Simulations Plus Inc (SLP) 2012 Q1 法說會逐字稿

Good afternoon. It is Wednesday, January 18, 2012, and on behalf of the Simulations Plus I welcome you to our first-quarter fiscal year 2012 financial results conference call and Webinar. Chairman and Chief Executive Officer Walt Woltosz will be presenting this afternoon. Joining Walt as panelists are Chief Financial Officer, Momoko Beran, and our Director of Marketing and Sales, John DiBella.

An opportunity to ask questions will follow Walt's presentation. (Operator Instructions).

(technical difficulties), 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.

As most of you are aware we sold our former subsidiary, Words+ on November 30, last day of our first quarter. And so, going forward we will now be reporting our financials and we will be comparing reporting periods for only the continuing operations which is primarily the pharmaceutical software services business. Our two small products, Abbreviate! and FutureLab, contribute very little. You probably wouldn't notice if we took those completely out.

So unless otherwise noted all financials and comparisons will be on a pro forma basis. In other words, for the previous fiscal year we have to treat it as though the discontinued operations of Words+ did not exist. So when we compare quarter to quarter or, later in the year, fiscal year to fiscal year, we will be comparing only the continuing operations and not the discontinued operations unless we specifically mention that the discontinued operations are included.

And because Words+ was operated through the end of the first quarter we are going to include the effect of its discontinued operations as appropriate for each quarter of this fiscal year. So when we report this quarter, six months, nine months, and then the full year we do have to include the effect of the discontinued operations on each of those three-month, six-month, nine-month, and 12-month periods. And when we include those we will make a note of that, so you will know.

So our first-quarter 2012 ended November 30 and compared to the pro forma first quarter of fiscal year 2011, again, pro forma meaning as if the Words+ subsidiary had not existed at that time, it was our 17th consecutive profitable quarter and 39th (technical difficulties) up almost 43% compared to $8.9 million at the end of November the previous year.

Cash per share just under $0.79 at the end of November, up 46% from about $0.54 the previous year.

Cash today down a little bit of $12.5 million. However, current assets are up and current liabilities are down and the current ratio today is quite high. We've prepaid some things and liabilities are down because we've paid some bills and so that dropped cash down but receivables are up and so on, so current assets are still up very strongly.

Shareholders' equity increased about 21% to $15 million from $12 million or so at the end of last year and equity per share increased $0.23 to just under $1.00 here at $0.97 compared to $0.79 last year, November 30 of 2010. And of course we continue to have no debt.

Comparing income statements for the first quarter of this year compared to the pro forma first quarter of last year net sales again about $2.25 million. Gross profit, $1.9 million roughly compared to about $1.7 million last year. Gross profit margins, you are going to see these margins are considerably larger now without the discontinued operations. We were running in the 70s earlier. Now as a pure pharmaceutical software and services business you'll see typically in the low to mid 80s. So, 84.3% this year compared to 82.8% last year.

SG&A up a little bit. And this includes some SG&A for legal and other professional services that we had for the Entellus -- attempted acquisition of the Entellus assets back in the beginning of the quarter but still up -- even with that -- up a relatively small amount.

Our research and development up a bit and total operating expenses up a bit. Income from operations, $944,000 compared to $810,000 last year. Other income, $120,000 compared to $24,000 last year. A good part of that is currency exchange with the Japanese yen.

Income before income taxes a little over $1 million, $1.06 million compared to about $830,000 last year. And then the discontinued operations this year, we had a contribution of about $216,000 compared to a loss of $9,000 last year as a result of the sale. And then the net income was just under $1 million. Again, about $971,000 compared to $567,000 last year and fully diluted earnings per share, $0.06 per share this year compared to $0.03 last year.

This is a pro forma income statement for the last fiscal year and this just shows the comparison of the consolidated, both of Simulations Plus and Words+, the part that was contributed by Words+ to the consolidated, the pro forma adjustment then based on taking out the Words+ operation and then the Simulations Plus result for the fiscal year. So we have reported the first quarter on a pro forma basis, but just to give you a comparison on a fiscal year basis, you can see the numbers here.

I won't bother going through all of those, but in general, you can see that without the Words+ subsidiary, the performance increases in terms of the gross profit margin, R&D comes down just a little bit. We do not have quite as much R&D on the Words+ side as we have on the pharmaceutical side. And income, you can see here in income before taxes and the net income affected this way.

