U.S. Markets open in 3 hrs 45 mins

Edited Transcript of SLP earnings conference call or presentation 9-Apr-18 8:15pm GMT

Q2 2018 Simulations Plus Inc Earnings Call

LANCASTER Apr 10, 2018 (Thomson StreetEvents) -- Edited Transcript of Simulations Plus Inc earnings conference call or presentation Monday, April 9, 2018 at 8:15:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Brett A. Howell

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

* Cameron Donahue

Hayden IR, LLC - Regional VP and Partner

* John R. Kneisel

Simulations Plus, Inc. - CFO

* Thaddeus Henry Grasela

Cognigen Corporation - President

* Walter S. Woltosz

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

================================================================================

Presentation

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Good afternoon. It's Monday, April 9, 2018, and on behalf of Simulations Plus, I welcome you to our Second Quarter Fiscal Year 2018 Financial Results Conference Call and Webinar.

Presenting this afternoon will be CEO and Chairman, Walt Woltosz; Chief Financial Officer, John Kneisel; and Division Presidents, Ted Grasela of Cognigen, and Brett Howell of DILIsym. An opportunity to ask questions will follow today's presentation. You may send your written questions using the questions pane on the control panel, or you may use the hand-raising icon on your control panel to ask your question directly.

Please be sure to enter unique audio PIN displayed when you join the call. This call is being recorded for playback at our website simulations-plus.com.

Before we get started with the presentations, we'll begin with the safe harbor statement slide. It is now my pleasure to introduce Walt Woltosz, CEO and Chairman of Simulations Plus. Walt?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Cameron and Renee, and hopefully everybody was able to read that Safe Harbor slide very quickly. I assume everyone on the call is familiar with the safe harbor.

So if I say expect or anticipate or words to that effect please understand that, that is our best understanding of how things are going at this time. But there are no guarantees or as our attorneys like to say, there can be no assurances.

So overview, really outstanding news to report. Revenues for the second quarter up almost 29%, $1.7 million to $7.4 million. Income from operations, up almost 35% to $2.4 million. Net income up 190.6% to $3.5 million, which includes a onetime noncash $1.5 million deferred tax adjustment as a result of the new 2018 tax law.

Diluted earnings per share increased to $0.19 per share, up $0.13, and I think $0.08 of that is due to the deferred tax.

So it still would be up $0.05 a share from the original $0.06 a share last year.

Software renewal rates, 89% based on number of accounts and 94%, based on fees and 15 new software clients added.

For the 6 months, first half of 2018, revenues up again just under 30%, up $3.3 million to $14.4 million. Income from operations, average not accounting -- not including the deferred tax benefit, up $1.3 million or almost 34% to $5 million.

Net income up $2.6 million, a 103% to $5.2 million, including the onetime noncash $1.5 million deferred tax adjustment.

And diluted earnings per share increased to $0.29 a share, up $0.14. That does include the deferred tax benefit.

Software renewal rates, 85% for accounts and 91% on -- based on fees for the first 6 months and 36 new software clients added.

Our consulting pipeline has been extremely full, consulting demand in the industry seems to just keep increasing. And so we've seen a significant increase in our consulting revenues.

Now I'll turn it over to John Kneisel, our Chief Financial Officer for his report. John?

--------------------------------------------------------------------------------

John R. Kneisel, Simulations Plus, Inc. - CFO [3]

--------------------------------------------------------------------------------

Thank you, Walt. Appreciate it. As Walt said, our net revenues increased 28.5%, about $1.7 million for the second quarter in the fiscal year.

Lancaster was up 12.6%, Buffalo was up 12.2% and North Carolina or DILIsym recorded $939,000 worth of revenues in this quarter. This is their first, second quarter of our fiscal year. They came on, on June 1 of 2017. So they weren't part of the numbers in the prior year. So that they are $900,000 of that $1.7 million increase, the 28%.

Our consolidated software revenues increased 10.6%, up $400,000 and our analytical studies revenues up $1.3 million.

Our cost of revenues increased by $562,000, of, that, about $413,000 was the new cost with DILIsym for the quarter. Consolidated labor increased about $288,000, and other significant increases in costs were $182,000 of direct expenses on contracts, most of that coming from the North Carolina division on consulting contracts where they have to pay for lab testing costs.

Software amortization was up about $46,000 and amortization expense associated with the acquired technologies at the new division was about $79,000.

Our cost of revenues as a percentage of revenue increased by about 1.6% during this period compared to the prior year. Our consolidated gross margin increased about $1.9 million to $5.2 million. DILIsym was $525,000 of that. They had about a 56% gross margin this last quarter.

The overall margin as a percentage of revenue decreased by about 1.6%. Now the decrease comes mainly from this higher blend of consulting revenues compared with the new division of consulting revenues. If you can look at Buffalo and with North Carolina, they have a lower margin for those revenues because of the higher percentage of labor costs associated with those consulting revenues. And in North Carolina, with the lab costs, when we have a chunk of lab cost that go into a contract, that'll come down. Last quarter, we didn't have that as much. It just will fluctuate a little bit in that division.

Our Selling and G&A increased $392,000, $306,000 of that was from North Carolina. So it really wasn't that big of an increase relatively. That -- just the new divisional cost. And as a percentage of SG&A, it was about 32% compared to 34% in the prior year.

