Simulations Plus Inc (SLP) 2017 Q3 法說會逐字稿

Good afternoon. It is Monday, July 10, 2017. And on behalf of Simulations Plus, I welcome you to our Third Quarter Fiscal Year 2017 Financial Results Conference Call and Webinar.

Presenting this afternoon will be Chairman and Chief Executive Officer, Walt Woltosz; and Chief Financial Officer, John Kneisel. An opportunity to ask questions will follow today's presentations. You may send your written question using the questions pane on your control panel, or you may use the hand raising feature on your control panel to ask your question directly. Please be sure to enter the unique audio PIN displayed when you join the call. This call is being recorded for playback at our website, www.simulations-plus.com.

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

It is now my pleasure to introduce Walt Woltosz.

Thank you, Renee, and welcome everyone to our third quarter fiscal '17 conference call. For an overview, for those who may be new to Simulations Plus, we are a major provider of both software and consulting solutions for R&D, predominantly in the pharmaceutical industry but also serving food, chemicals and some other industries, cosmetics, for example.

We cover all the way in the pharmaceutical development process from the earliest drug discovery when a chemist might be drawing a molecule or using a computer program to generate a million potential new molecules that have never existed to see if any of them might actually become a drug through the preclinical development -- that's laboratory work and animal work -- and then finally into first-in-human trials, on into safety research and risk assessment, Phase II and Phase III clinical trial data analysis by our Cognigen division in Buffalo, beyond-patent life to supporting generic companies and integration of data from multinational R&D efforts. This is a major $5 million, 5-year contract being performed by our Cognigen division in Buffalo for a major research foundation.

I should mention in the safety research and risk assessment, we are now into a new area, dealing with drug-induced liver injury as a result of the acquisition of DILIsym Services in Research Triangle Park, North Carolina, at the beginning of last month. We'll talk more about that in a couple of slides.

For our third quarter, it's our record third -- record quarter of any quarter ever in our history. Revenues were up $736,000 or 12.2% to $6.75 million. Our net income was up $171,000 or 8.9% to $2.08 million and the footnote there notes that there are some onetime charges that'll be detailed a little bit more in John Kneisel's presentation in a few more slides that reduced the net income to pay for some of the acquisition costs in the third quarter. Some of them were actually earlier than the third quarter, and when I talk about the 9 months, you'll see the same footnote there.

Software renewal rates. 89% based on number of accounts but 93% based on the actual revenue fees. We added 20 new software clients in the quarter, and our strong consulting pipeline resulted in a significant increase in revenues. And our current backlog remains high. We've had to hire. We have those new hires onboard, and they're now contributing.

For year-to-date, for the 9 months of fiscal year '17 through May 31, revenues were up $1.86 million or 11.6% to a total of $17.87 million. Net income up $476,000, 11.4%, to $4.64 million. Again, that was reduced. Even though it is a new record, that was reduced somewhat by onetime charges associated with the acquisition. Diluted earnings per share, just under 10%, 9.9% to $0.27 a share for the 9 months. And in the 9 months, we added 63 new software clients.

I mentioned the acquisition of DILIsym Services. We're very excited about this. DILIsym is a software program. It is a mechanistic mathematical model that looks at activities going on inside the liver and particularly inside the hepatocytes, the liver cells. And it looks at all of the effects that cause damage to the liver in a variety of mechanisms. Several mechanisms are covered now. Newer ones are anticipated as the consortium continues to develop this software capability.

The dosing software has been applied to support decisions throughout the clinical -- clinical development pipeline. The FDA is very interested in drug-induced liver injury. And in the past, the software has been used to evaluate and interpret clinical biomarker signals in clinical trials. So we look at, for example, levels of particular enzymes in the liver and in the plasma, which indicates potential liver injury.

Software has been used to optimize clinical trial designs for dose selection, monitoring, and inclusion and exclusion criteria. It's been used to translate preclinical safety risk for first-in-human. So when we look at rat data, for example, or dog or other preclinical species and then try to extrapolate that to what we expect to see in first-in-human trials [and I was only referring to] by the translation.

We can link compounds by risk. So often the pharmaceutical company will have several potential drug candidates to treat a particular disease. And they want to know, what is the relative risk of each of these with respect to each other for drug-induced liver injury, and then evaluation of the compound risk based on preclinical data.

