor statement. With the exception of historical information the matters discussed in this presentation are forward-looking statements that involve a number of risks and uncertainties. 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 and the Company's ability 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 Securities and Exchange Commission. So, very happy to report that the fourth quarter, June, July and August was a new record fourth quarter. It makes our 12th consecutive profitable quarter. Our sales were up 19.9% to $2.21 million from $1.85 million in the fourth quarter of last year, fiscal 2009. Net income was up 80.8%, very nice for the quarter over 4Q 2009. The Pharmaceutical segment sales were up 25.5% over 2009.

This was a record fiscal with of each of the four quarters being a record for its particular quarter. Fiscal year 2010 sales were up 17.2% to a record $10.71 million from $9.14 million in fiscal 2009. Net income was up quite a bit more, 52.7% to over $2 million, $2.16 million. Earnings per share, $0.131 per share compared to $0.082 a share for fiscal 2009. Pharmaceuticals segment sales for the whole year up 29% to $7.62 million. The net income for the Pharmaceutical segment up 49.3% to $2.24 million. Words+ revenues also were up 8.8% to $3.09 million. We had a net loss for the year, of $0.82 million compared to $0.8 million, that should be $0.08 million right, Momo? $82,000, not $820,000.

A $0.82 million loss this year and last year was $0.87 million loss.

But that should be $82,000 not $820,000, right?

Oh, I am sorry. Both should be --

So $0.082 million and $0.087 million we will correct that slide before we post them up on the website. The loss was $82,000 compared to $87,000. On the other hand, in the fourth quarter, the net profit for the Words+ subsidiary was a positive $137,000 and a little bit more. A very nice change in the Words+ performance. Recurring revenue of 70% of the total. That is all the Pharmaceutical side. Balance sheet remains very strong, cash at the end of August was $9.63 million and that is after we used almost $2 million for share repurchases over the last two years. The phase one, about $1.2 million and so far, about $700 -- just under $760,000 in the second phase of our share repurchase. The shareholders equity, up again, double digits over 20%, up 23.4%, $13 million and of course we still have no debt.

Our consolidated revenue, you can see the typical pattern here over our quarters. We tend to step from first to second to third quarter going up and then drop down in the fourth quarter. This is primarily because on the Pharmaceutical side of the business with the European and Japanese holidays -- not holidays but vacations in the summer, we tend to find that orders in the summer drop off a bit in the fourth quarter again as June, July, and August. So it does tend to be a slower quarter for the necessarily so with the Pharmaceutical business. Not necessarily for the Words+ business. Very interestingly, sometimes the fourth quarter has been the strongest quarter I think for that business over the years. You can see this typical pattern and you can see here on the slide that all of our fiscal year 2010 quarters were new records for their particular quarters. And you can see even though the fourth quarter is the lowest, you can see a significant improvement over fourth quarter 2009.

Revenue history, broken out by the two segments, the Pharmaceutical segment and the Words+ segment. You can see here both, by the quarter and by annual revenues. You can see the last three quarters were Words+ or even the last four quarters are showing a nice trend upward. We believe especially that the fourth quarter here and may be a tad in the first -- third quarter were affected by the launch of our new EyePro Eyegaze system and we expect that to continue to help the revenues and earnings on the Words+ side. You can see the annual revenues here for the pharmaceutical side, on the right-hand side, we were at a slow increase for 2007, 2008 and 2009 and then a nice healthy jump here for 2010.

We believe this is really part of the indication that the pharmaceutical industry is finally recognizing. I say finally because we have been in business for 14 years and it seems like it is taking quite a while but they are finally recognizing the value of modeling and simulation. Especially with the consolidations going on in the industry. The need for productivity is always great but there is even a greater pressure for productivity when you're cutting staff. So, we have not seen any detrimental effects. In fact, we have seen increases in licenses from many of the companies that you hear about announcing staff cuts. Here again, the pharmaceutical, an amplified -- or magnified view of the quarterly revenues for the pharmaceutical business. Again, a very nice increase over previous years.

Gross margin, continues to run in the 70% to 80% range, usually in the mid-to high 70%. That is consolidated, both business units. Income before taxes, as you can see, when revenues go up, a certain amount, earnings go up even more. This is earnings before taxes. Net income after tax, you can see here. We are very pleased to see this last bar on the right with Words+ making a nice positive contribution to profitability in the fourth quarter. Our consolidated income statement for both the fourth quarter comparison and fiscal year 2010 versus fiscal year 2009 are shown here. I'm not going to read all the numbers. I think the interesting thing to look at is when revenues go up a certain amount here, we've got from $6.3 million to $7.6 million. Earnings per share went up over 50% so we do drop quite a bit to the bottom line because we are past breakeven on the Pharmaceutical side and that does make a significant difference. You can see the difference in a gross profit margins here for the fourth quarter and of course, for the entire fiscal years.