The $72,000 contribution of Words+ was actually a paper contribution. Most of that is not all that was a result of the fact that, in earlier years, we had overallowed for bad debts, an allowance for bad debts for Words+. We've never had a bad debt on the pharmaceutical side of the business yet. Hope it stays that way. But on the Words+ side we had quite a number of claims, actually government agencies, that have not paid us typically state Medicaids. It's a bear of a business to be in and I guess we are happy that someone else likes to be in that business and has given Words+ a good home moving forward.

Revenues by fiscal year beginning in 2012 here. This is for just pharmaceutical software and services and the previous numbers are adjusted to reflect only the pharmaceutical software and services. So these are pro forma numbers. You can see our first quarter now is off to a good start, it is a record first quarter.

Revenues by quarter you can see the trend here, our first quarter increasing again over last year's first quarter rounded off to one place after the decimal here. But actually the increase was just about 10%, 9.6%.

You see the seasonality here. Quarter 1 is September, October, November. Quarter 4 is June, July, August. It's summertime. Japan is off, Europe is off, the folks in the United States are off, maybe not as much as the time they get off in some other countries, but it is typically a slower quarter because people are taking vacations. And because of our business model being an annual license model for our software, it is a self-perpetuating seasonality. The companies who license software in Q2 each year renew the next year in the same quarter with rare exception. Every now and then one will slip into the following quarter. But by and large, the renewals come in in the same quarter year after year and so the growth that you see is each year taking the renewals from the previous year and adding new sales and that gives you this stairstep pattern for each quarter.

Net income by fiscal year. Again, first quarter for 2012, this is just one quarter off to a good start. In fact our first quarter now has exceeded what we had in the entire year back here in 2006. Nice growth pattern in the income. Very, very steady. And net income per quarter this is, again, just showing the seasonality. And the black line here connects the first quarter so you can see the upward trend in first-quarter net income after tax income.

Of course, prior to 2012 these are on a pro forma basis so you can get a fair comparison how the pharmaceutical software and services business is compared to previous years without the Words+ subsidiary.

Balance sheet items as of November 30, about $12.7 million in cash compared to about $8.9 million the previous year. Cash per share, I think, in earlier current assets, total assets up, current liabilities nearly the same at $1.1 million. Total liabilities up a little bit $1.9 million compared to $1.6 million. Current ratio, a very healthy 13. There was an article on the Yahoo! Seeking Alpha not too long ago about healthcare technology companies with high current ratios and ours was the highest at 7.4 at the time they broke the article. Well, it is almost double that now.

Shareholders' equity about $15.1 million compared to about $12.5 million a year before. And total liabilities and shareholders' equity you see just under $17 million compared to about $14 million the year before. Equity per share up very nicely; almost $0.94 here compared to about $0.76 the year before.

Our marketing sales program continues to be aggressive the way we ramp things up here about 2 years ago and started doing a lot more shows and conferences. These conferences and scientific meetings tend to be the primary source of leads, in addition to our Internet media.

But we do about 50 or 60 shows a year. We have been adding shows in China. We see China as a potential growth area and I shouldn't say potential, we are getting orders out of China. So we definitely see the pharmaceutical industry in China is ramping up. They are licensing software. Some of those are multinational countries like Pfizer and GSK and Roche who have Shanghai offices now, for example, and some of them are Chinese companies.

We do quite a few posters and presentations and peer-reviewed publications of our own. We also see very satisfyingly that companies, other companies and the FDA and other government agencies, are doing these things as well and referencing our software. Particularly we see GastroPlus now referenced quite often in the peer-reviewed literature and at conferences with presentations from both companies and government agencies.

We did begin training workshops which is a combination of bringing people to a higher level of expertise with GastroPlus in our advanced GastroPlus training courses. And now we are adding a basic GastroPlus training tool, which is intended more to be a way of getting people more interested in taking GastroPlus into their companies or, if they are already in the companies, getting more of the people within the companies to be able to use the software. It is a very sophisticated program. It is cutting edge, and so it takes a bit of training to really learn to play it well.

In our strategic digital marketing initiatives we are using the Internet, Facebook and LinkedIn and HTML e-mails that are linked in and our website and so on. And those initiatives are also bringing in leads.

We have our five-year collaboration with the FDA and I have a separate slide on that but I will talk a little bit more in detail about our progress there. We have continued to get consulting studies. It seems like we are always doing four to six studies or so where companies come in and very often these are top five companies, very large companies who have particular problems in analyzing data from typically from animal studies and/or from human studies and so they come to us for assistance. And even the best pharmaceutical industry scientists do not get to use GastroPlus everyday where we do.