So these results have gone to regulatory agencies, including the FDA and other regulatory agencies around the world. They've been presented at the Antimicrobial Drugs Advisory Committee Meeting last year. And we're just very proud that DILIsym accepted our offer, and that the DILIsym Services team is now part of the Simulations Plus family. They are Simulations Plus employees and enjoy all the rights and privileges associated with that, including the fact that they now have around 50 additional scientists, engineers, and then additional support staff on top of that to support their efforts.

Our PBPK capability in GastroPlus and the prediction capabilities in the DILIsym software are complementary. GastroPlus will predict the liver concentrations over time, which are inputs to the DILIsym software to determine whether those concentrations are likely to cause drug-induced liver injury.

And we see some additional synergistic potential by looking at our ADMET Predictor software, which is -- has the ability to predict a variety of properties of drugs just from their chemical structure, so that, even before a drug is synthesized, we can take a look at the potential for drug-induced liver injury if we can predict the right property using ADMET Predictor.

DILIsym operates through a consortium or an initiative. The current members of that initiative are shown here. There have been in the past up to 17 major pharmaceutical companies. Some have been in and out over the years. DILIsym has been around since about 2011. So the DILIsym software has been under development since then, formerly under the Hamner Institute in Research Triangle Park, and about 2 years ago separated away into DILIsym Services when the Hamner Institute basically went out of existence. Over $7 million has been invested to-date in the development of the DILIsym software, and we expect the consortium to continue going forward.

In addition, we also have 2 funded collaborations with the FDA. We're now in the final year for our collaboration, which is funded at $200,000 a year for improving ocular dosing simulations. We have a consortium of leading pharmaceutical companies that are part of this effort. And when we look at the market for ophthalmic drugs, we're looking at a significant growth from $16 billion in 2012, estimating up to almost $22 billion in 2018. And as the population ages, we're seeing a greater prevalence of eye disorders, such as diabetic retinopathy and macular degeneration.

We're also in the second year of our 3-year $200,000 per year collaboration for the simulation of long-acting injectable microspheres. So these are small drug particle-loaded microspheres. So the drug particles are loaded into a polymer microsphere. And this little microsphere gets injected typically into muscle but could also be subcutaneous. And as it is in the environment of the tissue that it's injected into, it slowly degrades and slowly releases the drug. This can take weeks or even months in some cases, and so it's a very long drug release process, and simulating this is quite challenging.

We have developed some very nice enhancements, not only to GastroPlus software to add the intramuscular dosing but also enhancements to our DDDPlus software that simulates laboratory in vitro dissolution. And we found some significant changes that could be made to that program to better simulate the in vitro release and understand the mechanisms involved in the release of the polymer -- of drug from the polymer microspheres in an in vitro environment.

Stock price, as you can see, has been doing quite well. We closed today at $12.90, bumped against $13 again today. It's bumped against $13 once or twice in the last week or 2. So things are going well. The lower curves that you can see down here are the Dow, the NASDAQ and the S&P 500. And you can see over the last 2 years, this is a 2 year chart, that we've outperformed all 3 indices by quite a significant amount.

I'm going to turn the presentation over to John Kneisel now, our Chief Financial Officer

All right. Thanks, Walt. We'll cover the -- first, the last 3 months, third quarter, and then we'll go to the 9-month numbers. So I'll walk into the excitement of the accounting world here. So our consolidated revenues, like Walt said, we reached sort of a new height for a quarter this last year. They were up 12.2%, $736,000 to $6.75 million for the third quarter from $6 million the prior year. $284,000 of that increase came from our Lancaster division. It represented a 6.1% increase, and Buffalo increased $453,000. They had a 33.6% increase over the prior year. It was a nice increase, and I'm really happy with that one.

Our consolidated software and software-related sales increased $223,000 or about 4.9%, while we saw real good growth in our consolidated consulting and analytical study revenues, which were up 34.9% for the quarter. Our consolidated cost of revenues increased $250,000. They were up about 21% for the third quarter to $1.45 million over last year. The cost of revenues as a percentage increased by 1.54%. And $209,000 of those increases were for labor-related costs for the studies and contracts, and software amortization accounted for about $50,000 of that increase.

Our gross profit increased 10.1% to $5.3 million from $4.82 million the prior year. Lancaster accounted for $233,000 of the increase, which came from mix of software and analytical study revenues, while Cognigen and Buffalo showed about $253,000 increase, and those come mainly from the consulting revenues of that division. A consolidated gross profit as a percentage decreased 1.5% to 78.6% from 80.1% the prior year.

