Simulations Plus Inc (SLP) 2011 Q2 法說會逐字稿

Good afternoon. It is Monday, April 18, 2011. On behalf of Simulations Plus, we welcome you to our second quarter fiscal year 2011 financial results conference call and webinar. Chairman and Chief Executive Officer Walt Woltosz will be presenting this morning. Joining Walt as the panelists are Chief Financial Officer Momoko Beran and our Director of Marketing and Sales, John DiBella.

An opportunity to ask questions will follow Walt's presentation. You may indicate that you have a question by using your hand-raising icon on your control panel. (Operator instructions). This call is being recorded for playback on our web site www.simulations-plus.com.

It's now my pleasure to turn the presentation over to Walt Woltosz, Chairman and CEO of Simulations Plus. Walt?

Thanks, Cameron, and welcome, everyone, to our second-quarter fiscal year 2011 conference call and webinar.

So first, to keep the lawyers happy, we've got to do this. With the exception of historical information, the matters discussed in this presentation are forward-looking statements that involve a number of risks and uncertainties. The actual results of the Company could differ significantly from those statements. Factors that could cause or contribute to such differences include but are not limited to continuing demand for the Company's products, competitive factors, the Company's ability to finance future growth, the Company's ability to produce and market new products in a timely fashion, the Company's ability to continue to attract and retain skilled personnel and the Company's ability to sustain or improve current levels of productivity. Further information on the Company's risk factors is contained in the Company's quarterly and annual reports and filed with the Securities and Exchange Commission.

So, second quarter 2011, the three months were ended February 28, just about six weeks ago. And comparing our second quarter of this fiscal year to second quarter of fiscal year 2010, we see that this was our 14th consecutive profitable quarter and that sales were up 13.5% to a new record of $3.35 million from $2.95 million in last year's second quarter. This is not only a record second quarter, this is a record quarter overall. Typically, in the last number of years, the third quarter has been our record quarter. So this would even be last year's third quarter.

Net income was (technical difficulty) [up] 41.6%, so you can see the leverage there from 13.5% revenue increase to over 40% income increase, and that is clearly due to the margins on the pharmaceuticals, software and services part of the business. Our pharmaceuticals segment sales were up 17.7% and our Words+ subsidiary sales were up 0.7%.

Comparing the first six months of fiscal year 2011 to last year, we see sales up on a consolidated basis to a record $6.16 million from $5.39 million in the previous year's six months. Net income up 37.7%. Again, you can see the leverage there from 14.4%. Revenues increased to almost 40%, income increased to $1.475 million from $1.071 million.

Pharmaceuticals segment sales for the six months up 17.9%, and the Words+ subsidiary up 4.4%.

Our diluted earnings per share for the first six months up a little over 39% to $0.09 a share from $0.06 a share. Our balance sheet remains strong. We have no debt, cash a little under $9 million, $8.76 million at February 28. And that's after using cash of $4.2 million over the last two years to repurchase a little more than $2 million of our shares at a share price a little over $2, if you divide that out.

Our shareholders equity decreased 3% to $12.66 million from $13.05 million back at the beginning of the fiscal year, due to cash that was used for the share repurchases during that time period. Over last year at this time, the shareholders equity shows an increase.

Consolidated revenue -- this is the pattern that we have seen fairly consistently for several years now, where we have the first quarter, second and third quarter an increase, and then the fourth quarter being the summer time, June-July-August, being the lowest quarter. So we are seeing the same effect again this year. You can look up the slope of the increase; it looks very nice. We have not hit our third quarter yet. We're in the middle of that now. So you see the chart ends at the end of the second quarter.

Quarterly revenues -- comparing the pharmaceutical, software and services business with the Words+ subsidiary you can see on the left by quarter, and then by annual revenues where, on the far right, we are seeing the six-month results for this fiscal year.

Now, quarterly revenues for the pharmaceutical software and services segment you can see here, separated out from the rest of the business. And just try to draw a line there through the second quarters for 2009, 2010 and 2011, and you can see at this point it's a fairly linear slope. No guarantee that can continue, but clearly that's about as perfect a linear correlation as we might expect.

