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Edited Transcript of SLP earnings conference call or presentation 10-Jul-18 8:15pm GMT

Q3 2018 Simulations Plus Inc Earnings Call

LANCASTER Jul 17, 2018 (Thomson StreetEvents) -- Edited Transcript of Simulations Plus Inc earnings conference call or presentation Tuesday, July 10, 2018 at 8:15:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brett A. Howell

Simulations Plus, Inc. - President of DILIsym Services, Inc

* Cameron Donahue

Hayden IR, LLC - Regional VP and Partner

* Cynthia Walawander

Simulations Plus, Inc. - VP, Operators

* John R. Kneisel

Simulations Plus, Inc. - CFO

* Shawn M. O'Connor

Simulations Plus, Inc. - CEO

* Walter S. Woltosz

Simulations Plus, Inc. - Co-Founder, Chairman & Advisor

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Presentation

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Cameron Donahue, Hayden IR, LLC - Regional VP and Partner [1]

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Good afternoon. It's Tuesday, July 10, 2018, so on behalf of Simulations Plus, I welcome you to our third quarter fiscal year 2018 financial results conference call and webinar. Presenting this afternoon will be Chairman of the Board, Walt Woltosz; Chief Financial Officer, John Kneisel; and President of DILIsym Services division, Brett Howell; and we'll also be joined by our new Chief Executive Officer, Shawn O'Connor. (Operator Instructions) This call is being recorded for playback at our website, simulations-plus.com.

Before we get started with the presentations, we'll begin by reading the safe harbor statement. With the exception of historical information, the matters discussed in this presentation are forward-looking statements that involve a number of risks and uncertainties. The actual results of the company could differ significantly from those statements. Factors that can 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.

Now, it's my pleasure to introduce Walt Woltosz, Chairman of Simulations Plus. Walt?

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Walter S. Woltosz, Simulations Plus, Inc. - Co-Founder, Chairman & Advisor [2]

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Thank you, Cameron, and thanks, everyone, who joined the call today. This was another strong quarter for Simulations Plus. We've had 26.7% revenue growth compared to last year's third quarter and a 15.7% improvement to our net income. We continue to benefit from outsourcing trends in the industries we serve, and our 3 divisions are working well together.

More importantly, though, just after the conclusion of the quarter, we made a milestone announcement, naming Shawn O'Connor as our new Chief Executive Officer effective June 25. Shawn becomes only the second CEO in our history. As most of you know, I have been reducing my time allocation to Simulations Plus for about 4 years and with it my compensation, initially starting with our acquisition of Cognigen division in 2014. I have been asked about our succession plan a number of times. It's been a topic of increased importance and in my opinion and in the unanimous opinion of Board of Directors, the nominating committee has emphatically answered this question with this announcement.

Shawn is a proven executive. He brings more than 3 decades of experience in the pharmaceutical software industry to Simulations Plus, including as both a public company CEO and CFO. He joins us from Entelos, a provider of unique quantitative systems pharmacology, or QSP, modeling and simulation software, similar to the genre with our DILIsym division works in and services to the pharmaceutical drug development market, where as President, CEO and a Director, he designed and executed an asset repurchase strategy to secure intellectual property and other assets, recruited and directed a new management team, established a new strategic direction and secured financing.

Prior to Entelos, Shawn served as Chairman, President and Chief Executive Officer of Pharsight Corporation, a developer and marketer of software products and services that help pharmaceutical and biotech companies improve their decision-making in drug development and commercialization.

Shawn joined Pharsight at a challenging time, when the stock had just been delisted and the company was contemplating an offer to be acquired for $0.10 a share. The board decided not to accept the offer and then named Shawn as CEO. Shawn oversaw the development of a software product strategy, resulting in significant revenue, gross profit and cash flow improvements, which resulted in about a 20x increase in valuation, with the valuation rising from $3.2 million just before Shawn was named CEO to approximately $60 million.

Shawn also served as CFO of Diasonics Inc., demonstrating his financial expertise. Each of these companies operate in a similar product and market space as Simulations Plus. Accordingly, I'm confident in his unique qualifications to lead the company toward further growth and profitability.

As for my role, I will remain engaged with the company to assist Shawn during the transition as an employee through August 31, and thereafter as an Outside Director and Chairman of the Board. Although I cannot be considered an Independent Director for 3 years with the NASDAQ rule, I would still be an Outside Director and after 3 years, I will be an Independent Director.

I will also assist with special projects, such as working to further monetize our nearly 20-year investment in artificial intelligence in new industries. While I expect this will be the last time I join one of these conference calls like other board members, my involvement with the company I founded continues. I'm not going to turn my back on my 5.5 million shares for sure. I'm confident that we are in good hands going forward.

I'd now like to turn the call over to Shawn so he can introduce himself to our shareholders. Shawn?

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Shawn M. O'Connor, Simulations Plus, Inc. - CEO [3]

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Thank you, Walt. It's an honor to be with all of you today, and I appreciate those kind words. I am excited to assume the challenging position, and I believe Simulations Plus is very well positioned for future success. Under Walt's leadership, Simulations Plus has built an impeccable reputation for quality and innovation, delivering proven software solutions for drug discovery and development as well as consulting services for the clinical pharmacology. I believe the opportunity that lies ahead for Simulations Plus is enormous and I'm honored and eager to be leading the company the way forward.

