Simulations Plus, Inc.
Q3 2016 Earnings Call Transcript

Published: 12 Nov 2016

[Operator:]

Good afternoon. It is Veterans Day, Friday, November 11, 2016 and on behalf of Simulations Plus, I welcome all of you to our Fourth Quarter and Fiscal Year 2016 Financial Results Conference Call and Webinar. Presenting this afternoon will be Chairman and CEO, Walt Woltosz; followed by Chief Financial Officer, John Kneisel, Vice President of Marketing and Sales, John DiBella and Company President, Ted Grasela. An opportunity to ask questions will follow today's presentation. [Operator Instructions] This call is being recorded for playback at our website www.simulaitons-plus.com. Before we begin today’s presentation, we’ll start with the Safe Harbor statements. With the exception of historical information, the matters discussed in this presentation are forward-looking statements that involve a number of risks and uncertainties. The actual results of the company could differ significantly from those statements. Factors that could cause or contribute to such differences include, but are not limited to, continuing demand for the company's products, competitive factors, the company's ability to finance future growth, the company's ability to produce and market new products in a timely fashion, the company's ability to continue to attract and retain skilled personnel and the company's ability to sustain or improve current levels of productivity. Further information on the company's risk factors is contained in the company's quarterly and annual reports as filed with the Securities and Exchange Commission. Now it’s my pleasure to introduce you to Walt Woltosz, Chairman and CEO of Simulations Plus.

[Walt Woltosz:]

