Simulations Plus, Inc.
Q4 2013 Earnings Call Transcript

Published: 20 Nov 2013

[Renee Bouche:]

Good afternoon. It is Tuesday, November 19, 2013, and on behalf Simulations Plus, I welcome you to our Fourth Quarter and Fiscal Year 2013 Financial Results Conference Call and Webinar. Chairman and Chief Executive Officer, Walt Woltosz will be presenting this afternoon. Joining Walt as panelist are Chief Financial Officer, Momoko Beran; and Vice President of Marketing and Sales, John DiBella. An opportunity to ask questions will follow Walt's presentation. [Operator Instructions] This call is being recorded for playback at our website, www.simulations-plus.com. It's now my pleasure to turn the presentation over to Walt Woltosz, Chairman and CEO of Simulations Plus.

[Walter S. Woltosz:]

Thank you, Renee, and welcome, everyone, to our fourth quarter and fiscal year 2013 conference call and webinar. I would like to keep the lawyers happy, so I'll just read this. With the exception of historical information, the matters discussed in this presentation are forward-looking statements that involve a number of risks and uncertainties. The actual results of the company could differ significantly from those statements. Factors that could cause or contribute to such differences include, but are not limited to, continuing demand for the company's products, competitive factors, the company's ability to finance future growth, the company's ability to produce and market new products in a timely fashion, the company's ability to continue to attract and retain skilled personnel and the company's ability to sustain or improve current levels of productivity. Further information on the company's risk factors is contained in the company's quarterly and annual reports and filed with the Securities and Exchange Commission. So highlights of fiscal year '13. Sales up 6.6%, we announced that back in early September, right after the close of the fiscal year and at the end of August. Preliminary revenue estimate was quite accurate. It was the new fiscal year record, $10.7 million up from $9.45 million in the fiscal year '12. Gross profit was up 6.1%, a little over $8.4 million, from just about -- under $8 million in fiscal year '12. SG&A increased 5% to the lower $3.5 million around about $3.38 million, but as a percentage of revenue, SG&A decreased to 35.2% from 35.8%. R&D expense increased -- or decreased, sorry, 15.3% to about $800,000 from about $950,000 and that was because last year, in the second quarter of FY '12, we had about $150,000 in R&D expenditures that went toward our malaria NCE project. So that was paying for the synthesis and the outside testing for activity against malaria and also some properties for solubility and metabolism. We don't have a lab, we're a software company, so we contract track out for all of those. For those of you that may not remember, or haven't read about the malaria NCE project, this is where we've designed and had synthesized 7 molecules to see if we could inhibit the growth of the malaria parasite. And all 7, in fact, did inhibit the growth at reasonable levels, some of them at minimal levels. So a very successful project. The net income from continuing operations increased 12.7% to a little of $4[ph] million from $3.16 million. Diluted earnings per share from continuing operations was $0.18, which was the same as in fiscal year '12. Fiscal year '12 also had another $0.01 per share that came from the sale of the former Words+ subsidiary, which is now is treated as discontinued operations. So the total for the last year was $0.19 a share versus $0.18 on -- or $0.19 a share versus this year, $0.18 on continuing operations. During the fiscal year, we distributed to shareholders approximately $4 million in cash dividends, $0.05 of share in November, which followed by $0.05 per share in February, May and August for the fiscal year started on September 1. So then we continue the $0.05 per share. And then in December of last year, we noticed that a number of companies were advancing dividends to give shareholders a tax advantage of the 2012 tax rate over the 2013 tax rate. And so we advanced a portion of the subsequent 4 quarters. We advanced all of February, which was planned to be $0.05 a share and then we advanced $0.03 of the $0.05 for May, August and November. When May came around, the Board decided that instead of giving the remaining $0.02 of share, they would increase to $0.03. And in August, they did the same thing. So there was an increase of 1.5 -- or $0.01 per share in both May and August over the planned $0.05, recognizing that $0.03 of each of those quarters have already been paid in December, so it ended up being $0.06 a share. In November, we paid $0.04 a share, just paid last Friday. And so for November, accounting the $0.03 that was already paid last December, we paid a total of $0.07 a share for November. If you're a long-term holder and you've had it back in December, [indiscernible] we've had paid and realized the [indiscernible] if you did not hold it after December, then of course, you didn't get the dividends after that. Balance sheet is still strong. Cash over about $10.18 million at the end of the fiscal year and about $10.8 million today, even after the dividends had been paid out and paid another, as I mentioned, $0.04 a share on November 5, which was around $640,000, roughly as a total. Shareholders' equity on August 31 was a little over $14.2 million, and of course, we continue to have no debt. Let me just go to the next slide. Here we go. This summarizes the net sales. As you can see, the gross profit up -- and our gross profit margin hanging right around an 84%, 83.7%. SG&A and R&D, I have already covered. So total operating expenses, almost the same as last year within a few tens of a thousands. Income from continuing operations up from $3.96 million to about $4.26 million. And then other income, which consists of things like the rent that our former Words+ subsidiary was paying for their space in the building before they shut down operations earlier this year, the exchange rate on foreign currency and interest in our accounts was down from $343,000 to $184,000. So those are the things that do attract about [indiscernible] with the things that are largely beyond our control. Income from continuing operations before income taxes, up from just under $4 million to about $4.26 million. And then net income from continuing operations, about $2.89 million versus $2.81 million last year. And earnings per share based on continuing operations was up a little bit from $0.178 to $0.18 a share. Now this shows you the revenues by quarter and as -- rather than going through every single statistic for the fourth quarter as I had for the fiscal year, the numbers are particularly complete in these charts and of course, [indiscernible] 10-K. But you can see here, our -- because of rounding, both of these Q4s are rounded off to $1.6 million but there's a slight difference in the next significant digit, which causes that bar for this year to be just a little bit below last year's $1.6 million. And remember that we did announce in the preliminary revenues, announced at the beginning of September, that a significant order had slipped into Q1, the quarter that we're in now. We have