Walter Woltosz - Chairman & CEO John Kneisel - CFO Renee Bouche - IR.

Analysts:.

Good afternoon. It is Monday, July 10, 2017 and on behalf of Simulations Plus, I welcome you to our Third Quarter Fiscal Year 2017 Financial Results Conference Call and Webinar. Presenting this afternoon will be Chairman and Chief Executive Officer, Walt Woltosz and Chief Financial Officer, John Kneisel.

An opportunity to ask questions will follow today's presentation. You may send your written question using the questions pane on your control panel or you may use the hand-raising feature on your control panel to ask your question directly. Please be sure to enter the unique audio PIN displayed when you join the call.

This call is being recorded for playback at our website, www.simulations-plus.com. Before starting today's presentation we will begin with our Safe Harbor Statement. With the exception of historical information, the matters discussed in this presentation are forward-looking statements that involve a number of risks and uncertainties.

The actual results of the Company could differ significantly from those statements.

Factors that could cause or contribute to such differences include, but are not limited to, continuing demand for the Company's products, competitive factors, the Company's ability to finance future growth, the Company's ability to produce and market new products in a timely fashion, the Company's ability to continue to attract and retain skilled personnel and the Company's ability to sustain or improve current levels of productivity.

Further information on the Company's risk factors is contained in the Company's quarterly and annual reports and filed with the Securities and Exchange Commission. It is now my pleasure to introduce Walt Woltosz..

Thank you, Renee, and welcome everyone to our third quarter fiscal 2017 conference call. For an overview for those who may be new to Simulations Plus we are a major provider of both software and consulting solutions for R&D predominantly in the pharmaceutical industry but also serving food, chemicals, and some other industries, cosmetics for example.

We cover all the way in pharmaceutical development process from the earliest drug discovery when a chemist might be drawing the molecule or using a computer program to generate a million potential new molecules that have never existed to see if any of them might eventually become a drug through the preclinical development plus laboratory [working with animal] [ph] and finally into first in human trials on into safety research and risk assessment, phase 2 and phase 3 clinical trials data analysis by our Cognigen division in Buffalo, beyond patent life to supporting generic companies in integration of data from multinational R&D efforts.

This is a major $5 million, five year contract being performed by our Cognigen division in Buffalo for a major research foundation.

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

For our third quarter it was a record quarter of any quarter ever in our history. Our revenues were up $736,000 or 12.2% to 6.75 million.

Our net income was up 171,000 or 8.9% to 2.08 million and the footnotes, there are notes that there are some onetime charges which will be detailed little more in John Kneisel's presentation with a few more slides that reduced the net income to pay for some of the acquisition costs in the third quarter.

Some of them were actually earlier than the third quarter and when I talk about the nine months you can see the same footnote there. Our software renewal rates 89% based on the number of accounts but 93% based on the actual revenue and fees.

We added 20 new software clients in the quarter and our strong consulting pipeline resulted in a significant increase in revenues. And our current backlog remains high, we have had to hire -- we had those new hires onboard and they all contributed.

For year-to-date for the nine months fiscal year 2017 through May 31st revenues were up 1.86 million or 11.6% to a total of 17.87 million. Net income up 476,000, 11.4% to 4.64 million. Again that was reduced even though it is a new record that was reduced somewhat by one time charges associated with the acquisition.

Diluted earnings per share up just under 10%, 9.9% to $0.27 a share for the nine months and in the nine months we added 63 new software clients. I mentioned the acquisition of DILIsym Services, we are very excited about this.

DILIsym is a software program, it is a mechanistic mathematical model that looks at activities going on inside the liver and particularly inside the hepatocyte or liver cells and it looks at all of the effects that cause damage to the liver in a variety of mechanisms.

Several mechanisms are covered now and the newer ones are anticipated as the consortium continues to develop this software capability. The DILIsym software has been applied to support decisions throughout the clinical development pipeline. The FDA is very interested in drug induced liver injury.

And in the past the software has been used to evaluate and interpret clinical biomarker signals in clinical trials. So we look at for example levels of particular enzymes in the liver and in the plasma which indicates potential liver injury.

Software has been used to optimize clinical trial design so dose selection, monitoring, and inclusion and exclusion criteria that's been used to translate preclinical safety risk for first-in-humans.

So when we look at rat data for example or a dog they are taken by species and then try to extrapolate that to what we expect to see in first-in-human trials [Indiscernible] by the translation. We can rank compounds by risks.

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

So these results have gone to regulatory agencies including the FDA and other regulatory agencies around the world. It has been presented at Antimicrobial Drugs Advisory Committee Meeting last year. And we are just very proud that DILIsym accepted our offer and that DILIsym Services team is now part of the Simulations Plus family.