Gross margins -- this is consolidated; this includes both business segments. And you can see for second quarter 2011 here 77.6%, so a very healthy gross margin.

Income before taxes, and you can see again the leverage. And the three lines there show -- you can see the increasing slope that we are exhibiting from fourth quarter through second quarter for the last three years. And then net income overall -- this is where we show the net income for both business segments, and you can see the comparison of second quarter 2009 to second quarter 2010 and second quarter fiscal year 2011. Words+, as you can see over the last four quarters, has been mostly positive, just a very slight negative in the first quarter of 2011 but positive in fourth quarter 2010 and again in this quarter.

So that's largely due, I think, to the -- we have had a small increase in sales, but also we've really gotten the accounts receivable under control that were giving us a bit of a problem over a few years ago.

Consolidated income statement -- I won't read all of these to you, but you can see the basic comparison here, pharmaceuticals, software and services revenue up, Words+ revenue up, and of course that means consolidated revenue was up. Gross profit is up. Gross profit margin is up. SG&A is actually down a bit. R&D up very slightly, almost equal, and total operating expenses actually down a little bit.

Income before income taxes significantly improved because of the higher revenues and lower operating expenses, and of course net income, a very nice improvement.

Balance sheet items, again, cash is very strong, a little under $9 million as of February 28. I believe we're over $9 million today; is that correct, Momo?

I'm sorry?

I believe our cash is well over $9 million today, isn't it?

Yes, $9.1 million today.

Okay, so now that we have discontinued the share repurchase program -- that program was completed in February; that was the end of the authorized one-year period -- then, we are putting that money in the bank now, rather than buying back shares. And I'll talk a little bit more about that in another slide.

Total current assets, you can see about $12.5 million in total assets, just under $15 million, with liabilities here of about $2 million.

The share repurchase program -- I mentioned earlier we completed the second phase, which was another one-year phase. We repurchased over both phase one and phase two a little over 2 million shares at an average price of about $2.05 a share. We closed today at $3.25, so it looks like we've made a pretty good investment there. The Board of Directors could authorize another phase of share repurchases at any time. However, as of today the Board has no plans for doing so. You never know when we meet again if the subject comes up whether that will change, but at least as of today we have no plans for another share repurchase right now.

Marketing and sales -- the slide that I used last quarter is similar to this one with some changes. But one of the points I made last quarter is there is a fundamental industry shift that is continuing, and that is, in the pharmaceutical industry, pharma is increasingly utilizing simulation and modeling software. These are the tools that have the highest productivity of any tool available in the industry. And there is a steady stream of scientific meetings that are addressing this modeling and simulation. Unlike 10 to 12 to 14 years ago, when we were very new in this business, modeling and simulation was a rare topic. Now it's a significant thread of virtually every major conference, and there are many dedicated conferences where it's the only topic.

As with any other software business, software tools for pharmaceutical R&D continue to evolve. The advanced technology and, of course, new capabilities attract new users. So we just released ADMET Predictor 5.5 with expanded, structured property models including quite a few new toxicity models. Toxicity prediction is an area that we believe is a growth area for us. We have begun, as of about two years ago, attending the larger conferences that deal with toxicity and environmental toxicology, and so we are getting our name known there. And we believe that, as I say, is a potential growth area for us.

And in GastroPlus, we have added the drug-drug interactions, ocular delivery and nasal pulmonary delivery, and certainly ocular and nasal pulmonary delivery attract the interest of customers who focus particularly on drugs for those types of administration. And so they expand our markets.

The de novo molecule design -- that means designing new molecules -- in MedChem Studio and what I call our fantastic new MedChem Designer/ADMET Predictor combination, we believe, is probably the best tool available today of its kind where a chemist can generate a large number of molecules automatically with MedChem Studio, based on information known from existing molecules. And then they can test those new virtual molecules that just exist in the computer with ADMET Predictor to see whether they are likely to have any serious adverse properties. And if so, you can rule those out without ever having to make them.