During this period, SG&A expenses increased $274,000. They were up about 16.3% to $1.95 million. One of the major increases in the quarter was about $144,000 of onetime costs associated with the acquisition of DILIsym. Those costs were mostly legal and M&A-related accounting and other direct acquisition-related costs.

We did see some increases in wages and salaries this last quarter, which also included higher stock compensation costs, which are really noncash-related costs and G&A costs associated with the labor allocation of our scientific staff working on G&A type products, along with some higher commissions due to increased sales in Asia.

A couple items that went lower. Selling expenses were down a little bit. We had redone our website the prior year. We didn't incur those costs in this period. And our professional fees were down a little bit in the accounting area, down about $55,000 because we had a little bit of lower compliance costs associated with lower Sarbanes-Oxley-related costs this year.

Looking at research and development. Our R&D expense was $254,000 for this quarter. Total research and development costs actually decreased in this period, where we incurred about $598,000 of which $344,000 was capitalized and the $254,000 was expensed.

Our income tax provision, we actually -- Uncle Sam probably loves us. It was a cool $1 million for the quarter. Hopefully, we can do something with the government to get that down a little bit compared to about $891,000 for the year, but our overall effective tax rate actually came down a little bit to about 32.5% for the quarter, and that was down from 34.4% the prior year. The decrease basically is associated with effect of some tax credits and our equity-based compensation costs that affected the rate this year.

Overall net income increased by $171,000, 8.9%, $2.08 million from $1.91 million the prior year. Net earnings for Buffalo increased $131,000. They were actually up 102% over the prior year. The net earnings from Lancaster were only up $36,000 or 2%, but Lancaster is our parent company in that division, where all the costs of the DILIsym acquisition and -- which was about a $97,000 charge to the parent company.

Earnings per share for the quarter, still was up $0.01, 6.7% even with those additional charges borne by the company and the parent company. And EBITDA was up 9.7% to $3.6 million for the quarter.

Moving on to the 9-month numbers. Net revenues were up 11.6% or $1.8 million -- to $1.86 million -- or up $1.86 million to $17.87 million for the year. And $895,000 of that increase was generated by Cognigen in Buffalo, representing 20.8% increase over the prior year. And revenues from Lancaster increased $963,000 or 8.2% to $11.7 million -- to $11.7 million for the year. That doesn't look right for me. To $12.69 million for the year.

Consolidated software and software-related sales were up $751,000 or 6.7%. And consulting and study revenues were up $1.1 million, 23.2%. Overall, cost of revenues increased 22%. Those increases came mainly from $472,000 of increased labor costs, $65,000 for training programs that we've been doing in increased training programs, $129,000 of increased software amortization, and $108,000 of direct contract-related expenses.

Gross profit for the 9 months was up 8.5%, just over $1 million to $13.5 million from $12.5 million in 2016. $415,000 of the increase is gross margin in Buffalo, and -- which had a 56.9% gross margin on $5.19 million in revenues. Lancaster accounted for $649,000 of the increase and showed an 83.4% gross margin for the period, both strong margins in both divisions.

G&A for the period. It was up $687,000, 13.5% to $5.77 million for the 9 months. Major increases were salaries and wages, which have been increased this year. Mostly, again, stock-based compensation, higher G&A allocations and some higher annual bonuses paid based on increased profits last year the Board passed out. The commission expenses were also higher due to higher Asian sales, where we have commission -- or commission reps over there.

Our professional fees were up as well, which we've talked about earlier in the year due to the increased cost of our Sarbanes-Oxley expenses. And then we also incurred $261,000 this year in total to-date through the end of May on the DILIsym acquisition, which again, that's legal, M&A and all other accounting and direct related costs for them.

Selling expenses were down $50,000-some, some advertising-related and web-related costs, and the cost of website development. And we also saw some decreases in travel and entertainment, mostly some lower costs of conference attendance and foreign travel, not that we've decreased our conference attendance. We've just had lower costs and cost of the places we've gone to.

Research and development. We incurred about $1.89 million so far this year in R&D expenses. Of that amount, we capitalized $928,000, and $952,000 was expensed. Prior year, we'd incurred about $1.97 million of research and development, and we had expensed $1.16 million in the prior year. So operating -- ultimately, operating profits up 9.4%, $590,000 over the prior year. And our provision for income taxes is about $2.2 million. It's holding at about a 32.2% rate, which is down about 0.8% over the prior year's number. I know a lot of people are tracking -- trying to track our percentage of income tax rate. It's still holding in that 32.5%, 33% zone.

