Simulations Plus Inc (SLP) 2012 Q2 法說會逐字稿

Good afternoon. It is Tuesday April 10, 2012, and on behalf of Simulations Plus, I welcome you to our second 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 Vice President of Marketing and Sales, John DiBella. An opportunity to ask questions will follow Walt's presentation.

(Operator Instructions)

This call is being recorded for playback at our website, www.simulations-plus.com. It is now my pleasure to turn the presentation over to Walt Woltosz, Chairman and CEO of Simulations Plus.

Thank you, Renee, and welcome, everyone, to our second quarter fiscal year 2012 conference call and webinar. With the exception of historical information, 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, continued 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 product 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 Company's risk factors is contained in the Company's quarterly and annual reports filed with the Securities and Exchange Commission. So much for the formalities.

The highlights for our second quarter, which ended February 29, was our eighteenth consecutive profitable quarter, and I think 39 of the last 41. I have to check and see. The 2 that weren't may have been entirely from our now former subsidiary, in which case, on a pro forma basis, we would have more quarters (inaudible) than that. Our sales were up 6.4%. This is a record quarter for any quarter. Usually our third quarters are our record quarters, but this quarter has beat last year's third quarter, and that's a good sign. $2.8 million, roughly, from $2.6 million. And that had to make up some lost revenue, about $65,000, from last year, from our SBIR collaboration grants, rather, with the National Institutes of Health. So we've made up that, plus added new sales to achieve this 6.4%. Gross profit up 8.3%, to $2.4 million, roughly, from $2.2 million, and SG&A was up, and this is something everybody's going to notice, and I'm sure we'll get some questions on this. We're up almost 44% to just under $10 million from about $6.66 million. A part of this was non-recurring, the final payment to our M&A consultants on the sale of Words+ was just under $42,000. Our health insurance which is recurring, health and dental liability and workers comp insurance all went up, the total on a quarterly basis about $25,000. We did have more of our scientists spending time on marketing and sales efforts.

So that goes under selling expense, and that increased about $25,000. Increased labor costs about $119,000. This includes bonuses, which year end bonuses are always paid in the second quarter, so you're going to see a 1-quarter increase in SG&A because of the year end bonuses that we pay in December. Contract labor, we've hired some folks, very well known, well-respected industry scientists to review some of our software and give us feedback on what they like, what they think could be made better, suggestions for improvement. So that is a variable, we like doing that, it's really good for us to get these experts, who have been in pharmaceutical science and design for decades, to take a look at what we have. And the ones we choose are ones that are clearly the ones that you really want to have, that know the industry, that know the design tools that are out there, and can give you a good critique, instead of just telling you everything's great. I'm getting a message here, is everyone hearing me okay?

Yes.

Okay. I'm getting a network message that indicated maybe you weren't. Investor relations costs, we did some conferences, investor relations conferences, to get the word out about the Company, and spent a little bit more on that this quarter than we did last year in the same quarter. And then because of the Words+ sale, the subsidiary sale, we now report all of the cost of the building lease, and other facility-related cost utilities and so on, under SG&A for Simulations Plus. There is an offset to that that's not reported under SG&A, it's reported as other income, and that is the contribution to the lease and related costs from Words+. They still maintain a certain amount of space, and still contribute 20%, now, instead of 50% of all the costs. So it makes it look like SG&A is up a little bit more than it really is, because we don't use -- we don't account for the offsetting costs under SG&A. It's under other income.

There were also some other factors on SG&A. There is small changes in things like stock-based compensation, which are really not very significant. They tend to be pretty constant year over year. But these are the major factors that you see in that increase. We're estimating that, going forward, the total increase in SG&A is probably going to be on the order of $140,000 per quarter, and that includes the building lease, and labor costs and so on. The net income, compared to last year, was reduced 3.7% due to the SG&A increases, and there was another $25,000, in fact, that should have been under SG&A last year, but it was under R&D, there was an incorrect posting we discovered, and so that, again, makes this year look like a greater increase than it actually was by $25,000. Diluted earnings per share, though, did stay the same at $0.05 per share. Equal, because we still had a share repurchase program going on last year, and the number of outstanding shares, fully diluted shares is lower, so that offset the slight decrease in the net income on a dollar basis. We did pay our first of our ongoing quarterly cash dividends of $0.05 per share per quarter in March, and hopefully we have many happy people. We've gotten some very positive feedback on that decision.

The balance sheet remains strong. Our cash increased more than 50% over last year's second quarter to $13.2 million, from about $8.8 million. And that was just before the dividend payment. So we did make a dividend payment out of that of about $791,000, and yet, cash today is back to $13.4 million, so even higher than what we closed on February 29 as a result of our sales. Shareholders' equity increased just under 10% to about $15.5 million, from about $14 million in last year's second quarter, and we continue, of course, to have no debt.