I've mentioned in the past, we are not yet to the point in the industry where we can say, okay, generate 1 million molecules and we will tell you which one is the best one. But we can sure tell you which of many of those molecules, probably 80% or more, are definitely not going to be worth pursuing. That's a fantastic increase in productivity.

With MedChem Designer now, the drawing tool, chemists can take the most promising molecules that come out of the large-scale design and filtering that you can do in MedChem Studio, home in on a few models that look very interesting and look at where they might be improved a little bit, and make those improvements with a molecule sketching tool that allows them to take the existing structure that's close to what they want and try different modifications to that structure and then click on a button and, within seconds, with the ADMET Predictor software, see over 130 -- 120 different predictive properties to tell them whether the change they just made to that molecule was a good one or if it just created more problems. This is an extremely powerful tool, and we're quite excited about it.

Our team continues its prolific generation of scientific papers, posters and podium presentations with more than 30 in the past year. We actually had, I think, 35 in fiscal year FY 2010 and we've had around 30 already in FY 2011.

Collaborationists, consulting and grants, has been a new profit area for us for several years. We have now just completed our SBIR brand that was funding us for about 2.5, almost three years, to improve ADMET Predictor in two ways. One is to generate very quickly partial atomic charges. That may not mean much, but to tell you what that does for us in terms of productivity, in the past to calculate those charges would have required running software that's based on quantum mechanical calculations, very complex software. And it could take as much as a day to calculate the properties as atomic charge properties for one molecule.

We developed a method under this SBIR grant where we can now calculate hundreds of thousands of compounds in an hour on a laptop and generate those atomic charge properties and other related properties that can be calculated from that. The advantage that gives us is many properties of molecules are dependent on those atomic-level properties with these charges and other reactivity indices and so on. And in the rest of the industry, predictive models are built almost exclusively on properties of the entire molecule.

Well, the entire molecule has properties that are useful for building models; we've been doing it for a number of years. But it doesn't capture all of the relationships that cause the molecular structure to have a certain property. And particularly in the area of metabolism, which is the second part of our SBIR grant, if you want to predict where on a molecule a particular enzyme is likely to attack to try to change that molecule, either to cut off part of the molecule, to cleave part of the structure away or to add something to it, as some enzymes do, you really need to understand at an atomic level what's going on.

And so the rapid partial charge calculation capability was the precursor to one of the major features in our new ADMET Predictor 5.5 that was just released a couple weeks ago, and that is the ability now to predict where on a molecule different enzymes are likely to attack. And from what we can tell from the models and the testing that we've seen, we believe we have the most accurate prediction now of what we call the metabolic sites for different molecules. This is very valuable, and this is something that you can see with the MedChem Designer sketching software. With a couple of mouse clicks, you can pop up a drawing of the molecule and show the relative scores for each of the atoms in the molecule as far as a particular enzyme to say, is this enzyme likely to attack this molecule at any one of these points? And if so, where is it most likely to do that?

So the SBIR grant is done now. A very, very successful final report is being generated now. We recently signed a five-year collaboration with the FDA, specifically the Center for Food Safety and Applied Nutrition. And under this collaboration, we will be building toxicity models using our ADMET Predictor and ADMET Modeler for both food additives and contaminants. This will give us access to a very large database of compounds that can be present in foods either naturally or through processing steps for foods that are processed in factories.

We have recently formed a second studies team, so we now have within our life sciences group two studies teams, one that focuses on the simulation side of our capabilities -- that's with GastroPlus and DDDPlus -- and this other one now is going to focus on informatics. So this is the MedChem Studio/MedChem Designer and, of course, ADMET Predictor. This is being led by a very experienced scientist who has joined us recently, Michael Lawless.

Any software company that stops trying to improve its software is probably dying, and we are not in that place. We are always working on the next version. As soon as one version is released, the next version is in the works. And GastroPlus version 7 was released last August; that was a very major upgrade that added three market expanding capabilities and a number of convenience features -- the drug-drug interaction, which has been released but is now in beta test for even further expansions; the ocular drug delivery and nasal pulmonary delivery. And we've had some other improvements and nasal pulmonary recently that are also in beta test, and I believe those are going to be available in the ocular delivery as well, in terms of expression of enzymes and transporters.