They are Simulations Plus employees and enjoy all the rights and privileges associated with that including in fact that they now have around 50 additional scientists, engineers, and an additional support staff on top of that to support their efforts.

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

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

DILIsym operates through a consortium or an initiative. The current members of that initiative are shown here. There have been in the past up to 17 major pharmaceutical companies. Some have been in and out over the years.

DILIsym has been around since about 2011 so the DILIsym software has been under development since then formerly under the Hamner Institute in Research Triangle Park and about two years ago separated away into DILIsym Services when the Hamner Institute basically went out of existence.

Over $7 million has been invested to date in the development of the DILIsym software and we expect the consortium to continue going forward. In addition we also have two funded collaborations with the FDA. We're now in the final year for our collaboration which has funded $200,000 a year for improving ocular dosing simulations.

We have a consortium of leading pharmaceutical companies that are part of this effort. And when we look at the market for ophthalmic drugs we are looking at a significant growth from $16 billion in 2012 estimating up to almost $22 billion in 2018.

And as the operation ages we are seeing a greater prevalence of eye disorders such as diabetic retinopathy and macular degeneration. We are also in second year of our three year $200,000 three year collaboration for the simulation of long acting injectable microspheres.

So these are small drug particle loaded microspheres, the drug particles are loaded into a polymer microsphere. And this little microsphere gets injected typically into muscle that could also be subcutaneous. And as it is in the environment of the tissue that it is injected into, it slowly degrades and slowly releases the drug.

Now this can take weeks or even months in some cases and so it is a very long drug release process and simulating this is quite challenging.

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

Stock price as you can see has been doing quite well. We closed today at 12.90 and bumped against 13. Again today it is bumped against 13 once or twice in the last week or two. So things are going well. The lower curves that you can see down here are the DOW, the NASDAQ and the S&P 500.

You can see over the last two years as you can see in the chart that we have outperformed all three indices by quite a significant amount. Let me turn the presentation over to John Kneisel now, our Chief Financial Officer. .

Alright, thanks Walt. We will cover the first the last three months third quarter, and then we will go to the nine month numbers. So, I will walk into the excitement of the accounting world here. So our consolidated revenues like Walt said we reached sort of a new height for our quarter this last year.

They were up 12.2%, 736,000 or 6.75 million for the third quarter from 6 million the prior year. 284,000 of that increase came from our Lancaster division. It represented a 6.1% increase and Buffalo increased 453,000. They had a 33.6% increase over the prior year. It was a nice increase and I'm really happy with that one.

Our consolidated software and software related sales increased to 223,000 or about 4.9% while we saw a real good growth in our consolidated consulting and analytical study revenues which were up 34.9% for the quarter. Our consolidated cost of revenues increased $250,000, they were up about 21% for the third quarter to 1.45 million over last year.

The cost of revenues as a percentage increased by 1.54% and 209,000 of those increases were for labor related costs for the studies and contracts and software amortization accounted for about 50,000 of that increase. Our gross profit increased 10.1% to 5.3 million from 4.82 million the prior year.

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

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

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

A couple of items went lower. Selling expenses were down a little bit but we had redone our website the prior year we didn't incur those costs in this period.

And our professional fees were down a little bit in the accounting area, down about 55,000 as we had a little bit of lower compliance costs associated with lower Sarbanes Oxley related costs this year. Looking at research and development, our R&D expense was 254,000 for this quarter.

Total research and development costs actually decreased in this period where we incurred about 598,000 of which 344,000 was capitalized and the 254,000 was expensed.

Our income tax provision we are actually, Uncle Sam probably loves us, it was a cool $1 million for the quarter hopefully we can do something with the government to get that down a little bit compared to about 891,000 for the year. But our overall effective tax rate actually came down a little bit.

So it is about 32.5% for the quarter and that was down from 34.4 the prior year. Decrease basically is associated with the effect of some tax credits and our equity based compensation costs that affected the rate this year. Overall net income increased by 171,000, 8.9%, 2.08 million from 1.91 million the prior year.

Net earnings for Buffalo increased $131,000. They were actually up 102% over the prior year. The net earnings from Lancaster were only up $36,000 or 2% but Lancaster is our parent company and that division for all the costs of the DILIsym acquisition and which was about at $97,000 charge to the parent company.

Earnings per share for the quarter still was up a penny at 6.7% even with those additional charges borne by the company and the parent company. And EBITDA was up 9.7% to 3.6 million for the quarter. Moving on to the nine month numbers, net revenues were up 11.6% or 1.8 million to 1.86 million or up 1.86 million to 17.87 million for the year.