Comparing the 6 months, sales are up just under 8%. This is a record midyear, of course. If you have a record first quarter and a record second quarter, then you will have a record midyear. Just over $5 million, from about $4.7 million last year. Gross profit up just under 10% to about $4.3 million, from $3.9 million. SG&A on a 6-month basis, up about half what we showed in the second quarter, 22.5%, versus what was about 44% for the first quarter -- for the quarter alone, I'm sorry, the second quarter. So SG&A around $1.7 million, from about $1.4 million. And the same factors that applied in the second quarter apply here on a 6-month basis.

As a percent of revenues, SG&A increased to just under 33% from about 29%. Our net income from continuing operations over 6 months increased 10.4% to about $1.6 million, from about $1.4 million, and total net income, including discontinued operations, increased about 23% to $1.8 million, from about $1.5 million. Diluted earnings per share increased 25.5% to $0.11 per share, from $0.09 per share. The 25.5% comes from using exactly the dollar figures, rather than using the ratio of 11 over 9, so that's why it's not what you might expect of around 22%.

A strong balance sheet, and these are the same numbers as for the fourth quarter, cash is, as of the end of the quarter, was $13.2 million, and as of today, about $13.4 million, after paying the dividend. Income statement, most of these are the same numbers that you've seen earlier, but there are a few new numbers here. The gross profit margin increased from 84.2% on a pro forma basis, in other words, without the Words+ subsidiary, just looking at the pharmaceutical business, and comparing it on an equal basis with last year's second quarter, increased from 84.2% to 85.8%. SG&A, the increase you've already seen, the R&D increase was already in the previous slide and total operating expenses, you can see. I think everything else here is a repeat of what we had on the previous slides. And on a 6-month basis, differences in numbers from the previous slides, the gross profit margin, 85.1% compared to 83.6%. The SG&A, of course, is up, as we saw, and earnings per share here, bottom line, up from $0.09 to $0.11.

Looking at our fiscal year history of revenues, our first 6 months of 2012, you can see we're at just over $5 million, so if we continue the trend, and we expect to, we'll have another record fiscal year. And revenues by quarter, and we like to show this slide, and I thank Jeff Stanlis of our IR firm, Hayden IR, for suggesting this format, where we show, quarter by quarter, the increases in revenues, and there will be going on earnings here shortly. So that you can see the trend, and there is a seasonality in our business. Those of you that have been with us a long time know this, that the fourth quarter for us is June, July, and August, and so summertime is a slow time for many of our customers. Japan, and Europe, for example, very extended vacations in many cases. And so what we have is a self-perpetuating seasonality, because our licenses, our software licenses are done on an annual basis, the customers who license in Q2 this year are probably going to renew in Q2 next year.

Every now and then, one will slip into the following quarter, but it's pretty rare. And so you will see this seasonality tend to stay the same. Usually our third-quarter is our strongest. You can see in previous years, last year pretty close. Second and third quarter, second quarter was catching up. And so we would expect a strong third quarter again, and we'll see fourth quarter, we'll probably see the same kind of drop, but hopefully still an increase in the fourth quarter. So there is a seasonality, but the trends are very nice, and the slopes are very nice.

And then this is our income by fiscal year. So our net income after taxes this year, $1.6 million. Last year was $2.6 million for the whole year. So things are looking good. And net income by quarter, and you can see here, we did have a slight drop, here, because of our SG&A increase. Again, some of those being one-time charges and variable charges. Balance sheet items, again, these are as of February 29, and this is comparing to the beginning of the fiscal year, or the end of last fiscal year, however you want to word it, our fiscal year ends on August 31. And you can see cash has gone up a little over $3 million. Cash per share from $0.54 to about $0.79. That's even higher now, because cash is higher now than what it was here. Total current assets and total assets current ratio about 6. Last year it was almost 12. Again, a little bit of a hit on the SG&A took that down a little bit for this quarter. Shareholders' equity though, a nice increase here of $1.4 million or so. And shareholders' equity per share on a percentage basis, up, what, more than 10%.

For marketing and sales, we continue to do a large number of conferences and scientific meetings. These meetings are our primary source of leads, and we're doing about 50 or 60 a year. We've got shows going in China, we also have training workshops now going in China, we'll be doing two of those this year. We've increased our number of training workshops, we've added now a basic GastroPlus training workshop to our previous advanced training workshops for GastroPlus. GastroPlus is a very, very sophisticated program, and it's not one that you pick up a shrink-wrapped CD, open it up, pop it in your computer, and start running analyses right away.

These are programs that integrate a variety of scientific disciplines, and in almost every case, the new users that we have were specialists in one of those disciplines, maybe two, but have never had to throw it all together the way a simulation program must do in order to give you a proper simulation. So understanding how everything from the size of the particles of the drug in the tablet or capsule, to excipients that might be contained -- these are attitudes that are not part of the drug itself, but just things that help the tablet stay together, so when you're shipping it around the country it doesn't fall apart. And things that are in there for processing, how those interact with the environment in the intestinal tract in the stomach of humans, or rats, or dogs, or monkeys. Remember, we have to analyze data in a variety of animal species, as well as in human. We have different states for the human than animals, they can be a fasting state, where they haven't eaten for 8 or 10 hours, and the fed state, where they just had a meal, and you take the dose right after the meal. It changes things dramatically in a number of ways. And so you have to integrate all of this knowledge together to use GastroPlus. And so we began doing these training courses two years ago. They've been very, very well received. The feedback we get is very, very favorable.