Cash, again, as I mentioned, grew considerably, from $7.5 million to over $9.5 million. Total assets, you can see grew over $2 million and shareholders' equity grew from $10.5 million to $13 million. About $2.5 million increase in shareholders' equity. And that is while we have been repurchasing shares so the equity per share has actually gone up greater than the percentage that you would calculate from that. Discussing the share repurchase program, the Board did approve a second share repurchase program beginning last February for one year. So it goes from February 15 of 2010 to February 15 of 2011.

In phase two, the Board authorized repurchase of up to one million shares. And our purpose in doing this is to use some of our excess cash to increase shareholder value by a decrease in the number of shares outstanding and thereby increasing the per share metrics, earnings per share, sales per share and so on. As of today, in phase two, we have purchased a little over 700,000 shares, 718,000 shares at an average price of around $2.70 per share. There are still about 282,000 shares left that we could purchase. We do intend to continue repurchase under favorable conditions, what we believe are favorable conditions but we don't announce when and if or what our metrics are for deciding when to repurchase.

We began an aggressive marketing and sales program about two years ago, attending far more scientific meetings and conferences that we had been doing in years prior to that, averaging around 15 meetings at quarter in recent quarters. We do continue to use our development and consulting scientists as a major part of our marketing and sales team and this will be a philosophy we have kept the entire history of the Company. We believe it is important that instead of having salespeople who are purely sales people, we want people who are actually very deeply involved in developing the tools, the software tools and/or in using those tools in our consulting work. We do enough consulting work that we have a separate consulting team now and certainly, the software developers also contribute to the consulting work.

So we have a very compatible team arrangement between the scientists who are software developers and those who are working purely on doing the consulting studies or in-house studies if we get time to do those. We are so busy doing paid consulting that we don't have as much luxury to do things that we would like to do as we would like but we are looking to expand the staff, if we can find the right people to join. We do believe that there is a fundamental industry shift and that is something I saw back in the 1970s in the aerospace industry and it took quite a number of years before aerospace and of course, automotive and electronics to adopt modeling and simulation in a really big way.

And I think the pharmaceutical industry is getting on board. They are certainly using more software now, in more ways, than they were even perhaps three or five years ago, certainly 15 years ago. There is so much more that can be done through software, through simulation and modeling. A lot of it, I think, is the progression of those who have grown up with this technology, now moving into management positions, first and second and perhaps third level positions, recognizing the value of simulation and modeling.

And so, we do believe that this is an industry shift . We saw in aerospace industry, it was a slow start but it accelerated and I expect it is going to continue. As we evolve the knowledge base that is needed to improve the models that we build, as the industry learns to use their data in more productive ways, by modeling their data using a program like ADMET Predictor, they can build their own models for structure, to property models as they learn to use the sophistication of GastroPlus, for example.

We conducted in the first week of October after the fiscal year was over, we conducted our first advanced GastroPlus training workshop. This was a week-long workshop held in Durango, Colorado, and we had 18 students or attendees. Four from the FDA and the rest were from industry, represented by companies in England, Singapore, the Netherlands, Israel, United States, so we did garner a worldwide participation. This was a paid course. Each student paying just under $3,000 a piece. So this was a profit center. This is going to be something we do on a recurring basis, at least twice a year, for GastroPlus, every six months or so and then between those six-month trainings, we will do trainings for ADMET Predictor and MedChem Studio. So at least four times a year, we are expecting to have these training sessions with about 20 students per session. That seems to be a nice size to keep things under control.

Consulting services continue to grow. In fiscal 2009, we did about $773,000, between consulting, training and collaboration. Now, the collaborations in 2009 included three funded collaborations -- Pfizer, GSK and Roche, that helped us add new capabilities in GastroPlus, the drug-to-drug interaction, the ocular and nasal pulmonary delivery capabilities. These are all market expanding capabilities that bring not only new licenses from existing customers but new customers into who research in these particular areas, especially in ocular and nasal pulmonary where we have not had a capability before. So when we see the $773,000 going to $907,000, what you have to realize is that $907,000 has made up more of direct consulting on drug development projects on a percentage basis than the $773,000 because it had to make up for the termination or the end of the collaborations that we had . Two of them were finished in December of last year. The last one was finished in about May or June of this year.

I think the fact the consulting that we are doing covers a wide range of companies that especially, the big five customers -- the top five largest pharmaceutical companies in the world with the best scientists in the world who have been using GastroPlus for 10 years or more are still coming to us for consulting when they get into really difficult problems. With the staff reductions, outsourcing is becoming, every year, a greater and greater part of how the pharmaceutical industry is getting things done so we expect this consulting work to continue to grow.