Research and development, we incurred about $1.1 million of research and development costs, $640,000 was capitalized and about $500,000 was expensed. Total research and development increased about 3 point -- $360,000 in the quarter over the prior year and $76,000 of that was an increase in expense.

Income from operations increased $600,000 or 35% in 2018 -- second quarter of 2018 compared to the prior year. And as a percentage of income, that was actually up 1.4%.

I'm going to talk about income taxes a little bit now. We had a large benefit of $1.9 -- $1.1 million, not $1.9 million, sorry about that, that compared to tax expense of $600,000 the prior year.

The -- we finished our assessment of the deferred taxes based on the new taxes -- tax rates enacted by Congress as of January 1 this year.

The -- going through those, we ended up booking about $1.5 million onetime tax benefit adjustment to our deferred tax liabilities, which comes in as onetime adjustment as we went from statutory tax rates for federal purposes of 34% to a 21% rate for our estimated future liabilities on taxes.

That gave us an effective rate for the quarter, which was basically a negative tax expense of about 46% compared to a rate of about 33% the prior year.

Now that means -- that's not going to continue obviously, with a 1% or with a onetime hit like that. So on an ongoing basis, we do expect to have gain -- have the effect of the new tax law on us. And in the past, we've been running in the -- anywhere from a 29% to a 33% tax rate in the quarter. But we expect that to go down with the new rate.

And so, we can probably this year expect to be somewhere in the 20 -- low-20% range for the year. And even in 2019, we may see that going down a little bit. It all depends on the amount of our permanent differences in tax credits and other stock-based compensation, however those come out.

Our net income for the year increased $2.28 million after the 6 -- or for the 3 months, was $2.28 million, which was, like Walt said, was up 190%. But at --1 point -- $1.5 million of that related to this onetime charge. And without that deferred tax benefit, we still would have been up $800,000 or 44% for the quarter.

Moving to the 6 months. The revenues were up 29.7%, $3.3 million. We -- North Carolina recorded revenues of about $2 million, $2.1 million, all those are new revenues for us in the fiscal year compared to the prior year.

The Lancaster division was up 11.1% to $8.6 million. Buffalo was up 11.6% to $3.8 million, all great gains in our core divisions.

And our consolidated software and software-related sales were up 10% by about $700,000. And while our study revenues and consulting revenues were up 66%, and that does include revenues from the new division.

The cost of revenues were up 33%. 2/3 of that increase came from the new division. Most of the cost or labor-related cost and those costs of the increases from the direct contract costs, and amortization costs for newly acquired technologies associated with the acquisition.

Overall cost of revenue as a percentage increased by about 0.7%, as compared to the prior year.

Our gross martian -- our gross margin increased $2.3 million or about 28% in the 6-month period. DILIsym showed about a $1.3 million gross margin, [and] 64%. Gross margin rate of $700,000 came from our California division, which showed an 82% margin. That one is more heavily software related. And the Buffalo division increased $300,000 or 15.8% with the gross margin of 58%.

Overall, our margin as a percentage of revenue decreased by 0.7% for the year, holding pretty steady even though the increase in the -- the large increase in the consulting work in that period.

SG&A expenses over the time period were up about $900,000, $600 -- about $650,000 of that was from the DILIsym group. And as a percentage of revenue, SG&A was about 33% for this time period, which was actually down about 1.4%. The majority of that was just decrease in legal expenses associated with the acquisition and other related items.

Our research and development, we continue to put money back into the business. It was about $1.9 million or $2 million total during the period. And of that amount, about $1.1 million was capitalized and $800,000 was expensed.

Total research and development increased $700,000 and the expense portion of that actually increased by about $146,000.

Our income from operations increased by $1.3 million or about 34% in the 6 months. And as a percentage of revenues from operations, increased about 1% over the period.

Again, we've talked about the provision for income taxes, for this period, for the 6 months, it was a benefit of about $300,000 compared to last year with an expense -- the majority of that again has a difference of $1 million, $1.5 million. But we saw a little bit of tax rate helping us in this quarter, because we had blended rates between the statutory 34% and 21% rates as the cutoff on December 1, and we got new rates in that time period.

And our effective rate was just a small benefit of about 6%. And last year, we had about a 32% rate, it was 31.8% in the period. And again, we've sort of talked about on a go-forward basis. This year, we'll probably in that low-20% range. And next year, we could even see a better rate than that.

Our net income during the period, $2.6 million for the 6 months and -- which is including the $1.5 million, which represented about 57% of that change. Without that, we'd still have about $1.3 million profit.

Looking at diluted earnings per share. We're $0.29, would be about $0.21, and still would have been up about $0.06 for the time period. EBITDA still remains strong. That would not have been affected by the $1.5 million because we would've thrown the tax back into it and still strong, is up 1.4% or 30% over the last year.

Moving onto the chart. You can see the consolidated revenue. We can see the progress -- progressive growth we've had. Since the fourth quarter of last year, you can see the big jump from $4 million to $6.3 million last year. A chunk of that was the acquisition of DILIsym. But you can see the -- we've had progressive growth throughout this entire time period.

The next one -- next chart is income from operations. We've added this chart this time. So it is before taxes, and will not impact the -- be impacted by the $1.5 million adjustment as we go forward. You can just see the movement of the numbers again, sort of an upward direction.