And we thought, well, okay, we've got our advanced training courses, but what about people that just would like a basic training course? Maybe they're not customers yet, but they want to see if they would like to be? And so we did our first one in Boston not too long ago. I think it was in March. And we'll have another one going in the fall. We've got a couple of those going in China, as I mentioned, and then we have the advanced training courses, there will be another one of those at the end of this month, in fact. These are a full week on the advanced courses, and three days for the basic courses.

Strategic digital marketing initiatives, we've had a very nice response from some of the things that Arlene, our assistant in the marketing and sales department, has taken upon herself, with John's guidance, to get into things like Facebook and LinkedIn, and some of the other strategic digital media that we can use to get the word out about Simulations Plus. Our new board number, Dr. David Ralph, who is a professor of marketing at Pepperdine University, has quite a bit of knowledge in this area, and so we're expecting him to give us some good ideas. And I know John DiBella, our Marketing and Sales Vice President, I recently had lunch with him to kind of get to know him, and maybe begin to get some of those new ideas.

As far as our collaboration and consulting grants, we are progressing on our five year collaboration with the FDA, and I'll talk more about that in the seventh slide. Our consulting studies continue. We keep having demand for doing consulting for various companies, very large, and not so large around the world. We are now negotiating, actually, two new funded collaborations, both with different top five pharmaceutical companies to add some new capabilities to our GastroPlus software product. And so this would be like we had a few years ago, when we had over $1 million over several years in funding to actually fund some of the R&D that advances our software. And we expect both of those to be initiated here in the near future.

We're also negotiating a new collaboration with an important US government agency, not going to say who it is yet, but there again, for modifications for GastroPlus to better fit their needs for analysis. And we always like it when government agencies use our software, because they kind of set the standard for the industry. And people know that, for example, the FDA is using GastroPlus, and DDDPlus, and ADMET Predictor, then that's a strong signal that these pieces of software are very useful tools, and even regulatory agencies are using them.

We believe that the industry shift that we've talked about quarter after quarter is continuing. Software tools are gaining wider acceptance, applications are growing, we had 20 new customers in the first quarter. We've got 18 new customers in the second quarter. We continue to have very, very high, around 95% renewal rates at our existing customers. So the trend is continuing. Adoption of simulation modeling has been slower in the pharmaceutical industry than it was, say, 20 or 30 years ago in the aerospace industry, and automotive, and electronics. But it is coming around, and we believe that this is still very much a growth industry. We'd like to see the growth a little faster than it has been, but it is there.

Software enhancements, well, we've now slipped our release dates but we're very, very, very close this time. We expect all of our new releases out this month. We've had issues with installer software on different versions of Windows in different languages, and that's always one of our biggest challenges. We can do the science and design software so that it's friendly for a scientist, but if they can't install it on some special version of Windows, in Japanese, or French, or German, or whatever, then they can't use it. So we really have to test very thoroughly. And I have to congratulate our team. We've had a lot of people hammering on all of these different versions of the software, and discovering little issues with getting them installed, getting some of the software components that we get from third parties that become a part of our software to behave properly and to get registered properly with the operating system. And our fairly new computer scientists, JJ, we call him, Jeff Jacobs, has been buried, along with a number of the scientists, in testing this work and getting all of those bugs ironed out. We're very close. We expect all of these releases imminently.

Version 8 of GastroPlus has a number of very powerful features, the expanded drug-drug interaction, now, that includes transporters, as well as induction of both transporters and enzymes. And by that, what I mean is that when you take a drug, sometimes that drug actually causes production of certain enzymes, or transporters, to a greater level than they would normally exist. So it's inducing the metabolism or the transport, as opposed to in the past, we would look only at the inhibition, where we are reducing the amount of metabolism and transport.

Our PDPlus module for pharmacodynamics has had some very nice expansions done to that. Now, we have some very sophisticated tools within PDPlus to automatically select the best model among many different types of pharmacodynamic models for a particular data set. In the past, and in most other software that we're familiar with, the scientist would have to try each model one at a time and try to find out which one best fit the type of pharmacodynamic response that they are observing. We have expanded our ocular delivery model, and our nasal and pulmonary delivery model, and a number of other convenience features, and what I call error traps, the typical kinds of mistakes that people can make without realizing it, we have the software look for those and pop-up a message, a warning, to say, do you really want to do this? Because this doesn't really look right. And if they want to do it, they can. But at least they have a warning that says, this is not -- something doesn't look quite the way we would normally expect it.