I've devoted the last 15 years of my career to the development of in silico modeling for use in drug development in personalized medicine applications that impacts patient outcomes positively and reduce health care costs. (technical difficulty) benefits of this approach and I've never been more optimistic that the industry will increase its adoption of modeling tools to improve outcomes and reduce costs.

Walt discussed most of my career achievements. In addition, I spent approximately 6 years with QRS Corporation. I was initially hired in 1995 as CFO and was promoted to CFO and COO in 1997. I was then tasked with identifying a replacement CFO, who joined in 1998, leading to my title being changed to President and COO. In September of 2000, I resigned as President and COO, but remained as a consultant for the company for approximately 1 year.

I was also a founder of Aisle411 with 3 other partners. There were 2 different companies with similar names founded at approximately the same time, and ultimately, we changed our name to TradePoint Solutions when we completed our initial funding. I remained on the advisory board with TradePoint until I joined Pharsight. In 2006, TradePoint was acquired by DemandTec, who shortly thereafter went -- completed an IPO in 2007, and then was subsequently acquired by IBM. The original product services initially developed beginning with Aisle411 continue to be offered to the grocery industry, retail segments by IBM today.

Over the next few weeks, I look forward to meeting with the entire Simulations Plus team in all 3 operating locations. I am impressed with the management team in place and the skilled and committed team at Simulations Plus and look forward to leading them to new successes in the future. I appreciate Walt's support through the transition and his carrying the load on this, his last earnings conference call.

I will no doubt be speaking with many of you who follow the company closely in the coming months and look forward to our year-end earnings conference call to communicate our full year results and more with regard to my view of the company going forward.

With that, I'll now turn the call back to Walt to continue the discussion. Walt?

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Walter S. Woltosz, Simulations Plus, Inc. - Co-Founder, Chairman & Advisor [4]

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Thank you, Shawn. Next slide, please. So I'll give you a quick overview and then I'll turn it over to John Kneisel for more detail from our CFO.

So third quarter, a nice -- very nice quarter. Revenues up $1.8 million or 26.7% to a total of $8.6 million. Income from operations up 10.4%, $323,000 to $3.4 million. Our net income up 15.7%, $327,000 to $2.4 million. Our diluted earnings per share increased to $0.13, up $0.01. Our software renewal rates continue to be very nice, 90% based on number of accounts and 97% based on the actual fees received. We added 20 new software clients during the third quarter.

For the first 9 months, revenues were up 28.6% to $23.0 million, up $5.1 million. Our income from operations up $1.6 million or 23.2% to $8.4 million. Net income up $3 million or 63.8% to $7.6 million. That includes the onetime noncash $1.5 million deferred tax adjustment that was booked in the second quarter. It still would have been up $1.5 million or some 37% even without that. Diluted earnings per share increased to $0.43 a share, up $0.16, and software renewal rates 87% based on accounts and 93% based on fees received. And we added 56 new software clients during the first 9 months. Also our consulting pipeline resulted in a significant increase in revenues and consulting continues to grow.

Next slide, please. So now I'll turn it over to John Kneisel, our Chief Financial Officer, for a little more detail on the financials. John?

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John R. Kneisel, Simulations Plus, Inc. - CFO [5]

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All right, thanks, Walt, and thanks, Shawn. I'll go to the first slide. These things will cover the first quarter -- this last quarter. The -- our consolidated net revenues were up 26.7%, like Walt said, about $1.8 million to $8.6 million for the third quarter compared to last year. Lancaster was up $706,000, about 14%, had a good growth this quarter. Buffalo was up $141,000, about an 8% increase. And DILIsym was about $1 million, $957,000 actually, and this was the end of their first year with us, and so it's been a good year for them. Consolidated software and software-related sales are up $830,000, about 17.4%, and analytical study revenues are up $974,000 or 49%.

Moving on to cost of revenues. We are up about $578,000. Labor increases account for most of that. It's a combination of increased labor count, salaries and bonuses that were occurring as we're going along, including $167,000 of that expense coming from DILIsym, being their first time with us in this quarter.

Other significant increases are also contract costs that we're incurring for testing at that division. Those costs come in on certain contracts, so they'll -- they pop in from some quarters, some quarters we don't have much in way of those costs, this quarter there were. We're also seeing an increase in our software amortization in this quarter as well as amortization expense associated with the technologies that we acquired during the acquisition last year. Our cost of revenues as a percentage of revenue increased by about 2 -- a little over 2% this quarter in comparison to the prior year. And most of that comes from the higher salaries and direct costs of the contract studies.

Our gross profit increased about $1.2 million overall, by about 23%, and $600,000 of that came from California, which showed the biggest increase in the divisions. Our overall gross margin as a percentage was 76.4% and that's down from 78.6%, but that's mainly from the blending of adding a little more consulting services in comparison to the software services that we are -- predominate in the Lancaster division.

SG&A expenses increased $649,000 for the quarter, and as a percentage of revenue, they were up just about 1% to 1.4% over the prior year. Again, most of that's in labor-related costs, as we've had some increases in labor and headcount in Lancaster and Buffalo and also for sign costs at DILI for the first quarter after the acquisition. We actually had some professional and accounting cost increases of $77,000 this quarter in comparison to last year, for more internal tax and compliance costs which start a little later in the fiscal year in comparison to last year. And those we did see an offset in legal costs due to less acquisition-related activities in this period of time.