In the third quarter, you can see there is a little bit of beginning anomaly there for 2015. I went back and looked at that. We had, had a large software sales carry into that 2015 year. That's why we saw a little decrease there at the beginning. But consistently, we've seen revenue growth over the last several years and the years before that.

Going to the next slide. In this quarter, we -- if you look at the dark purple band there, you'll see what would be sort of a normalized income for the fiscal quarter in comparison of a large jump. It just makes a little bit easier to see where numbers would have been without the tax-deferred adjustments and it still shows the growth and the progression that we've consistently seen as a company.

Moving to the next slide. And taking out $0.08 of the effect of that same tax benefit, see where the numbers are actually very happy with this and we're showing $0.11 for our second quarter, which is close to where we've been in our third quarter most years going forward. So the effect of our acquisitions is showing is really -- just really pleased with the numbers that we see that are coming out of the company here.

Moving on, consolidated EBITDA. Our cash position is strong, consistent -- consistently putting money back money into the company to build our software products. And it's a stable company for the -- from an investor standpoint. We always feel good talking to people about the company.

This next slide. No, go back, please. On the cash position, for those of you who've never may be seen this slide before. There's 3 components to this slide. One is the -- our quarterly cash position, which is the line here above the red line.

Today, we're sitting with the -- as of last week, we were about $8.5 million in cash. The blue bar is our dividends. We've been -- this is about 4.5 years on this chart here. We've been paying $0.05 a share, increased that at the beginning of '18 to $0.06 a share. And the red lines are the uses of our cash, where we've made a strategic buys of companies, acquisitions or uses of cash to buy out, in the one case of TSRL, a royalty agreement or restructure that royalty agreement and ultimately buy it out. So we no longer have any royalty payments on that agreement.

In the end, I went back and looked at the stock price at the beginning of this chart. It was $5 a share. Today, I believe it closed just near $16. So we're still in the same pretty good cash position than making payments out to shareholders, and making acquisitions to grow the company, so very pleased.

And next slide, please. Just some of the highlights. We've got this -- just going back to August -- last audited balance sheet. We've maintained a cash balance -- our cash balances and cash balances per share, our current assets are stable, solid going into -- even into our third quarter, they're real solid. And our current liabilities are mostly acquisition-related liabilities, where we've got some payouts coming up later on in the year. And we've got -- which also -- that increase in those when they were split from total -- from long-term liabilities to current, actually dropped our current ratio a little bit.

But really, everything's very stable and ready for the future. Walt, back to you.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Okay. John DiBella, the President of the Lancaster division is traveling. I think he's over Asia somewhere in this week. So I will present his presentation for the Lancaster division.

So our software products, we have 3 upgrades coming out in the next few months. v9.6 of GastroPlus, our flagship product that generates the largest share of the software revenues is scheduled for this month. This has been a lot of work on this one, going on in parallel with the complete rewrite of GastroPlus into C++ at the same time. So very, very busy group here doing some outstanding work.

We've got some new special population physiologies that are going in, that will be enhancing one of our optional add-on modules. Also, we're improving all of our mechanistic absorption models in a variety of ways, again, enhancements to an optional add-on module, so hopefully generate more sales of those optional modules.

ADMET Predictor is our program that uses Artificial Intelligence to predict the properties of molecules from their molecular structure. It's been top rated time after time in publications that compare various software programs in various modeling challenges that come out every few years, while we consistently perform at the top of all of the 100 or so competitors that go into those.

Version 9 is scheduled for release next month. This will update our high throughput pharmacokinetics, HTPK Simulation Model. This is unique capability to actually predict blood concentration versus time. Bioavailability, [and fractionally] absorb or different dose levels, just from molecular structure. So this is a new optional add-on module.

We're also improving the ADMET Modeler -- module. This is our Artificial Intelligence engine that we use to build our models, and we've applied that not only to pharmaceutical chemistry but to some applications in some other industries that we would like to try to monetize and get into.

DDDPlus, version 6.0 is scheduled for summer 2018. In our FDA grant for long-acting injectable microspheres, we expanded the DDDPlus to deal with the in vitro experiments. But going along with that type of dosage forms, so that expands our potential user base.

We've also added some new abilities to use our -- different precipitation assay and biphasic dissolution models, where we have a rapid dissolution place followed by a slower dissolution phase.

MembranePlus, we released version 2.0 in September of last year, that included new models to analyze data from liver cells and hepatocytes, which expands the user base. And we approve the integration of the ADMET Predictor modules so that we can generate inputs from MembranePlus from molecular structure, and that is an optional add-on module for our MembranePlus.

We finally released version 2 of PKPLus in January. This is a program that we released first in about September of 2016, version 1. And we got tremendous amount of feedback from users. They liked a lot of what they saw. But they said we also needed to do this and that, so we spent 1.5 years making it do this and that. And now we have it out there being evaluated by significant number of customers.

This new version handles the 21 CFR part 11 requirements. It adds a nonparametric superposition, which is just a fancy set of words for dealing with multiple doses over a period of time in modeling pharmacokinetics.

Next slide, please. So for Lancaster, revenue for the second quarter up 12.6%. Software revenue up 7%. You've seen the renewable rates that are 89% based on the number of accounts, but 94% based on actual fees. Some of the accounts that we lose are academic accounts when a PhD student graduates. For example, who was using a program for their thesis and no one else in the department needs it. So their fees are extremely low or sometimes even free. But the renewal rate for a paying customer as you can see is very nice at 94%.