As far as enhancements on the Pharmaceutical side, we continue to increase our technological advantage. We released three major releases, GastroPlus, ADMET Predictor and MedChem Studio all had major new releases in the fourth quarter so they are just now getting exposed over this past first quarter, getting exposed to the industry. Version 7, a huge upgrade, adding drug-drug interaction, ocular and nasal pulmonary drug delivery and of course, whenever we do an upgrade there is quite a number of convenience features and other things that we do to make the program easier to do, to trap likely errors. We try to make the software smart enough that if someone slips a decimal point or does something that looks a little out of line, we will at least give them a warning and say, if you want to do this, you can but consider it could be wrong because of whatever.

ADMET Predictor, a very major upgrade, about a year working on that one. This is fueled by the SBIR grant, $0.5 million grant from the National Institute of Health. And this is paying for development of quantum level descriptors that were used in building the predictive models that allow someone to put a structure of a molecule that they draw into the program and get predictions of about 90 different properties. We are expanding the number of predictions.

We added some new toxicity predictions and we also have now, as part of our SBIR grant, a prediction of sites of metabolism and what this means is that when you look at the drawing of a molecule and you see the different atoms connected together, you would like to know if you're the chemist designing the new molecule, you would like to know which of those atoms is likely to be attacked by different enzymes and allow the molecule to be modified in some way into a different molecule, a metabolite. Predicting the sites of metabolism is a very important capability. That is in beta test, internally results are looking extremely encouraging and we expect to release that, possibly in December, certainly by early 2011.

DDDPlus, I'm sorry, I skipped MedChem Studio. MedChem Studio used to be called ClassPharmers, so those of you that have followed us for awhile, you remember the ClassPharmer name. That was a program that we acquired five years ago in 2005 from a company that was basically on the rocks, it was called Bioreason out of Santa Fe, New Mexico. We acquired ClassPharmer. And we also acquired assets from a second company called Sage Informatics also out of Santa Fe, New Mexico and their CEO, Dave Miller joined us at the time and has been the leader and is the team leader for the Discovery Cheminformatics team that develops the software. We've made so many improvements to the de novo design aspects of MedChem Studio, in other words, the abilities to design new molecules from scratch. We've made so many improvements in that, that it was no longer the data mining tools that it began as, that led to ClassPharmer name.

Now it is a combination of the data mining capabilities and molecule design capabilities with some very powerful tools that integrate tightly with the ADMET Predictor software. If you're a chemist and you're trying to design the next new medicine, some molecule, what we would like to know, is if you change that molecule, what happens? Do you get improved solubility, do you get improved activity against the target protein, do you develop a new toxicity that the previous structure before you modified it, did not have? Are you trying to design out toxicities or some inappropriate properties?

By having the MedChem Studio link back to ADMET Predictor which repeatedly has been shown to be the best prediction program in the world, in independent comparison studies, by having that link back, as the chemist makes a change to the molecule, they can quickly see how those changes affect about 90 different properties, not just one or two but very quickly see how all the properties are affected, to see if that change, maybe fixed one thing that caused another problem are perhaps more than one. We believe this is a very important new capability. We have some new developments. We are not making public just yet but they are in alpha test, in-house. We think these are, again, going to increase the appeal to medicinal chemist as a design tool. We expect to release those new changes in MedChem Studio in early next year -- 2011, the calendar year.

DDDPlus is a stable product and we have done some fine-tuning of capabilities. We have a growing customer base. This was a program -- those of you that followed us know that we developed this on speculation about six or seven years ago. We did not really know how the market would accept this. It was a slow start. It took several years before we had more than even three or four licenses. Now, we have quite a number of licenses and the FDA added, I think, 10 more licenses, fairly recently. This is a simulation program that simulates how the dissolution experiments go in the laboratories. Here is where they have a glass container, usually 900 mm fluid level container with a paddle that stirs it or some other mechanisms to agitate the dosage form. Then they measure how quickly it dissolves. This is a very, very critical step in developing a new formulation. It is one thing to develop a drug. But the FDA does not approve drugs.

The FDA approves the specific dosage forms. You have to take the drug and put into a tablet or a capsule or some other dosage form and then that is what gets approved, a specific number of milligrams, for example, and a very specific tablet that tablet doesn't contain just the drug. In fact, often the contents of the tablet are mostly things that are not the drug. They are fillers. They can be lactose, potato starch, other fillers. It can be ingredients that are there, not for you or for the tablet but for the machines. You can have a lubricant in there that lubricates the machines that stamp out the tablets. You can have something called the glidant which allows the powders to flow smoothly from the hoppers that feed down into the tablet press.