And 895,000 of that increase was generated by Cognigen in Buffalo representing a 20.8% increase over the prior year. And revenues from Lancaster increased 963,000 or 8.2% to 11.7 million for the year. That doesn't look right for me. It is a 12.69 million for the year.

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

129,000 of increased software amortization and 108,000 of direct contract related expenses. Gross profit for the nine months was up 8.5% just over $1 million to 13.5 million from 12.5 million in 2016. 415,000 of the increase was gross margin in Buffalo and which had a 56.9% gross margin on 5.19 million in revenues.

Lancaster accounted for 649,000 of the increase and showed an 83.4% gross margin for the period, both strong margins in both divisions. G&A for the period was up 687,000, 13.5% to 5.77 million for the nine months.

Major increases were the salaries and wages which have been increased this year mostly against stock based compensation, higher G&A allocations and some higher annual bonuses paid based on increased profits last year.

The board passed out the commission expenses that were also higher due to higher agent sales where we have commissioned our commission reps over there.

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

Selling and expenses were down 50 some thousand. Some advertising related and web related costs and the cost of website development and we also saw some decreases in travel and entertainment mostly though some lower cost of conference attendance and foreign travel.

Not that we've decreased our conference attendance, we have just had lower costs and the cost of the places we've gone to. Research and development we incurred about 1.89 million so far this year in R&D expenses. Of that amount we capitalized 928,000 and 952,000 was expensed.

Prior year we had incurred about 1.97 million of research and development and we had expensed 1.16 million in the prior year. So operating -- ultimately operating profits up 9.4%, $590,000 over the prior year and our provision for income taxes is about 2.2 million.

It's holding at about a 32.2% rate which is down about 0.8% over the prior year's number. I know a lot of people are tracking, trying to track our percentage of income tax rate. It is still holding in that 32.5% to 33% zone. Overall net income was up 476,000 or 11.4% to 4.64 million. That increase came from both divisions.

Net earnings in Buffalo increased by 216,000 or 45%, nice healthy increase over the prior year. While the earnings from Lancaster were up 260,000 or 7.9% to 3.95 million.

And as we mentioned earlier there are 261,000 of pretax charges related to the DILI acquisition which amounted to about $177,000 for the nine months period which impacted obviously the bottom line but I think it was well worth what we spent on it.

EPS is up 9.9%, $0.03 a share to $0.27 from $0.24 the prior year and EBITDA also increased 22% to 8.3 -- 8 million for the period. Cut some of the older years out of the slides for those of you who have seen this before but if you look at the last five years you can see the growth in the years.

The green bar in the middle is the year we picked up and acquired the Cognigen and so some of those increases in revenues came from the Cognigen acquisition but you can see where we've had some pretty good growth trends coming into our fourth quarter which is one of our lower quarters for revenues and earnings but we have that seasonality that's been built into the pharmaceutical industry over the years slowing down in the summertime.

Go on to the next one Walt, net income sort of the same tracking mechanisms but again we are always seeing the upward trends as we move forward. Next slide, earnings per share again same scenario. We expect to see our see our numbers continue and no known issues moving forward.

And EBITDA again it's healthy cash business model, a model of Simulations Plus as always does well, provides cash and allows us to really return money to our shareholders. Keep moving there we go, on the slide here we have tried to show where the bottom bars are distributions to the shareholders.

The 0.86 at the bottom is 860,000 that is quarterly dividends that are coming back out to the shareholders. The cash, the red line is this cash on a quarterly basis. You can see it drop but where it's dropped here at the end reduced. Every time there's been a decrease there's been some purpose for the decrease.

It's been to make an acquisition or for some strategic purpose. Back in 2014 we renegotiated our royalty agreement with TSRL that has saved us about 900,000 to date. And since we've done that our pretax 900,000 has been a good deal for us and we just made our last payment this last quarter on that so we're now unencumbered on any debt on that.

And when we've made major payments for the acquisitions we've got those marked here. So feeling really good going forward. Walt, next one. Couple of key numbers, again cash is down since we -- the DILI acquisition occurred on June 1st so cash dropped on June 1st and 2nd as we made those payments.

But actually if you see on the prior slide where it is 6, well it is down at the bottom here, $6 million now. We did pick up some cash from -- in the acquisition and so we are still in the healthy cash position going forward. Current ratios are excellent. We're going to have no real current liabilities and equities solid for the company going forward.