ADMET Predictor -- I mentioned version 5.5 was released a few weeks ago in March, major upgrade, the prediction of sites of metabolism, which we believe is the best out there. And also, because we continued to expand the number of new atomic level descriptors since our previous 5.0 release, we retrained the models that we have, all of our models, so that if these newer atomic level descriptors could help, they would be selected automatically in the training process. And so our already top-ranked property predictions were further improved as a result.

MedChem Studio -- we have just released version 2.0 last week, again a major upgrade. The integration of the new MedChem Designer software -- you see the CD jewel case artwork on the left for the products and on the right for MedChem Designer. MedChem Designer is, to us, very exciting capability that David Miller and his team have developed. We have seen significant speed improvements in MedChem Studio, but the MedChem Designer capability is now integrated as well into MedChem Studio and will be actually, as a standalone product, integrated with ADMET Predictor as well. And I will show you a slide in a second that just gives you an idea of what MedChem Designer is all about.

Our fourth product, our second simulation product, is DDDPlus. This is a very stable product; we have been fine-tuning some of the capabilities there based on customer feedback and requests. With our growing customer base, we believe, does show that there is acceptance of this unique technology. There's no competition for DDDPlus; we're the only organization that has even tried to build a simulation of these in vitro dissolution experiments. The FDA Office of Generic Drugs, in fact, added I think it was 10 more licenses just last year for DDDPlus. So that's always a very good sign.

MedChem Designer -- this is one screen capture. It can do many, many, many things. But if you want to fit it all into one slide, I thought this would be a good example. If you look closely at these molecules -- I think my mouse will show up -- I think my mouse is showing up -- let's see. I'm not seeing it on the audience view. Well, maybe you can't see it. If you look at molecule one, molecule two, three, four and five, you will see that in the bottom ring there's a nitrogen that has been added that wasn't in the first molecule, which is called Fluoxetine, and it's a marketed drug.

So if a chemist said, you know, what if I took Fluoxetine and I just modified it by putting a nitrogen at each one of these different points around that little ring; what would happen? Well, it took about 15 seconds or so to do that. And then clicking on the yellow AP button up near the top on the icon, that bar up there, automatically over 130 properties or 120 properties were predicted for each of these changes. And you can see there's a table of numbers there, and you will see that the numbers are different in many of the properties as you move that nitrogen around. And so this is a way that the scientists can say, what if? What if I changed the molecule this way or that way? What should I expect? Am I going to get better in terms of things that I'm trying to improve? Am I going to end up generating some toxicity problem or some other problem? Maybe I solve one problem but create two others.

So this is the reason we're quite excited about MedChem Designer. It's quite unique. This capability of drawing and getting property predictions that are already ranked independently is the best in the world. And doing that in a matter of seconds is an extremely powerful design tool.

So, in summary, for the trailing 12 months through February 28, our revenues were about $11.5 million; net income, about $2.5 million, 22%, roughly, of revenues. Earnings per share about $0.16, and that's based on the current diluted, fully diluted shares of about [16.2 and 8 million] shares.

Simulations Plus is globally recognized as a leader in our respective market niches with an outstanding reputation for scientific expertise, technological innovation and strong customer support. In terms of growth, we are expanding our life sciences team to promote faster development of new products and services as well as to reinforce marketing and sales efforts. As most of you who have followed us know, our life sciences team does spend a significant portion of their time supporting marketing and sales. We believe in getting people out of the building -- those who are software developers, those who are on the studies teams, getting them out into the world so they can interact with customers by either attending scientific meetings just to attend and present or to staff the exhibit booth for the significant number of shows where we have exhibits and to demonstrate what we can do to customers who come up to the booth and want to see what our software will do.

So with that, I'll open up for questions and answers. And let's see if I can -- I see a question here. I see several questions here. Now, can I expand that window, because I'm reading about one line. Here we go.

The tax rate -- this is from, I think, [Walter Emsley]. The tax rate was approximately 35% for Q2, but 33.5% for the six months. What is the expected rate for the entire fiscal year?