Overall, net income was up $476,000 or 11.4% to $4.64 million. That increase came from both divisions. Net earnings in Buffalo increased by $216,000 or 45%, a nice healthy increase over the prior year, while the earnings from Lancaster were up $260,000 or 7.9% to $3.95 million. And as we mentioned earlier, there were $261,000 of pretax charges related to the DILI acquisition, which amounted to about $177,000 for the 9-month period, which impacted obviously the bottom line, but I think it was well worth what we spent on it.

EPS is up 9.9%, $0.03 a share to $0.27 from $0.24 the prior year. And EBITDA also increased 22% to $8.38 million for the period.

Cut some of the older years out of the slides for those of you who've seen this before. But if you look the last 5 years, you can see the growth in the years. The green bar in the middle is the year we picked up and acquired the Cognigen. So some of those increases in revenues came from the Cognigen acquisition, but you can see where we've had some pretty good growth trends coming into our fourth quarter, which is one of our lower quarters for revenues and -- revenues and earnings. But that's -- we have that seasonality that's been built into the pharmaceutical industry over the years, slowing down in the summertime. And go on to the next one, Walt.

Net income, sort of the same tracking mechanisms. But, again, we've all seen the upward trends as we move forward.

Next slide. The earnings per share. Again, same scenario. We expect to see our numbers continue, and no known issues moving forward. And EBITDA, again, it's a healthy cash business model. The model of Simulations Plus has always -- always does well, provides cash and allows us to really return money to our shareholders. Keep moving. There we go.

On the slide here, we've tried to show where the bottom bars are our distributions to the shareholders. The 0.86 at the bottom is $860,000. That's quarterly. Dividends are coming back out to the shareholders. The cash, the red line is our cash on a quarterly basis. You can see it dropped, but it's dropped here at the end. We've used -- every time there's been a decrease, there's been some purpose for the decrease. It's been to make an acquisition or for some strategic purpose.

Back in 2014, we renegotiated our royalty agreement with TSRL. That has saved us about $900,000 to-date. And since we've done that pretax $900,000, it's been a good deal for us, and we just made our last payment in this last quarter on that. So we're now unencumbered on any debt on that. And when we've made major payments for the acquisitions, we got those marked here. So feeling really good going forward.

Walt, next one. Couple of key numbers. Again, cash is down since we -- the DILI acquisition occurred on June 1, so cash dropped on June 1 and 2 as we made those payments. But actually as you see on the prior slide where it's 6 -- well it's down at the bottom here, we're $6 million now. We did pick up some cash from -- in the acquisition. And so but we're still in a healthy cash position going forward. Current ratios are excellent. We have no real current liabilities, and equity is solid for the company going forward.

Next slide. Going back to Walt, who is handling the marketing and sales and, for John DiBella, who is actually traveling in Asia at a client site today, and could not make it. And also, I think Walt, I think you're handling Ted's slides today because I think he got caught in an airport with bad travel schedule.

Yes. Unfortunately, Ted was coming through Chicago going to Seattle on the trip, and his flight got delayed, so he was not able to get into Seattle in time to join the call. And he sends his regrets, and John DiBella, as John Kneisel has mentioned, is in Asia.

So from a Marketing and Sales standpoint, just to cover the breadth of technologies that we deal with, all the way from early drug discovery through preclinical and clinical and even postclinical trial, postpatent on into generic companies. Our software programs that are on the left-hand side here, ADMET Predictor, MedChem Studio, MedChem Designer. We call these cheminformatics programs. These deal with chemical structures like this, either individual structures or millions of structures potentially. Analyzing what those compounds would be like if we were to make them before they've ever been synthesized, or mining data that comes from, for example, high throughput screening, one of the features of MedChem Studio is data mining. Also designing these new molecules is another function of MedChem Studio as well as MedChem Designer.

On the right-hand side, GastroPlus, DDDPlus and MembranePlus. These are programs that are simulation programs. So we call these modeling programs on the left. Generally, those are based on static equations with no time dependency, although there is a miniature version of GastroPlus as one of the potential modules in ADMET Predictor.

On the right-hand side, these are all GastroPlus, DDDPlus, MembranePlus and DILIsym and NAFLDsym, which I will explain in a second. These are all differential equation-based, which means they are actually simulating things that are changing over time.

PKPLus has the ability to do both some static analysis and differential equation-based analysis. And KIWI is the data management, data integration program that is being used on the $5 million -- 5-year grant from a research foundation but also being used by a number of other organizations for data integration, data management and storage.