And so, we develop an expertise and by doing these studies we expand our expertise because we see typically the most difficult kinds of problems. They can solve the easy ones on their own if they are using GastroPlus, but when they get into something that is very complex, then they come to us for the expertise we have, which I believe is the best in the world when it comes to oral absorption and pharmacokinetics and so on and related technologies.

So far, knock on wood, we have always succeeded in providing an answer that either says this is what we believe is going on with your drug or here are two or 3 possible explanations and here are the experiments you would need to run to rule out all but one. We are now negotiating a new funded collaboration with a top five pharmaceutical company to enhance GastroPlus. We have had a number of these over the years with Roche and GSK and Pfizer; and now we have got another one that is being negotiated, and we are also negotiating a new collaboration with, I will just say for now, an important US government agency for some modification to GastroPlus to better fit their needs for analysis, which of course will ripple down into the industry using the new capabilities as well.

We believe that there is, as I said before, a fundamental industry shift that is ongoing. Software tools are constantly gaining wider acceptance and applications. We are seeing more and more interest across the field and we are trying to get all of the market share that we can out of that growing interest. We had 20 new customers during the first quarter, and by new customers, we mean new companies or organizations. Could be academic or government as well as private companies or it could be new departments within existing large customers. Just because you have a license with someone at Pfizer, it is so vast and the other large companies are so large that there's still plenty of opportunities and selling across department lines is one way to expand the number of licenses that we sell.

Like all software companies, we are always working on the next release as soon as we get a release out and we have a battery of releases coming up next month. We now have such strong handshaking between ADMET Predictor and the other programs -- GastroPlus, MedChem Studio and MedChem Designer -- that it makes sense to release these in tandem so that we have coordination among the models that we added to ADMET Predictor, new features, updates and the other programs that call ADMET Predictor in the background and get information from ADMET Predictor to use in the other programs.

So GastroPlus version 8 is coming out. This is a major upgrade. This is a very large effort that has been going on for many months with our simulation technologies team, expanding the drug/drug interaction capabilities so that we now include transporters and we include induction of transporters and enzymes. In other words, we can have drugs that cause an increase in the number of transporters or the amount of enzyme that is available that may affect another drug. And so, you end up with a drug/drug interaction because the second drug now has -- which uses that transporter or those enzymes -- has greater exposure to them and that affects the result that you get.

We have expanded the pharmacodynamics modeling module that we called PD Plus to make it more convenient to build pharmacodynamic models and more automatic in certain ways. We have expanded the ocular delivery model and the nasal and pulmonary delivery model. So a very significant number of improvements here that expand the capabilities of GastroPlus across human and virtually all of the common laboratory animals. So we have mouse and rat and dog and rabbit and monkey, two different kinds of monkey, and so on.

ADMET Predictor, this is our program that takes structures of molecules whether they have ever existed or not. The chemists can just draw something and shoot it through ADMET Predictor or shoot 1 million molecules through and get predictions of over 130 different properties that very important for determining whether those molecules could be useful as drugs. We have added now prediction of the sites of metabolism so when you look at a molecular structure, those little diagrams that you see, we can predict with reasonably good accuracy where on the molecule -- which atoms, in other words -- are going to be attacked by various enzymes, and also not only where they are going to be attacked but working together with MedChem Designer what the resulting metabolites would be. So this is a very powerful new capability, very exciting new capability that we will have released here in just a few weeks.

Our PKA models, these are calculating the extent of ionization of molecules at different pH values. Very critical to predicting all of the other properties, and our PKA model has always been best in class. Now it has improved even further.

And then we have retrained all of the models, with some new atomic level descriptors, we are very fortunate that we had a several year SBIR grant from the National Institutes of Health to calculate -- to develop a way to calculate these atomic level descriptors very, very quickly. And we were using that now and expanding these descriptors. So again with these new descriptors, the models become even better.

MedChem Studio version 3 also coming out in February. Another major upgrade. So you can see all of the software development teams have been working for many, many months to bring these software products to a point where we can release them all and, again, because of the strong handshaking with ADMET Predictor and with MedChem Designer, by the way, which is now quite the part of ADMET Predictor and always was part of MedChem Studio in addition to being a standalone program. So version 3 will have the newest MedChem Designer software which will be version 2 of MedChem Designer. The current downloads and activations from the Internet now is approaching 2,000 of MedChem Designer. We have done quite a bit in improving the processing speed of MedChem Studio predicting metabolite structures. It says to be available soon. That means in the next couple of weeks that will be part of the next release.