That's a good question. We keep asking that ourselves. We never know our tax rate literally until about the day before or sometimes the very day of filing our 10-Qs and 10-Ks. It's very complex, the R&D tax credits, and so on, seem to jump around a little bit. The NOLs that we've had, the state of California has not been very friendly in allowing us to use those, but I would guess that somewhere in the 35%, plus or minus 1% or 2% -- would that be reasonable, Momo?

Yes, I would think so.

Sorry we can't the little more precise there.

Again from Walter, approximately one-third of the tax provision was deferred long-term. That's still more than what General Electric paid. (Laughs). Yes, that's a point of aggravation, isn't it? With all the money they make, they didn't pay anything. But what factors caused the deferral? I'm going to have to ask Momo to answer that.

The main reason -- there are several reasons to cause deferral tax. But the long-term deferral tax is mainly caused by capitalized software development cost. We capitalize -- for instance, let's say if scientists spend 50% of its time for new develop -- capitalize new development, in which we will capitalize it, and we amortize it over the five years. So that's the main cause of the deferral.

Okay, thank you. This one probably is going to be for John DiBella. Pharmaceutical software sales was up 17.7% in Q2. How much of that was generated by greater unit following, sales mix, higher prices?

One of the things that Walt didn't go into too much detail about was the sales mix for this quarter. In fiscal year 2010, the second quarter, we actually saw a record for the amount of revenue from consulting studies, and we were also neck deep in a number of collaborations as well. This quarter or the second quarter for fiscal 2011 we actually saw approximately $200,000 to $250,000 less in revenue from the consulting services side and from the collaborations.

The reason, the primary reason for the increase in the revenue was because of the renewal rate being so high, 96%. That actually addresses, I believe, the next question. And then also, we saw a significant amount of revenue coming from new license sales. This second quarter for fiscal 2011, we saw almost $700,000 in new license sales. So that was the primary reason why we saw the 17.7% increase.

The result of the price changes that we instituted last year -- at this point now, most if not all of the companies have seen this price increase. For this particular quarter that just ended, we saw approximately $60,000 of the total revenue due to the price changes. And going forward now, all the companies are subjected to or have been subjected to these price changes. So we don't expect to see any additional revenue increase from the price changes in 2010.

Thank you, John. I think that probably encompassed much of the next question -- how much of the total pharmaceutical software revenue was generated by existing customers compared to new ones? Do you have any more you want to say on that, John?

No. Again, the renewal rate was 96%. We just lost one very small nonprofit license, so we did see quite a bit of renewal revenue. I think total, percentage-wise, it was about 63% was based upon renewal revenue. But again, the new license sales were responsible for about 28% of the revenue from this past quarter. So it was a very good mix, very healthy mix between existing and new license sales.

Thank you. Pre-tax margins were approximately 42% in Q2 compared to 30% in Q1. Six-month average was 36%. What is the expected pre-tax margin for the entire fiscal year?

Well, we haven't made an estimate of that. If we did, we haven't made it public. And so I'll just have to say that, as I've said many times over the years, we never know how a quarter is going to turn out until the last day of the quarter. We -- I have to say, under John's management of marketing and sales, we generally have a pretty good idea going into the last couple of weeks how it's going to finish, but you just never know whether companies that you expect to get their purchase orders in, especially new business, are they going to get them in so that we can get the software unlocked and take credit for that sale before the end of the quarter, or is it going to slip into the next quarter?

I think, without putting a number on it, I think the trends are going to continue. I have no reason to believe that they are not. We haven't seen any effect, for example, of the earthquake and tsunami in Japan. We actually tried to find whether there was any customer or extended family of a customer who was affected that we might be able to help out, and we were not able to find any. So in spite of the disastrous effects of that in Japan, it doesn't seem to have affected anyone that we know directly, or even their extended families. So we don't expect much change even in that part of the market.

The next question -- I think I just read that one, does the Company expect the same year-to-year growth rate?