Our research and development costs increased $522,000 this year in comparison to last year. Those costs -- we incurred $993,000 in R&D this quarter. Of that, $485,000 was capitalized and 580 -- $508,000 was expensed. So our total cost was up $522,000 over the prior year. In the prior year, 343 -- $344,000 was capitalized and $254,000 was expensed. We saw the expensable portion of our R&D a little bit higher this year, as we have some -- a couple of projects that are in their expensable phase, especially in our North Carolina division, got a couple of projects that had finished off and released and now we're in our development phase there, a couple of new products and updates.

Overall income from operations was up $323,000 in this year compared to last year. Our provision for income taxes, which actually doesn't have a line item on this slide, we saw a drop in our tax rates due to the new tax rates enacted in January. So our provision for income taxes was $991,000 compared to $1 million last year, and that gave us a 29.1% effective rate, which was lower than the 32% that we had last year at that time. That came from the tax rate decrease even though -- and that comes really from a blending of how we do the calculation. And we actually had a little bit lower effect of our tax credits on higher income this year, which is pushing our rate a little bit higher than originally anticipated.

Our net income increased by 321 -- $327,000 or 15.7% this quarter in comparison to last year. EPS is up to $0.13 from $0.12 last year. It shows as $0on 02 from the slide, the prior summary showed as $0.01. It's actually $0.016 if we get to the detail of it, so it rounds up to $0.02 on this formatted slide. EBITDA, it is up 13.5%, a little over $4 million for this quarter.

Moving on to the 9 months slide. Consolidated net revenues increased 28.6% or $5 million to 20 -- just under $23 million for the first 9 months of the year. That was a 12% increase at Lancaster, a 10% increase in Buffalo and just $3 million in revenues in North Carolina. So our software and software-related revenues were up 13% and our study revenues were up 59% overall.

Cost of revenues were up $1.6 million. Again, about half of that was labor-related costs, around $800,000-some, a combination of increased labor counts, including $288,000 of salary expense in North Carolina. The other increases were in software amortization of $88,000 and then 400 -- the other major portions, $460,000 of direct contract costs for testing in North Carolina. As a percentage, cost of revenue increased 0.6% overall from year-to-year.

Our consolidated gross profit is up $3.6 million from the prior year. And overall, the gross margin actually has decreased about $1.4 million and that's just the blending of the new consulting revenue and for the divisions as we move forward.

General and administration increased $1.6 million, but as a percentage of revenues, the SG&A's remained fairly stable. It's at 32% versus 32.3% the prior year. Big increases in SG&A came in commission expense for increased international sales, that was up about $141,000. Marketing expense was up about $174,000, that's mostly trade shows and conference attendance. And then, we have -- like I said, we have a larger increase in salaries and G&A related is $400,000-some in combination of increased stock compensation cost, first time salaries of about $197,000 at DILIsym and all the attendant health care costs and payroll taxes that go with those higher salaries.

Our professional and accounting was up about $100,000 in this period over the prior year, and that was offset by legal decrease of about $228,000. One other major increase in SG&A is amortization expense of $158,000 and that is on the newly acquired amortization on the intangibles from the acquisition that we did with North Carolina.

Total research and development costs for the year, we incurred an additional $1.1 million in this 9-month period in comparison to last year. And of that, we -- of that amount, it was about $3 million and $1.6 million was capitalized as software development and about $1.4 million was expensed.

Consolidated net income from operations was up $1.6 million, about 23% over the prior year. And of that, $607,000 was from North Carolina. Lancaster was up about 14.5% and Buffalo was up 13%. Inside our other income is a imputed interest on the debt. The market value of future payments, I sort of call it debt, but it's future payments for the acquisition that's being applied. It's not cash yet until we pay it out that is what that $100,000 of other expense is in there.

Income before taxes was up $1 million -- $1.5 million or 21% -- 21.4%. The provision for income taxes was $700,000 so far this year compared to $1.2 million last year. The difference basically being that $1.5 million that we posted as a benefit in the second quarter. Our overall effective rate for the 9 months was about 8.5%, compared to 32% last year. Again, we talked about it last period with the tax benefit coming through and that rate will still -- that will come up a little bit from there before the end of the year. Going into 2019, we should see tax rates -- overall tax rates somewhere in the low-20s percent as income increases the effect of our permanent differences for R&D tax credits is starting to be lower as a total as a percentage, but we still should see low-20s as a rate.

Net income for the year, it has increased by $2.96 million or $3 million. Of which, $1.5 million of that increase was the onetime effect of the tax change. Earnings per share, $0.43 compared to $0.27 the prior year, an increase of $0.16 and $0.08 of that is related to the tax benefit that we posted. Looking at EBITDA, we reached a $10 million EBITDA number through the 9 months, end of the third quarter.

And we can move on to the other slides. The first slide here just shows the growth you can see, where we -- each one of the last bars here, we actually saw an increase both from our acquisition, the jump that came from that along with what is ultimately some just core growth from the other divisions really shows the increase with 2 of them combined.

Moving on. Consolidated income by quarter. Still -- we still have a little bit of seasonality in our income. The third quarter has always been a good income quarter for us and -- but still moving upward trends throughout each of these periods.

Next slide. This next slide shows our net income. You can see in the second quarter, where we had the additional $1.5 million, we sort of shaded that in to show the benefit of that. The dark purple lines being what it would be without it. So it doesn't -- you can see where the -- it's not so skewed as we move forward. So relatively consistent growth each quarter as we've -- going back around 3, 4 years.