received that order and so that would be part of our Q1 revenues going forward for this year. Gross profit by fiscal quarter, you can see here, it is same again, of course for the year. The large revenue order that slipped affected us as well. And EBITDA by fiscal quarter, again, affecting -- that large order affecting this one as well. And net income, approved by quarter. So what I like to look at is going back to the revenues per quarter. In general, you'll see a nice increasing slope on all of the quarters. In fact, large order had stayed in, we would have seen the increase continue through Q4 of this year as well. I guess, we'll see a pretty good jump in Q1 of 2014, which I hope so since we have that to add to our revenues. New customers by quarter, 9 new customers versus 10 in Q4 of last year. We just continue to penetrate the market, of course, it gets to be more of a challenge every year because you have your market that you've already penetrated. You have your renewals and now, you're trying to get new business. And it's just as challenging to get a new department in a very large company, if they're not closely tied to other departments that already have our software. It's just as challenging to bring them in as a new customer as it would be for a small company or a company that we have not previously licensed anything to or done a consulting report. Balance sheet items. I mentioned this earlier, again, our cash today, about $10.8 million and that's after being out about $640,000 here -- I'm sorry, 400 -- that's $0.04 a share -- $640,000 here just last week, so still doing well. I won't read all the numbers to you. Our shareholders' equity, again, because of the dividend payouts, it does go down a little bit, but overall, very strong financially. And here, you can see the cash balance [indiscernible] of above $10 million, again, that's was as of August 31, $10.18 million, today $10.8 million. So our dividends are easily manageable for -- within our cash flow and still maintain a balance of $10 million before. Going to our products. In services, we continue to work all the way from early discovery into clinical trials. In the pharmaceutical industry, we are also exploring some activities in other industries. We've done a little a bit of work in the food industry. We've done some work now with our herbicides and pesticides or agri-tech and we even have an exploratory effort going into aerospace industry using the modeling engine from our ADMET Predictor software to predict aerodynamic coefficients for missiles with different shapes, configurations at different Mach numbers and different angles of attack. And the preliminary work that we've done there is very exciting, the accuracy is very, very high. Much easier to model parameters like that, that do not involve biology than it is to model the kinds of things that we have to deal with in the pharmaceutical industry with the high variabilities that you see in biological systems. So ADMET Predictor spans discovery fleet, pre-clinical, even into some clinical, early clinical areas at times. The ADMET Predictor has been very useful in helping us to understand why a particular molecule choose a certain kind of behavior. In Japan recently, we were working with our customers there on the compound and found a -- had some very usual solubility behavior. And using the ADMET Predictor, we were able to come up with an explanation for why the experimental results would come out the way they did. Dr. Mike Bolger, our Chief Scientist helped out on that and he actually did the analysis on it. Our MedChem Studio and MedChem Designer are tools used for data mining, so that when companies do a very large high-throughput screenings of thousands to hundreds of thousands to even millions of compounds, and have a large library of compounds and you want to find compounds that have certain characteristics within that library about the phenomena[ph] instead of [indiscernible]. MedChem Studio can help you organize that data in a way that allows to search it, in a way that -- looks like a chemist, and it looks for those drawings like you see under the word discovery on the Slide here. Now [indiscernible] you will see hidden here. So [indiscernible] a strong, amountful [indiscernible] MedChem Studio can allow you to and search a library and maybe what you would find is that a certain part of that molecule, let's say, this part that I'm circling in red, we call that a scaffold or a common substructure. That might be common to a few thousand molecules, or maybe even only a few hundred molecules, out of a file that contains a million molecules. But MedChem Studio can find those for you. It doesn't have a database of these structures that actually learns what they need to be from your data, so quite a powerful program. MedChem Designer is our sketching tool, so it allows a chemist to draw these molecular structures, copy and paste and then it makes some changes to them. And with both of these programs, you can click on the button, you can call ADMET Predictor and from the structured drawings alone, we predict about 140 different properties of those molecules. So even though they have never existed, observing the size, we can get a good idea of how they're going to behave in terms of clinical properties of absorption, distribution on the body, metabolism and excretion. So that's what ADME stands for. And then toxicity as well. There's about around 35 toxicity models in ADMET Predictor. So before we even synthesize a molecule, we can give a chemist a good idea whether it's going to be toxic in various ways that are going to cause cancer. Is it going to cause DNA mutations? Is it going to be harmful in the environment? Something is going on with my computer here. Sorry, [indiscernible] to jumping in here and something this happened to my presentation, let's see if I can back to where we are. Okay. I hope that's back on everyone's screen now. GastroPlus, of course, is our flagship product. It's brings in about 60% of the revenue or so. It is the dominant program of its type. It would simulate how drugs are absorbed in the gastrointestinal tract, as well as -- now, in recent years, we've added the ability to dose through the eye. So topical eye drops or implants or injections in the eye. It also has the ability to dose by nasal, in pulmonary, so inhaled products. So the inhalers, the nebulizers and so on. And we are now finishing up a collaboration with a major pharmaceutical company to add transdermal dosing, so skin patches and ointments and creams will be simulated in the mix for GastroPlus, that's in development now. DDDPlus is a simulation of laboratory experiments that measure how fast tablets dissolve in capsules. And so when we have a dosage form that has solid particles of drug and it's mixed in with other excipients. We simulate it. How? If you drop a few of those tablets into a glass container, typically with about 900 millimeters of some buffer solution and you stir it with a paddle or you'd use other apparatus. How fast will that stuff actually dissolve in the experiment? And that can be a very nice partner to GastroPlus because we can -- from GastroPlus, we can deduce how the drug dissolves in vivo, in life so, the intestinal track in humans or of laboratory animals. Then