DDDPlus remains the only program of its kind that we know of. And this is a simulation of laboratory experiments that measure how fast things dissolve. So formulation scientists need to achieve a certain rate of dissolution for a tablet or a capsule. Sometimes they want it to be very fast. Sometimes they want it to be slow so you get a time release effect.

The FDA added more licenses during the third quarter of last year. I think the FDA probably has as many or more licenses of DDDPlus and GastroPlus than most of our industry customers. So very strong use there and they did give some presentations at the American Association of Pharmaceutical Scientists Conference back in October.

Our food safety research collaboration with the FDA began last year and the way this works is that the FDA has data on a large number of substances, over 10,000 substances that can be either additives or contaminants in foods. And there have been some experiments run on small samples of this large data set, typically a few hundred to perhaps 1,000 or 2,000 molecules have been tested in a certain way for a certain type of toxicity. The more expensive and time-consuming the test the smaller the data set tends to be.

And so, the idea of the collaboration is take the data that has been measured, build predicted models using ADMET Predictor and its built-in ADMET Modeler capability, and then use those models to predict the other compounds that were not measured to see how likely they are to be toxic in that particular way. And there would be many of these models. As we began this effort, the FDA scientists wanted to train the models using some methods that were a little bit of a twist on what we did in ADMET Predictor and Modeler before that. So as part of the effort over the last few months, we have been modifying the code to include these capabilities. They are now a part of version 6. We have been using them as we have been testing and we now have built a rodent carcinogenicity, which is a tumor model.

So this, by rodent, I mean both rat and mouse. And this new model has come out quite well and we will be releasing that as one of the new models in ADMET Predictor version 6 next month.

Our NCE or new chemical entity project is something that we are very excited about. And just to take you through a few steps here, a lot of text on this page, but I think by the time we get to the bottom, you will understand exactly what we are doing here. When drug companies invent a new molecule, this is the earliest part of the drug development process called drug discovery. It is called a new chemical entity or NCE and the process of getting to a drug molecule that could actually become a drug means making and testing a large number of molecules to find good what are called lead candidates. And lead candidates are molecules that aren't going to be the actual drug, but they are close to it in their molecular structure, hopefully. And so, they have activity against the target. You have a protein typically that you are trying to bind to that helps mitigate some disease or condition, and you also need that. But you also need other properties and many, many other properties.

So what happens is in the past chemists have focused on getting the activity against the target, and worried a little bit about a few other basic properties but didn't really worry about many of the other properties. Because it was just too early and it took a long time to run all of the experiments it would take to measure all the other ones.

So nowadays, because we have the power of ADMET Predictor, we can predict over 130 properties. And these protections aren't perfect, but they are pretty darn good. So what you can do is when you look at a very large number of molecules you can eliminate a vast majority of them, because your predictions are saying this particular module has a lot of things wrong with it.

And so, all right, if it just said it had one thing wrong with it you might say but that prediction might be wrong. But if it says it has a lot of things wrong with it, you know probably a lot of those predictions are correct. So why spend your time and money even making that molecule?

So ADMET Predictor can work with virtual molecules. Things that are just in the computer as potential new structures that haven't even been made yet. And so, you can eliminate a lot of losers before you spend the time and money to develop a way to synthesize the molecules and then make them and get them purified to a reasonable level so that you can then start testing them.

But, what we've done is using MedChem Studio, MedChem Designer and ADMET Predictor which is a suite now for a molecule design, we designed some lead candidates to inhibit the malaria parasite. We did this in a very small fraction of the time and cost that would normally be required. We qualified these for a large number of (technical difficulties) properties using ADMET Predictor. No testing was required.

Getting a lot of noise from somewhere. Sorry.

The selected molecules are now being synthesized and I was told a little while ago that we have about 30 milligrams of one of the final molecules that has been synthesized. And so the synthetic method used to the series of reactions used to make this molecule has now been identified. And we can scale it up from there. And we have several other molecules that are still in the development process. The synthetic methods are being developed now.

So what happens? We get samples of actual white powder in glass vials. We won't actually get them ourselves but they will be sent to testing laboratories and if the molecules showed significant promise as lead compound we will have completed a very exciting proof of concept for our software tools.