Next slide. And as expected, EPS will track with the income on it. So we've shown the tax benefit pulled out also in the last quarter on this slide too. Next one. EBITDA, a little bit more stable looking, but it continues its growth producing the cash for the company and with which we can reinvest for future growth also.

Next slide, please. This slide goes back over about 4 years now, showing the blue bar down below, the consistent dividend payouts last -- beginning of this fiscal year, the board added $0.01 per share to the dividend. With that, we've still maintained our cash assets throughout this time to allow us to put money into new potential investments, pay out the acquisition money and return money to the shareholders at the same time as we go forward.

Next slide. A few statistics to go. You can see it actually on the current liabilities slide. You can see from the end of the year, we jumped up total current liabilities. That increase is really just the acquisition-related liabilities for payouts. There will be about $2.5 million paid out over the next 6 months or so for the acquisition. And that's what caused that increase over the August period last year. Outside of that, everything else is relatively stable cash-wise. Equity, healthy equity for a company our size and nature of our business.

Moving forward, Walt. Back to you, Walt, to go over the division with John off in Korea, I believe, right now.

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Walter S. Woltosz, Simulations Plus, Inc. - Co-Founder, Chairman & Advisor [6]

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Okay, thank you, John. And as you mentioned, John DiBella is in Korea doing training workshops, so it fell to me. I wouldn't expect Shawn to take over this just yet, having only been on the job for a couple of weeks. So I volunteered to do this.

So software product-wise, Lancaster division, we released version 9.6 GastroPlus in May. This enhanced couple of add-on modules for special populations physiologies and improvements to all of our mechanistic absorption models, oral, ocular, dermal and so on, formal drip. ADMET Predictor, we released Version 9 in June 2018. Both of these were many, many months in the works, significant improvements, a lot of testing. Our Q&A -- our QA testing has become quite extensive for all the different versions of operating systems and languages, German, Japanese, French, and so on. And so every time we change anything, we've got quite a bit of testing to do and these finally made it through the gauntlet and have been released.

We expect to release Version 6 of DDDPlus this summer. And here we will be releasing the long-acting injectable microsphere model where these are typically injected into muscle. So this added our intramuscular capability and GastroPlus actually as part of the changes there. And this was all funded from one of our FDA-funded grants. And this will expand our user base, we believe. Also adds new precipitation assay in 2 phase -- biphasic dissolution models.

MembranePlus, we released version 2 in September 2017, a very stable product at this point. We do have some new models that were released back then that allows us to test -- to simulate testing in liver cells or hepatocytes and also improved our integration with the ADMET Predictor module, so that we can use predicted properties of certain molecules when they haven't all been measured to run the MembranePlus software.

Version 2 of PKPLus released in January. We added quite a few capabilities to that as a result of the feedback that we received from version 1. And I wish John DiBella was on the call so that I could ask him how the evaluations are going. I know there were quite a number of companies evaluating PKPLus at the last time that I had asked about that.

Next slide, please. For the Lancaster division, revenue up 14.3% over last year's third quarter. Software license units up. We've got software renewal rate of 90%, based on accounts, 97% based on fees, a 14% increase in the number of license units, 11 new commercial companies. Again, continued penetration in generic and also in some nonpharma markets such as chemicals and consumer goods and 9 new nonprofit groups added.

Consulting and training revenue up 38%. Consulting is just growing quite fast. I think the demand in the industry outstrips the industry's capability of getting the software in on their own and using it. And so until we can get folks and some of our newer customers trained and up to speed, then they pay us to do more. So we've got projects with 21 companies and 2 of our FDA-funded collaborations ongoing during this past quarter.

Next slide. And for 9 months, revenues up a little over 12% versus last year's first 9 months for the Lancaster division. Software revenue up 8%. Consulting and training up 63%. Then you can see a similar trend in terms of license units and fees and a number of new commercial companies and new nonprofit groups.

Next slide, please. Globally, we are a global company. The distribution, in terms of percentages stays relatively constant with North America, of course, dominating about 43% of revenues, about 29% in Europe, about 27% in Asia, with Japan being the dominant part, but very quickly growing markets in India and China and now -- I mentioned John DiBella is in Korea right now. Korea is starting to come on as well.

Next slide, please. Our marketing activities. We've worked a lot on the website, particularly on the content and production of video content for promoting and branding purposes. We have increased our focus on the search engine optimization, SEO performance. So when you Google something, we want you to see our name coming up on the first page.

Continued migration of content from different division sites, so from the Buffalo site and the North Carolina site to the main Simulations Plus domain so that people can come in through 1 entry point and get to whichever technology or service they're looking for.

Workshops and conferences. We continue to do many of these PBPK workshops we held in San Diego, Frankfurt and Shanghai during the third quarter. We hosted 7 on-site trainings at individual companies during the third quarter. And we attended 16 scientific conferences and workshops and delivered 16 poster or podium presentations.

Our strategic digital marketing initiatives. We hosted 3 webinars, a lot of them simulation applications. And we continued with our very active social media campaigns on Twitter, LinkedIn, YouTube; followers have increased 22% over the last year. And our GastroPlus group membership increased 6% over the last year.

And Ted is in -- I believe he is in Seattle, working with our large foundation there on a $5 million 5-year grant project. So I will also review Cognigen. We also have Cindy Walawander, our Vice President of Cognigen online, who hopefully can help me with any questions that may come up that I need to help with. And so Cognigen pharmacometric services, had relationships in the fiscal year so far with 26 companies, 43 different drugs and 72 different projects across those drugs. And 3 new companies, 34 new projects, 27 projects expanded scope, 4 projects reduced scope. And these happen in clinical trial sometimes that are not what you hope for and then you don't need so much analysis.