you can compare how the in vivo release was or the solution was from GastroPlus with how the in vitro or laboratory experiment was, and you can adjust that laboratory experiment in DDDPlus to try to better match what's happening in vivo. So the goal of the laboratory experiment, one of the goals, is to be able to predict the -- how the drug is going to dissolve when you actually dose it to a human, or perhaps to an animal. And so those 2 are complementary products. In development now is our newest product, MembranePlus. Pretty far along in development. We had a very nice poster presented by one of our scientists, Kay Sieto [ph] at the American Association of Pharmaceutical Scientist Conference in San Antonio last week. And a lot placed an interest in that, where [indiscernible] one doing the analysis and reporting on them. We now have under contract a company that still makes some laboratory work for us where -- what this program does is to simulate how drugs permeate through laboratory experiments to measure permeability. So layers of cells are grown -- a single layer of cells on a shelter and the drug is then put on one side of this layer and the measurement is made of how much drug shows up on the other side. And there are many different mechanisms that affect that, both how much shows up and how quickly it shows up, and that's how we measure permeability in a laboratory experiment. That can be input into GastroPlus. So again, MembranePlus will be complimentary to GastroPlus and it will help to analyze the data that comes out of these expensive experiments so that you get more bang for your buck. Again, we do quite a bit of consulting services and collaborations. Our consulting services is like a restaurant business. You'll never know if someone's going to walk through the door and order something. But overall, it's been strong and we have a continuous flow of consulting contracts, most dealing with GastroPlus but occasionally, some of them dealing with the chemotraumatic [ph] software, which should be ADMET Predictor and MedChem Studio and MedChem Designer. So the product [indiscernible] we did release version 8.5 of GastroPlus in the fourth quarter. We added a number of features here that are unique in this industry, precipitation model is unique. It's based on what's called classical nucleation theory. We've added the ability in how to simulate with infants, all the way down to 16 weeks premature. This is a very high-interest area in both the FDA and industry because drugs that are approved are generally approved based on large clinical trials, but you can't do a large clinical trial in infants. There are ethical issues, as well as simply finding infants quickly enough to grow -- outgrow being an infant. It doesn't take too long as an infant for their physiology to change. And so in GastroPlus, we can now actually simulate infants. An example would be starting with a 10-year-old Japanese boy, for example. A day 10-day-old Japanese boy turned to simulation the infant just to 11 days, 12 days, 13 days on up several weeks perhaps to several months. And the physiology is changing, the baby is growing. The sizes of different organs are changing. The expression levels of different enzymes and transporter proteins is changing, so all of these things that are accounted for in the infant PBPK, which simply means physiologically based pharmacokinetic models. So again, a very strong interest area by the FDA and the industry. We added a built-in method to extrapolate from laboratory experiments, in vitro experiments, to the in vivo initiative. For transporters, this has been a challenge for the industry and we've come up with a method Dr. Viera Lukacova developed a method to do this extrapolation, so that we don't have to always fit parameters to data. We can assume that from the in vitro experiments now, they gets us in the right ballpark for what's really going to be happening in human or animals. We also added a number of additional built-in enzyme expression levels in different tissues. And ADMET Predictor, we released version 6.5 in June and we are now closing in on version 7, expect to release this next month. This is going to add a number of features. One that is not listed here is the ionization constant model, and I'm sorry for all these technical terminology but basically, that's what it is. It's a capability within ADMET Predictor, that helps chemists know if a molecule is put into solutions that are at different pH levels, acidic or basic. Where they are likely to ionize, which atom on the molecule is likely to ionize and at what pH is it likely to ionize to a certain extent or vice versa. What extent would it be ionized at a certain pH. The importance of that model -- and we just got an email today from someone who tested that model and what he said, "It's by far, the best pKa predictor". PKa is what we call the ionization constants. The best one he'd ever have seen. So it's really a remarkable achievement and it comes on the basis of a large collaboration with Bayer AG in Germany, where they were able to provide us about 16,000 of their molecules or pKas, I cannot remember which. Some molecules are modeled with pKa. They were able to provide us that and virtually doubled the size of our database. That we've used to train that model and addition -- had additional molecules that they can test it with, that were not used in the training to make sure that it really was able to predict outside of the molecules used to treat it. The new licensing software gives us more flexibility is to customers a few more options in how they [indiscernible] things much more efficient to unlock the software. And then MedChem Studio, version 3.5, and MedChem Designer 2.5, were released together in July. We improved the way the molecules are drawn. Yes, in the past, they could have kind of a fuzzy look to them, looked a bit out of focus and use the technique call "anti-aliasing". They're now cleaned up and they look very smooth, and clean and crisp. Again, the new licensing software has been incorporated into this program as well. We will be incorporating that licensing software into GastroPlus in the next release, version 9.0, which is in development now. We see some of the other features there for MedChem Studio and MedChem Designer. DDDPlus, there's some minor changes here but the significant one is the ability to do what we call virtual trials, and this simply means that using a Monte Carlo method, instead of running 1 simulation for a dissolution experiment, you run a large number of them and you vary the kinds of parameters that you know will vary from one experiment to the next. And then you can see the distribution of the dissolution versus time curves, to see just how much variation to expect in real life. MembranePlus, again, release expected in early 2014. We're contracting, as I mentioned, for some in-vitro assays that will help us validate the model in great detail. These types of experiments are not run with the kind of detail that we want to have in terms of what's measured and when it's measured and the conditions under which is measured, so that we can really validate this model. And I mentioned the poster that was presented at AAPS last week. Marketing and Sales, John, you want to take this one?