8% increase in license unit, 8 new commercial companies and 7 new nonprofit books were added to our customer base.

Consulting and training revenue is as you can see is growing at a remarkable rate, up 83% in projects ongoing with 26 companies, plus our 2 FDA-funded collaborations.

The bar chart, you can see up there shows a number of software license units sold per quarter. You can see, the trend is very nice trend. Very similar to the financial trends that John Kneisel showed a few minutes ago.

And you can see our revenue breakdown in the pie chart there. So about 75% of our revenues are from renewables, about 12% on new sales, about 12% software sales and about 12% consulting and 1% were trivial.

Next slide, please. For the 6 months, similar numbers don't need to read all of these to you. But you can see the trends are pretty well the same. Of course, the number of new groups, is about double of what it is for one quarter since we have 2 quarters here. Percentages remained fairly similar about 72% from the renewables, 14% from new sales of software, 13% for consulting and 1% were trivial.

Next slide, please. As far as the distribution of customers, it seems to remain pretty close to these numbers quarter-over-quarter and year-over-year, around 41% and so in North America, Europe about 33% and Asia around 25%, 26% with more than half of that out of Japan, which is our largest single country, considering Europe to be a variety of countries, Europe of course, would be bigger on the whole. But as a single country, Japan is actually second largest pharmaceutical industry in the world.

Next slide, please. Marketing activities, we do a lot with websites with social media. So we've been increasing our production of video content. We've increased the focus on search engine optimization performance and continuing migration content from our different division sites to our main corporate site with Simulations Plus. We held a PBPK workshop at the University of Maryland, that's physiologically based pharmacokinetics. The thing that GastroPlus does so well.

We hosted 6 outside trainings at individual companies, and we attended 2 scientific conferences during the first quarter and delivered 3 posters and podium presentations. First quarter closes over the winter holidays. And so there's not quite as much conference activity that goes on during the quarter.

Strategic digital marketing initiatives. We did host 3 webinars in modeling simulation applications and we do continue with our very active social media campaigns through Twitter, LinkedIn, YouTube. And the number of followers have increased 20% versus February, a year ago. And our GastroPlus user group membership increased 8% versus the previous year.

Next slide, please. Now I'll turn it over to Ted Grasela, President and Director of the Cognigen Division. Ted?

--------------------------------------------------------------------------------

Thaddeus Henry Grasela, Cognigen Corporation - President [5]

--------------------------------------------------------------------------------

Thanks, Walt. It's a real pleasure actually to see how these numbers all add up to the performance of the company, and it's very rewarding to myself and our staff to see the responses that we've been getting from our clients for our services.

In 2018, we had relationships with 25 companies, working on a total of 38 drugs and 62 projects overall.

So far in this fiscal year, we've started to work with 2 new companies. We have 2 new projects that are just starting. Of the old projects that we had, 11 of them expanded in scope. There were [3] projects with reduced scope, primarily because the drugs didn't respond as they were expected to as part of the development program. And our pipeline is very healthy with 41 outstanding proposals with 28 different companies.

Picking up on the theme that Walt talked about before, about our marketing of our services, really being based on interactions with our clients and communicating with both our clients and people we hope are going to be clients about the quality and the diversity of the work that we do.

So, so far at scientific meetings, we've had 7 posters and 5 peer-reviewed publications. One of our posters actually won a blue ribbon at a recent clinical pharmacology conference for the sophistication of the material that was presented.

And while we're -- when we're not working on consulting projects, we're working on 20 publications and 5 conference abstracts for presentations of material at upcoming meetings.

The PAGE meeting is the pharmacometrics meeting in Europe, and we'll be presenting 2 posters on new functionalities that we've incorporated into the KIWI platform during that meeting.

For a while now, the most common area that we are working has been oncology and that's followed by neurology, endocrinology and infectious disease. And actually, also global health.

Overall, the really important part of our deliverables are the way that they are incorporated into regulatory filings. And it's been a constant theme that nearly half of the projects that we work on end up being incorporated into a regulatory interaction or submission of some sort in any given year.

Next slide. So the way that we've been continuing to develop our pipeline and share our constant flow business has been increasing marketing and sales activities, primarily through the use of poster-drivers and presentations at scientific meetings. We've been continuing to recruit new scientific talent and have been quite successful with that.

So that we're able to handle the increase in work that we have.

The nature of our services continues to expand. And as I mentioned, we have a healthy pipeline of new projects, including a number of global health projects that we continue to expand on.

Global regulatory filings, where the information from one region is used to justify regulatory approval in another is an important part of our work. And we continue to look for opportunities to embed our services into our client partners so that we're involved in those compounds as they move through the life cycle from first-in-human to commercialization of new medicines.

We've been working on developing cross-selling opportunities with both Simulations Plus and DILIsym. Of course, we've been at this now for a little over 3 years and so we have a really good relationships with any number of the scientists in Simulations Plus. We're still feeling our way with our colleagues in DILIsym. But actually, right now, we're in the process of finalizing a proposal, dealing with some questions from a potential client that would involve the use of all 3 of our services.

So this is enabling us to create and continue to create broader spectrum of business models for our clients, and expanding scientific synergies across the scientists and letting us to do be more creative and innovative in bringing solutions to our clients.