Thank you, Renee. And thanks everyone for joining us for our fourth quarter and fiscal year 2016 earnings call. Happy Veterans Day to all the veterans. I was at air force, dad and myself a long, long time ago. We actually had airplanes back then we are now. Overview, first for anyone who might be knew we are a major provider of software and consulting services for pharmaceutical R&D beginning all the way of the earliest drug discovery when a chemist might first draw a potential new drug molecule through preclinical development, lab tests, animal tests, and then into first in human trials in Phase I, on into Phase II and III clinical trials and then beyond patent life to supporting generic companies. So we cover the entire range of activities from the earliest discovery all the way through to post patent operations with generic companies. During the year, we’ve been enhancing every existing software product and we launched an exciting new product right at the end of the fiscal year PKPlus. We continue now to investigate new applications of our machine learning, technologies in aerospace and some general healthcare. We have those on hold for quite a while during our PKPlus development. Now that PKPlus is out. We’re looking at getting back into trying to pursue some of these other industries where our machine learning technologies have already been demonstrated to provide value. For the fourth quarter, our revenues were up 6.6%, $246,000 to $3.96 million, a new record. Our net income also a new record up 60.6%, $298,000 to $789,000, and our diluted earnings per share up 58.9% to just under $0.05 a share from just under $0.03 of share in the fourth quarter of last year. For the entire fiscal year, our revenues were up $1.66 million or 9.1% to $19.97 million, or we just missed that $20 million. Net income was up $1.1 million, or 28.8%, to $4.9 million and diluted earnings per share up 27.5% to just under $0.29 a share from just under $0.23 a share in fiscal 2015. Fourth quarter itself, a few other highlights, software renewal rates 88% on accounts and 97% on fees. So what this tells us is that some of the accounts that drop off could have been academic or something where perhaps a graduate student graduated and no else needed the software, so they didn't renew, but our commercial accounts, which is where we make the money 97% renewal rate. 19 new software client sites were added during that quarter. Product development and mission PKPlus was released just prior to the end of the fiscal year as we had about a week before the end of the fiscal year. This is a new software product that we've been in development on for a couple of years very intensely for the last eighteen or more months. And it's for non-compartmental analysis and compartmental analysis that are used in regulatory submissions. And we believe this has the potential to become a significant contributor to revenues and earnings and they’re not too distant future. At finalizing version 9.5 of GastroPlus, this has been very intense effort by the team here with assistance from the Buffalo team as well. We've added intra-muscular dosing and enhanced ocular dosing based on two FDA research collaboration agreements, RCAs that are funded by the FDA. We've added antibody drug conjugates. This is where an antibody serves as a carrier for a small molecule, drug molecule to deliver it to the target. And we've added some new animal physiologies for the additional dosing routes, so additional dosing routes is a module that covers dosing by ocular nasopulmonary and transdermal dosing through the skin. We released version 8.0 of ADMET Predictor, a major, major upgrade of ADMET Predictor. The user interface now a very modern and colorful and insightful interface and code refactoring, so that the entire code now is in one programming language, C++. This did require extensive QA testing to make sure that we can operate and install properly on different languages meaning you know Japanese, German, French English and so on and different versions of Windows, Windows 7, Windows 8 and Windows 10. Yet the same timing, we added a few features of MedChem Studio for free in ADMET Predictor, but with a full MedChem Studio license, the integration between the two programs is much tighter now and it serves as a quite a valuable tool especially in early discovery efforts. We released version 5 of DDDPlus. Our software that simulates the solution experiments in the laboratory. This is a product that we brought out more than ten years ago had a slow start, but now has a significant user base worldwide. We've added several new doses forms. We have a disintegration model that for tablets that was added. We've added biorelevant solubilities. These are solubilities in fluids that simulate the type of fluid that you have in the stomach, in the intestine in acid state or in the intestine in fed state. And we’ve added a table compression model. Our consulting services were impacted as somewhat by a couple of failed drug trials. When a sponsor has a drug in Phase II or Phase III trials and it's clear that the trial is going to fail, they say stop all the analysis, there's no sense doing it. And so, we did have an impact there where some of our trials – some of the trials of our sponsors ended up not having the efficacy or perhaps cytoxicity or some other problem that caused them to cancel the trial. In spite of that we still increase the net consulting revenues for the Buffalo Division that was impacted most by this. Also to Buffalo Division, we announced a $4.7 million dollars five-year contract with a major research foundation that won’t allow us to say their name, but this is the first contract of its kind that we've had and we think there's a potential that that could lead to more. Since the failed drug trials of course we've been submitting proposals. This goes on weekly in this type of business. And the current backlog is actually quite strong for future consulting work. This is a slide I always show at the board of directors meetings. It’s a two year stock price history. And you can see that compared to the Dow, the NASDAQ and S&P 500, the dark blue line, which is Simulations Plus has done pretty well most of the time compared to those indices. And that was as of the 9th, we just closed a few minutes ago at $9 and I think $9.25 a share, so that blue line would be a little bit higher than that on the right hand side. We had two funded collaborations. I touched on a minute ago with the FDA. The first one we completed the second year and the contract was renewed for the third year, this is $200,000 per year collaboration looking at dosing to the eye. We met all our milestones. We have a nice consortium of leading pharmaceutical companies that participate in this with us. And it's important because the global market for ophthalmic drugs is based on one study was valued at $16 billion in 2012, expected to go up to $21.6 billion in 2018. So in only six years we're looking at 30% or more, 35%, perhaps increasing that market. And we know that the prevalence of eye disorders as the population ages is growing up due to things like diabetic retinopathy and macular degeneration. The other collaboration of the FDA is in its second year we finished the first year. And this is for simulating the long acting injectable microspheres. So these are very tiny spherical particles involved polymer that has the drug particles embedded in it. And it dissolves slowly typically injected into muscle, but can be subcutaneous, can be ocular. And with this capability now, we can simulate the release of the drug over weeks to even months in some cases. So these are drugs that are released over a very long period of time compared to the typical tablet or capsule that you might take orally. We in the problem of doing – in the process of doing this, we did form a consortium again and we added the intramuscular dosing to GastroPlus, which will be in the next release here version 9.5. We also have to enhance DDDPlus, so that we can simulate the in vitro dissolution and release from this type of dosage form is polymer microspheres. I am going to turn the microphone over to John Kneisel, I will advance the slides for you John. If I don’t anticipate properly let me know.

[John Kneisel:]