[John Anthony DiBella:]

Just waiting for your -- sorry, your screen to refresh on mine. So I know what it is what I'm talking about here. I'm bringing it up on mine.

[Walter S. Woltosz:]

I can't tell what the leg is in go to meeting here.

[John Anthony DiBella:]

Okay. So with respect to conferences and scientific meetings, these tend to still be the largest driver for us in terms number of leads. And during Q4, which is traditionally a slow period, the June, July, August, summer period, we did attend 13 scientific meetings and conferences throughout the U.S. and Europe and our scientists did a very nice job of presenting some of the technical work with the software, presenting 12 posters and oral podium presentations. For the trainings and workshops, in Q4, again, that 3-month period during the summer, we conducted 6 on-site training courses at various customer sites throughout the U.S. and Europe. And in total, for the entire fiscal 2013 year, we did 24 such trainings. And then we also ended up hosting 4 workshops in North America and Europe during the fiscal year. And also just finished the first successful workshop in Japan to hosting to an overflow crowd, and I think Walt might mention that a little bit more in the last slide. With respect to strategic digital marketing initiatives, these do continue -- we've been very successful hosting our webinar series and it's been focused mostly on the cheminformatics products to date. So we've hosted 1 every 2 months, and in total, we've had over 900 registrations. Usually on average, somewhere between 50 to 100 people attending each webinar and it's been a very good source of leads for us. And also continuing to very aggressively try and get the message out through LinkedIn, Facebook and Twitter accounts that have been established over the last year or 2. And also finish the website redesign, which has helped us communicate some messages a little bit better, getting some more kind of up-to-date marketing programs in the faces of prospects and customers. The collaborations, the consulting projects and the grants, so we still continue with the 5-year collaboration with the FDA Center for Food Safety and Applied Nutrition, so we're continuing to build toxicity models with the ADMET Predictor software. These models then become available for the rest of the community to use once they've been stamped and approved, and these are going to be focused on working with data sets, kind of outside the traditional pharmaceuticals space that we've been focusing on over the last few years. So these are going to be for food additives and contaminants. The consulting studies continue and they continue at a breakneck pace. We've added a couple of scientists to the consulting team within the last few months, just to handle the number of requests that are coming in. So we've had 3 consulting projects, which were initiated in Q4. 1 or 2 of those are still ongoing and then we had another 2 start in Q1. So since September, another 2 have started and several more are in the proposal stage. As Walt mentioned, we finalized the collaboration with Bayer Pharma for the enhancement of the pKa model and ADMET Predictor, and feedback has been incredibly positive to-date. The funded collaboration for the enhancement of the oral cavity dosing model, that was also completed. And so that updated model will be available in the GastroPlus 9.0 release and then the transdermal model that Walt also talked about. That one is still ongoing. We're in the final stages of validation, working with the sponsor company on it, and that will also be a model extension for version 9.0 GastroPlus. Overall, I think we believe that there is this fundamental shift, which is continuing. We've issued a press release a few months back talking about several submissions from our consulting group, where we work together with different sponsors on their projects, put together some reports and sent them over to different regulatory groups, both in North America and in Europe. All of these submissions were accepted positively and one of them actually, to-date, has resulted in a full biowaiver being granted to the sponsor. So it's a really big deal. It was a really nice story to tell over the last few months. We just finalized the white paper, kind of taking people through the steps in a nonconfidential way to give them some idea about how they can start to follow the similar process. So the submissions have been something very positive for us and has helped customers really appreciate the return on investment that they can achieve utilizing the software. The GastroPlus user group was formed. This was towards the beginning of this calendar year, and now over 350 members are on LinkedIn. And this is a big development as well because now we're starting to see a lot of people share some of their experiences with the software in-house at the various companies. They are discussing best practices with the software. They're offering constructive feedback to us for ways in which the software can be improved. So it's been very much a community that's been established, which has worked both ways for us and for the clients in terms of opening up new lines of communication. And overall, in fiscal year 2013, we did add 60 new customers, new companies that were licensing the software, and now this is going to include completely new organizations, as well as new departments within existing large customers. And I think one of the more important developments as part of this is that all major regulatory agencies in North America, Europe and even over in Asia now have added licenses to the software, and this is for GastroPlus, for ADMET Predictor, primarily. So when we see the regulatory agencies adding more licenses, requesting more training, we know that this is going to essentially trickle down to the rest of the industry because, essentially, what the regulatory groups say is what the industry has to follow. So we feel very good about the fact that these regulatory groups have been adding licenses to the software. Walt?