And of course, in the back of all of this is the work that we're doing on the KIWI communication platform. And we continue to identify new functionality, and we're -- as a result of some of the hires that we've had in this past 6 months, able to accelerate deployment of some of that functionality. Thank you.

--------------------------------------------------------------------------------

Brett A. Howell, Simulations Plus, Inc. - President of DILIsym Services, Inc [6]

--------------------------------------------------------------------------------

All right. Well, thanks, Ted. This is Brett Howell, President of the DILIsym Services division. Just want to take a few moments to comment on our quarter as well. So let's go to the next slide, please.

Just we are relatively new to the group, I'll take a moment just to mention again who we are as a division and how we fit into overall picture. We focus on safety, primarily through the use of our DILIsym platform or drug-induced liver injury prediction software platform. We also focus on evaluating treatment for nonalcoholic fatty liver disease, that's NAFLD -- our NAFLDsym program and also NASH and other related liver disease.

So we do both pharmacology but also safety.

Next, please. Just a quick review of our fiscal Q2 sales. In terms of our breakdown, we did about 67% of our revenue from DILIsym-related consulting projects, about 19% from software licensing and 14% from NAFLDsym projects.

Over time, we expect the NAFLDsym portion of that to grow as we expand that platform. We had 18 active consulting projects unrelated to DILIsym, and we were using the software through all those projects to help companies predict drug-induced liver injury or understand issues that they were having in those areas.

These projects often involved data management collection as well as analysis using our software.

For NAFLDsym, we had 2 active consulting projects going, one of which is a very significant development project, which will increase the scope on our capabilities with the software. And again, NAFLDsym is focused on helping companies evaluate targets and the effectiveness of the potential drugs for those targets.

Finally, in terms of licensing, our DILIsym platform, we have nonactive consortium members who are licensing the software. That's the vehicle through which we make it available for companies to use internally, and we're continuing to work through the avenue of the consortium to add new science and new features to DILIsym. We're actually completing the process right now of giving FDA additional licenses to the software where in the past they already licensed it.

Next slide, please. In terms of our products, we have -- version 7A was released in January, and by all accounts running smoothly. We received good feedback. We also are working on Version 8A for release in early 2019.

In the meantime, we are working on an exciting project refactoring and recoding the software to be very tightly integrated with GastroPlus. So that will be coming in the future. And we're also as I said adding some features in [AAPS] Including fibrosis and inflammation to make it more capable and that will be coming at the end of 2018.

Finally, we're looking to expand into the safety of kidney, and we have currently put forth a grant proposal to fund this, that we're waiting on final funding decision.

Next slide, please. Our marketing and sales front, just a few quick notes. We had some -- a very successful 3-day workshop in San Diego, which is one of our first, that was in parallel with the GastroPlus workshops. So that's very good example of synergies across the divisions. We had some great interest at the Society of Toxicology meeting in San Antonio, where we exhibited with both Cognigen and Simulations Plus Lancaster. And we had a nice joint presentation with John DiBella and myself had a joint presentation focused on DILIsym plus GastroPlus and the power of using these tools together.

And finally, we continue to make website revisions that will allow customers to see coherent and improved work in terms of their look and feel on the web for the 3 divisions coming together.

Next slide, please. So just to summarize, the products currently out there are working well. We're continuing to expand and working to move into new area. We continue to find synergies as you've heard on the other speakers with Lancaster and Cognigen or Buffalo division. Our number of consulting clients is growing. We're now well over 30 companies who have used the software for various development purposes. And we also have continued to grow the number of licenses overall. We now have 19 companies due -- all license DILIsym throughout the life of the consortium. Of course, we hope to continue to move that number forward as well.

So that concludes my slides. Walt?

--------------------------------------------------------------------------------

Walter S. Woltosz, Simulations Plus, Inc. - Co-Founder, Chairman & CEO [7]

--------------------------------------------------------------------------------

Let me unmute myself here. So just to summarize, our next slide, please. Second quarter, again, with outstanding numbers. Revenues up almost 29%, income from operations 35%. And neither of those are affected by the tax rates but the net income certainly is with the $2.3 million, 190-plus percent including the deferred tax.

But the even it still ramped, what was it, 60 -- 44%, even without the deferred tax benefit. For the 6 months, revenue is up almost 30%. Income from operations 34% and net income just over 100%, roughly deferred tax.

Diluted earnings per share increased to 29% -- $0.29 per share for the 6 months, up $0.14 and about $0.08 of that is from the deferred tax benefit. So $0.06 was due to just normal operations, which includes the DILIsym acquisition. So very nice comparison for the quarter and 6 months.

All 3 divisions are performing well, California, Buffalo and North Carolina. We are realizing synergies. We've got now a nice intermediate connection between GastroPlus and the DILIsym software. The DILIsym software needs the output of PBPK simulations, which GastroPlus provides as inputs to the DILIsym. And so, we've not made that much more convenient that integration will continue to be improved as we refactor GastroPlus and reprogram our DILIsym software and C++.

There are new guidance documents issued by the FDA and EMA. The new commissioner of the FDA, Scott Gottlieb, Gottlieb is a very strong proponent of modeling simulation. And we think that, that maybe one of the reasons our consulting work is going up so quickly. Many companies don't have the expertise to run these very sophisticated software programs in-house. And so, they contract for that work. And we're benefiting from that. As we do that for them; they learn. And so very often, what we've seen over 20-plus years is that our consulting customers eventually become software customers.