ADMET Predictor 6.0, major upgrade again. Prediction of sites of metabolism now available. This means that, when you look at a molecule, the site of metabolism of a particular enzyme can be identified, or predicted, in more than one site sometimes. So this tells the scientist which atom on a particular molecule is the likely target of various enzymes. Our pKa models, this predicts ionization of chemistry, of chemicals, have been improved, already the best in the world, now improved. And the type of display that shows the scientist the different ionized states at different pHs has been enhanced to make it easier to see what's going on. And we've enhanced our atomic level descriptors that we had developed under our SBIR grant with the NIH, and now retrained all of our predictive models using these. And so our models that were already top ranked in the world have been further improved.

MedChem Studio, again, scheduled for release, and the reason these are all coming out at the same time is MedChem Studio, GastroPlus, and on the right there, MedChem Designer, all talk to ADMET Predictor. ADMET Predictor is a program that allows us to take, basically, drawings of molecules expressed in the file format, but basically a depiction of a molecule. So a chemist can draw a molecule, or have a computer program draw a million molecules, and then run them through ADMET Predictor, and we predict around 140 different properties, ranging from simple physical chemical properties, like solubility and permeability, to metabolism properties, to toxicities, and so on. And so this gives the chemist a tremendous, tremendous tool to be able to draw a molecule, or a series of them, and without having to synthesize them, without ever having to go to a lab and make those molecules and test them, to have a pretty good idea of what 140 or so different properties would be. Would a particular molecule be likely to be so insoluble that it wouldn't dissolve enough to be useful? Would it be likely to cause cancer, or cause mutations of DNA, or some other problem, cause cardiac problems?

So all of our programs talk to ADMET Predictor with the exception of DDDPlus, and because of that, the handshaking that goes on between the different programs has to be coordinated. And so there's a bit of a ripple effect. If we change something in one program, we have to be careful that it doesn't adversely affect this handshaking capability. And that's why you see all these programs now coming out at the same time. So with MedChem Studio, we've integrated the MedChem Designer software, and this is also integrated into ADMET Predictor. MedChem Designer, we brought out last year, about a year ago now, we've had nearly 2,000 downloads. We do provide that program for free, as most other companies do, who have a molecule drawing program. And that's what MedChem Designer is. It allows you to draw molecules.

And then if you have an ADMET Predictor license, you can click on a little ADMET Predictor button, and get your 140 predictive properties for the molecule you just drew. And then you can click on another little icon that has an M on it, and that stands for metabolism, or metabolites, and you'll see a chemical drawing showing the original structure that you drew, and then pathways showing which enzymes affect the molecule, and turn it into different metabolites, slight changes in molecular structure. Very powerful tool, very impressive to see, and you get very nice reactions when people see it working. We've made speed improvements, ADMET Predictor is a very fast program, MedChem Studio, also a very fast program. There were certain parts of MedChem Studio where we wanted a little faster speed, and so we've been able to increase the efficiency and speed it up. MedChem Studio tends to work with large numbers of molecules at one time, as many as 0.5 million, or even more, if you wanted to do that. And so processing speed becomes an issue.

And then predicting the metabolite structures to be available soon. There, what we're saying is, we can identify for molecules with ADMET Predictor, we can identify whether a molecule is likely to be metabolized by a certain enzyme or not. We can identify the atoms on that molecule that are likely to be the metabolites -- likely to be the sites of metabolic attack. And we do, in fact, in MedChem Designer now, predict some of the metabolite structures. Maybe I didn't update this slide, and I should have, someone can correct me on that later if that was the case. There are other enzymes, though, that we don't process just yet to that full extent. Enzymes called UGTs, you simply classify molecules as likely or not likely to be metabolized by about 9 different UGTs.

For DDDPlus, we did release version 4 in June of last year. We added virtual trial capability, which is a way of doing simulation of many, many different experiments with the kinds of variances that we expect to see, as you try to run the same experiment over and over; of course you can't. There's always small changes and little things. And so this just shows the spread of results you are likely to see. FDA added more licenses in last year's third quarter to this, and our customer base does continue to grow.

Our FDA improved safety research collaboration, most of these bullet points are the same as last quarter, but down there second to the last, during the second quarter we did continue, of course, working with our FDA friends to model various toxicities, testing various modeling methods. I know we had a staff meeting earlier today, and one of our scientists reported that in a conversation with the FDA scientist that is leading this effort, that he is clearly indicating he's getting the best method, the best models using our software over any of the other software programs that he's tried to use, and he's clearly having a lot of fun using this code to build new models, new predictive models for things that can be either contaminants or additives in different foods. There's a very large number of substances, as you see at the top. I used to put 10,000 up there, but the FDA corrected me, and said it's actually more like 70,000 substances that they have to worry about.