I'm getting a lot of noise from someone and I think it is someone in my building. So please if you are moving your phone try not to make some much noise.

So this is an exciting proof of concept and our goal here wasn't really to cure malaria. That would be wonderful if we came up with something that actually could be a cure, but our goal is rather to show that we can get to this stage of lead candidates very, very quickly just with software.

And why did we choose malaria? Well, you know, it is one of the largest killers in the world. It is in the millions. It is an area where the very low cost method is needed, pennies per day to treat the disease developing country. (Technical difficulties).

-- and so we can focus our energies and our attention, our resources now strictly on pharmaceutical software and services part of the business. We are continuing to expand our Life Sciences team. We have got ideas that we want to develop. You need people to do that. We continue to interview -- another recent interview here just last couple of weeks looks very interesting. I hope we are able to bring that person on board. And because we use the Life Sciences team as part of our marketing and sales team every time we add a scientist, we are adding a potential salesperson. Once they get up to speed on the software they are able to go out and they are not salespersons in the sense of taking orders but they are in the sense of meeting the customer, cultivating the relationship demonstrating the software, answering questions and then turning it over to the marketing and sales department for the actual execution of a purchase order.

But the sales team itself is something we want to expand. We are looking right now for a chemist. If any of you know a chemist with sales experience, we would really like to get someone who can go out there and show, in addition to the scientific staff that we have, this very powerful suite of tools with ADMET Predictor, MedChem Studio, and MedChem Designer.

We are also in the process of developing training courses for chemistry tools -- the three products I just mentioned -- similar to what we do now for GastroPlus. We began with GastroPlus because it is our largest revenue generator and it is, in many senses, the most complex in terms of learning how to use the tool. It requires someone to become a generalist to integrate information from a lot of different departments, whereas the chemistry tools for someone who does that of type work already is a much faster learning process. They understand the science that they are working with well and it's just a matter of getting them familiar with the way that they can put these tools together and do things that they haven't done before.

We continue to be recognized globally as a leader in the field. We have without a doubt an outstanding reputation for scientific expertise and innovation. We are recognized for very strong customer support. We have always been very customer-centric in the way we approach business and, of course, financially very strong. Very strong cash position and no debt. People often ask, okay, what are you going to do with all that money? Well, you know, we have been trying to do acquisitions. We have done three acquisitions over the years. All very successful. All paid off typically within the first year after we did them.

But as we look for other acquisition opportunities now in the pharmaceutical and software and services space or something reasonably close related -- we don't want to go into something completely different like drilling for oil -- but staying in our area of expertise, it is quite difficult to find companies of a size and an expertise that match closely enough to what we do that we feel we can take it on, manage it, grow it, make it profitable if it is not already profitable.

So we're not going to give up looking. We just finished an evaluation of another company, a small software company. Unfortunately, the software was not up to our standards and the length of time and resources that we would have to divert from what we do now would have been prohibitive for taking that on.

So as we continue to shop for acquisitions the Board of Directors is evaluating right now doing another share repurchase. We have already bought back a couple million shares over the last few years. We spent about $4 million doing that. If we hadn't, we would have about $16 million right now.

Has that helped? Well, that reduces the number of shares when you divide earnings by shares and to calculate earnings per share, it definitely helps that way. An ongoing dividend. I've talked with quite a number of financial people over the last couple of months saying, what are your opinions regarding a dividend versus share repurchase or combination of the two. And as you can expect I got just about as many different opinions as people that I talked with.

So the Board is looking at this. We are trying to make an intelligent decision about what is in the best interest of our shareholders going forward. So hope to have some news on that in the near future.

And so that completes the formal part of the presentation and I'll be happy to take questions now. I am going to see if I can get this display to show me more than half a line at a time of these questions.

First question I see is, do you expect the new releases of MedChem Designer, Studio, ADMET Predictor, and GastroPlus next month to significantly affect revenues in the coming quarters?

Well, we certainly hope so. You know, we have had an ongoing process of upgrading software on at least an annual basis, sometimes a little bit more frequently. And I believe that that has resulted in the performance that you have seen so far.

I think the NCE project is very, very exciting and that, with that proof of concept, the recognition of the power of these design tools should improve. You know, we tell everybody it is good. We show them examples where we have taken things from the literature and we have duplicated designing certain drugs.