I, again, don't see any reason for the trend to change, but we will not quantify that publicly. We talk among ourselves and kind of watch things as the quarter goes along. Don't expect any surprises there at this point.

Is the Company developing any new pharmaceutical software products, or is R&D focused primarily on enhancing existing products, excluding the Words+ operation?

We are looking at new products. We don't disclose what those are for competitive reasons. So it's not primarily on enhancing existing products, although I should comment that enhancing the existing products can result in new products. For example, when we added the drug-drug interaction and the ocular and pulmonary capability to GastroPlus, those became new modules that are priced separately. So it's as though you developed another product with its own price and its own set of customers. It just happens to be integrated into one of the existing products.

Of course, there are many enhancements that are simply included in an already existing product or its modules that existed earlier. And we certainly do that, but there are capabilities that we are developing that would be additional cost, either as part of something that we have now or as completely stand-alone products.

Are the asking prices of potential pharmaceutical software acquisitions too high to make it worth pursuing?

We only had one, I'd say, where the price was just too high to make it worth pursuing. The other ones that we've pursued, just as you got into the due diligence, you began to realize that it just wasn't all it was cracked up to be on the surface. And I won't go into specific companies, but we've had times when we have been very interested, for example, in the science and products of a particular company, but we could not get straight answers on why a company had the financial results that they had.

And so without clear due diligence we are not going to jump into something and then find that we bought a pig in a poke and we would end up losing money on it.

All of those questions were from Walter [Ramsey].

[Fred Milligan] -- what do you intend to do with cash? Well, I've been out looking at new jets, but Momo says I can't spend it on that, so I guess I'm going to have to say that we are expanding the staff internally. We continue to look for acquisitions. We are not giving up. There's always a chance that we will find a capability that, in terms of our expertise, our ability to absorb in terms of understanding from senior management's side, understanding what the business is about, being able to get compatibility among locations and people and governments. We had an acquisition we really wanted to do in Germany a few years ago, and between the German government tax policies and our tax policies there was just no way to make it a win-win situation.

So yes, growing the Company internally, organic growth -- we are aggressively interviewing people. I think we've got three online right now that we are talking seriously to. So we do intend to expand the staff and go after specifically some of the strategic objectives that we identified as much as two years ago -- new product areas where we know that there are opportunities out there that no one is addressing right now, and that's one of the reasons I'm not going to say what they are. But we believe we have some capabilities that can offer some new products that would be quite lucrative.

I did say more than once that one of the things that we're going to do with some of our cash is use the tools that we now have in hand -- MedChem Studio, MedChem Designer and ADMET Predictor, specifically -- to design some new drug molecules and actually make them -- by contract, of course, have someone make them for us and run a limited battery of tests with the intent primarily to show off what you can do with these tools. So if we take a specific disease area and we say, all right, here is a disease area where people are struggling to find something that can meet all the requirements that a new drug has to meet, it not only has to hit the target, it also has to be non-toxic, at least to the extent that it can be tolerated. Some oncology drugs are certainly toxic, but they are designed to be toxic, and you hope they are only toxic to cancer cells, but not always, so non-toxic or tolerably toxic.

They have to be permeable, they have to be soluble and so on. They have to have a stable shelf life and many other properties.

So we think, if we take some of the public data that are available on various targets and then use that data to design some new molecules, pick the ones that we think are best, make them, test them and show that the tools work -- even if we don't get a drug, and we don't expect to; that would be extremely serendipitous. But, if we did, of course, that would be fantastic; that could blow the roof off because you could license that molecule, patent it and license it to one of the majors to actually take it through the entire development process.

So that's another use of our dollars. Now let's see. Walter says thank you, congratulations for another excellent quarter. Thanks, Walter.

Fred -- are you active in your search for acquisitions?

We never stop, Fred. We are always, always looking. And it's not easy to find, as I pointed out before, to find compatible technology, compatible people, financially sound investment, and all of that in a size that we can afford. We don't kid ourselves; we are very small for a public company. And $9 million or $10 million is cash is -- you know, it's something; it's a decent resource. But many of the companies that we might truly like to have join with us could be many times that in terms of their enterprise value. So that makes it a little difficult. We are small fish; we've got to find a smaller one to swallow.