[Walter S. Woltosz:]

Thank you, John. So I mentioned the malaria new chemical entity project that we had done last year, and that was quite successful. The new sales that resulted from that have already repaid the investment that we made. It was about $150,000 worth of it. We've now started a science project, and molecules are now at the synthesis contractor, I should say, the drawings of the molecules are there, so that the synthesis contractor can develop a way to synthesize these molecules and get us a large enough sample and maturity that we need to go on to do the testing against the target. The target [indiscernible] after looking at the product number was COX-2. And COX-2 is the target for Celebrex. You probably know that Celebrex is the only drug left on the market that is a COX-2 inhibitor. The other, such as Vioxx, and a couple of others were pulled from the market due to cardiotoxicity, so heart problems. As we read the literature, the scientific literature, following where Vioxx was hold and other areas of a number of research projects that went on and were reported in scientific literature, and it appears that when you inhibit COX-2, you also need to inhibit COX-1 at the same time, and COX-1 is an enzyme, as is COX-2. COX-1 also needs to be inhibited, but not at maximum [ph] level at a lesser level. [indiscernible] Celebrex. Well, the problem is the half life on the aspirin against COX-1 is not going to match the half life of Celebrex against COX-2, so you really like to have a single molecule that have the right ratio of activity against the 2 enzymes and of the same half life against the 2 enzymes. So that's our goal. We did use our newest versions of ADMET Design Suite. This Design Suite includes ADMET Predictor, MedChem Studio and MedChem Designer. We also used GastroPlus to run the simulations to predict how the dosage form would behave and what amount of dose we might need to achieve a therapeutic level. Our goal here is not really to design the next COX-2 inhibitor. That would be serendipity. Our goal is simply to demonstrate how quickly and inexpensively you can get to good lead compounds that not only hit a target, but that also avoid the problems that often crop up due to ADMET properties. Because we're able to predict ADMET properties with good -- reasonably good accuracy, we can screen out likely molecules out of a large library that we can create using MedChem Studio's automatic design capabilities. We can create thousand -- hundreds of thousands or more of potential molecules that would be predicted to hit both COX-2 and COX-1. But we want to hit them both. We want to hit the COX-2 stronger. We want to hit them at a certain ratio, but we also want to make sure that the molecules that we move forward are not going to cause cancer or have problems in the environment because most prescription drugs, believe it or not, are not taken. They're flushed down the toilet, and they go into the water. And they can kill fish. They can create a toxicity issue for a lot of different animals and people. So our real goal is to show that using the methods that we have, you can get to a set of lead compounds, not necessarily the final drug molecule, but something close where the chemists can then use their knowledge and experience to tweak that molecule a little bit and take it forward and perhaps become the next drug. Again, I mentioned we had good results last year. We're pretty confident that we're going to get good results this year, but it is -- the business of designing drugs is not an easy task. Obviously, the number of new drug approvals per year is quite small, and by the time those drugs get approved, they've been in development for 15 years and a few billion dollars. As much as a few billion dollars could have been spent under development. So we're not after designing drugs. We're after selling software or licensing software. If we got lucky, we might get some lead compounds that someone would want to license, but that's a long shot. So in summary, for fiscal year '13, they were record revenues. The growth is not what we'd hope. 6.6% was not quite what we'd hope for. But as you can see, earnings growth continues to be approximately double the revenue growth and that's -- it's a clear demonstration of the high margins we'd have in a software business. Substantial increases in income taxes and health insurance didn't help, but that's a fact of life and every company has to deal with that with the income tax situation and the health insurance situation. We just know there are going to be increases year after year. I think our health insurance is going up another 5% for next year. There's not much conversation today, we know that. We are continuing to grow in terms of our scientific team. We added 3 new PhDs. We also added a team to deal with computer technology. So the information technology, or IT, team now has 3 members. This is a relatively new team in the last year, and this, for the last support to the scientists down to the administrative staff, where all the things that we need for servers and networks and various other things that we do. We continue to seek and interview additional scientists and engineers. And I [indiscernible] in the sense [indiscernible] and the IT team is also working on that aerospace application that I mentioned, going with some help from the scientific teams. So they are also getting involved in some product development as well. The additional staff that we hire will support not only expanding the product line and consulting but also, they strengthen the support, marketing and sales. We have a small marketing and sales -- dedicated marketing sales staff, but they are supported by all of the scientists. So it's always been our philosophy that -- a couple of philosophies, every scientist gets their own private office and every scientist gets kicked out of their own private office now and then they go out on the road and go to a scientific meeting. That's how we cover all these meetings, go to a customer site, meet the customer face-to-face, do the trainings and that relationship building is really, I think, a very important part of what we [indiscernible] Simulations Plus. We are recognized for our scientific expertise, for our customer support, and we want to keep it that way. The introductory workshops that were held and the first one in Japan, that's a major event. I've been going to Japan since 1998. I just got back from my 43rd trip to Japan. And when we went for many years, you couldn't even tell one company, what other companies you might be visiting on that trip. They didn't want to know. Now they have their own user group, and they formed their user group before the one that John mentioned with the 350 LinkedIn members. So that's a European and North American group, primarily. The Japanese formed their own user group several years before that. And now they have their own meetings. We attend them. We're invited. We're not running the meeting. We're an invitee. We do get to pay for the facility and the beer and food, but that's fine. And they present to each other. They are actually presenting results of their GastroPlus analyses. It's not proprietary, of course, but talking with each other about, "Well how do you deal with this?" or "How do you deal with that?" It's really a wonderful thing to see a cultural change that's happened to Japan, both in getting together like that and then from this introductory workshop that for the first time, we've been able to get managers in Japan to allow their people to leave the office for 3 full days, to take an introductory workshop on GastroPlus and, of course, they're paying for that. So committing the time and the money to get good training is a big change, and we're very pleased to see that, and that's going to reap the benefits going forward and issue licenses. Again, a strong cash position, no debt, and we are returning cash to shareholders. So that completes the formal presentation. Let's go to the questions now, and let's see.