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

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

So from a marketing and sales standpoint just to cover the breadth of technologies that we deal with, all the way from early drug discovery through preclinical and clinical and post clinical trial, post patents to their generic companies. Our software programs that are on the left hand side here ADMET Predictor, MedChem Studio, MedChem Designer.

We call these Chem Informatics programs.

These deal with chemical structures like this either individual structures or millions of structures potentially analyzing what those compounds would be like if we were to make them before they have ever been synthesized or mining data that comes from for example high throughput screening of one of the features of MedChem Studio's data mining.

Also designing these new molecules is another function of MedChem Studio as well as MedChem Designer. On the right hand side, GastroPlus, DDDPlus, and MembranePlus, these are programs that are simulation programs. So we recall these modeling programs on the left.

Generally those are based on static equations with no time dependency although there is a miniature version of GastroPlus as one of the potential modules in ADMET Predictor. On the right side these are all GastroPlus, DDDPlus, MembranePlus and DILIsym and NAFLDsym which I will explain in a second.

These are all differential equation base which means they are actually simulating things that are changing over time. PKPlus has the ability to do both, some static analysis and differential equation based analysis.

And KIWI is the data management, data integration program that is being used on the $5 million five year grant from the research foundation but also being used by a number of other organizations for data integration, data management, and storage.

You know across the entire product line we provide consulting services and collaborations all the way from early discovery again through preclinical and clinical trial data analysis, the toxicity analysis potential for DILIsym, and the non-alcoholic fatty liver disease, NAFLD similar issue.

So just quickly DILIsym, DILI is drug induced liver injury, this is really the potential for a new drug or an existing drug that cause liver injury over some period of time. So here we have a known drug overtime to find out if it is likely to cause liver injury in a significant number of subjects in a population. NAFLDsym is the opposite.

With NAFLDsym we are not looking for the drug to cause an injury, we are looking to see if the drug can treat non-alcoholic fatty liver disease. And Brett Howell, our CEO, our President rather of DILIsym division is on line. If I say anything wrong jump in and correct me. Okay, next slide. Our software continuously is evolving.

In any software company once you put out a version you are already working on the next version and that is always the case here. If you are not working on an update then probably the software product is slowly dying. All of our products are being upgraded so we released version 9.5 in April of this year. We added the intramuscular dosing.

This came out of the three year FDA contract for long acting injectible microspheres. This is an optional add on module so separate level base. We have added new PBPK models for antibody drug conjugates. This is also an optional add on module. ADMET Predictor we are scheduling the next release version 8.5 for the fall.

This is used for rapid compound library screening in virtual humans and rats and this is again an optional add-on modules being added and a synthetic feasibility assessment.

So, you can draw all kinds of molecules but can you make them and so synthetic feasibility since if I look at a molecular structure what's the challenge to make that, is it likely to be easy to make or is it likely to be very difficult to make. And this will be an upgrade to our MedChem Studio module within ADMET Predictor.

On DDDPlus version 6.0 in development schedule for fall release, this is again affected by the FDA grant on long acting injectible microspheres and so we have added capability to model the release of drug from the microspheres in in-vitro environment.

And then we have also added some new precipitation assay and biphasic dissolution model since some of our dissolution methods show two different phases of dissolutions. Sometimes an initial burst followed by a longer acting release after that for example. On MembranePlus, expect to release version 2 later this month.

We've added new models to look at data collected from hepatocyte studies, these are liver cells. This again is complementary to our RTP division there. At DILIsym that maybe responsible for working with DILIsym and this will expand the user base.

And we also have improved the integration with the ADMET Predictor module so we have an ADMET Predictor module where you can load in structures, molecular structures directly into MembranePlus same like GastroPlus and have it set up within a base and do some analysis using predicted properties from our ADMET Predictor even though the molecule has never been named.

PKPlus version 2.0 scheduled for the fall. This addresses several items reported, actually requested from prospects and clients during testing and we still have a number of evaluations ongoing at this time. Sales revenue, you can see a number of software licenses sold per quarter and nice steady climb.

Consolidated revenue up by 12.3% versus the previous third quarter. Software revenue up 5%, 93% renewal rates, 20% increase in licensed units, 10 new commercial companies and 10 new non-profit groups, continued expansion of licenses at the Chinese FDA.

So GastroPlus in particular is being used by regulatory agencies around the world and that is something very important. The regulatory agency is using a piece of software.

The companies that are submitting results or applications to those regulatory agencies want to know what the regulatory agencies were seeing and so they want to have the software as well. Consulting revenue, very nice increase in consulting revenue, up almost 34% in Buffalo, 43.5% in Lancaster during the last quarter.