Fred says, do new hires mean higher expenses? Well, it depends on what they do, Fred. Momo has mentioned more than once the capitalized software development cost. If we have a new hire who works on developing software, a new product, then the majority of their time is probably going to be capitalized until that new product is offered for sale and then we begin amortizing it.

So if they do that, it wouldn't show up as an expense right away. It would, eventually, through the amortization, once the product was offered for sale, it would show up as an expense. With any new hire, there's going to be some overhead expense and that sort of thing. So yes, it should mean higher expenses. It also should mean at some point after the appropriate amount of lead time more products available to sell and better sales of our existing products because it means we have a larger sales force.

Keep in mind that our scientific staff is very much a part of our marketing and sales efforts. We want people to get out. We want them to meet customers both to show what we can do and also to have the ear of the customer to make sure that we are staying in tune with what our customers want.

Are there any other questions?

Walt, Howard Halpern has a question.

Okay, I don't see it here.

Howard should be able to speak.

Okay, go ahead, Howard. Can't hear you, Howard. Howard, are you there? I'm not hearing anything, Renee; are you?

No.

Very faint background.

I hear Walt's question echoing. Howard, there's an audio pin; if you entered that, we should be able to hear you. Ah, you sent it in writing.

Technology is not working. Well, that's not our technology; ours works. You can go ahead and type your question, if you'd like, Howard.

Okay, new contract -- how will the revenue stream work? I'll see if I can understand the question. FDA -- oh, FDA -- that is a non-funded collaboration. We are changing some software licenses, a limited number of licenses for a particular group there, for a huge amount of data, millions of dollars worth of data that the FDA has accumulated over quite a number of years. So the advantage to us is first access to the data. This allows us to build additional models for toxicity in ADMET Predictor, a very large number of toxicity models, which should give us a substantial advantage over anyone who doesn't have access to that data. It also means that we're working very closely with FDA scientists, and that's a relationship that you can't put a dollar value on, but it's a very valuable relationship to be able to work with the regulators and their scientists to understand their thinking and what their concerns are. And of course, getting into food safety means that we are now into an area where companies who are in the food business, whether they are taking stuff directly from the farm and putting it on the shelf or processing it, have to be concerned about additives and contaminants. And as I recall, there's over 10,000 compounds that are in the databases that the FDA has that we will have access to.

So this is a very significant collaboration. Again, it won't immediately bring in money. What it will do, though, is enhance what we have to offer so that we expand our markets into companies like, oh, for example, Kellogg's or Nestle's or other large companies who do a tremendous amount of food processing. So that's where we see the advantage there.

Paid training workshops -- how many more to occur this year?

Well, we actually have another one taking place at the end of May. The last week in May, we will be doing our next GastroPlus workshop. And then in October we are working on trying to find the best location to do a workshop in Europe also on GastroPlus. We will be starting soon on developing workshops for the MedChem Studio, MedChem Designer, ADMET Predictor side of the business. So that will be a second series of workshops, and we will probably alternate those about once every six months or so, in between the -- every six months for the GastroPlus workshops.

Question from [Melvin Lemire] -- I read an article mentioning the possibility of selling the Words+ division. You did? Is there any truth to the rumor? And if so, how will it affect the Company?

We have nothing in process to sell the Words+ division at this point. Certainly, the Board of Directors is obligated to consider anything like that that may come up, but there is nothing at this time in process to do that.

[Karl Hoffman] -- have you signed up any food companies or consumer goods companies?

Yes, we have. I think -- I don't know if we are allowed to announce it publicly, who they are. Are we, John?

The one, we are, yes. We did issue a press release when they first signed up about two or three years ago. That's Unilever, one of the large European food companies. I don't know that there are any others at this point, though. There are several that are in the process of evaluating software right now, but Unilever right now would be the only paid customer.

Thank you, John. From Howard, how many additional life sciences staffers are you likely to have by year end?