All right great. Thanks Walt appreciated. So we’ll go through the first quarter comparison here – or the fourth quarter comparison, I should say and take a look at the net sales here. They were up $246,000 over last year. As Walt mentioned we did have some cancelled contracts in Buffalo division that actually dropped about 11% in sales over last year but we're anticipating that to recover pretty well. California made up – went up 17% and made up the difference, we were up 6% and –6.6% over the year. If we look at the gross profit you'll notice that gross profits are up $263,000, which is higher than what the sales went up. We had actually a usual of debt where we had our gross profit decreasing, our cost of revenues decreasing, while our sales were increasing. So we actually went up 10% on our gross profit. That was due to the software amortization actually decreased in this period, sort of a little bit of an anomaly in our calculations in depreciation for the period. So I'll take it and when I get it. I'm just sort of happy to have it once in a while. If I want to continue that way as we keep adding our new software products and our SG&A went up $111,000 during this period 7%, about a 7.7% increase in SG&A. The increases were mostly in commissions, commissions and advertising, travel for advertising and marketing and our professional fees. We are now an accelerated filer with the SEC. And we're spending our time and compliance related and audit related items getting that done. So our increases were – have been pretty heavy in our audit tax and SOX compliance this period. R&D actually decreased in expense though we've continued to spend a lot of money on R&D during periods and that, that cost that we've been spending has been going into capitalized costs. During the period with PKPlus going in to ADMET Predictor releases. We spending a lot of money to spent it up in capitalized costs during that time. Other income and expense, we recorded a $22,000 of income in the period for foreign exchange gains and losses. The prior year we had a pretty big loss but that change in other income $99,000 increase over the prior from the loss in the prior year was basically from the change in the strengthening of the dollar against the yen. We have had a pretty heavy hit last year. So that's all recovered. We're up like Walt said earlier we're up 59%. So when it comes to our diluted earnings per share pretty happy about that, always feels good when that comes through and we continue to make our cash distributions every quarter. We move on to the next slide Walt for the year. Again like Walt said we just sort of missed the $20 million. I guess if I am a rounding person, might round up a little bit we are just short of the number there. But we actually 9% growth as that number keeps growing feels really pretty good. The three hundred, and some thousand of our increase in revenues from the year came from Buffalo. That was – would have been better had we not had a little bit of cancellations toward the end of the year but we're looking forward to next year at this point. California we had a million three increase in revenues. Software was a big driver of that and consulting still was up $300,000 for the year. If you look at our margins were up 10% over the year and that increase in the California Division we actually showed an 84% gross margin, which we love in revenues from software and our margins actually were 58% from our consulting divisions, which is really a healthy margin for consulting. So if we look at our SG&A, over the year we actually we’re decreased our SG&A for about $44,000. We had a whole bunch of items that went up mostly advertising, marketing and annual trade show expense. Those totals were approximately $150,000 $180,000 when you add them all up. That along with our professional fees which were up about a $120,000 a year for all our consolidated audits and compliance related expenses. We’ll make up a lot of the, a lot of the increase. But those were offset by a $400,000 which we've talked about in the past. For the cost of the consulting that we had to do to acquire Cognigen back at the beginning of 2015. So overall we were slightly down for the year. We are going back to research and development for the year. We're down $117,000 – or increased $117,000 in total R&D expense for the year. We're still putting the same amount of money into R&D overall expense for the year. Moving to other income other, the other income line, we’re actually increased to $169,000 over the prior year and that's the same issue with the strengthening of the dollar against the yen. Not shown on this was our provision for income taxes. But I know that there will be questions about that. Our effective interest or our effective tax rate for the year was about 32%. That’s pretty consistent with last year, it's actually down a little bit and we'll talk about that in the where we think that's going to go a little bit later on, and see if some questions are coming in on that. And then net income overall was up $1.1 million over the year, about 29% just short of a $5 million mark for the year. It’s a pretty good place to be at. Diluted earnings per share were up 28% just short of $0.29 a share, which is a little bit better work than – where some of the expectations were, but we're really proud of that. EBITDA continues to grow and its really sustainable things for us as we're concerned. Moving on, you guys are seeing some of these charts before, but I think they speak for themselves. Our revenues continue to grow quarter-by-quarter and year-over-year as we continue on. Next slide Walt. Income we just – we show a steady march forward in our income and you can see where the big jumps occurred when we acquired Cognigen in beginning of 2015. And Walt, next slide please. Diluted earnings per share borrowing the one quarter where we have the one sort of flat quarter in the third quarter compared to the prior year. There's just a little bit of anomaly, and where we got a big jump that one period the year before. We’ve had some pretty consistent growth showing. Next slide Walt. And again EBITDA continues to grow, one more I think then we're done. We're sitting basically right now with $9.2 million, next week we'll be showing our dividend. So that will come down, but we’ve had a pretty steady march across the bottom with the dividend payments using our cash wisely and holding on looking for opportunities as they come along. And I think that's… There we go, our ratios continue to maintain themselves. They're strong. The equity of the company is strong. We intend to keep looking for opportunities to spend our money wisely. And I think the market likes what they're seeing from what I can tell.

[Walt Woltosz:]

Okay. Thank you, John. John says spend our money, he really meant to invest. Now we'll turn the microphone over to John DiBella, Vice President of Marketing and Sales. John?