But the tendency is, well, you know you already knew the answer. Well, yes, we did but we didn't use the answer in calculating, in generating what we did. Well, it is easy to say that. It is hard to convince people that in fact that's the case.

So now we are designing brand-new molecules, making them and testing them. So you know there is a matter of putting our money where -- putting our money where our mouth is. And if we are successful, it will be fantastic. If we are not, we will learn something.

The NCE project, when do you expect the contractor to complete the synthesis of the anti-malaria molecules?

Well, again, one has been completed. There is also a precursor which is a molecule not quite the final design that we wanted, but it is one that is close. And we predicted that is also active against malaria. So we are going to test that one, too, because that is already made of course as part of the synthetic process.

The NCE project. On a scale of 1 to 10 how would you rate the efficacy of the anti-malaria molecules as designed by ADMET Predictor?

Well, the ones that we selected are predicted to be active and quite active. So I would say up there in the 8 to 10 range. When we designed molecules, unlike the kind of the historical or traditional approach where chemists would focus on a number called the IC50 that's the concentration needed to inhibit 50% of the target protein. And you want that number to be very small. So you want a very tiny concentration to really hit that protein and interfere with its action and prevent the disease.

That is just one aspect of it. And if you have to give up a little bit on IC50 which you almost always have to do in order to get, say, better solubility or permeability or get rid of a toxicity or effect the pharmacokinetics in some way, then you have to compromise. And you know the optimum design of anything in general is a compromise among all of the different competing factors. If you try to maximize one property you end up affecting other properties adversely.

The example I like to use is a racecar. You know, tires are very important for a racecar but if you put the biggest tires in the world on that racecar they are going be so big and so heavy that you are going point to slow the racecar down. But if you put tires that are too skinny and small they may be lightweight but they are not going to grip the ground really well.

So you need to balance the tire, the rubber composition, the size of the tire and all this with everything else in the car. Same thing with the engine. You know, if you put the biggest engine you can find, it may be so heavy that you have a problem hauling the weight of the engine around even though it has got a lot of horsepower. And so, everything has to be compromised and balanced and the same thing is going to be true with molecules.

Also a question here from the same person, [Donald Borsier], the NCE project, have you yet identified the additional therapeutic targets that you intend to pursue? And if so can you state what they are?

We have not yet. We have looked at a few different things bit we have not identified yet what we are going to pursue next. I want to do at least one or two more of these projects during this fiscal year. We want to see how we come out with this first one and see what we learn from that and then we'll pick some other targets and go after them.

Again, it is really proof of concept more than trying to become a drug company but we would like to pick targets that have some promise that, if we are successful, that there would be someone interested in them. I think designing another headache pill maybe not, doesn't have much appeal compared to things that have perhaps more of an orphan drug status.

Now let's see, Howard Halpern, what was the customer retention rate in the quarter?

John, are you on the phone?

I am and the customer retention rate was at our historical levels, 90%.

Thank you. Another question from Howard. How many new customer licenses contributed to the revenue increase? How many existing customers expanded their site licenses and or added additional modules?

John, I will turn that back to you, please.

Looks like the count for new customers was at 12 for the quarter and existing customers expanding was at eight, giving us the total of 20.

Thank you, John. Also from Howard, in which quarters and how many training seminars currently scheduled for in FY 2012?

Well, we have got a training in Boston coming up, our first basic training for GastroPlus that I mentioned coming up in March. We have got an advanced training in Durango, Colorado, for GastroPlus in April. And now, looking at my calendar I haven't put up the one for the fall. Do we have that one set yet, John?

No, we don't; not yet. But we do have also the two scheduled basic workshops in China that we are going to host in May. So in the third quarter, the March to May quarter, we will have four workshops. Three basic and one advanced.

Right, thanks for the reminder about Shanghai. I'm not doing that one so I guess that's why I didn't have it on my calendar.

Okay, also from Howard. What are the two or three key strategy points you need to accomplish to generate revenue in toxicology? How long will it be before revenue is generated?

Well, you are asking a Ouija board question there. We have a need to get more of the people in toxicology interested in what we do. We know they like PBPK modeling, for example. We know they like structure activity predictions, like we do in ADMET Predictor. We also know they have been using other tools for some time, and getting people to switch is not all that easy. It is like switching from a PC to an Apple or from a Toyota to a Chevy or whatever.