And then across the entire product line, we provide consulting services and collaborations all the way from early discovery, again, through preclinical, clinical trial data analysis, the toxicity analysis potential for DILIsym and the nonalcoholic fatty liver disease, NAFLD, simulation.

So just quickly DILIsym, D-I-L-I is drug-induced liver injury. This is dealing with the potential for a new drug or an existing drug to cause liver injury over some period of time. So here we have a known drug, and we're trying to find out if it is likely to cause liver injury in a significant number of subjects in the population.

NAFLDsym is the opposite. With NAFLDsym, we're not looking for the drug to cause an injury. We're looking to see if the drug can treat nonalcoholic fatty liver disease. And Brett Howell, our CEO -- or President rather of the DILIsym division is online. If I say anything wrong, jump in and correct me.

Okay. Next slide. Our software continuously is evolving. In any software company, once you put out a version, you're already working on the next version, and that's always the case here. If you're not working on an update, then probably the software product is slowly dying. All of our products are being upgraded. So we released version 9.5 in April of this year. We added the intramuscular dosing. This came out of the 3-year FDA contract, the long-acting injectable microspheres. This is an optional add-on module, so a separate revenue base. We've added new PBPK models for antibody-drug conjugates. This is also an optional add-on module.

ADMET Predictor. We're scheduling the next release, version 8.5, for the fall. We're -- this is used for rapid compound library screening in virtual humans and rats, and this is, again, an optional add-on module that's being added. And a synthetic feasibility assessment. So you can draw all kinds of molecules, but can you make them. And so synthetic feasibility says, if I look at a molecular structure, what's the challenge to make that? Is it likely to be easy to make? Or is it likely to be very difficult to make? And this will be an upgrade to our MedChem Studio module within ADMET Predictor.

DDDPlus. Version 6.0 in development, scheduled for fall release. This is, again, affected by the FDA grant on long-acting injectable microspheres. And so we've added capability to the model. The release of drug from the microspheres in an in vitro environment. And then we've also added some new precipitation assay and biphasic dissolution model. So some of our dissolution methods show 2 different phases of dissolution. Sometimes an initial burst followed by a longer-acting release after that, for example.

MembranePlus. Expect to release Version 2.0 later this month. We've added new models to look at data collected from hepatocyte studies. These are liver cells. This, again, is complementary to our RTP division there, in DILIsym. That may be useful to working with DILIsym. And this will expand the user base. And we also have improved the integration with the ADMET Predictor module. So we have an ADMET Predictor module where you can load in structures -- molecular structures directly into MembranePlus. Same thing's true with GastroPlus. And have it set up the database and do some analysis using predicted properties from our ADMET Predictor, even though the molecule has never been made.

PKPLus Version 2.0. Scheduled for the fall. This addresses several items reported -- actually requested from prospects and clients during testing, and we still have a number of evaluations ongoing at this time.

Sales revenue. You can see the number of software licenses sold per quarter is on a nice steady climb. Consolidated revenue up by 12.3% versus the previous third quarter. Software revenue up 5%, 93% renewal rate, 20% increase in license units, 10 new commercial companies and 10 new nonprofit groups. Continued expansion of licenses at the Chinese FDA.

So GastroPlus, in particular, is being used by regulatory agencies around the world. And that is something very important. A regulatory agency is using a piece of software. The companies that are submitting results or applications to those regulatory agencies want to know what the regulatory agencies will see. And so they want to have the software as well.

Consulting revenue, very nice increase in consulting revenue, up almost 34% in Buffalo, 43.5% in Lancaster during the last quarter.

You can see here, the sales breakdown on software licenses. About 58% of the revenues coming from renewal, about 11% from new, and then this is not just software, about 29% of the revenues coming from consulting and a couple of percent coming from training.

Similar trends for the 9 months. You can see, again, the progression, somewhat similar percentages here in terms of the breakdown between renewals, new software and consulting. Software revenue up 6.7%, 95% renewal rate based on fees, 88% based on accounts. The reason these 2 differ is because some of the accounts are very low-priced accounts, so government or academic licenses. And these are typically academic licenses that are used by graduate students. They finish their thesis and graduate, and the software doesn't get renewed, but there wasn't -- it didn't involve very much money, and so you see a very high renewal rate for the commercial licenses, and that's where, of course, the revenues really come from.

8% increase in license units in the first 3 quarters, 32 new commercial companies and 31 new nonprofit groups. Consulting revenue up 23%, almost 21% in Buffalo and almost 43% in Lancaster.