[Walter S. Woltosz:]

The first question I see from Howard [indiscernible] will the full $180,000 related [ph] revenues from Q4, that you realized in Q1. If so, this represents about 8% of Q1 2012 revenue. Do you expect next Q1 growth year-over-year to be north of 20%? John, I'm going to let you answer that. I don't remember the $180,000 number, but you probably do.

[John Anthony DiBella:]

The full $180,000 will not be recognized in this first quarter, and that's because a portion of that is from government agencies in the U.S. and because of the shutdown in October that has further kind of delayed the finalization of a few agreements and orders. The orders will come in, but the full $180,000 will not be recognized in Q1.

[Walter S. Woltosz:]

Okay, thank you. And the amount that will be is not a public number yet, so I guess, we can't talk about that. How many new consulting contracts were started in the fourth quarter? And how are [indiscernible] completed. I think you could answer that, John [indiscernible].

[John Anthony DiBella:]

Yes. So we had started 3 different consulting contracts in that summer period. One of those is completed. Two of them are still ongoing, and then I know Howard, you didn't ask this question, but in this quarter that we're currently in right now, there are additional 2 studies which were started, and several more are in the proposal stage.

[Walter S. Woltosz:]

Thanks, John. Also from Howard, can you provide your view of the market potential and acceptance of your software tools in Asia? John?

[John Anthony DiBella:]

I think one of the things that we mentioned in the press release today was that the Asian territories. So that would be, really, China, Japan, Korea, Singapore, Thailand. Those are the 5 main countries over there, which have licenses to the software. Revenue was up around 30% or so compared to last year, and we think that there's real progress that's being made in China and Korea, and this is, I think, due to the licenses that are being secured by the local regulatory agencies over there, and also some key licenses being purchased by some of the large CROs. I think we announced in a press release a few weeks back about how WuXi PharmaTech, the largest CRO in China, has now secured licenses to ADMET Predictor for supporting some of their in vitro services for toxicity. It's a big deal. And in Japan, which is -- which some people considered maybe a mature market, as Walt mentioned, he's been going over there now for 15 years, usually 2 to 3 times per year, we're still seeing more and more companies signing up for software licenses in Japan as well, especially now we're starting to penetrate the generic industry over there. So I think that market potential and acceptance is -- well, market potential is very high. Acceptance is also very high over there. There's a lot of momentum that were starting to generate, and I think that's going to be one of the reasons why we'll make some dedicated visits to Asia, several of them next year, especially to attend local meetings, host some more workshops over in Asia, et cetera.

[Walter S. Woltosz:]

Thank you, John. Next question from Howard also. If the large upgrade order was included in 4Q '13 results, how much would annual sales growth exceed the 6.6% reported for fiscal year '13? Well, if the whole $180,000 from the ordering [indiscernible] industry were added, I think you can just add the number there. I don't have the slide in front of me. Let's see if I can find that. So...

[John Anthony DiBella:]

It would be somewhere around 9% for the year. And I think one of the other points, there is no maybe real benefit to crying over spilled milk, but between that and also what had happened in Q1 with regards to that perfect storm of site closures and reorganizations, if we had just performed at our historical levels with regards to the renewal rates in Q1 and then also added in the revenue that is going to be coming, but because of external factors, it wasn't received in Q4. You're looking at the year-over-year top line growth to be somewhere around 12% to 13%. So with that $180,000 that Walt mentioned, we'd be somewhere around 9% factoring in historical rate for renewal back in Q1. It would have been somewhere around 12% to 13% for the year.

[Walter S. Woltosz:]

Thanks, John. Walter Ramsley -- it's not really a question, just a statement. Cash taxes paid are equal to a $1,964,545. We asked [indiscernible]. Howard asked, are you increasing price this fiscal '14? John, do you want to comment on that?

[John Anthony DiBella:]

We are increasing prices for some products for calendar year, starting in calendar year '14. So there were too many early requests for quotations and so forth coming in for this particular quarter, but starting in calendar -- at the beginning of the calendar year 2014, there will be some price changes for some of the products.