The FDA, everybody thinks of the drug side of FDA, and not so much of the food side, but the FDA has the responsibility to look at things that can be in foods and to set limits as to what can be accepted. You're never going to get a pure food. There's always going to be trace amounts of things that, in larger quantities, could be toxic. And then the question is, well, how much is toxic? How much can you take a certain type of chemical that might be in the soil naturally? Or might be part of a pesticide or an herbicide that's used in farming? And you try to wash all of that off, and get it off of your lettuce, or whatever it might be, but what if there's a little bit left there? How much can you tolerate? And so this is the kind of thing that the Center for Food Safety and Nutrition has to deal with. And of course, they can't test 70,000 substances for every possible toxicity. It's just humanly impossible. There's not enough time or money to do that.

So the goal here is to take data on particular toxicities for a small number of molecules, hundreds to a few thousands, and build predictive models, and predict the rest. And then you look at the ones that are predicted to be nasty from your predictions, and then you go test those, you don't have to test everything. You can rule out some using the software predictions. So we will, in fact, in our version 6.0 of the ADMET Predictor, we're going to have our first new toxicity model for rodent carcinogenicity, it's tumor formations in mice and rats, that will be part of version 6.0, and we'll be models as we go along. As they're finalized, models can be added without a new release of the software, they are simply model files that are added in the folder where ADMET Predictor exists.

Our NCE project, or malaria project, NCE stands for new chemical entity, continues to progress. We've reported here, recently, that of the 5 original molecules that we obtained out of synthesis, all 5 showed some activity against the drug-sensitive strain of malaria, the one that responds to current drugs. And one of those was quite active, at a level of about 60 nanomolars. If you're not familiar with that term, basically what you're looking for in a drug is the smallest amount of drug possible to get the therapeutic effect you want. And drugs that are on the market range from millimolar, so that's 1 one-thousandth of a mole, which is basically how many molecules you have in a gram of substance, and it's a very big number, Avogadro's number, 10 to the twenty-third, or something like that. But it's a very big number. And so the least potent molecules have a millimolar, 1 one-thousandth of a mole, activity. In other words, it takes about that much drug to inhibit half of whatever target you're trying to inhibit. Many drugs are in the micromolar, so that's 1 one-millionth of a mole. And the ideal drugs are in the nanomolar, so 1 one-billionth of a mole. And so when we are at 60 nanomolar activity, that's pretty exciting, because that says you're down there with some of the most potent drugs that are on the market now, and much lower concentration required than many of the drugs that are on the market.

We have additional testing. We can't reveal it just yet, but look for a press release probably tomorrow morning with the latest results on our malaria testing with the molecules that we have, and one newer one that has come out of synthesis. We're still waiting for a couple more to be synthesized by the chemistry company. These are challenging molecules to synthesize. And so they've been doing it and getting them out, it just takes a little time.

So just to summarize, then, financial performance continues our profitable trend. The higher SG&A, of course, is something that we expected after the sale of Words+, and we're feeling. Part of the sale of Words+ put some cash in the bank, and we knew that some of that was going to end up going towards some of these higher costs for the building lease, for example. But that extra office space now means that we can hire more scientists, and we are aggressively interviewing right now, trying to hire more people. So we do plan to invest, to grow the life sciences staff, to grow organically. We have not given up looking at acquisitions. We had another interview call with a company this week that looks like a very good potential, but you never know. No promises.

We hope that something's going to work out, either as a collaboration, or possibly as an acquisition. Who knows? But it's a little early to say that. The sale of Words+ has simplified the business and focused it. We had a nice jump in the margins, and reporting and auditing, much simpler. We originally didn't expect our 10-Q to be out until next week, but especially in this busy tax season, where our auditors are working very hard for many, many different customers, but the fact that Momoko, our Chief Financial Officer; and Carol, our accounting manager; and the folks who are our auditors were able to go through this much quicker without the Words+ business, which really was the larger share of transactions and financial records before the sale. The pharmaceutical side of the business is a smaller number of transactions, with very nice, big checks. And so a little easier to balance the checking account, and a little less paperwork to go through.

We are continuing to expand our life sciences team, compared to last year's second quarter, we had 16 in those that work on the sciences, this year we had 19, so we've gone up by 3. Again, we're aggressively interviewing, so look for more. And our newer scientists also, as I've mentioned many times, scientists both newer and the ones that have been experienced, are involved in marketing and sales. It's part of our philosophy. We have a small marketing and sales department that does nothing but marketing and sales. They don't do software development, they don't do consulting studies, although they may contribute to that now and then a little bit, but they're primary focus is marketing and sales. And they are supported by the scientific team. And I believe that's healthy in both ways.

The scientific team needs to get out of their offices and go out into the world, talk to customers, see what competitors are doing, look at the university research that's being reported at these various scientific meetings, and this stimulates lots of ideas and relationships. And in any business relationships are important. In this one, I think they're as important as any other business that you would see. And so building those one-on-one relationships, scientist-to-scientist, I think is one of the reasons that we continue to see this very consistent growth throughout all of the global economic crises and all that. We just continue to grow.