So you have a variety of these excipients as they are called. And all of those can affect how the dissolution profile behaves, if you want this thing to dissolve over an extended period of time to have a controlled release dose. It can be quite complicated. You can use various types of polymers. Some of them swell up. Some of them don't swell up, they just erode. So all of these things are simulated by DDDPlus and has finally caught on nicely and is not because of the way we priced it, we priced it quite a bit below the other tools. It is not going to be 50% of our revenues but it is a very nice product that complements the GastroPlus product and we see many companies now, especially the formulation scientists, learning to use both of these tools in concert with each other. So, that is the presentation and I will now open up the forum here for questions and we will see if we can answer everybody's questions in the time we have.

(Operator Instructions)

Okay. I do see some questions. I am trying to figure out how to expand it so I can read the whole question. I've got this little tiny slit of a window. There should be a way to blow this up. Let's see. No. That did not work. Let's try it again. Okay. Walter Ramsley. Will the trend towards smartphones reduce average selling prices in the Words+ division? I don't think so and the reason I don't is that the majority of our products are for those who cannot speak. They are certainly smartphone products, iPhone and iPad products that can use voice synthesis and can provide a voice.

They will work okay if you are in a very quiet room. But, the speakers on those are not very big and one of the things that we have to deal with in this business, are the various environments and our standard tests, the standard tests in the industry, is how do you go into a noisy McDonald's at lunchtime and if you don't realize how noisy those are, the next time you go to McDonald's. And if you don't go to them, just go to one for the heck of it and listen to the noise level at lunchtime when it's packed with customers. You would not hear this.

You would have a hard time talking to someone on your own cell phone in that environment. So one of the things that we have to do, and others who are in this business is we have to come up with sound packs, I will call it, that we add on to the commercial hardware that we use. Virtually, about 70% or 80% of our sales are based on commercially made computers, either laptops or tablets or PDAs. We do make some of our own systems from scratch but a majority of the sales come from commercial hardware and we add to that a package with various names, depending on the type of system, that has larger speakers, amplifiers, interfaces for switches, for example.

If I have to use a switch, if I have to use, like Stephen Hawking, an infrared switch by blinking my eye, I have to have a way to plug that in and the phones and the iPads are not made for that. I don't think we are going to see any change in sales of volume. The specific question asked about average selling prices. In most cases, probably 70% or 80%, maybe more of our devices in this business segment are funded under Medicare or Medicaid and there are certain allowables and basically, you work within those allowable. So I don't see the selling prices changing.

Second question, are operating margins likely to increase in fiscal 2011 and how much? I would say that as you have seen, the trend is when revenues go up a certain percent, the margins tend to increase. Again, we are well past breakeven on the pharmaceutical side. On the Words+ side, if we continue the way it appears we are going to, we are again, above breakeven and starting to make a profit, so -- and a very nice one, in fact. In the fourth quarter, $137,000 compared to the pharmaceutical side, I believe it was $220,000 or so. So in the past, what we have seen, is almost breakeven or loss on the Words+ side and now a profit that is inching up there in the direction of where the pharmaceutical profits are, at least for the fourth quarter. So I would expect the margins to increase, simply because we do see that margins increase when revenues increase.

Do expect to hire additional staff in 2011? Well, we are constantly looking for talented people. We are very, very particular about who we hire. We interview far more people that we hire. We are going to continue to focus work on trying to locate the right people to join especially on the pharmaceutical side, where we can probably use two or three or four people if we can find the right ones right now. We do have people that we are communicating with on a regular basis. So the answer is yes, we do definitely expect to expand staff, certainly on the pharmaceutical side.

We have any customer collaborations that are active? At this point, the three collaborations, Pfizer, GSK and Roche collaborations have been completed with -- very much successfully. We do have the SBIR grant collaboration that is going to be finished here in the next few months. We don't have any other customer collaborations going on right now and there is, again, I think an indication that our consulting work is growing very nicely because again, we are up -- what is it, up around 17% over last year. When you combine studies, collaborations and training. That means that our consulting has made up for the fact that two out of three of those collaborations ended in December of last year and the third one, the Roche one ended in May or June so the answer is no, we don't have active collaborations now unless you consider the SBIR grant which is not really a collaboration, it is a funded grant.

Forecast for 2011? Herbert Schaefer. Well, Herbert, you're probably new to the Company here because if you haven't heard before, we have been reluctant to do any projections or guidance since we tried a few years ago, five or six years ago and got burned in that. What we find is that if we project a certain level of revenues or earnings, then people think that is the least -- that is the best we're going to do when in fact we tried to project pessimistically a little bit to make sure we could meet the numbers. If we over predict, and don't achieve it, then we get hammered even worse.

So we have just said no, we're not going to do that because truthfully, we couldn't project any better than you can. You can look at the trends and without acquisitions, I will qualify it in that way, without any acquisitions, the growth is probably going to follow a similar trend to what you have been seeing. It does seem to be accelerating little bit but other than saying, look at the numbers and look at the trends, we don't have any better tea leaves then you might have, as far as that.