And so, they finally get to the point where they realize they would actually save money by licensing the software and hiring someone internally to run it with our support of course. And for us that means a higher-margin sale, the software margins are very high compared to consulting and that gives our consulting team the opportunity to go and work with new potential customers.

So we definitely believe that Simulations Plus continues to lead the trend towards more use of modeling and simulation in pharmaceutical, food products, cosmetics and general chemistry industry and research and development.

With that, we'll open it up for questions. And Renee, are you going to moderate the question?

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

This is Cameron. I'll be reading through the questions. (Operator Instructions) We'll start off from Howard Halpern. Why do you believe consulting services for the industry seems to be booming? What is your pipeline of consulting revenue within each division?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Okay, well I'll comment on that and that -- I just did actually, briefly. I think the -- several reasons. Software is one of the -- if not the highest productivity tool out there. When you could do something in software that either replaces an in vitro experiment or animal experiment or a clinical trial, you save tremendous amount of time and money. Now that doesn't happen every day. But very often, what it also does is, guide you to choose which experiments you're going to run and then in what order. And so, as is commonly known, most molecules fail to become drugs. The winner is a needle in the haystack almost out of all the molecules that are examined every year. And we have the ability now to examine millions and millions of molecules a year, at least with software. Very few of them will ever make it all the way through the cycle to become drugs. So that if you can eliminate any of those in software, without even having to make the molecule, you've saved a tremendous amount of time and money. And I always like to say that a drug that fails out there in the Phase III clinical trial goes bad 15 years before when the chemist first drew it. They just didn't know it. And so the more that we could eliminate upfront, the fewer of those failures that we can experience in very expensive clinical trials, the better it is. I think that's why, the consulting services are booming as I say because these are sophisticated programs that require quite a bit of expertise to use properly. And I think the industry has not been able to get employees who are fascicled with these tools as rapidly as they have the need to see the results. Pipeline of consulting revenue. I'm not able to answer that. Maybe, John K. could you answer for Lancaster?

--------------------------------------------------------------------------------

John R. Kneisel, Simulations Plus, Inc. - CFO [3]

--------------------------------------------------------------------------------

I think, John. From my understanding, John's just gone and there's been a back -- sort of backloaded -- sorry, a backloaded section and it just opened up when we hired more employees back and we filled -- we're filling in stuff that has been out there pent-up demand for some of our services out there. And we've now -- he is now going after the business that was out there.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Okay, thanks. I think Ted, you do the most consulting at Cognigen do you want to address that one? Ted, you there?

--------------------------------------------------------------------------------

Thaddeus Henry Grasela, Cognigen Corporation - President [5]

--------------------------------------------------------------------------------

Can you hear me?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Thaddeus Henry Grasela, Cognigen Corporation - President [7]

--------------------------------------------------------------------------------

In -- the way that I'd like to answer that is to simply say that, we keep track of the outstanding proposals as we send them out. And of course, we keep records of which ones we're successful with and which ones we aren't and why. But right now, we have 41 outstanding proposals with 28 different companies. And so, for us that represents a really robust pipeline in terms of incoming projects.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

And ted, this is Cameron. One follow-up question, I guess, on the Cognigen side. Within the industry, how is Kiwi being viewed and how solid is the growth pipeline in that segment of the business?

--------------------------------------------------------------------------------

Thaddeus Henry Grasela, Cognigen Corporation - President [9]

--------------------------------------------------------------------------------

Yes. So, we've been continuing to add functionalities that we believe will make the platform more attractive to a variety of different types of users. We've been experimenting with different groups from different environments. And everyone has a very positive things to say about the software and the way that it has been designed and intended to be used. One of the great things about the project that we're working on for the Gates Foundation is that, we're actually getting to use it in the development of some specific projects, specific drugs. And so, not only are we able to test out different functionality, but we're also able to show how that can serve as a prototype for its use in a variety of different environments and different sectors of the industry. So we continue to be at a place where we're developing and testing new functionality, continuing to demonstrate the software at different scientific meetings and doing what we can to encourage people to share our vision for the platform.

--------------------------------------------------------------------------------

Cameron Donahue, Hayden IR, LLC - Regional VP and Partner [10]

--------------------------------------------------------------------------------

Great. Next question is on the Lancaster side is, where does your current penetration in the commercial customers stand? And how do you anticipate future growth within the software sales?

--------------------------------------------------------------------------------

Walter S. Woltosz, Simulations Plus, Inc. - Co-Founder, Chairman & CEO [11]

--------------------------------------------------------------------------------

Commercial customers? I'm assuming...

--------------------------------------------------------------------------------

Cameron Donahue, Hayden IR, LLC - Regional VP and Partner [12]

--------------------------------------------------------------------------------

I think the large blue chip customers or even the pharmaceutical companies for the software sales.