41 outstanding proposals right now with 28 different companies, so the pipeline is very full. In 2018, so far, we've presented 15 posters and 6 peer-reviewed publications and are currently working on 15 publications and 4 conference abstracts. So very active on the publication side. The most common therapeutic area for Cognigen is oncology, followed by neurology, endocrinology and infectious disease. About 45% of the projects that we work on result directly in regulatory interaction.

So a quick summary, we've increased our marketing sales activities and publications. We continue our recruitment of new scientific talent to satisfy the demand for our pharmacometric services, which, again, continues to expand. We've got a healthy pipeline of new projects, including global health initiative projects.

We are bridging global regularly filings. So we're not just dealing with the FDA. We are dealing with the other regulatory agencies around the world through our customers. Embedded client partner opportunities for first-in-human to commercialization of new medicines. So when a company first comes out of preclinical work and they're going to go into human, they've got a big question mark, just how much should we dose humans for the first time since we know that animal pharmacokinetics don't always translate perfectly to human. So that is a big part of what we offer, support there. And then finally, all of the efforts through Phase II, Phase III and commercialization.

Cognigen is also recognized and then supportive of cross-selling opportunities with both the Lancaster division that we call Simulations Plus and DILIsym in North Carolina. So we are creating broader-spectrum business models with clients and expanding the synergies that we have among company scientists.

The KIWI platform, which is a communication platform, a data integration and management platform, the design and development of that is accelerating under the 5-year, $5 million contract with the research foundation up in Washington State.

And with that, I'll turn it over to Brett Howell, President of DILIsym Services. Brett?

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Brett A. Howell, Simulations Plus, Inc. - President of DILIsym Services, Inc [7]

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All right, thank you, Walt. So I'm going to give a little bit of background information reflecting the quarter that we just closed and John Kneisel discussed earlier. Just for a reminder for those of you who aren't familiar with DILIsym Services and our division, we do detailed, or more mechanistic we'll call it, modeling and simulation in the area of both pharmacodynamics or the efficacy of drugs and also in area of toxicology or the safety of drugs.

We used 2 primary platforms right now, NAFLDsym and DILIsym. DILIsym focuses on drug-induced liver injury and NAFLDsym focuses on the treatment of nonalcoholic fatty liver disease, or NASH, nonalcoholic steatohepatitis. So these are our 2 primary areas of focus currently in terms of building products and using those products for consulting. Along with the DILIsym work comes from in vitro assay design and outsourcing, as John alluded to prior in the financial discussion. In addition, I'll talk about a third product that we envision briefly here today.

In terms of our fiscal Q3 sales review, some quick highlights. The breakdown shown on the left shows was about 60% coming from the DILIsym consulting, about 1/4 of it coming from NAFLDsym consulting and then the remainder or 15% or so coming from licensing DILIsym software.

We've got 13 projects active during that period we earned revenue on. We have a good reason to believe that the pipeline is solid, and that the DILIsym consulting projects are looking good for the future in terms of projects lined up currently in various stages, whether it be working towards signature or starting a proposal and filling it out. So we've gotten good leads there.

On the NAFLDsym side, we continue to work on a few larger projects, 1 primary project that focuses on expanding the capabilities of the software, which is very important for us to be able to cover the various most important areas of the disease. So once we complete that towards the end of this year, this calendar year, NAFLDsym will be equipped to do even more in the area of evaluating targets and compounds.

And on the consortium or DILIsym software licensing front, we have 9 active licenses, we have some leads for additional ones, and we also are working towards integration with GastroPlus so that we can expand our user base as well. And the news that we announced this quarter in that regard regarding the DILIsym software licensing is that the FDA has now acquired licenses and we put out a press release on that a while back during this quarter.

Next slide, please. In terms of product news, DILIsym, we continue to move forward with the existing code base and adding new features and capabilities. Largely that is determined by the consortium members that we have in the DILIsym initiative who license the software, but they also get an opportunity to vote and currently, we have the voting ballot outstanding, waiting on it to be returned from the companies in the consortium. So they will help determine what goes into the next version of the software.

In parallel, we have a large refactoring or recording effort in progress to redesign the software to be much more nimble, much more modern, quicker, in terms of computation resources, but also very synergistic with GastroPlus and ADMET Predictor.

On the NAFLDsym side, the specific areas where we're doing a lot of work now is in fibrosis and inflammation. And as I mentioned, we're getting near the end of that large building phase. And then the area that I mentioned for the potential for new product is in the area of drug-induced kidney injury. We are awaiting a final funding decision on a potentially large grant to help us develop that product. So we don't have the information yet on whether that will get funded or not.

Next slide. In terms of marketing, we had a good quarter. We were able to sponsor the nonalcoholic steatohepatitis or NASH Summit in Boston in April. We were one of the key sponsors. That generated a lot of interest, we had a very large number of companies there from large to small pharma, who now are potential clients of ours in the area of NAFLD and NASH.

We've submitted abstracts along with the other divisions to multiple meetings in the fall coming up, so we look forward to having an opportunity to co-exhibit with our colleagues in Buffalo and Lancaster. And we have 2 training workshops that are offered in the fall as well, both to our consortium members, but also to nonmembers and academic and regulatory individuals.