Next question, how much of a 21% growth in pharmaceutical software revenue was provided by unit volume and higher prices. Higher prices accounted for about 20% of the $1 million something I think was the number for last year, improvement. About 20% was -- of the 21%, so the 20% of the total dollars were from the price increases and the rest was by increasing sales to existing customers to a certain degree, but mostly the rest was coming from new customers, new companies that are now licensing the software.

Next question. Is there any meaningful potential to expand the Words+ technology into new markets via smartphones? We are looking at them. I tend to think that the hardware that we're using is better than the smartphones in terms of, again, how we can take advantage of the technology that is there, wrap our own package around it, or into it, to provide the sound levels and sound quality that you need. There are two things that you worry about when you are trying to give someone a voice, that doesn't have a voice.

One is can you give them a voice that they want? The quality of the voice? That is, male, female, child voice but also the quality that comes out of the speakers. It is not just the voice synthesizer, it is how you get that sound out and the air that is moved by the speakers, as you know, from stereo systems, you can get cheap systems and you can get very high quality systems and there is a distinctive difference. The intelligibility, especially for voice synthesis, from having sufficient volume and clarity and then, of course, a voice that is aesthetically pleasing to the user. If you are a child, you don't have a deep base man's voice and neither would too if you are a woman. You want a voice that is appropriate for the age and gender and you want sufficient volume and again, clarity.

What are the margins on the consulting services? Well, that is not something we disclose directly. We do charge a fair price and basically in the industry rate for what we do on a per hour basis. These are always difficult to estimate. You try to estimate reasonably how many hours it is going to take to do different tasks and virtually in every case, these are fixed price contracts. And we do try to make sure that we are not going to get burned and in fact we haven't. We have done quite well and our customers have been very satisfied with the results and the price that they are paying. Walter Ramsley. What is the expected tax rate for fiscal 2011. Momo, do you want to answer that one?

I would estimate 34% to 38%. General tax, as you know, federal is 34%, and California 8.9% and since we do have R&D credit, as long as tax law doesn't change, I expected to be 34% to 38%

We ended up with 30 point something this quarter so it is always hard to project those and that's one of the reasons why we'll often announce, from now on, I should make the point, from now on we will be announcing preliminary revenues at the end of each quarter. We have only done that in the past when we have had a significant investor conference or some other meeting like that where we want to be able to share the recent numbers and we have had requests both on these conference calls and through e-mails and so on, to do that every quarter. Our attorneys actually advised us to do it every quarter or don't do it so we decided we are going to do that.

You will see a press release coming out with preliminary first quarter revenues in the next day or two. Again, taxes are the tough thing. For some reason, we just don't seem to get those numbers until right at the very last minute, before each Q or K is released. So Momo says 34% or 38%, I don't have any reason to challenge that except that recently it has come out a little less than that so let's hope that the tax laws are kind to us and it comes out to be less than that.

Carl Hoffman. What is the status of environmental talks and opportunities. Well, we have added several environmental talks models to ADMET Predictor with the last release that came out in August, version 5.0. I would expect that we will continue to do that. We do have database that we have obtained from various sources. We are looking at those databases and when you find data, whether you buy it or you find it, publicly available, it is always what we call dirty data and there are always incorrect data and incorrect entries and incorrect molecular structures and various things. It takes us sometimes several months to clean up the database and then to start building models with it and sometimes as you start building models what you find is that you don't get a model that is useful. The data are not yielding that for some reason.

Maybe there is are variety of molecules that were run in many different laboratories under different experimental conditions and the numbers don't really relate to each other in the way that they need to, to build new models. So, we definitely, toxicity is an area that we feel there is a large potential for adding to the number of models we have in ADMET Predictor and so we will be adding new models and most of those are related to environmental toxicity. I wouldn't say most -- a significant number are related to environmental toxicity, others are related to toxicity in humans or in animals.

Next question, what percentage of pharmaceutical software and services revenue comes from government sources, FDA and NIH? It's going to be fairly small. I don't have the exact number, perhaps John has that but we do give substantial discounts to government and academia. Typically, they are paying only 10% of retail prices. John, do you have anything on the tip of your tongue that would give an estimate for that percentage?

It would be somewhere between 1% and 2% of the total revenue. A very small percentage.

Those are -- you might consider them loss leaders. We want to get academia and government agencies using these systems. Clearly, it is important for us to be able to say, and for the customer to see that someone like the FDA or the NIH or in Japan, the NIHS which is their FDA, who are all users of Simulations Plus software. It is important for them to see that those government agencies use it because they know, sometimes, if they submit something to that agency, that, that agency is very likely to run simulations using the software. And it behooves them to run it first and know with the agency is going to find, perhaps even do the courtesy of providing all the input files and so on to save the agency the time of having to do that all themselves. And then again, not only know ahead of time what the agency is going to get but also carry some favor with the scientists there at the government agency by helping them do their job a little bit easier.