Boy, that's a good question. I -- by year end, if you mean the calendar year end, December, I'd say five or six is quite possible. If you mean the fiscal year end, August, I'd say three is quite possible. So it's always something where you never know if people are going to accept the offers you make, and if the new people that we identify on a month-to-month basis are going to be suitable.

We interview any more people than we make offers to. We are very, very selective, as I had mentioned earlier. As result, we have the luxury of being small, of course, that we can be very selective. And we have a team that is just, I say, knock your socks off. This life sciences team, marketing and sales team, is just phenomenal. And I say, I would put them up against any other team in the world in a similar kind of business.

Anything happening with China? Fred asks.

Yes; we do have, I think, two dealer/representatives in China. These are independent business people who are only paid if they sell something, so it's a commission basis. We've done several seminars in China, and I think we have had a few small academic licenses in China. Have we, John?

Yes. In fact, one of the distributors has now sent over several POs for this quarter for a couple of academic and nonprofit institutions. So they are doing a very nice job. Once they have gotten beyond that initial learning curve of becoming a bit more familiar with the software, they have really gotten a foothold as to how to present it, and we are starting to see an increase in the number of new licensed business.

Thanks, John. Howard says, are you using webinars to continue to reduce travel costs?

We have been using the same service that we are using right now, GoToMeeting, for a number of years. And I forget how many accounts we have expanded to because we are always -- we were always bumping into each other when we didn't have enough accounts.

We have GoToMeeting sessions. Webinars maybe is not the right word, but we use GoToMeeting on almost a one-to-one basis with customers to demonstrate capabilities for potential new customers, to do training with existing customers where they end up maybe trying to use a new module that they've just licensed; they need a little assistance, and also for troubleshooting. You know, software is -- there's no such thing as completely perfect software, and so if someone runs into a problem, maybe an installation problem, getting it installed on a certain type of server system or perhaps just a problem with trying to do a particular type of analysis and it's not coming out the way they expect.

So I would guess that, on a daily basis, we probably have -- and I truly don't know the number, but I'm going to guess around a half a dozen sessions that go on many, many days of the week, if not every day of the week.

How are you protecting intellectual property when selling in China? Are you doing due diligence on the potential customers?

Well, our intellectual property is in copyright primarily on the software look and feel. But we don't trust anyone, even our most valued and long-term customers, to say here's some software; you've only paid for three licenses, so only use three. We have a very tight software security system. So far, to our knowledge, it has never been cracked. It is something we license from a third party who specializes in this sort of thing. So that's basically how we do it.

In terms of intellectual property, the nature of the business that we are in is that scientists want to know what's going on inside the box. They don't want a black box, they want a white box, if you want to call it that. They want to know, what are the equations you are using, why are you using those equations? And so most of what we do, at least in GastroPlus and DDDPlus, these simulation programs, is documented in the manual, and that's available.

What you find, though, is it's not just a matter of the equations; it's how you integrate them into a software package that's commercial quality, it can withstand the rigors of exposure to a wide variety of scientists around the world -- different operating systems, different kinds of computers, all Windows right now. But making all that play together, we probably have -- what do we have now, 14 years, 15 years, almost, of work in Simulations Plus, and probably -- I can't even guess -- tens of millions of dollars of investment to get to where we are.

It would take -- it was a significant barrier to entry. It would take a tremendous effort on the part of anyone to take our manual, even with the documented equations, all the scientific papers that we and others have published, and put it together and compete. If it was easy, someone would have done it.

So really, are we doing due diligence is the second part of your question, on potential customers. And the answer is, absolutely. We are as careful as we know how to be. We are not going to just send a demonstration package to Joe at Yahoo.com; we want to know who he works for, what his interest is, what his background is and so on. Good question, Karl.

Any other questions? Okay, I don't see any on this end. Renee, do you see any there?

No, I don't see anybody else raising a hand.

Okay. Well, with that, then, we will wrap it up. Thanks, everyone, for coming today and for attending and listening and for an excellent set of questions. I didn't think we were going to have that many, but we actually had some very, very -- a good list of questions, and I appreciate those.

So until next quarter, thanks, everyone. Stay tuned; we hope to have more good news for you as the months go by.