[John DiBella:]

Okay, thank you Walt. In case, we've got anybody new to the company on line today, let me just briefly describe our solutions and where they fit in this drug development process. In a nutshell what we do is offer model driven end-to-end solutions, which span from early discovery going through clinical development and into regulatory filings. Our Cheminformatics software, which consists of the ADMET Predictor, MedChem Studio and MedChem Designer platforms really allow research scientists to design new compounds and virtually screen them across the spectrum of properties helping to prioritize testing as they go forward. The simulation software which consist of GastroPlus, DDDPlus, MembranePlus and the new PKPlus platforms really help scientists model and predict complex in vitro experiments and then ultimately the in vivo exposure that would be seen in animals and humans as we go from preclinical to clinical spaces. And the KIWI is a cloud-based validated program for managing, communicating, pharmacometric projects and results once we get into that clinical area. These software tools as you know are complemented by a team of expert scientists who really provide these model-driven consulting support services on a project-by-project basis. Next slide. Walt already gave a pretty good overview of where the products stand in terms of their development, let me just dive a little bit deeper into each one. The software development team is working really hard on new releases of all programs. The next version of GastroPlus, which is our flagship product is expected before the end of the year and will include a new optional add-on feature for intramuscular dosing also enhancements to our recently released biologics module modeling for large molecules which we really expect will help deliver more sales of that feature as we go into 2017. ADMET Predictor 8.0 was released in August and the improvements that we made to the user interface have really been well-received. We also incorporated many of the key features from our MedChem Studio program to really help streamline many of the common cheminformatic activities that computational chemists and medicinal chemists both will perform. And we’re hard at work on Version 8.1, which is going to have 64-bit compatibility and also some rebuild toxicity models, which is expected to be released before the end of the year and we hope that these improvements will help us to continue penetrating the medicinal chemistry and drug safety departments. We released DDDPlus 5.0 several months ago and we’ve seen a really nice uptick in sales over the past several quarters from this release. Hopefully we’ll have another release of the program sometime in the middle of 2017. And we really hope that the changes that we’ve made to DDDPlus and then what we’re expecting to finalize with MembranePlus early in 2017, will continue to increase the exposure of these in vitro simulation tools and really be a solid revenue driver for us. And then finally, as Walt mentioned earlier, we released the new standalone PKPlus platform in late August. We have closed so far on a number of small license orders at different companies, including several contract research organizations CROs, who are utilizing the program to assist with some of the PK services that they provide to their clients. And we do have a really solid number of active and planned evaluations in the pipeline. There have been several items that users have asked us to address since we released the program several months ago and we do expect to do so in the next Version 10 and it will be called Version 1.5, which is slated for release sometime early in 2017. Next slide please .John already discussed the Company’s solid performance in Q4 and for the full fiscal year. And here what I’ll do is just describe a few highlights. The consolidated software revenue growth for the quarter was 20% unlike John I do like to round up. And this was driven primarily by new license sales to companies across several markets. So being able to now recognize a lot of interest and capitalize on a lot of interest from companies outside the pharmaceutical biotech spaces and also driven by our abilities to maintain historically strong renewal rates. Consolidated consulting revenue did decrease by about 10% in Q4. And as John mentioned earlier this was due to an unusual number of clinical trial issues occurring at once which impacted the project pipeline. As you can see on the bar chart in the upper right, we had approximately 15% increase in the number of software units that were licensed in the quarter. And this was driven by 19 new software clients added including eight commercial companies. And as a reminder when we say new software clients, a new client is defined as a brand new company or organization which has never licensed anything from us before or an existing company that is now adding licenses into new departments or new research sites. And then in the pie chart, in the lower right, for the quarter, software license revenue was about 64% of the total with consulting and training services making up the remaining 36%. Next slide please. Numbers for the fiscal year 2016 are strong when compared to 2015. The consolidated software revenue growth for the year was 11% with a 10% increase in the number of software units licensed, this increase driven by 75 new software clients for the year, coming from different industries and also across the globe. We saw some really nice business coming from India, China and even Japan this year. Consolidated consulting revenue increased by 6% for the year and this is really a testament to our ability to secure new consulting work to make up for some of those discontinued trials. Had those trials not been discontinued, we do have seen really, really nice growth in consulting side of the business. Next slide please. We continue to see a really nice distribution of software license revenue globally with growth for the year achieved in the U.S., Europe and Asia when compared to 2017. So those numbers in parentheses show the growth in software license revenue versus 2015 the percentages right underneath the name of each territory represent the percentage of the total software revenue for 2016 at each territory generated. We do continue to recruit distributors in India and Korea to try and help establish a local presence in those countries. And we are still looking to expand our sales operations on the East Coast as well. Next slide. And then finally, in terms of marketing activities our new website is now live. This new website has a fresh look. We hope an intuitive design and also updated content that should encourage visitors to learn more about us and our solutions can help. This was a massive effort, especially for a company our size and we received contributions from a lot of people. But I do want to give special recognition and thanks to Arlene Padron, Victor Aguilar and Michael Lawless, they spend a lot of time working on all things website. Additionally, we continued attending and presenting at numerous conferences and hosting webinars and onsite training seminars around the globe. We had a really successful workshop week in Bethesda, Maryland near FDA offices, training on both our PBPK modeling technology and also the population PK data analysis work that we offer. We’re going to continue with an aggressive workshop schedule through the end of the year. We do have courses scheduled in Tokyo and Florida coming up in December. And then to also help out without promotional activities we’ve got a very robust social media presence and continue to explore other digital marketing opportunities, which is really complemented by our webinar series and the publication of peer-reviewed journal articles, as well. And with that I’m happy to now invite Ted to give an update on the buffalo operations.