So we will expand the sales team as well, though, and we are looking right now for a chemist with sales experience to emphasize the molecule design suite. This is MedChem Studio, MedChem Designer, and ADMET Predictor. These are the tools that we used to design our malaria molecules. And we took that task on, really not to cure malaria, that would be a wonderful thing, I wish we could do that, but it's a long shot to design a real drug. What we wanted to show was that with this set of software, we can very quickly get to lead molecules, not the final drug, but molecules that are close, that do hit the target, that do have acceptable solubility and permeability, that don't have adverse effects, at least the ones we know how to predict, and so on.

And so we believe that the malaria initiative is -- the success there has been fantastic, and that this is quite an achievement for us to put our money where our mouth is, design some molecules, go out, find a chemistry company that can make them, and go out and find labs that can test them against the target that we're after, in this case, the malaria parasite, and lo and behold, we've not only achieved activity, but we've achieved nanomolar activity with one particular [compound]. We have spent greater staff time meeting the life sciences staff on marketing and sales, and that did kick up SG&A a little bit, but that's an investment in the future. You can have the best mousetrap in the world. If you don't have a strong marketing and sales program, then the guy with the second best mousetrap is going to go out there and outsell you. We are now developing training courses for the chemistry tools. So just like we have the GastroPlus basic and advanced training, we're now developing training courses, and expect to begin those in the fall, for MedChem Studio, MedChem Designer, and ADMET Predictor.

We continue to get global recognition as a leader in what we do. We have an absolutely outstanding reputation for scientific expertise, innovation. We're widely recognized as very strong customer support, and I think that comes out of what was our subsidiary business, where for 15 years before we started Simulations Plus, we dealt with people with Lou Gehrig's disease, or cerebral palsy, or multiple sclerosis, and we became very customer centric in the way we did business, and we do that now in the pharmaceutical industry. We will drop things to satisfy a customer if it makes any sense at all. They know that. They can come to us and say -- gee, you know, if we could just get a little help with this, or if you could make your program do that, it would really help us. And so when it's possible, and practical, we do that. And when we can't, we simply have to say, this is not something we can just do overnight.

Cash position continues to be strong, again, $13.4 million now. That dividend was paid in March. You can expect another dividend probably around May, or something like that. We'll have to get you exact dates here, probably shortly. And that completes the formal presentation.

Let's see if I can make this display expand a little bit, so that I can see these questions a little better. There was a way I did this last time, because otherwise, I can just barely see one line at a time. Okay. There was a way to do that --

There's a little button next to the X that pulls the panel out.

Next to the X. Show the answered question?

Next to the -- on the right-hand side, there's a little X, and then there's a little thing next to it that's got an arrow up and to the right that pops it out.

I'm clicking it, and it changes from an up arrow to a down arrow, and nothing changes as far as the size of the display. Let's see. I did do that last time. Doggone it.

I can read the questions, Walt, if you'd like.

I might have to have you do that. Let me scroll up here. I see the first asker is Donald something, but it's cutting off. Will there be any price increases for the new major upgrades of software to be released in April? Not right away. We are always looking at pricing, testing ideas, but at least for now, there will not be any price increases directly linked to these releases.

Walter Ramsey, will selling prices be increased? I just answered that. Same question.

Who are the potential new customers, once the toxicity model is released? From Howard. There are a number of companies in, for example, food industry. We have one or two of those now, but there are quite a number of others that should be interested in this. Anyone who is processing food on a large scale, for example, where you have to worry about what kind of contaminants, just from the machinery. Every machine has to be oiled and lubricated and maintained, and there is wear, metal can wear off from the metal-to-metal contact. Anyone who's in that kind of business needs to be concerned about food safety. So, the food industry is one.

The chemical industry, if you are an agrochemical company, where you're developing pesticides and herbicides and things like that. Well, if you have a choice of a number of different molecules that will kill a certain insect, that's a problem with a certain crop. Then you'd like to take at least the one that's going to be the least toxic -- if some trace amount of it, or greater than trace amount of it, gets into the food supply. So chemical companies and food companies, I would see. Also, cosmetic companies.

It's very interesting to me, when I went to the Society of Toxicology meeting for the first time several years back. To see that one of the largest presenters, in terms of the number of scientific posters, and the type of science that they were doing was L'Oreal, the French cosmetic company. They do a tremendous amount of research, and they do physiologically based pharmacokinetics, PVPK, like we do in GastroPlus, and they do structure-to-property modeling, like we do in ADMET Predictor. We don't believe they do it at nearly the same level, and so there's a possibility there of the cosmetic industry, again, being another customer base.

Walter Ramsey, what were consulting revenues in Q2? How much is that business likely to increase in the upcoming periods? I'm going to need some help with that one. John or Momo, could you answer that?

Yes. I can take that one. Consulting revenue made up about 4% of the total revenue in the second quarter, and it's a little hard to predict what the future consulting revenue is going to be, because typically we get approached from time to time from clients when they have very high-priority projects, or are working on something that's very difficult. We would certainly expect to maintain that level, but I couldn't offer any kind of predictions as to the likely increase that might be seen.

Okay. Thank you, John.