You have got some brand loyalty. People often stick with what they have just because they don't want to take the time to evaluate something new. So it's a matter of continuing to do what we do, and we are getting interest from that area. I mentioned that we interviewed someone here in the last week or two. This is a person coming out of the toxicology area. Have pretty strong hopes that he will decide to join the team. New PhD or not so new, he has been around a while.

So we will see. I can't begin to answer how long it will be before revenue is generated. But we certainly hope in the coming months that we get more and more interest from that area.

Another question from Howard. How many site licenses do you currently have and support? At your current staffing level, how many more licenses could you comfortably support?

I'm not sure we want to make that information public. We probably have some competitors listening as well. I know when I look at the names of people that have signed up as the audience I see ABC, ABC and combinations of letters that are not real names. So we are not going to talk about that.

But at our current staffing level we can definitely support much more than what we are supporting now. Support is actually pretty easy. We get relatively few support calls. Our training is the primary thing. If you provide some good training up front then we use go to meeting as we are using now or go to Webinar, conduct some training in that way and so we really maximize our efficiency.

We don't have to travel to train someone anywhere in the world nowadays. It is simply a matter of coordinating schedules with different time zones. We are far, far from saturation. That doesn't mean we are not trying to hire, we are. We -- basically my attitude is we will hire smart people whenever they show up and have the right aptitude and attitude to fit within the team that we have.

Another one from Howard here. After adding in 4Q 2011, a second study -- after adding in 4Q 2011 a second studies team for Predictor modeler, has analytical consulting in general seen increased volume in the number of studies done at one time?

We have done a few small studies in that team. That team is the one doing the FDA collaboration for food safety; that's a very large project. And we continue to look for ways to sell our molecule design services. We have actually designed molecules for commercial customers. And so, this is an area of potential growth and, again, I think the NCE project, the malaria project and the other ones that we choose are going to be the things where we can go out there and say, look, here's what we did. Our team did this with our tools. Maybe we can help you with your design process.

From Howard, again. What will it take to achieve consistent annual sales of at least 10% to 15%? I think you mean annual sales growth. Given that type of sales growth would you anticipate operating margin of 45% or better?

Well, I think we are seeing that kind of growth consistently. If you average it out over just the pharmaceutical sales and software and services sales, I think you'll see that we have had very consistent growth like that.

Would we anticipate an operating margin of 45% or better?

Momo, you want to answer that?

45% on that, I would say current is 42% in the last year was under 40% and --

Pro forma or with Words+?

Oh this is just the for Simulations Plus. Not -- so it is a hard question to answer. But the resulting development expense, I expect to be going up a little bit. And I -- if you are looking for percentage I would say between 42, 45 because SG&A, we are very watching cost-conscious. So hope we can maintain in that range.

Okay, thank you. A question from [Carol Hoffman], what sort of competitive research are you doing to determine future technology that could either steal customers or improve SLP's offerings?

Well, competitive research is something that goes on virtually by everyone in the Company on a daily basis. You know, we are all watching the newsletters. We are attending these scientific meetings and conferences. We are talking with our customers. You are looking at stuff on the Internet.

There are so many sources of information now it is pretty hard for someone to kind of sneak up on you and suddenly announce that they have been working on something for the last five years and now they are going to have something as significantly impact your business. Word gets around our distributors and in Japan, in England and China, you know, keep their ear to the ground in their particular markets.

So it's basically all the different ways that you can gather information. And so, it is a combination of knowing what everybody else is up to, but also knowing that at the current time -- and it has been this way for a while -- we are at the top of the game. We are independently judged the best in the world for GastroPlus and for ADMET Predictor. Not us saying it, someone else saying it.

And so, you want to make sure you stay there. You don't want to get comfortable. You know, competition is sometimes considered ugly. But let's face it, competition is a good thing. It drives technology. It drives innovation. You need a little bit of pressure I think to perform at your peak. So I hope I've answered that question.

Another one from Howard here. How do you market to those who download free versions of MedChem Designer? Have you been successful upselling them?

Well, MedChem Designer like other sketching programs is free. And so this is what Howard is talking about. This is a free program. They do have to give us an e-mail address. They could give us a phony one, but I think of the nearly 2,000 I don't think we have had too many phony addresses.

How do we upsell?

Well, MedChem Designer gives you a couple of free predictions from ADMET Predictor and then it shows you all the ones that you don't have. And so the idea here is that once you see that and you work with a few molecules and you say, okay, I know this and this now, but I sure wish I knew all these other things, that it is a way of selling ADMET Predictor. John, I don't have a measure for how many people that bought or downloaded Designer and then licensed something else. I'm not sure if we have anything we can say along that line just yet. Do you?