[Ted Grasela:]

Thanks very much, John. Good afternoon everyone. I’d like to talk about things that are happening in Buffalo. And in fact most of what I have to share with you today is about how we’re continuing to build on the synergistic relationships between scientists at Buffalo and the scientists in Lancaster. We continue to find new and innovative ways of using modeling and simulation to address issues that our clients have. And increasingly these are more complicated and more sophisticated issues, because our clients have had experience with modeling and simulation of their understanding how far they can actually push this technology. So it’s been a really great series of collaboration on these projects and our clients are appreciating the value that we’re bringing to them. It’s important to recognize that these consulting projects are not only a source of revenue for the company, but they also help to shape management in regulatory decision making processes, which at the end of the day is leading people to look for additional consulting and software products to help support their work. Over the course of fiscal year 2016 we worked with 33 companies on 58 drugs and 107 different projects. We had nine new companies come on board in fiscal year 2016. And nine new projects that started just in the fourth quarter. And as everyone has mentioned we had a couple of clients who dropped off. We were prepared to do quite a bit of modeling and simulation work for them at the last minute the drugs weren’t having the efficacy that they had expected. And so they abruptly terminated those. So those nine new projects in the fourth quarter were a testament to the hard work that the group at Buffalo put in to finding replacement products over that period. As I reported before in the fourth quarter, we also have projects that expanded scope because clients learn new and interesting things and they want to do additional modeling and simulation work if we can get one such project fourth quarter. Four projects were delayed because of slow trial enrollment we’ll pick up that revenue in quarters in the future and the projects that failed because of lack of efficacy I’ve already pointed out. We do have a robust pipeline. Currently we have 13 outstanding proposals with 20 different companies. Presenting our work at scientific meetings continues to be a big deal. In 2016, we presented 15 posters and published three peer-reviewed papers in scientific journals. We’re currently working on 17 publications and we have four conference abstracts that have been submitted. Our work continues to be in areas of oncology, neurology and immunology. And I just point out that a big part of our work is directed towards helping companies be successful when they submit their dossiers for new products to regulatory agencies. And the projects who don’t make it this quarter will be submitted in future quarters. There are a couple of presentations that were given that standout in my mind as being importance to note. We gave a presentation on an application of ADMET Predictor in combination with GastroPlus at the The Japanese Society for the Study of Xenobiotics Meeting in Matsumoto, Japan. And what was interesting about that is that we're working to open up conversations about the value of our products to support drug discovery. But we're making that case to scientist at a later stage development. So we're beginning to see the use of our products by late stage development to get an early read on the compounds that are coming down the pipeline. We also gave a presentation at the European Union SimInhale Consortium this is a meeting that's designed to learn about ways for modeling the pulmonary absorption of drugs. There was a meeting in Prague and our presentation highlighted our innovations in pulmonary absorption that we have corporated in GastroPlus to-date. And it gave us a really interesting opportunity to evaluate the emerging science in this area and the ability to think about in the corporate meeting in future GastroPlus modules. KIWI as John mentioned is a cloud-based solution for managing modeling and simulation projects and we are continuing to work on the contract that we received from a major foundation to implement a version of KIWI for global teams engaged in specific model based drug development activities. This contract as a five-year term that’s contingent on satisfactory completions in milestones and we are meeting all of our milestones as we go along. What’s important about this project is it builds on our extensive project – process related research and it is enabling us to make substantial enhancements to the KIWI platform. And this is going to allow us to provide a scaffold for future modeling in simulation activities that will have a broader capability and will be able to make it available to academic and industry clients of KIWI. We currently have six active KIWI licenses and to were signed in the fourth quarter and we have had and we will continue to KIWI demonstrations with various research groups – excuse me, ranging from academics to large pharma. So in summary, we continue to look for new opportunities to apply, modeling and simulation activities projects to our clients and we are realizing important synergies and combining the Lancaster capabilities for PBPK modeling with the Buffalo capabilities for performing clinical pharmacology modeling. And we continue to see new and some exciting projects as a result of that synergy. The contract to enhance the KIWI product performed as a major step forward in our long-term vision for that product. And we continue to generate electricity in the academic and industry communities regarding the future licensing of the product. And I’ll turn it back to Walt. Walt, I think you’re muted.