Question, what is the expected tax rate for the entire fiscal year? I think in the press release, I think we guessed that 31% to 34%. Is that correct, Momo? Hello? Momo? Are you there?

Yes, I am. It's a 31% to 34%, dependent on how much R&D credit we can obtain for fiscal year 2012.

Thank you. From Howard, what is the average revenue contribution of an advanced/basic training course? Well, an advanced course, the price for the advanced course is right at $3,000 per person for the full week. If we fill it with 20 people, that's $60,000. Our costs probably run in the, I'm going to guess, $20,000 to $25,000 range. So it does contribute somewhere in the $30,000, $35,000 range, that's a ballpark estimate, if we fill the course. If we don't fill the course, it's probably proportional, the costs are proportional to the numbers of users pretty well. We bought a set of laptop computers when we did our first course a couple of years ago, so those were capitalized. We continue to use those computers.

When we do these courses, we pre-load all of the software, everything is licensed and unlocked, so that when the students come in, they sit down at the computer, turn it on, and everything is ready to go. We don't waste time trying to install on their computers with different operating systems, and who knows what other software they might have. So it keeps it cleaner that way. We reformat the drives basically, wipe them between shows, so that if they went out there and downloaded something on one of our computers, it would be gone for the next show. That's a ballpark average for the advanced training. For the basic training, John, help me on that. I forget what we charge for the basic training.

For the three day basic training course, we charged $1,500 per student. So again, filling it up at around 20 students, and then minus the costs, in that case it comes out to be a little bit lower. But in the reverse case, the students that typically attend those basic courses are coming from companies that may not necessarily have licenses to the software program. We've been very pleased with the response so far from some of those attendees with regards to asking, now, for quotes to bring in the software to their companies.

So, where is the advanced users are typically coming from companies that already have licenses, these basic workshops have, at least this initial one, has done a very nice job of introducing the software to new clients who are now very interested in moving forward with licensing the software. So, there is some additional kind of auxiliary revenue that's coming, maybe, from the basic workshop.

Thank you, John. Howard asked, the press release noted approximately a $130,000 increase in quarterly SG&A expenses. Is the increase based on prior year first quarter '12 or second quarter '12, excluding the one-time payment to the M&A consultants? This was a calculation of what to expect going forward. I'll ask Momo, could you please comment on that $130,000 figure going forward quarter by quarter?

Yes. There is still this quarter, as well as six months operation. There is a one-time fee, such as Intelius legal fee, which is about $65,000 or $66,000, and also a conservation fee for Words Plus sale related. So, eliminating those one-time fee, I expect it to be, like with SG&A, to go up about $130,000.

Third quarter going forward, right?

Yes.

Some quarters will be higher than others, or some will be lower. I mentioned that our year end bonuses are always paid in the second quarter. So, we take a large hit in that quarter for the year end bonuses, and then you don't see that in the other quarters.

How will the Enslein royalty buyout improve margins? Well, the royalty buyout was a deal where we basically purchased the IP, the intellectual property rights, and eliminated a royalty payment on the Enslein metabolism module. That's royalty buyout will be amortized over a number of years, 10 years. We were able to buy it out at the equivalent of about 3 years of average royalty payments. So basically, the amortization of that will be only about 30% of what the royalty payment would have been. It's not a huge number. I think we averaged, what was it, about $25,000 per year, Momo?

Probably more like a $20,000 quarter payment.

Per quarter, sorry. So, about 70% of that will remain, then, as, I should say 30% of that will be the expense now, rather than the whole 100%, so $20,000 or so per quarter will drop to about $6,000 per quarter. So, there will be about a $14,000 per quarter, ballpark number now, improvement.

How do you drive consistent double-digit sales growth with your current cost structure? Well, I'm going to ask John to answer that one, our Vice President of Marketing and Sales.

You know, one of the things that I don't think Walt mentioned in the presentation, but it was in the press release, had to do with the actual software license revenue, and how it compares between both last year's second quarter, and then the first six months last year. Software license revenue has gone up. We're 11% above last year's second quarter, and now over 12% for the first half of the year. So, we're producing this double-digit sales growth with regards to the software licenses.

We are in the process of negotiating a couple of new funded collaborations, which will help to make up for a lot of that lost revenue that we've seen over the last 2 years or so from collaborations that have expired, grants that have expired. I think that this NCE project, as Walt mentioned as well, is doing a very good job of starting to illustrate how our cheminformatics software products can really help add value to the research that's going on at these companies.

GastroPlus is certainly the cash cow product here at the Company. But there's a lot of room for growth, still, with regards to the cheminformatics software lines. So, we've begun to really push, in combination with these press releases for the NCE project, how the software products can begin to assist with companies' internal research efforts. So, I think it's trying to find new revenue routes through collaborations, still identifying possible grants that we could apply for as well. Then really making an effort to do a better job of promoting the cheminformatic offerings that we have to continue to drive the double-digit sales growth. Again, license revenue, software license revenue, has grown consistently by double-digits. So we only expect that to continue, if not increase, now, with the nice news related to the NCE project.