Next question, when evaluating prospective acquisitions, does the Simulations Plus exclude non-cash intangible amortization expense from the calculation? Most Wall Street analysts exclude those costs because ongoing R&D will be incurred and recognized to maintain the asset's value. Our acquisition philosophy is we don't acquire companies, we acquire assets. So what we are after is, say we are looking for software because that is pretty well all we look for.

We are going to say, here is an asset, here is a program that is out there on the market and we know right away, it's got sales. It's got revenues, and hopefully has earnings or we can turn it into earnings by a more efficient operation. We are going to look at a software program and or a series of programs and say, can we -- first of all, is it something that we feel comfortable in bringing into our product portfolio? Do we understand the science well enough? Are the people that would come with it expert enough to continue to develop and maintain the software and help to sell it and provide customer support?

We are going to look at this as a specific asset and we are going to look at the revenues that it would generate, the earnings it would generate and our basic philosophy is, we want to buy something that is going to add immediately to revenues and that is going to repay or at least the cash portion of our investment in a reasonable time, which to us is typically three or four years. We may put some stock with that, although we are not really too fond of issuing a large number of shares of stock but we think it is important for those people that come with us and become part of the team to have stock and to be interested in helping to promote the price of the stock, as an incentive for their reward. Next question. That is part of the same question. That is a long one. I think I am back to the beginning. I think I am back to the smartphones.

Have there been in the database sales, Walt was asked that question.

Okay. I did not see that one. There have not. It surprises. We did not develop the Biorelevant Solubility Database specifically to cell. That was an afterthought. In fact, that was an afterthought. We developed it, especially to have our own data so that we could have predictions in admet predictor that allow us to predict the likely solubility of new compounds in these Biorelevant fluids. For those who have not heard those terms before, there are fluids, solutions that are used in experiments that try to mimic the fluids that actually exist in the stomach and in the small intestine. And those are in the small intestine, are done two different ways -- fasted and fed. So, before you have eaten or when you haven't eaten for a long time and then right after a significant meal, those conditions are quite different from each other and the contents of the fluids are different so when solubility is measured, in years past, it was measured in some buffer solution or in pure water.

Those are useful measurements but it is more useful to know how soluble something is going to be when you actually get it inside the human body or perhaps, an animal. So these biorelevant fluids, these fluids that imitate the actual fluids inside the body, have been developed. It was Dr. Jennifer Dressman, originally out of Michigan, now in Germany has been probably one of the leaders in the world who has developed the recipes, the ingredient list that you put together to make these fluids. So we contracted with Northeastern University here about two years ago to measure a solubilities of 160 different drugs and drug-like molecules, mostly real drugs.

And these different fluids, these three different fluids for the stomach and for the small intestine and fasted and for the small intestine in the fed state and that proprietary database that allowed us to build some very nice predictive models for ADMET Predictor to predict solubilities in those three fluids. The afterthought was, now that we have this database maybe some other companies would like to buy the database. Well, we put out there for sale. We haven't pushed it very hard but the truth is, as far as I know, we haven't sold any of those yet. Is that correct, John?

That is correct.

Okay. I'm still not seeing any other questions. Are you seeing any?

You need to be unmuted. Howard, you should be unmuted.

Can you hear me guys?

You are usually first. You ended up last today.

Well I just raised my hand for the phone instead of typing away. Save my fingers. Do you know, or could you give out how many new customers you got in 2010?

We have been hesitant, for competitive reasons, to give number counts like that, but I would say, that is probably a reasonable number to give. John, do you have that on the tip of your tongue?

Yes, it is somewhere in the vicinity of 18 new companies that signed up in fiscal year 2010.

Okay. Have you gotten inquiries from new companies now do you have incorporated those three collaborations and they have just been released?

John, I'll let you answer that.

Very much so, especially when you're talking about the additional dosage routes getting into areas now where we can model the delivery of drugs through the new administration sites, ocular and pulmonary systems. We are now able to offer some tools to companies that may not have been interested in our software in the past. We do have a few proposals that are out right now for consulting work related to the pulmonary system, in particular. And there are a good number of companies who have expressed interest in evaluating the software, learning more about pricing, et cetera.

Okay. You would think it was going to be, for those, the latter, it is going to be the typical sales cycle then, you would imagine?

I would think so, yes.

Okay. And, this question is probably more descriptive, earlier, I think you talked about it last time too, about aerospace and the auto industries moving towards simulation. And if you compare the aero to the pharmaceutical industry, what inning would you say we are in, in the pharmaceutical industry? Or are we still in that batting bracket?