[Walt Woltosz:]

I wasn’t muted, okay. Talking to myself here but it sounded pretty interesting the fourth quarter just to summarize again revenues up 6.6%, $246,000 to $604 million. Net income up $298,000 or 60.6% to $789,000, diluted earnings per share up 58.9% to just under $0.05 a share from just under $0.03 last year. And for the entire fiscal year revenues up $1.66 million to just under $20 million little over 9%. Net income up 28.8% to $4.95 million an increase of about $1.1 million and diluted earnings per share up 27.5% to just under $0.29 a share from $0.23 in fiscal 2015. Both California and Buffalo divisions are performing well, we are realizing in synergies we expected to from the merger two years ago of Cognigen and Simulations Plus we are addressing regulatory agency interest in applying PBPK modeling in clinical pharmacology and the five year $4.7 million contract with the research foundation is a largest contract we’ve ever signed and it offers a potential for additional such contract research organizations. Our software sales continue the strong growth trend that we’ve had for quite a number of years now. We believe that Simulations Plus continues to leave the trend toward greater use to the modeling and simulation in drug development. And so with that, I’ll leave this slide up and we’ll go to the questions. Renee, do you want to moderate those.

[Renee Bouche:]

Thank you, Walt. Sure, I will start Howard Halpern has sent a several questions. His first question is what’s the good number to use for the fiscal year 2017 tax rate?

[Walt Woltosz:]

John K?

[John Kneisel:]

No, problem. Howard, our general overall tax rates been about 33% I keep expecting that number to claim up to around 34% but every year keep standing in around 33%. So I still expect to go up a little bit but one reason or another it keep staying down at 33% so I’m not complaining about it. But that’s what they are saying so I can give you at this point.

[Walt Woltosz:]

And I’d tell them that with the results in the election corporate rates may go down, we don’t know when and if that might happen but that’s a possibility to think about as well.

[Renee Bouche:]

Okay, Howard’s next question is what is the acquisition landscape look like and what is your strategy regarding potential acquisitions?

[Walt Woltosz:]

Well, it continues to be the same we are always on the look out. We’ve got cash and I’ve been told by our bankers left and right that if we need more there, they’re very happy to provide loans to us. So when and if we find something that looks attractive we will jump on it, we’ll do our proper due diligence. If everything survives that process and we'll keep going. We occasionally see an opportunity of evaluated and beside that it's not worth what the sellers might want to have or it's not the technology that it looks like on the surface and so on, but we're constantly on the lookout.

[Renee Bouche:]

Okay. Well, thank you. Howard's next question concerns PKPlus, should we anticipate in terms of PKPlus sales potential for fiscal year 2017 with existing customers, new customers and expansion into new departments within existing organization.

[Walt Woltosz:]

That’s sounds like a John D question.

[John DiBella:]

Yes. The early distribution of sales for PKPlus is actually skewed more towards new customers. I mentioned earlier that there have been several CROs signing up to use the tool to support PK services for their clients, which I think is a really encouraging sign. Of the evaluations that are ongoing are planned over the next couple of months. The majority of those are from our existing customer base or new departments at existing organizations and as we head into 2017 I'd expect I think the majority of sales to come from those groups first. So existing customers, new departments within existing organizations probably leading the way for PKPlus over the next year. But we're still continuing to see some nice interest in the software. As I mentioned from organizations that have never worked with us before and especially contract research organizations.

[Walt Woltosz:]

I might add to that for many companies, they're already under a license that has some term to it for other software. And as they get near the end of that license period, there might be an increased interest from some of those companies.

[Renee Bouche:]

Okay. Well, thank you. Howard's next question is do you have some idea on your penetration, our market share within the biotechnology pharmaceutical industry.

[Walt Woltosz:]

John D?

[John DiBella:]

Okay, based on information that we have from several research reports, our solutions are being utilized today by approximately 20% to 25% of what we consider to be viable pharma biotech or generic companies that would be potential users of either the software or our consulting services. So there's still plenty of room for us to penetrate. Of the companies that are currently utilizing these type of solutions that we provide. I think it's very safe to say that we have a significant chunk of the market in the preclinical, clinical research basis and less in chemistry and early discovery where there are quite a few commercial tools that are available, though we still have more than our fair share when you take into account just the number of competitors in that space. We've identified I think several things that we might want to work onto help improve our positions, but I also think it's important to point out here. The use of modeling and simulation in general is only going to grow. So even if our slice of the pie remained the same. We should see some nice growth just because that pie is going to become larger. But we I think also have identified again some things that we can work on that will help us potentially obtain a larger slice.