So next slide please. So just to summarize, we have a lot of R&D going on. We're developing what we think are going to be great products for the future and updating the current ones, and we're also enjoying the process of working with our colleagues in the other divisions and now that we've been involved or part of the larger group for 3 quarters, that is becoming more and more common.

So with that, I'll turn it back over.

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Questions and Answers

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Cameron Donahue, Hayden IR, LLC - Regional VP and Partner [1]

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Thank you, we are going to the question-and-answer session now. (Operator Instructions) We'll start off with a few of the written questions from Howard Halpern with Taglich Brothers.

First question. Mr. O'Connor, let me congratulate you on your appointment as CEO. What drew you to SLP?

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Shawn M. O'Connor, Simulations Plus, Inc. - CEO [2]

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Okay. This is Shawn O'Connor. Howard, thanks for the question. Well, it's interesting, my visibility to the company has not been a short time frame. Followed the company for many years now, I believe it's close to 10 years that Walter and I have known each other. But from a vantage point, both at Entelos as well as at Pharsight, we have operated in a similar space. Not significant in terms of direct competition over the years, relatively complementary. But I've known the company for a long time. I guess, there is both sides of the business in terms of its software products as well as its service capabilities have always impressed me. The installed base with custom-based software it sits in. It's large, healthy, and quite frankly, quite happy with the functionality that Simulations Plus provides to them. And that provides a tremendous foundation upon which to grow the business over the years in terms of expanding services, the functionality of our software that we can deliver to those clients. Always easier to sell more to a happy customer than to go out and acquire a new customer. Both are required, but that installed base is a tremendous asset for a company like Simulations Plus.

On the service side of the business, the company has a wealth of scientific capability, knowledge and skill set that shows up both in the software functionality and new releases that are periodically delivered on a very consistent and frequent basis compared to many other companies out there. But also in terms of the direct services that we provide to our clients through projects, assisting them, accelerating, providing them increased speed in addressing their needs as they work a molecule through the drug development cycle. So both the software and the service side of the business is a tremendous asset that from my vantage point coming in, provides me a good foundation to help lead the team that is here forward in growing the business.

And that growth comes both inorganically as well as organically. Opportunities exist to extend the footprint of our software products through internal development. And the company in its recent years has demonstrated its ability to as well add to its growth with organic opportunities -- inorganic opportunities, I should say, in the acquisition and bringing companies into the fold and successfully integrating them and moving forward without hiccup. That isn't always easy and the company has done a relatively good job in that regard, setting itself up to continue growing the company in that fashion as well. So all of these positives add up to something that I viewed as a good match for my skill set, my background, my experience along with the company. And I guess the only downside is that Walt will play a lesser role, but I'm thankful he'll be involved on the board assisting us as we move forward as well. Hope that answers your questions, Howard.

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Cameron Donahue, Hayden IR, LLC - Regional VP and Partner [3]

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Great. Next question also from Howard is what type of traction are your simulation software products seeing in Korea and India?

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Walter S. Woltosz, Simulations Plus, Inc. - Co-Founder, Chairman & Advisor [4]

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Okay. I'll take that one. John DiBella is really the person to give you the most insightful answer to that, but Renee, can you go back to Slide 20, please? Thank you. So as you can see, the Asia 27%, India is now 20% of that 27% and China is 16% of that 27%. A few years ago, Japan was pretty well the only thing going there. Japan has been a great market for us, continues to sustain and grow. But the untapped potential in India and China has been realized over the last few years. And I know John DiBella has spent a significant number of trips over there in support of the dealers. So we now have dealers in all 4 of those countries that are helping us to reach the markets there.

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Cameron Donahue, Hayden IR, LLC - Regional VP and Partner [5]

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Great. Next question is, where does your penetration into nonpharmaceutical customers stand? And how do you anticipate future growth in that space?

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Walter S. Woltosz, Simulations Plus, Inc. - Co-Founder, Chairman & Advisor [6]

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I'll take a cut at that. John Kneisel may be able to help me because he sees where the checks come in from sometimes. And so we have sold to cosmetics, we have sold to food companies and general chemical companies, agrotech companies. I cannot give you percentages or dollar amounts. I just don't have those in my head. John K, do you have any more information on that?

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John R. Kneisel, Simulations Plus, Inc. - CFO [7]

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I can't be too precise as to percentages right now, Walt, but John has seen some recent good activity in that area for himself. That's what he mentioned in some of the slides here this time. So just leave it at that for now without going too granular.

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Cameron Donahue, Hayden IR, LLC - Regional VP and Partner [8]

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Okay, right. Moving on to additional question from Howard, what is the sales pipeline -- what does the sales pipeline look like for PKPLus? And when might a ramp in orders occur?

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Walter S. Woltosz, Simulations Plus, Inc. - Co-Founder, Chairman & Advisor [9]

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Oh boy, that's another John DiBella question. We should have woken him up at 4:00 in the morning in Korea to be on this call. I don't know the answer to that. John K, do you have any information?

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John R. Kneisel, Simulations Plus, Inc. - CFO [10]

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Not that I think I can share right now, Walt. I'd rather relate that and deal with that on the next call with John, I think.

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Cameron Donahue, Hayden IR, LLC - Regional VP and Partner [11]

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Okay. Next question, what is the long-term goal for KIWI and could it eventually become an industry standard?

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Walter S. Woltosz, Simulations Plus, Inc. - Co-Founder, Chairman & Advisor [12]

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Cindy, you want to take a crack at that one?