The top of the first -- I say that because we had a speaker at a pharmaceutical conference that's held every year, called the R&D Leaders Forum and we had a speaker come in one year from Lockheed one year. He was the vice president. And he got up and it was very interesting because I did not know this guy and was not involved in bringing him in so I did not know what he was going to say. And he got up and the first thing he said was, you guys are 30 years behind. This was about five years ago. I would say we are still 29 years behind. We've probably advanced a year or two in the last five years. He pointed out, and in fact, I asked him when his talk was done, I said, Lockheed, at that time, was deeply involved, and still is, on the F-35 program, the new Joint Strike Fighter, the international fighter.

There is a program, a single program where the investment, by the time you finish, is going to be between probably $1 billion and $2 billion of that is going to take ten to 15 years to do. Is that right? And he said yes, that sounds like a drug because that's about the same numbers to get one drug on the market. Now it is around $1.5 billion and ten to 15 years and maybe up to 17 years, I have heard. And I said, okay. On the one program, how much money is being spent just on modeling and simulation?

And he said I don't know but hundreds of millions of dollars. We are not spending handfuls of millions of dollars. If you count every piece of software that modeling and simulation type software that is being used, across the industry. I don't think we're anywhere close to that, that is covering all of the projects in all of the companies, not just one project and one company. So I just think we are still so much in the infancy that the growth potential is phenomenal here.

Okay. This question is, I guess more about the future then, say in five to seven years because once it starts to catch on, is going to be rapid. But, when you reach the inflection point where everybody wants it, are there any constraints on you on how much licensing you can do in any particular time? Is it -- would it be a personnel constraint on setting it up in the questions? They walk in and want a 100 licenses in one quarter or something like that?

The biggest issue there is going to be training. We can unlock licenses. In five minutes, we can unlock 100 licenses, that is not a problem. It is the training. So they have to recognize that these tools, especially GastroPlus, for example, this is a very, very sophisticated tool and this is what the aerospace industry had to learn too and I'm sure it is true in automotive and electronics. What you need to use these programs as well is you need a cadre of generalists and the pharmaceutical industry, for years and years, has been made up of specialists. People go, they get their PhD. They specialize in a very narrow area of science, because that is what it takes nowadays.

Science has -- we have moved so far in the last century that it is very difficult to be the renaissance man anymore, if you will. So, what we have to do is get the management to understand that they are going to have to find those people within their organization that like the big picture. They are able to communicate with all of these specialists, on a good level. They are not the specialist but they understand what the specialist do and they are able to integrate all the information together into one place, like GastroPlus and see how it all interacts with all of the other information from the other departments. Those people are being developed. And I think that is maybe the biggest key. This advanced training that we just did. We probably could have set that course for 40 people.

First time around, especially, we did not want to get it too big. And I think, now having done it with 20 people, that is a very reasonable size so that you keep things moving and you always go at the pace of the person who wasn't paying attention, off on doing an e-mail and then comes back and slows you down. We will continue to do these advanced trainings as I mentioned, every six months. Maybe we'll go to four times a year, again as we build our own staff and more and more people come on board who are able to do the teaching, then we can handle the greater training and the more we can train, the more we can support a larger number of licenses.

Okay, down the road you might have your consulting business and you might have a school at some point when everybody is starting to flock to the Simulation's part.

I would not be surprised that we would have a separate training team, under the Life Sciences team at some point.

Okay. And I guess, this is for Momo. I guess if she can describe a little bit of that line item, in the cash flow statement, excess those tax benefits from share-based arrangements. If you could just describe that a little bit. Is it something I'm going to have to model going forward or --

Tax-based share. That was the stock option compensation, correct?

I believe, I think so. From the excess tax benefits,it was over $1 million.

Oh that one.

In the cash flow statement.

That one was the adjustment. We filed the tax amendment for tax year 2007 and 2008. When the price was really high, most of the employees exercise it and sold it. And this is an [incentive] option and if you sell within a year, they lose the qualification to be incentive stock options immediately become an ordinary compensation. So, we went back and modified the tax return so that is the $1 million something adjustment that just came in.

Okay. I won't have to concern myself with that going forward then at this time.

What was happening in the past was that, employees were selling stock in less than a year after they exercise the option but they weren't reporting that. We now have created basically, through our Morgan Stanley account, we have created accounts for everyone so that when we issue stock, if someone exercises an option, we put the stock in that account. If they sell in less than a year, we're going to know it or if they move it out of that account, we're going to know it. This way, we can keep track of these things and is not going to come up and surprise us later. It turned out to be a nice surprise for the Company because we had this basically reduction in taxes without this tax refund but it wasn't such a nice surprise for the employees.

And, on Words+, the eyegaze product, do you have a general idea about the overall market is for the eyegaze type product?