[Renee Bouche:]

Okay, John. Howard's next question is what are the prospects for further penetration within industries outside of biotechnology and pharmaceutical company.

[Walt Woltosz:]

Okay. I'll take that one. We did sort of put that on hold as we were intensely trying to get PKPlus turned out the programming on that one was quite a bit more difficult than we anticipated and we had to switch databases in the middle of the string. At the same time and the database programming was one of the more difficult probably was the most difficult aspect of developing that software. So we're now turning our attention back not stopping on PKPlus still have some important improvements that were suggested by various evaluators. But now we've got a little bit of spare time to go back and pay attention to aerospace in other industries. And so I can't comment on the prospects. We're going to continue to explore those. We believe our machine-learning engine. It's a general purpose engine that can be applied to many different things and we have in fact demonstrated it in applications for aerospace and for the analysis of magnetic resonance imaging data. So we're going to pursue it. I'll not try to speculate on when and how much we might see coming in from that, but it’s definitely something that on the table.

[John Kneisel:]

Can I – Sorry, can I just add a slightly different twist to the answer as well, because I'm not sure of Howard's asking about also maybe potentially the chemicals and consumer good markets as well.

[Walt Woltosz:]

Okay, yes.

[John Kneisel:]

So if you don't mind so just the growth prospects or penetration prospects for those non-pharma biotech markets I think is strong. We're seeing lots of positive interest from chemicals and consumer product companies. And I think this is being driven a lot by the technology that Walt just mentioned, the stuff that we can do both on the QSAR and PBPK side. So we call it the QSAR, PBPK marriage or some of us do. And this just means really the integration between our ADMET Predictor and GastroPlus software. This really allows scientists in these markets who have very limited data to be able to create virtual animal or virtual human models from chemical structure and perform some really early risk assessment work, which can be very valuable to them as they start to plan any potential chemical safety or registration work that they have to do. And I think that also the relationships that we have that are very strong with the U.S. EPA, the National Institutes of Environmental Health Sciences and other agencies also help to drive this interest.

[Walt Woltosz:]

Thank you, John. Yes, I might have misinterpreted that.

[Renee Bouche:]

Okay. Thomas Darren has a question. Has any revenue relating to the KIWI foundation project then recognized to-date or as well as materialize in future quarters only.

[Walt Woltosz:]

Let me first say hello to Tom. I've known Tom since I was in high school and I'll turn the question over to John Kneisel.

[John Kneisel:]

Yes, we've been recognizing in some for the last five months on that project, it started just at the end of our third quarter. And so it's pretty – it'll go out for four and half, five-year time period of that project.

[Renee Bouche:]

Okay. Walter Ramsley has a few questions concerning PKPlus. I think some of this was addressed already, but yes, what are the competitive advantages of your product. What is the size of the market? What market share is the company hoping to achieve? And then again he asked the question whether we're selling to existing customers or new customers?

[Walt Woltosz:]

Okay. As well as John earlier pointed out, we are selling it initially more to new customers, but also there's a backlog of the evaluators in our existing company – customers. The size of the market, the best I can say is if we look at the best information we have on one of the major competitors, there are a number of licenses on the order of 5,000 to 6,000, and that's just one of the competitors, but I believe it is a leading competitor. The advantage of the product, very easy to use, very easy workflow; one of the evaluator said, this was the easiest piece of software they ever tried to use in their life or a new piece of software. The productivity we think is significant, productivity improvements and some of the advantages that we're able to incorporate because we've based it on our relational database; allow the researchers or scientists to slice and dice the data in many, many different ways and a lot of that is automated. So when you look at a large set of clinical trial data, you've got a cohort of subjects that can range across various ethnic groups, male and female, different age ranges, a variety of conditions faster than fed for example, different dose levels. And you'd really like to be able to quickly go in and examine the data, see if there's any trends that just kind of jump out at you. You can do that in other software, but you can do it very quickly and very easily in PKPlus. In addition our pricing strategy is very competitive. So I'd say those are the competitive advantages.

[Renee Bouche:]

Okay, well, thank you. Karl Hofmann has a question which I think you touched on earlier. What are the plan/strategy for aero modeler and MRI modeler going forward? Is there a go – no-go decision point for any of these potential products?