Then significant increase in training revenue. Training is very important to our sales process, and training is really the, I'd say, the foot in the door. When we can get industry scientists coming to our training sessions and they learn how to use the software, then they go back to their companies and request funding and, hopefully, get it.

Our revenue by region globally. You can see in the third quarter, a little over half in North America. Europe about 21%. Asia is coming up now, 26%, a trace in South America. Within Asia, Japan is the majority, but China and India now have begun to increase, and then Korea has now started. We signed dealer agreements in both India and Korea during the quarter.

For 9 months, the percentages are pretty similar. As you can see, not a lot of change so far. But Asia now, where a few years ago, Asia was maybe 15% or 20%, now they're up to about 27%.

Marketing activities. We did redesign the website last year, and we've added now a video. We've added video content, and we have a video newsletter -- I guess you might call it, format that's provided around the first of each month. This looks like a [fancy] studio with a couple of our presenters. This time around, it was Arlene and John DiBella. Sometimes it's John DiBella and Michael Lawless, and it's a back and forth between the 2 speakers on camera talking about what's coming up in the next month and what's the status of our marketing and sales activities.

So we're continuing to do that. We've increased our focus on the search engine optimization performance. So when you do a Google search or some other search on keywords, we want to make sure that we are up there at the top of the hits for those keywords.

Workshops and conferences. We've done PBPK or population PK data analysis workshops in San Diego, Germany, Shanghai and Buffalo. And we have workshops scheduled in Korea, Boston and Tokyo in the summer and fall. I think John DiBella is in Korea right now if I remember right. Hosted several on-site training for the individual companies. So this is separate from our training, where many companies come together in these workshops. We actually go on-site at individual companies and train as well.

We've attended 12 scientific conferences during the quarter and delivered 9 poster or podium presentations. We've had 2 webinars on GastroPlus modeling applications, and we continue with our very active social media campaigns. We use the social media, Twitter/LinkedIn/YouTube and those followers have increased 18% over the last year. The GastroPlus user group increased 13% versus the previous June.

Ted, again, his flight was delayed. And so he's in the air traveling between Chicago and Seattle. So I will go ahead and go through his slides.

We have Cindy Walawander, who's the Vice President at Cognigen and really functions as the one that runs the company when Ted's out of town, and from what he says also when he's in town. So if I say anything wrong, she'll jump in and correct what I say.

So in FY '17, Cognigen has been working with 26 companies on 39 different drugs and 65 total projects. 6 new companies have been added so far in fiscal 2017 in 36 new projects. 22 projects expanded scope, 3 reduced scope, and there are currently 32 outstanding proposals with 20 different companies. So Cognigen is just firing on all cylinders, and we're very proud of the work they're doing. They're doing a fantastic job over there.

In fiscal 2017, so far, they've presented 9 posters, published 2 peer-reviewed manuscripts, done 4 invited presentations, and 1 book chapter has been published. And right now, we're working on 21 additional publications and 5 conference abstracts or additional presentations at scientific meetings that are coming up.

The most common therapeutic area is oncology or cancer, followed by neurology, endocrinology and infectious disease. About 45% of the projects that Cognigen works on result directly in regulatory interaction. So the work that they do is very different than what we do in California or what is going on now in North Carolina in that they are dealing largely with clinical trial data analysis. So when there's a clinical trial going on and the data is being collected from the large cohort of subjects, they get that data, and they can be the first one to unblind that data and know whether that project or that clinical trial is going well or not. You can imagine how sensitive that information is.

So they have built a process and a hardware capability that is locked down very, very tightly. It's been audited probably on the order of 50 times in the last 10 or 12 years and never had a significant finding.

When I say audited, I don't mean financial, I mean, IT teams come in from the big drug companies to see what they're doing and how they're doing it. And it's a critical part to have that capability.

They've done a very good job recruiting and adding new scientists to maintain their growth. KIWI is their software that is dealing with the data integration and working with this major foundation. And that has been a continuing development, had additional staffing. There are 19 relicenses, so it's not just with the research foundation. It's other users as well. We have some other demonstrations ongoing with research groups ranging from academics to large pharma.

So in summary, Cognigen continues to grow. Consulting activities expanding very nicely on healthy pipeline of new projects, including collaborations with Lancaster, for PBPK modeling, a number of the Cognigen scientists are now quite expert in using GastroPlus for PBPK modeling. We're very excited about the collaboration opportunities with DILIsym and Cognigen because a lot of the analysis that's done can be in the later-stage clinical trials when a lot of money is being spent. And so the ability to identify potential issues with drug-induced liver injury is very important at those stages, of course.