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Cynthia Walawander, Simulations Plus, Inc. - VP, Operators [13]

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Yes, absolutely. This is Cindy Walawander. I'd be happy to answer it. We're actually in the beginning of the third year of a 5-year contract to develop KIWI. And we are on track with that contract, hoping to expand it. And we're also on track for being the M&S -- the modeling and simulation platform for communication of pharmacometric results, and collaboration among drug companies that are using our model-informed approach to their drug development programs. We're continuing to have an interest in KIWI. For licensing, we are expanding into academic departments, and we do anticipate an increase in sales as the foundation of our platform continues to be solidified.

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Walter S. Woltosz, Simulations Plus, Inc. - Co-Founder, Chairman & Advisor [14]

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Great. Thank you.

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Cameron Donahue, Hayden IR, LLC - Regional VP and Partner [15]

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Thank you. The next question, how many outgoing consulting proposals are outstanding for the Lancaster, California, division as you enter the fourth quarter of 2018?

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Walter S. Woltosz, Simulations Plus, Inc. - Co-Founder, Chairman & Advisor [16]

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I have no idea. John K, do you?

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John R. Kneisel, Simulations Plus, Inc. - CFO [17]

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I don't know what the actual number of outstanding proposals are. John has several going, but they -- usually closes and then they become projects as they go. So I don't know that he keeps an outstanding list on it, they usually just become proposals as we -- as they hit or become projects as they hit.

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Cameron Donahue, Hayden IR, LLC - Regional VP and Partner [18]

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One final one from Howard Halpern. Walt, just wanted to thank you for all the hard work in building the company. With regard to the special projects and AI, do you see other opportunities beyond AEROModeler and MRIModeler?

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Walter S. Woltosz, Simulations Plus, Inc. - Co-Founder, Chairman & Advisor [19]

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Well, AI is such a general purpose tool. The capability that we built over nearly 20 years we've applied in a number of defense-related applications and in the magnetic resonance imaging application that MRIModeler addresses. Right now, we're focusing on those 2 areas, trying to break through to some of the DoD organizations, Department of Defense organizations, that we have some connection with either through the aerospace engineering at Auburn University or right out close to the Lancaster office out at Edwards Air Force Base, where I used to work many, many years ago. So we're focusing right now on those 2.

Big Data analytics is a big thing. It's a big thing where the best work seems to be done by small teams as opposed to necessarily a Google or a Microsoft or an IBM. In fact, I think IBM just announced a cutback in that area. So I think there's a lot of small start-ups. We've talked to a few of them in the Bay Area. A lot of people are getting venture capital money for relatively small operations, no bigger than what we have. We have nearly 20 years' experience in the area. And I think there are opportunities here. I'm excited about it, and we'll see where it goes from here.

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Cameron Donahue, Hayden IR, LLC - Regional VP and Partner [20]

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And the next question is from [Scott Boudreaux], kind of piggybacks on the previous question, but just as a company as a whole, the business development pipeline look like as well as M&A strategy going forward, if there is a formal or just an opportunistic focus on that standpoint for M&A?

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Walter S. Woltosz, Simulations Plus, Inc. - Co-Founder, Chairman & Advisor [21]

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Yes, I'd say our strategy has not changed over the years. We have always been shopping. We have no debt. We've got -- for our size, we've got an adequate supply of cash. Investment bankers are constantly giving us opportunities to borrow money if we needed to. We haven't needed to. But we're constantly looking. We probably look at -- I'm going to guess, well over a dozen companies a year. Most of them don't meet our criteria, which are fairly conservative. We want immediately accretive to both revenues and earnings. We want technology that is synergistic with what we do that can be merged in business-wise, customer support-wise, marketing-wise. We want good personal chemistry between the teams. And the price has got to be right. So those 4 criteria. It's pretty easy to get 2 or 3 out of 4, but getting 4 out of 4 is not so easy. And we did Cognigen in 2014, that was 9 years after our previous acquisitions in 2005. We did DILIsym last year, only 3 years after Cognigen, and I'm hoping to reduce the time in between DILIsym and the next acquisition. So it's a very active area for us. We're constantly meeting with folks, talking with folks, assessing technologies, assessing finances, assessing people. And so I can't comment any further than that, but we're always shopping. And I see you going through slides. If you'll go to the summary slide, I will do the summary after we finish the Q&A here.

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Cameron Donahue, Hayden IR, LLC - Regional VP and Partner [22]

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Okay. We have one follow-up from [Scott Boudreaux]. Is the software or the consulting, is there a preference on the M&A side?

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Walter S. Woltosz, Simulations Plus, Inc. - Co-Founder, Chairman & Advisor [23]

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Say that again?

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Cameron Donahue, Hayden IR, LLC - Regional VP and Partner [24]

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On the M&A side, is there a preference for either a software or consulting business?

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Walter S. Woltosz, Simulations Plus, Inc. - Co-Founder, Chairman & Advisor [25]

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Well, I like software, the margins are really nice. But the truth is, consulting is in such high demand that bolstering our current staff by adding consulting scientists who are already experienced could be a valuable thing for us to do. When we hire a new scientist, almost all of them are pretty well right out of school and it takes them a while to get up to speed. But if we could acquire an operation that had scientists that are in the groove and able to turn around studies of high quality back to our customers, then that certainly would be attractive too. But yes, software is -- it's definitely a better play in terms of the margins, but consulting eventually sells software. So I'd say we're open to both.