[Walt Woltosz:]

Yes. We haven't put a ton of effort into these because they're easily spun off from the modeler program, ADMET Modeler; sub program is part of ADMET Predictor. So we're adapting something that we already have very, very well developed. As we pursue these other ones, we're getting positive feedback that indicates there is definitely an interest especially when we show some of the proof of concept studies that we've done and show just how well is modeling engine can take data that you might not think without seeing it, to believe it and you might not think we’ll do that well, but we're getting nearly perfect models for aerodynamic coefficient predictions, for missiles for example and things like that. So there is definitely interests, there are other applications within the aerospace, in the side of aerodynamics that we’ve demonstrated as well and I think there’s definitely a potential there. The MRI Modeler, we’ve been basically told by some folks we know at Auburn University, who’s been our partner in this that until we’ve put out a peer reviewed journal article and have a publication that the folks that evaluate at the NIH typically on these things just don’t think you credible if you haven’t published anything. So we are working on our publication that will report what we did a couple of years ago, which did achieve better results than anything that we’ve seen published in the literature. As far as it’s a go or no-go, at some point if we just keep getting frustrated even though people are selling us these interest, then we just put it on hold and go on and do other things as we did with PKPlus.

[Renee Bouche:]

Okay, thank you all. Ujjain Robin has sent a couple of question, which regard the – regarding the Buffalo Division. What is the limit for the number of engagement that your current headcount can support in Buffalo? And is there’s an average dollar amount per engagement that you call out or is that too variable to have averages mean anything?

[Walt Woltosz:]

That’s clearly a question for Ted.

[Ted Grasela:]

Hi, Ujjain. We’re pretty busy right now. And we’re actually looking for additional scientists. But at the same time we really pay attention to our processes and we’re constantly trying to tweak them, so that we can get our systems to work harder for us instead of having people work harder, although right now people are really pretty hard. So we’re looking for new people, we’re trying to figure out how to improve the processes and continue to push work down to less technically skilled people where appropriate. In terms of an average dollar amount it’s really too variable to say anything meaningful. We have projects that are really quite large, where we will receive just about all of the data of the pharmaceutical company has accumulated over a multi-year drug development program and we hope to analyze that and produce reports for regulatory submissions. Although we down to very small projects analyzing data that came from a couple of docs to help out our client submitted in IND, which allows them to get into clinical development. So we really partner with our clients to deliver whatever services they require recognizing that as the drugs moves through the development process, they will continue to come back for superior service.

[Renee Bouche:]

Okay, thank you, Ted. Walter Ramsley has sent some questions. His first question is concerning overhead. Are all the expense is charged to Lancaster Division?

[John Kneisel:]

I can answer that, Walt.

[Walt Woltosz:]

Yes.

[John Kneisel:]

No, not all the expenses are overhead expenses are charged to Lancaster. It’s pretty fairly clear where expenses fall. The Cognigen have their own set of expenses beforehand. We had our own set of expenses Lancaster, California. So they’re pretty straightforward, but there are expenses that are clearly allocable. If that’s case and we do our best to allocate those expenses as fairly as we possibly can at that point.

[Renee Bouche:]

And Walter’s next question concerns software amortization. What explains the lower amount expense in Q4?

[John Kneisel:]

Walter, the amortization of our software – when we finished a project and we put it into the point we start amortizing at, we take that cost out over five years and a couple of our software amortization projects once they started – once they were put into service and if their five year runs at that point in the last – in the fourth quarter right at end of the third quarter actually. And they just – they’re dropping of the amortization schedule at the end of the third quarter beginning of the fourth quarter.

[Renee Bouche:]

And Walter’s next question is whether software pricing, is there any time to increase?

[Walt Woltosz:]

Yes, we did actually institute a small price increase for our couple of products starting September 1, the beginning of the fiscal year 2017. And the plan is to evaluate pricing every other year and see whether or not adjustments are needed.

[Renee Bouche:]

Okay. And Walter’s last question at this point is concerning the Cognigen and TSRL – I believe this TSRL payments this fiscal year, it’s the total amount $1 million.

[John Kneisel:]

Yes. There’s one more payment – the final Cognigen payment was made in July, which was this last fiscal quarter of this – last fiscal year we finished in the final payment on TSRL is in April of next year.

[Walt Woltosz:]

That total is $1 million.

[John Kneisel:]

Yes, that is $1 million on April next year. And then we’re done with that one and we’re home free.

[Renee Bouche:]

That appears to be all the questions, Walt.

[Walt Woltosz:]

Okay. Well, thank you very much. I’ll turn it back to Renee to provide the final wrap up.

[Renee Bouche:]

Thank you very much, Walt, and thank you everyone for joining us. This concludes today’s conference call and webinar. If you missed any part of today’s presentation, the replay will be available at our website, www.simulations-plus.com. Thank you again for joining us, enjoy your afternoon and have a wonderful weekend.