The KIWI platform development is going -- ongoing, and there is a continued interest in both academic and industry for licensing KIWI.

And just a final summary slide before we go to questions. So third quarter, revenues up 12.2%, $6.75 million. Net income up just under 9%, a little over $2 million. The 9 months revenue is up 11.6% to just under $18 million. Net income up 11.4% to $4.64 million. Again, the net income for both the quarter and for the 9 months were affected -- were reduced as a result of expenses for the onetime charges for the DILIsym acquisition.

Diluted earnings per share up just under 10% for the 9 months. Both California and Buffalo divisions performing very well. We're very pleased with the efforts going on in both divisions. Now the DILIsym Services acquisition will expand the offering that we have into both drug-induced liver injury and nonalcoholic fatty liver disease. And the synergies that exist between the 3 divisions, I believe, are going to play together quite well. We're now in our first quarter with DILIsym included. And so June, July, August is our fourth fiscal quarter. And at the end of this quarter, you'll see the effect on revenues and earnings of adding the additional division.

We believe that the company as a whole continues to lead the trend towards greater use of modeling and simulation in research and development, not only in the pharmaceutical industry but also include cosmetics and agritech.

And with that, I'll turn it back to Renee, who will handle the questions.

The acquisition of DILIsym is of great interest out there. Howard Halpern has sent some questions. His first question is, prior to acquiring DILIsym, how many new scientists and support staff did you hire to support the increase in demand for consulting service projects? And how many new project requests are you currently seeing?

John K., you probably have a better headcount than I do, but I'm going to guess we've grown 10% to 15% in the last 9 months.

Yes. Well, in Lancaster, we've added 3 consulting type people here, 3 PhDs. And over in Buffalo, I think, they're up a net 5 people. Cindy would know the exact number because we've had a retirement or 2 through there, but I think they're up 5 people in the last 9 months over there because we're handling the major contract and looking for -- looking to expand to handle the work there.

Okay. And Howard's next question, where does DILIsym fit strategically? And what will the increase in staff enable you to accomplish productivity-wise going forward across all your consulting and simulation software platforms?

Okay. So DILIsym is involved in what's called QSP, or quantitative systems pharmacology. Some people refer to it in another term, and my mind just blanked. It's biological system simulation or something like that. I've forgotten the term. But basically, everything that we do other than DILIsym involves what's happening outside of cells, for the most part. We don't really deal in how proteins interact with each other inside of cells in very complex ways. Systems pharmacology deals with that. So this adds a whole new realm of science and capability.

The DILIsym Science Advisory Board is absolutely world class when it comes to drug-induced liver injury and disease of the liver. The person who runs the -- who chairs the DILI-sym, D-I-L-I-s-y-m, which is what the consortium or initiative is called, is Dr. Paul Watkins of University of North Carolina. Paul is a -- he's the man on the mountain when it comes to drug-induced liver injury. And he combined with the Science Advisory Board and the consortium, which consists right now of about a dozen companies, whose scientists -- also many are specialists in the drug-induced liver injury are guiding this development effort, give us a really unique capability. I don't know of any other capability in the world that has the sophistication and understanding of drug-induced liver injury of the DILIsym team and the consortium.

So it adds a new dimension where we're now dealing with very complex processes that go on inside of cells in -- particularly in the liver cells, and potentially, we'll be looking at some other tissues, probably the kidney is one that will be following on very shortly.

Okay. And Howard's next question concerns the new FDA Director. How do you see the new FDA Director impacting the future of simulation modeling since it appears he wants to accelerate the time line for generics and biosimilars coming to market?

Well, it's always good when the FDA wants to accelerate things because the highest leverage capability that I know of myself is modeling and simulation. When we can predict things well enough to avoid failing trials or to avoid unnecessary experiments that may be successful experiments, but we can show they're not necessary, then time and money is saved. And so having that attitude, the tone at the top, as we say, at the FDA, I hope it's going to pervade the industry. We certainly expect that modeling and simulation will be a key element in satisfying his desire to accelerate drug development and reduce cost.

Okay. And Howard's next question is how are sales into nonpharmaceutical markets tracking? And are they skewed to either software sales or consulting services?

Oh boy. I need John DiBella for that one, and he's in Korea. I don't know the answer to that. John K or anybody else, any idea?