--------------------------------------------------------------------------------

Walter S. Woltosz, Simulations Plus, Inc. - Co-Founder, Chairman & CEO [13]

--------------------------------------------------------------------------------

Yes, I think most of our customers are commercial customers. Our best guesstimate some time ago is based on the FDA registry of about 2,500 companies. And we probably are in the order of 10% to 15% of that number of companies. The fact that we keep adding at a pretty aggressive rate new customers every quarter, I think is an indication of the increasing sophistication in the industry. But I one thing to learn, to use simulation and modeling where 20 years ago, 21 years ago when it started, the term "in silico" Didn't even exist in the computer as opposed to in vitro at the lab or in vivo in life. And so, I think the trend is going to continue. I feel quite optimistic about it. But again, as my attorney would say there can be no assurances. But 10 or 15 years ago, we wondered where will this begin to plateau, and it just hasn't happened yet. So I think as we continue to expand the capabilities of the software, the knowledge-based, the underlying science keeps growing. We learn more and more for example about how to model different populations going from premature babies, born up to 16 weeks premature. We couldn't do that 10 years ago, and now we do it in routine. Looking at Asian populations and other ethnic populations. How you change what happens in the intestinal tract for different populations, different ages and genders and ethnic groups. So all of these things are built on a knowledge base that continues to grow. And as we understand more about enzymes and transporter proteins that affect many drugs, the better we can model those. I don't see this ending anytime soon. It's just going to continue to grow.

--------------------------------------------------------------------------------

Cameron Donahue, Hayden IR, LLC - Regional VP and Partner [14]

--------------------------------------------------------------------------------

Okay, one quick follow-up on that. As far as the current I guess penetration with our existing customers of the top pharma companies and with the India growth we showed on the slide, is that from I guess, stemming out from the new contract we've established there last year?

--------------------------------------------------------------------------------

Walter S. Woltosz, Simulations Plus, Inc. - Co-Founder, Chairman & CEO [15]

--------------------------------------------------------------------------------

John DiBella, would have to answer that. But it makes sense to me, the fact that we do have a distributor in India now that is promoting the product. And we have had our scientists go to India to do workshops and trainings. That certainly -- that market, Asia in general, India, China, Korea and some of the other countries in that region certainly have come on where probably 5 or 6 years ago, we hardly had a customer in those countries.

--------------------------------------------------------------------------------

Cameron Donahue, Hayden IR, LLC - Regional VP and Partner [16]

--------------------------------------------------------------------------------

Okay. Next question, how are these synergistic opportunities between DILIsym and the 2 other divisions progressing?

--------------------------------------------------------------------------------

Walter S. Woltosz, Simulations Plus, Inc. - Co-Founder, Chairman & CEO [17]

--------------------------------------------------------------------------------

Well, the -- I mentioned part of that. The DILIsym software needs the outputs for population simulations from physiologically-based pharmacokinetics, PBPK software and that's what GastroPlus does so well. And these simulations can be pretty complicated. And what we have done as an initial integration of the 2 is to provide an output file from GastroPlus, that could be loaded directly into DILIsym without having to do a lot of hand manipulation to reorganize things and get them into a format that DILIsym could input. So that part is done, it's working. We still have to run each program separately. What we would like to do eventually is to be able to fire up the DILIsym software for within GastroPlus and have all of the information that's needed just pass through memory it so that you don't have to do anything other than start the program and set up the parameters you have to run a simulation. So that has progressed well. I heard Ted mentioned a proposal with Cognigen and DILIsym, working together. I don't know the technical details of that one but we've been working now with DILIsym for 3 quarters, the fourth quarter of last year and the first 2 of this year. A lot of work has been done. A lot of nice things are working already. And I just see the immigration continue to improve as we go forward.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Great. Next question would be for Ted and Brett. Could the Presidents of both Cognigen and DILIsym, discuss the scalability of the business on a high-level basis? And what is the opportunity for top line growth?

--------------------------------------------------------------------------------

Brett A. Howell, Simulations Plus, Inc. - President of DILIsym Services, Inc [19]

--------------------------------------------------------------------------------

Yes, I can start that Ted. This is Brett from DILIsym. Certainly, I'll be happy to discuss that in the general sense. We have 2 different lines of revenue as discussed clearly today. One is our consulting side and one is our licensing side for the DILIsym platform and our potential future products. So as you might imagine on the licensing side, the scalability is very high. And really, the only limitation there is acquiring those customers. We can make that software available and sell those licenses as customers want to use them. Our software is a little bit specialized. And so, we do oftentimes use it for customers to do consulting. And on the consulting side, we've -- we do have the barrier of needing to add additional trained scientists who can use the software internally for consulting. So that's always going to be a concern with any consulting activities is that, with any companies that you need to scale that by adding trained individuals to use it. However, we've been working hard at getting in place over the last many years, processes and procedures and the report formats, styles, presentations milestones, goals, styles, et cetera to really facilitate the use of these employees with the software and doing this consulting projects. So I actually feel quite positive about our ability to scale as our consulting demand continues to grow. We have in the order of 15 -- 14 to 15 proposals currently outstanding for consulting, both in terms of model use and also model construction to new tool development and, all total, that's well over $5 million of new proposals. Again, those are over long period of time or certain different periods of time, and at various places in the proposal process. So I'm not saying that's -- all of those are imminent but that's certainly our pipeline currently. So I think we still feel fairly positive of our ability to scale both on the consulting side and it certainly on software side, Ted?