Thank you, John. I think another thing to note is that, when we talk about the different sources of revenue, consulting, collaboration, software licensing. Software licensings are the ones that renew every year, where consulting and collaborations, they have a term limit, and once you finish the consultation or the collaboration, it's over. Where the software licenses have their own self-perpetuating growth, because each quarter, you get the renewals from your previous year's like quarter, and the aggregate doesn't say that. So, double-digit growth in software sales, when you don't see the double-digit in the overall top line, just keep in mind that the software sales growing double-digits is actually a pretty good thing that's underlying that.

Another question, how much was the M&A payment in Q2 for the Words Plus sale and the Intelius due diligence, how much was it in Q1? I did answer that in a slide. The Q2 payment was about $38,000, I think, for the final payment on the Words Plus sale was when we had the Intelius expenses, and that was the legal fees were around $50,000. We did not have an M&A firm expense on that one, as I recall.

How long do you expect it to be before the new toxicology line contributes 5% or more to sales? Well, 5% would be about, what, $250,000 in six months? We had $5 million in sales for the first six months, so 10% would be $500,000 and half of that would be $250,000. So, John, can you guess where the new toxicology could contribute around, that would be about $125,000 a quarter? It's not too many ADMET Predictor licenses.

It's not, no. I think the key is to first get this new release of ADMET Predictor out the door. Because we're really excited internally about all of the enhancements that have been made, so it's going to be critical to first get this new version out the door. One of the nice things that we saw last quarter, we're seeing again in this quarter, is that there is a diversity with regards to the client base.

We did sign a major industrial chemicals company to licenses of ADMET Predictor. Also, one of the major food ingredient companies have made a significant investment in expanding their licenses for ADMET Predictor, and also for GastroPlus. So I would guess that, as soon as we get this new version out the door, we should see an uptick in the sales of the module. Time frame for that, I really can't say right now. But I would guess it's sooner than later, before it reaches that 5% mark.

Thank you, John. This is another one for you, John. How does your current pipeline of prospective customers compare to the same time last year?

The first of each month, what we do is update our conferences webpage that gives folks an idea about where we're going to be going over the course of the next month or so. If you've noticed, starting in February, we really ramped up, for 2012 at least, the activity at conferences. It continued into March, and has certainly picked up the pace here in April. So the pipeline of prospects is very strong. It's probably higher than last year, but the more important thing, I think, is the diversity in these prospects.

Again, now we're starting to -- we still have a very strong prospect pipeline as it relates to those folks interested in GastroPlus. But the attendance at conferences that are aimed a little bit more towards the cheminformatics software products, whether it's drug design conferences, toxicology conferences, et cetera. Combined with the news about the NCE projects, it really has drawn in a more diverse audience than what we would have expected from years past. So, it's strong and more diverse than this time last year.

Thanks, John. And the next one is for you, too. Have the terrific results from the malaria product begun to read produce higher sales demand?

It has produced higher demand, yes. We decided to take an approach instead of continuing to refer to MedChem Designer, MedChem Studio, and ADMET Predictor, just rattling off each product name individually. We've started to design a marketing plan around an ADMET Design Suite, which has a little bit of a nicer ring to it. So promoting the news, and having a dedicated site that talks about the combination, the power of the combination of those three products has led to higher demand, more requests for evaluations, more requests for quotes.

Thank you, John. Last question I see at the moment, assuming successful synthesis of the NCEs, what will be the next steps for this project? Well, even where we are now, I think we can proceed. Although we're waiting for a little bit more results, and again, watch your computers tomorrow morning for a press release, I think we'll probably have it out by then. If we don't, go ahead and call the office, because I'm not there the rest of the week. Little joke, there. (Laughter)

Anyway, we will definitely be contacting organizations like the Bill and Melinda Gates Foundation, GlaxoSmithKline, others who have a strong interest in malaria research, to see if there would be an opportunity for a collaboration, especially a funded collaboration. We do know that the Gates Foundation has a strong interest in malaria. It is an area of critical need around the world, and that if they see something promising and innovative, and I think this certainly is, that they are willing to add funding to it.

We know, for example, just recently, they funded the University of South Florida, I believe it was, to the tune of about $5.5 million to pursue some chemistry that, as I've seen -- what I've seen, doesn't appear to be that much further along, if at all, than where we are. So I think there's a possibility, no guarantees of course, but a possibility that we could get external funding to take this to a much more significant level.

If we were to do that, then we would be designing larger numbers of molecules. And the more you can design, and synthesize, and test in order, the greater likelihood that you're finally going to find a winner. So I would say that would be the next steps. I believe that's the last question. I don't see any more. Does anyone else see any more?

No more questions.

All right. Well, thank you all for attending. We'll talk to you again in about three months. I guess it will be what, about, July, we'll have the next conference call. Watch for the press releases. We'll keep you posted as best we can, as news develops, and hope you all enjoy your spring, and talk to you again in the summertime. Thank you all for attending.

Thank you Walt. 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.