[Walter S. Woltosz:]

Thank you. We haven't announced which products or how much yet so [indiscernible]. It hasn't been settled. From Donald [indiscernible], is the status of malaria constitute NCEs? I believe I answered that. Malaria is complete for now unless someone else outside the company wants to pay us to continue that work. We don't see putting anymore of our money into that. It's not an area where you're going to make a lot of money. It was a target [indiscernible] in the sense that there was a substantial amount of public domain data that we could use to begin our analysis and to design our new molecules. We've demonstrated we can hit the target, and we're happy with that. The past 2, as I've mentioned, the molecules design [indiscernible] the press release [indiscernible] announcing that the molecule design phase was done and that we were going out for quotes for synthesis. We have now contracted with a group out of Birmingham, Alabama that does this type of thing, and the synthesis process has been [indiscernible], as we speak. And Walter Ramsley, this was a -- it actually was a question. You mentioned that the cash taxes paid was about $1.96 million. The taxes for the financial reporting period $1.37 million. What explains the difference? Well our taxes are flat on a calendar year basis, but our fiscal year begins September 1 and ends August 31. I believe that's the explanation. Is that correct, Momo?

[Momoko A. Beran:]

Now I would like to add cash tax paid, $1.96 million using the cash flow actually we paid. In other words, to cash basis, we paid $1.96 million during the FY '13, while $1.37 million tax is booked as your tax expense for the fiscal year.

[Walter S. Woltosz:]

So was that $1.96 million taxes that we paid for income?

[Momoko A. Beran:]

This is in cash, if you include the payment we made when we filed the extension of previous tax year, plus [indiscernible]...

[Walter S. Woltosz:]

Okay, yes, that was my question. Yes, the question was $1.96 million is taxes not only on income for this fiscal year, but also for a part of the previous fiscal year. Is that correct?

[Momoko A. Beran:]

That's correct.

[Walter S. Woltosz:]

Yes, thank you, okay. From Howard, how much closer do you think Simulations software tools are gaining a wider acceptance for drug development in the [indiscernible] for engineers and drug designers? No, I should have been aware of that, but I wasn't aware the [indiscernible] providers was granted to that, where we the recipients and no one told if we were [indiscernible] technical sessions that went on. When we first started this business 15 years ago, you could hardly attend the session that talked about more than a very limited type of software that was used [indiscernible] file data or to do what we call a doctor study [ph]. And now there's been really an enormous explosive growth there, recession after recession after recession, covering the various ways that modeling and simulation is used from all the way from the earliest discovery efforts like you do with ADMET Predictor, MedChem Designer, MedChem Studio, onto how clinical [indiscernible] trial data are efficiently collected and analyzed and reported on. There are companies that specialize in just that, and so it's really a wide ranging area. The systems biology area where companies are looking at what's going on inside of the cells that causes certain proteins to control certain functions and then try to identify which ones are the likely good targets for the next drug to treat a particular disease. All of this work is going forward, and there's a lot of work being done. And companies are using it more and more. So I think it's an inevitable trend. Someday, it will long after I'm gone, I think the number of experiments are going to be need to be run and will be reduced drastically and more and more will be able to be predicted in a computer. We have a long, long way to go, but 100 years ago, nobody thought [indiscernible] and we certainly did. Q4 sales $1.58 million, what explains the slow collections? Well, you have to remember that orders come in almost always, there's a burst of orders in the last couple of weeks, and also companies are now extending their payment terms to 60 days [indiscernible]. Momoko, are you there?

[Momoko A. Beran:]

Yes, I am.

[Walter S. Woltosz:]

Yes, that was...

[Momoko A. Beran:]

The tax rate of $2 million [ph], one of the reasons is that timing over the collection on the large account receivable. Last year, same customer, we received the payment by the end of August 31. This year, that same customer large order, the collection came in to early September. That will skew the receivable balance. Another reason is this is the industry trend I've been seeing lately, most of the largest pharmaceutical companies joining to outsource PO invoices[indiscernible] and customer joined to [indiscernible] the receivable cycle standard is a 90-day, which is some customer with the 30 days that now trying into 90 days. We [indiscernible] if we pay some discounts [indiscernible].

[Walter S. Woltosz:]

Thank you. From Walter Ramsley, how large was the order that slowed down of Q4? I don't think we identified separate orders, but it was a series of orders booked in the industry that totaled $180,000. From Walter Ramsley, [indiscernible] increasing customer [indiscernible] rate, aren't profits [indiscernible] becoming shorter? Well, actually, no. The amortization is based on the useful life with the maximum. I think it's 5 years on software, when in fact, GastroPlus has been out now for 15 years, and there's [indiscernible]. So the product cycles are not [indiscernible] these are product life cycles, and there's no thought towards increasing amortization rate. How large is the install base? From Walter Ramsley, what percentage of that is a candidate for new membrane [indiscernible] product? John, do you want to talk to that one?

[John Anthony DiBella:]

There are, right now, a little over 200 companies that have paid licenses to the software. So this is going to include both industry commercial companies and nonprofit organizations as well. The number of licenses is somewhere around the order of 800 to 1,000. So you can kind of do the math to see what would be the average number of licenses per organization. And then it's just important to remember that 99% of the customers, they will install these licenses onto a network server and, essentially, treat these licenses as a floating seat available for use by people at their specific site. So the number of people who actually have the software installed and can access these concurrent floating licenses is in the thousand. The percentage of those customers that might be candidate for new MembranePlus product, it's going to be focused on those folks who are used to running in vitro studies for permeability, who may have some interest in learning or analyzing some of their in vitro results to get better information out and be able to then provide that as input into the GastroPlus simulations. We're really trying to promote this synergy between MembranePlus and GastroPlus. I would say that's probably about 1/3 of the clients who would have interest in the MembranePlus product. I don't know, Walt, if you have any other thoughts on that.