--------------------------------------------------------------------------------

Thaddeus Henry Grasela, Cognigen Corporation - President [20]

--------------------------------------------------------------------------------

Thanks, Brett. Yes, so the nature of the business at Cognigen is primarily consulting revenue. And there over the years, we've spent a lot of time and effort in streamlining our processes and getting them down so that we deliver a consistently high-quality product in a timely way. So I feel really very good about all of that work that has been done. And we're leveraging that now as our consulting pipeline continues to fill up. But as you can imagine, in that consulting business can only scale so far. So as you continue to bring in projects, we have to continue to bring in new scientists. And we've been successfully at both of those requirements and are feeling really good about the consulting side. The KIWI platform is the opportunity to really scale up in a rather large way. And that is still in the process of being developed and fleshed out. So I don't know what to say about that particular part of it, but I feel really good about having created a system for the consulting that is as sufficient as it could be.

--------------------------------------------------------------------------------

Cameron Donahue, Hayden IR, LLC - Regional VP and Partner [21]

--------------------------------------------------------------------------------

Great. Two quick questions for John. What do you expect your effective tax rate to be for all of fiscal 2018 and '19? I know you touched on that already. And the second question, will there be any material impact on the new revenue recognition Accounting Rules 606?

--------------------------------------------------------------------------------

John R. Kneisel, Simulations Plus, Inc. - CFO [22]

--------------------------------------------------------------------------------

Okay. I'll handle the -- for 2018, I'm expecting it to be somewhere in the low 20s. And that's a little -- like I said on the -- earlier in the call, it's a little hard to estimate some of the effects of the permanent differences and what's going to hit during that time period. But clearly, the rates are lower. I don't have any concerns that is going to affect us this year, substantially but I just can't -- I can't really quite get there and all the estimates that I have to do, because there are some moving parts there. But it should be in the low 20s somewhere. And 2019 should be a few points lower than 2018. Again, all for the same reasons. And the second question was related to 606. The -- all indications are that there will be some effect, not sure how big it's going to be. I'm not seeing a lot of effect, based on the analysis that's been done right now. So I'll know more at the next call that we have. I should be done with most of the analysis by that time. But not really seeing any real big hits based on the way we sell our software here. On an annual renewal model, there really doesn't seem to be anything there and we're on a percentage of completion on our consulting revenues. And that really isn't concerning me a lot at this point.

--------------------------------------------------------------------------------

Cameron Donahue, Hayden IR, LLC - Regional VP and Partner [23]

--------------------------------------------------------------------------------

Great, we have 2 more questions. One is a follow-up. You mentioned that there was some pent-up demand that you were able to take advantage of by hiring talent. Any sense of where that pent-up demand level is at now?

--------------------------------------------------------------------------------

John R. Kneisel, Simulations Plus, Inc. - CFO [24]

--------------------------------------------------------------------------------

I don't want to finish that question much farther than that. I was answering for John who's not on the call. He would be in a tough better sense of answering that. I just know that we're able to really flex up really quickly once the -- once we have the personnel in place at this point. And we're just saying -- we're seeing some really good results of our -- of that at this point here in Lancaster.

--------------------------------------------------------------------------------

Cameron Donahue, Hayden IR, LLC - Regional VP and Partner [25]

--------------------------------------------------------------------------------

And the final question. Is there indication as the launch of Version 2.0 of PKPLus? And how those sales have starting to ramp up?

--------------------------------------------------------------------------------

Walter S. Woltosz, Simulations Plus, Inc. - Co-Founder, Chairman & CEO [26]

--------------------------------------------------------------------------------

Again, John DiBella would be the person to answer that question in detail. It's only been out here for what 8 or 10 weeks and the sales cycle for software tends to run probably an average 3 to 6 months, sometimes longer. And for products like this, where there is a competitive product already out there that people license typically on an annual license and sometimes on a 3-year license, it may be that we have to wait for those annual licenses to expire, which has probably happening every month somewhere before we might be able to get some market share away from the competitive product. So I don't have a good, solid answer for you on that. And John again -- John DiBella would be the one that would give details how many companies are actually evaluating right now, what sort of feedback they gave.

--------------------------------------------------------------------------------

Cameron Donahue, Hayden IR, LLC - Regional VP and Partner [27]

--------------------------------------------------------------------------------

Great. That does conclude the questions that have been submitted. Walt, do you want to say a quick closing remarks, and then I'll finalize the conclusion of the conference call.

--------------------------------------------------------------------------------

Walter S. Woltosz, Simulations Plus, Inc. - Co-Founder, Chairman & CEO [28]

--------------------------------------------------------------------------------

Yes, I think you know the company continues to grow. We are always shopping. John showed you our cash with the outlays that we've had. I think somewhere on the order of $13 million in acquisition costs and the buyout of the TSRL agreement altogether. And another -- I don't know, it's probably almost a similar amount in dividends that we paid out since we started paying the dividend. Yet our cash still seems to stay right in that same range and we saw the growth in the last 3 data points there. It's just on a nice upward slope now. We will have some cash going out as we pay back the earnout portion of the DILIsym acquisition. But we're generating cash at a healthy rate. And I see a bright future so far. I see no reason to think otherwise.

--------------------------------------------------------------------------------

Cameron Donahue, Hayden IR, LLC - Regional VP and Partner [29]

--------------------------------------------------------------------------------

Great. Thank you everyone for joining the call. One final note, management will be presenting at several upcoming investor conferences, the Needham Emerging Technology Conference on May 15 and 16 in New York City as well as the LD Micro Invitational on June 5, and that is in L.A. This concludes today's conference call and webinar. If you missed any part of today's call, the replay will be available at our website, simulations-plus.com. Thank you, for joining us today.