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Cameron Donahue, Hayden IR, LLC - Regional VP and Partner [26]

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Two final questions from [Donald Bossier]. The first one is, is there any concern for software piracy, especially in the Asian markets?

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Walter S. Woltosz, Simulations Plus, Inc. - Co-Founder, Chairman & Advisor [27]

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We've been concerned about it, we haven't had an issue. We use what we believe is the best security software on the market called Flexera. It's very commonly used in the pharmaceutical industry. Some years ago, we discovered a Chinese website with how to crack through various pieces of software, and we were not one of them that they could crack. So we feel pretty confident. We're doing the best that can be done in today's world. Certainly, if someone had the resources of an NSA or equivalent, they would probably get around it. But we haven't seen any real problem with it as of now.

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Cameron Donahue, Hayden IR, LLC - Regional VP and Partner [28]

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Great. Well, final question before you can finalize the summary slide, Walt. What is the status of monetizing the software in the MRI and missile guidance markets?

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Walter S. Woltosz, Simulations Plus, Inc. - Co-Founder, Chairman & Advisor [29]

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Well, we continue to probe different DoD agencies. We write white papers and submit them. And typically the way these agencies work, they either have a broad agency announcement, a BAA, they call it, where they've got a whole bunch of different things that they're going to fund over the next months or a year. And you try to find a slot to fit into there and contact the people, or you just submit a white paper, which could be 5 to 10 pages typically, describing what it is you think you could do for them, and then solicit interest. And so we're doing those things. There's nothing public yet. So I probably shouldn't go any further than that, but it is something that I have a very keen interest in myself and will stay remaining on a project basis without being paid as an employee, just kind of volunteering my time to promote that.

I do have the aerospace engineering background and experience with -- many years' experience with proposals and DoD contracts. So it's something that I'm very interested in. The MRI, I've worked with and work, and I'm sitting right now in Auburn, Alabama, right next to Auburn University. We have a state-of-the-art MRI facility with both 3 Tesla and 7 Tesla machine and a significant amount of research is done there. And that's where we partnered originally to do the MRI work. We pulled off our folks to work on PKPLus and now on the conversion of GastroPlus to C++ in large part, so our resources on the AI side have been less than what they were. But I intend to try to staff up and support that area going forward. I think it's an area where the time is still good to get in. A lot of start-ups, as I mentioned, are trying to get in now.

We have a significant amount of experience. We've got the best-in-class AI engine for the pharmaceutical industry, and types of predictions that we do for molecular properties. That's hands down, and that's not us saying it, that's independent comparison studies. So we need to not just sit on our laurels, but we need to make sure we stay ahead of the game and do what we can to provide this capability not only to pharmaceutical, but to other industries.

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Cameron Donahue, Hayden IR, LLC - Regional VP and Partner [30]

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Go ahead. There's no more questions, if you wanted to go ahead and finalize the wrap-up slide.

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Walter S. Woltosz, Simulations Plus, Inc. - Co-Founder, Chairman & Advisor [31]

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Yes, okay. So I've introduced Shawn O'Connor. Very, very pleased that he is on board. My wife is too. She's been asking me when I was going to retire for the last 7 years or so. But this is not sudden. It may have appeared to be sudden from the outside world, but this is something that was many months in the works with the search committee searching. With me saying, "I really would like to retire by the end of the fiscal year, the end of August." And thank goodness, Shawn was available, and we found him. I don't think we could have found anyone with better credentials to take over running a public company in the pharmaceutical software and consulting services business. I will remain as Chairman, and I will remain involved on a project basis on the side, again, uncompensated for that work. My compensation as a Director will be like all the other outside directors.

Our third quarter, again, great quarter. Revenues up 26.7%. Income from operations up a little over 10% and net income up almost 16%. And for the 9 months, revenues up 28.6%, income from operations 23.2%, net income almost 64%, which includes the onetime $1.5 million deferred tax adjustment. But even without that, it would be up $1.5 million, which will be in the 30% range. Diluted earnings per share increased to $0.43 a share, up $0.16. That would have been increased to $0.35 a share without the deferred tax over $0.27 last year. So again, a substantial increase in diluted earnings per share. The board did declare a $0.06 a share quarterly dividend payable August 2, I think shareholders of record, I believe, of July 26.

Our 3 divisions -- California, Buffalo, New York and RTP in North Carolina all performing well. We're realizing the synergies that we expected from these divisions. We're addressing regulatory agency focus on PBBK modeling in clinical pharmacology and safety research. The new guidance documents that have been issued by the FDA and the European Medicines Agency have been helping to drive interest. And I think they're driving not only interest in the software, but the considerable amount of increase in consulting demand that we've been seeing in the industry. The industry knows that modeling and simulation are not going away. They are the highest productivity tools available. We generate tons of data in the pharmaceutical industry in our labs, and in animal studies and in human. The only way to integrate that data and make sense out of it is through simulation and modeling. You just can't do it by a human staring at databases or spreadsheets or reports. So we believe that we continue to lead the trend toward greater use of modeling and simulation in research and development in pharmaceutical, also now in cosmetics, food, agrotech and general chemicals.

And we thank you for your attendance today, and I'll turn it back to Cameron to wrap it up.

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Cameron Donahue, Hayden IR, LLC - Regional VP and Partner [32]

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Thank you, Walt. This does conclude today's conference call and webinar. If you missed any part of today's presentation, the replay will be available on the website, www.simulations-plus.com. Thank you for joining us today, and have a great summer.