I would say there has been maybe approximately 3% to 5% of those who have downloaded that have actually gone on and moved forward with a paid version of ADMET Predictor. Primarily those have been clients that are either nonprofits or universities. But we have seen some success in being able to upsell based upon the pace that they are getting from the free ADMET Predictor predictions inside of MedChem Designer.

Great, thank you, John. Donald Borsier again. at what stage of testing/development of an NCE molecule which you consider applying for a patent?

Well, I would say at this stage where we were willing to go out and show it to someone outside the Company who could be a partner, a customer you know, just licensed it. If we got to that point when you need to predict, protect the intellectual property that's when we would go ahead and pursue that. Until that time, until we have some confidence that we actually have something that someone would be interested in investing in either as a lead candidate or perhaps even as a molecule going further into development, until we reach that point of having that kind of confidence, I wouldn't want to spend money on patents just yet.

Another question from Don Borsier. As far as acquisitions are concerned, have or are you also looking to just acquire our individual programs and not the entire company?

In fact, yes. We are -- we are not very interested in acquiring companies in most instances. We would be interested in acquiring assets and it could be all the assets, it could be a portion of the assets of a particular company. So yes, if someone had a product maybe they have got a half a dozen products and they said, well, we are only interested in selling these two, absolutely we would take a look at that. If it makes business sense and we can come to a deal that works well for both of us, we will absolutely move ahead.

[Herbert Schaefer], when will the Board of Directors decide on a dividend? Well I hope within the next few weeks. Our annual shareholder meeting is February 17. So that is what? About four weeks from now. It would be nice if we can get the Board together before that and make a decision and be able to make an announcement either before the shareholders meeting or at the shareholders meeting. So that would be my personal target, but I can't speak for the rest of the Board.

You know, they are going to have to be satisfied that the analysis that is being done gives them enough information to make a decision. And it is not going to be an easy decision. This is a judgment call. It's absolutely a judgment call. And as I mentioned talking to quite a number of financial people over the last few weeks, you get a lot of different opinions.

I have to say that the weight of those opinions leans towards a dividend and not a one-time dividend, but an ongoing dividend with a respectable yield. We will see where that goes. I'm only parroting back what people have told me and if I took a larger sample, maybe the opinion would shift in the other direction. But talking about 20 or 30 people, I would say that's the leaning of those people.

Also, Herbert Schaefer who it says has left but says stock pricing is high for repurchase in relation to NAV or net something value? NAV?

Net asset value.

I am not sure. NAV. Well I guess, you know, it's in the eye of the beholder. I think the stock price is undervalued. We are trading at a PE of what, around 17 before we release these earnings and it is going to drop significantly with these newest earnings.

So it all depends on how you look at it I suppose. I mean, I see companies with negative earnings with higher share prices and obviously you can find companies that represent a wide variety of ratios, of price-to-earnings of management effectiveness, ROE, ROI, ROA. We are always up there on the very top.

We have had earnings-per-share growth, I think, that exceeds most of the companies on most of markets in the world. That is again something that came out of a recent net asset value. Thank you, Donald, I just got a post here. Okay so stock pricing is high for repurchase in relation to net asset value.

Well, again, I guess that depends on how you calculate what the stock price should be. If you do it on the basis of earnings per share that is one way of looking. If you look at the projected earnings per share going forward from the analysts, we are down around 10 or 11 again before this most recent earnings release so to me that's pretty darn low for a company with 10 years of profitability and a fantastic cash position and best in class software and so on.

So I think that's the last question. I'll wait just a couple of seconds here to see if anyone else wants to submit something. Is there -- does anybody else see someone raising their hand or --? I don't see any.

No.

Okay. Well, I think that's it then. So I want to thank everyone for attending. I think this is one of the largest groups if not the largest group we have had. And we would look forward, if any of you want to make the trip out to California to seeing you at the annual shareholders meeting on Friday, February 17th. If not then we will talk to you again at the next conference call.

We are always open to calls and e-mails directly to the Company. Clearly we can't tell you anything that's nonpublic, but we will try to answer your questions as best we can. Thank you all for attending.

Thank you all. This concludes today's conference call and Webinar. If you missed any part of today's presentation the playback will be available at our website, www.simulations-plus.com. Thank you for joining us today.