We know that one particular company, we are seeing some numbers on, was acquired, probably within last year I think it was. And we know that company, alone, who sold only eyegaze products was doing a little over $3 million a year and that was one of three competitors in that space. They have now been absorbed by another company so we at least know that if everybody was equal and there are three competitors and they were all doing $3 million, there is about $10 million worth of business out there. I suspect that is not an unreasonable number but it could be $15 or $20 million. And the Words+ is doing $3 million a year, if we can grab a nice market share out of that, then that is going to be a very nice kick to the Words+ revenues and so far, it has been. We're seeing our projections are being exceeded on a monthly basis, based on how we thought this would ramp up, how many units a month.

Okay. Are there any other products that you have, that you might be releasing in 2011 that might rival what the eyegaze is projected to do?

Nothing that we are talking about publicly.

Okay. And, on the acquisition front, is there anything in the Words+ side that you could acquire an asset or have another type of venture to move that division forward?

There are some possibilities. It is a fairly limited field. In most cases, what we would be acquiring if we were to do something would be a pure competitor. So the only reason to acquire them would be basically to turn off that product flow and take over the market share. But then if you do that, the market share is probably going to get split up among your competitors. So you don't really know if you're going to gain anything. In terms of technological capability, we have capabilities already that cover the spectrum now that we have the eyegaze system. We pretty well covered the spectrum within the field so any acquisition that I could think of would be pretty small and more on the idea of support materials rather than the major communication systems.

And the accounting system you implemented, was that the main driver for driving down accounts receivable, year-over-year?

I think that plus the fact we added some staff in that area. We really got aggressive. We've got a new accounting manager. Our previous accounting manager retired and the new one, Carol, has done an outstanding job. She is also contributing to that effort where the previous accounting manager didn't work in that particular part of the business. We had specific funding group but now, Carol has managed to find some time to go in and help out with that as well.

Okay. One final question, I guess back to simulation side. It is probably early because you just mentioned it, I think, on the last call. But have you begun thinking about designing a molecule for testing that could be a nice little option for you down the road?

Yes, I guess we have already talked about that publicly. The answer is yes. We do plan to do some of our own molecule design . We have been traveling and doing, as we mentioned, we've got a very aggressive marketing and sales program. The folks who do that, have spent a lot of time on the road or in the air, I should say. It is not going as quickly as we'd like but it is something we are moving forward with and we do expect to design some molecules and have them synthesized by a company that can do that and then have them run through a specific battery of tests to see how well we are able to design molecules that behave the way we think they should.

I said that was my last, but have another one because you brought up the topic that trigger something else. Attending conferences, I know you have ramped it up this current fiscal year. Is the cost going to go up significantly this year or should it pretty much mirror what you have done this current year?

Well, we are pretty saturated right now in terms of the conferences that are worth going to. We're hitting just about everything so I don't see any significant change. Possibly we may even withdraw a little bit because you test some of these and they just don't turn out to be productive either, business-wise or scientifically, then you say, let's blow that one off for next year. It may contract a little bit. There is always new conferences that come out as well though so I wouldn't expect a huge change in either direction.

Okay. Congratulations I look forward to the pre-announcement of Q1 later this week.

Great. Thank you, Howard. I don't see any other hands up. Renee, do you see any other questions?

No hands up but there are a couple that came in. Accounts receivable declined $600,000 even though sales climbed 17%. How did you do that?

We collected. The accounts receivable is a combination of Words+ and Simulations Plus and the Words+ receivables have been a significant issue for us over the years, where most of these are from government agencies, Medicare and Medicaid or from a private insurance or school districts. And we have had some accounts receivable there were over two years old that just kept aging and we had a heck of a time collecting on some of these. By instituting the new software that we put in a year ago, in October, and also by just the tenacity of our funding people and our new accounting manager, we have been able to start collecting some of those old receivables and some of these we had actually included in an allowance for bad debt.

Which does not mean we wrote them off. It simply means we labeled them as doubtful for collection. We have actually collected some that were quite old. So I think the combination of the additional staff, getting after people, the new electronic filing software, which makes sure that the things we are putting in now are done. Every T is crossed and every I is dotted and they are electronically submitted. What we are finding is the current billing that we have in the Words+ side is getting paid very well and so there aren't the pipeline going into those very old receivables has been basically choked off. And now it is just the old ones that we are still trying to collect.

There is only one other question and you did pretty much address that with Howard and that was for 2011, do you expect the conference is scheduled to increase or decrease or remain the same?

Yes, I would say, my gut feel is probably about the same again for the reasons that I mentioned when I answered it for Howard.

That appears to be all the questions.

All right. Thanks everyone for attending. It has been a very nice quarter, a very nice fiscal year and we'll have some preliminary revenues for Q1 which ends today. We will have it out next day or two. Think you very much.

This does conclude today's conference call and webinar. If you missed any part of today's presentation, the audio playback will be available at our website, simulations-plus.com and thank you for joining us today.