[Walter S. Woltosz:]

No. I'd say that sounds in line with what I would understand. Thank you. Walter Ramsley again, what percentage of GastroPlus users have also other products [ph]? John?

[John Anthony DiBella:]

Right now, it's relatively small. I think it's about 20% of the companies which license GastroPlus have licenses to some of the other software. One of the things that we don't -- we didn't talk about so much in this presentation, but our plans for 2014 is to tighten the integration of ADMET Predictor with GastroPlus, and that's specifically related to some of the new metabolism kinetic models that ADMET Predictor 6.5 now has. And I think some of the presentations that we've done highlighting what can be achieved with the combination of these 2 products is really going to drive some additional licenses for ADMET Predictor for these customers of GastroPlus. I think we're really excited about this. So right now, it's still relatively small, but I think that's with some of the things that we're doing as far as, again, tightening this integration, we'll see some new license sales for other products coming through to the GastroPlus client base.

[Walter S. Woltosz:]

Thank you, John. Walter Ramsey again, what is the company's pricing strategy? Well I'd say we look at the competition, and we look at the value [indiscernible] software. We look at long-term [indiscernible]. We look at the volume of the software that customers are getting if it's a single license at a single site versus multiple licenses at multiple sites. And we try to price very fairly to [indiscernible] in a way that [indiscernible]. Aren't there any third-party products the company could leverage with this technology platform and distribution network? Also from Walter Ramsley. We look at those all the time. We [indiscernible]. They're difficult to find with the right size and technology [indiscernible] profitable and willing to sell at a price that makes business sense for us. That's something we tend to continue to look for. From James [indiscernible], do you think MembranePlus is a significant part in the [indiscernible] industry will it take a little longer to gain back? Thank you. John?

[John Anthony DiBella:]

We've done a number of scientific posters at several conferences over the last few months for MembranePlus, so we've started to do some demonstrations, and there has been some very good interest expressed so far. The learning curve may be a little bit steep because the audience for this particular product may be a little bit different in the audience that is going to be utilizing GastroPlus. I think we'll try and learn from our experiences with the DDDPlus software. When we first released that product, we realized that the audience for it, the formulation and the analytical scientists did not historically utilize any sort of computational tools to assist with some of their research. So the learning curve was steep. We had to make sure that we spend a lot of time with them really understanding how things are set up and they needed a lot of training and things like that. We've learned from those experiences, it might be somewhat similar with MembranePlus, but I think that provided we can get the software released early in 2014, that would still give us a couple of quarters to try and recognize some sales. I think the full breadth of the product is going to be realized though going more into fiscal year 2015.

[Walter S. Woltosz:]

Thank you, John. Can you please give some more information and how much you choose to raise prices on GastroPlus? Does the competitive environment and your ability to raise price [indiscernible]? Thank you. I would say, right now, nothing's been settled on. And until we make a decision, we wouldn't want to speculate usually on that. Walter Ramsley, what is being referred to by the comp, the earnings increased by 12.7% in fiscal 2013? That was earnings on [indiscernible] continuing operations as opposed to the other income category that you see here at the slide and opposed to the sale of Words+ in 2012. So looking only at continuing operations. That's software licenses, consulting contracts and funded collaborations. So on those activities, the earnings, which is a majority of our business, of course. That's been heart and soul of our business, if earnings increased by 12.7%. And so only my mic [indiscernible] doesn't come in nearly as clearly or consistently as any speakers [indiscernible] getting an external microphone. Walter. So there was a potential of a cost to NCE project actually hits? Well, again, we ended up with -- from the malaria project, we ended up more than recovering our investment in 1 year. So it actually hits the real drug [indiscernible] a lot of money and a lot of time before we'd ever reach that stage and we don't have to go through all of the preclinical trials, which take years, then the clinical trials which take years. So if it becomes something where we can license that molecule and then have milestone payments as the molecules [indiscernible] development, and the potential [indiscernible] I don't know how to put a number on that. I know there are small companies who are in the business of designing molecules, but not in the business of developing drugs. And so what they do is get beyond that first barrier and come up with something that a large [indiscernible] would like and things [indiscernible] and they make a soft front payment and the numbers I've seen have been as much as 7 and 8 figures on occasion. And then you get milestone payments and perhaps, with the drug becomes -- if the molecule becomes a real drug someday, then we'll get a little percentage of the national sales. That's the last question there [indiscernible]a little over an hour. So I'm going to draw this to a close. Thank you, all, for attending, and we look forward to seeing you at the end of Q1 and probably around mid-January when we have the next conference call. Have a great Thanksgiving and holiday season and nice New Year. Talk to you soon.

[Momoko A. Beran:]

Just one final note. Thank you, all. We will be presenting at a few upcoming investor conferences. We'll be presenting at the LD Micro Investor Conference in Los Angeles on December 3. And the following week, we'll be presenting in Chicago at the Benchmark Micro Cap Investor Conference that takes place on December 11. And in January, we'll be at the Sidoti Micro Cap Semiannual Investor Conference that takes place January 13, 2014 in New York City. So this concludes today's conference call and webinar. If you missed any part of today's presentation, the playback will be available at our website, www.simulations-plus.com. Thank you, again. From Simulations Plus, have a great afternoon.