Yes, I mean, looking at John's slides, Walt, I know we've got a lot of new commercial companies in. I mean if you go back to his slides, you can see them. But I can't -- I think most of the consulting services are going to the pharma companies from my reads of the contracts that I've seen.

Okay. And Howard's next question. I know in prior announcements that the acquisition of DILIsym would be accretive to the bottom line. I do have some modeling questions. Will revenue from DILIsym be broken out as coming from North Carolina division? Or will it be folded into Lancaster sales?

I think we'll continue to show each division's performance so that you'll be able to see that. As we reported earlier, DILIsym last year, calendar year 2016 was their fiscal year also. And during that fiscal year, it did just over $3 million in sales and netted about $720,000 in net earnings. Again, we expect to grow the company. They don't have quite the seasonality that we have in the West Coast, in particular, where software license renewals tend to fall in the same quarter that a company initially signed up in.

And so you see -- in the bar charts, you could see a pattern here. The fourth quarter, June, July, August, was always the lowest quarter. Even though the fourth quarter now is better than the third quarter, which has typically been our highest quarter, if you look at just 3 or 4 years ago, fourth quarter is now exceeding the third quarter used to be the record. So I think, DILIsym will be a little bit more linear. And again, we expect to grow the division.

That pretty much answers Howard's next question. He asked if there was any quarterly seasonality for DILIsym sales? And what could their contribution be in 4Q '17 based on historic numbers?

It's anybody's guess, but I just gave you the numbers for last year. So everybody's guess is about equal.

Okay. And Howard's next question is what are the approximate growth and operating margins for DILIsym? And are there synergies that you can leverage expenses?

I don't know those numbers. They're certainly not public at this point. We see synergies more, I would say, in the ability to comarket, to cross-sell. The customer base that we have between Buffalo and Lancaster is much larger than the customer base in RTP, and so we definitely plan to be introducing and already have begun to introduce DILIsym to our other customers, and we've had conference calls and things like that to begin to try to expand the market for DILIsym.

Okay, Walt. The next questions are from Walter Ramsley. He asked if we could please describe DILIsym's business model. Also, how does the group of 17 companies work? How large is the backlog? And what is the revenue run rate?

Okay. Well, 17 companies is the number that have been participating at one time or another. There are 12 right now, if I remember the number correctly. It is a consortium model. So consortium dues are low 6-figure dues. As part of that -- the dues, they are able to use the software. And so they get access to the software. They also get reduced consulting rates. Overall, the consortium dues run -- I'm just going to ballpark it very roughly. About 1/3 of the total revenues ballpark-ish and the rest is consulting. Consulting is done in the companies who are not part of the consortium. They do not get the software, but the DILIsym team uses the software in performing the studies for them.

And that includes the nonalcoholic fatty liver disease simulation software as well. That software is tailored more per customer where DILIsym itself as a software product is more of what we might think as a shrink-wrapped product. It's a product that you develop the software, you send it out to all the consortium members, and they all get the same copy. For the nonalcoholic fatty liver disease, the software has to be tailored for the specific interests of the customer. And so it's not as amenable to a consortium effort, for example, as the DILIsym. I think that pretty well answers the question.

And Walter Ramsley's next question is has the competition undercut the PKPLus launch either with performance upgrades or more attractive pricing? If not, what's holding up the sales acceleration?

Well, what's holding us up is, as I mentioned, when we took the software out almost a year ago for evaluation, the feedback we got was, wow, this is pretty slick, but can you make it do this and that? And it's been far more difficult to make it do this and that, but that's what we've been doing. It's coming along. It's come quite far from what it was, say, a year ago. I think, it was a year ago, September or August when we released Version 1. So we have been working very hard to try to wrap that up and be able to put out Version 2 with all the new requests that we got from different folks around the world doing evaluations.

Okay. And Walter Ramsley asks what was the tax rate on DILIsym's 2016 income.

It's not public, and I wouldn't even know what it is. John?

You know, what, Walt, those numbers will come out relatively soon when we do the 8-K/A. So I'll let that come out when it comes out here this next month.

Thank you, John.

That appears to be the last of the written questions that I see.

Okay, well, we finished up right on the hour. I'll turn it back to Renee to wrap it up.

Thank you so much, Walt. It was great having you run the call today. With that, we've concluded today's conference call. If you missed any part of today's presentations, the replay will be available at our website, www.simulations-plus.com. Thank you all for joining us today. And may you all have a wonderful summer.