We can see here the sales break down on software licenses, about 58% of the revenues coming from renewal, about 11% from new, and then this is not just software, about 29% of the revenues coming from consulting with a couple of percent coming from training. Similar trends for the nine months. You can see again the progression.

Somewhat similar percentages here in terms of the bright [ph] that is really renewals, new software, and consulting. Software revenue up 6.7%, 95% renewal rate based on fees, 28% based on accounts.

Recently we see difference because some of the accounts are very low priced accounts so government or academic licenses and these are typically academic licenses that are used by graduate students. They finish their thesis and graduate and the software doesn’t get renewed.

But it didn’t involve very much money and so you see a very high renewal rate for the commercial licenses and that is where of course the revenues really come from. 8% increase in license renewals in the first three quarters related to mid commercial companies in 31 new non-profit groups.

Consulting revenue up 23%, almost 21% in Buffalo and is 43% in Lancaster. And significant increase in training revenue. Our training is very important to our sales process.

Training is really the, I would say the foot in the door, and that industry scientists coming to our training sessions and they learn how to use the software when they go back to their companies and request funding and hopefully get it.

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

For nine months the percentages are pretty similar. As you can see not a lot of change so Asia now there -- few years ago Asia was nearly 15% or 20% however up to about 27%.

Marketing activities we did redesign the website last year and we have added now a video, we have added video content and we have a video newsletter I guess you might call it that's provided around the first of each month. This looks like a healthy studio with a couple of our presenters. This time around it was Irene [ph] and John DiBella.

Sometimes it is John DiBella and Michael Wallace. So it is back and forth between the two speakers on camera talking about what is coming up in the next month and what is the status of our marketing and sales activities. So we are continuing to do that. We have increased our focus on search engine optimization performance.

We need to do a Google Search or some other search on keywords. We want to make sure that we are up right at the top as it hits for those few words. Workshops and conferences we have done PBPK or Population PK data analysis workshops in San Diego, Germany, Shanghai, and Buffalo.

And we have workshops scheduled in Korea, Boston, and Tokyo somewhere in fall. I think John DiBella is in Korea right now. Hosted several onsite training for individual companies so this is separate from our training where many companies come together in these workshops. We actually go onsite of individual companies and train as well.

We have attended 12 scientific conferences during the quarter and delivered nine poster/podium presentations. We had two webinars on GastroPlus modeling applications and we continue with our very active social media campaigns. We used the social media, Twitter, Linkedln and YouTube and those followers have increased 18% over the last year.

The GastroPlus users group increased 13% versus the previous June. Okay, Ted again his flight was delayed and so he is in the air travelling between Chicago and Seattle. So I will go ahead and go through his slides.

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

So in FY2017 Cognigen has been working in 26 companies, in 30 million different drugs and 65 total projects. Six new companies have been added so far in fiscal 2017 and 36 new projects. 22 projects expanded scope, three reduced scope and there are currently 32 outstanding proposals of 20 different companies.

So, Cognigen is just hiring -- and we are very proud of the work we are doing. We are doing fantastic job over there.

In fiscal 2017 so far they have presented new posters of those two peer reviewed manuscripts, then four invited presentations, and one book chapter has been published and right now we are working on 21 additional publications and five conference abstracts for additional presentations and scientific readings that are coming up.

The most common therapeutic areas oncology and cancer followed by neurology, endocrinology, and infectious disease. And about 45% of the projects that Cognigen works on result directly in regulatory interaction.

So the work that they do is very different than what we do in [indiscernible] or what is going on now in North Carolina and that they are dealing largely with clinical trial data analysis.

So there is a clinical trial going on and the data is being collected then the large cohort of subjects, they get that data and they can be the first one to unblind that data and know whether that project or that clinical trial is going well. And that you can imagine how sensitive that information is.

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

When I say audited by that I mean financial and IT teams come in from the big drug companies to see what they're doing and how they're doing and it's a critical part to have that capability. They have done a very good job recruiting and adding new scientists to maintain their growth. KIWI is a software that is dealing with the data integration.

And working with those major foundation and that has been a continuing development, had additional staffing. Around 19 new licenses so it is not just with the research foundation, it is other users as well. And we have some other demonstrations ongoing with research groups ranging from academics to large pharma.

So in summary Cognigen continues to grow, consulting activity is expanding very nicely and healthy pipeline of new projects including collaborations with Lancaster for PBPK modeling, number of the Cognigen scientists are now quite expert in using GastroPlus for PBPK model.

We are very excited about the collaboration opportunities with DILIsym and Cognigen because a lot of the analysis that's done can be in the later stage clinical trials when a lot of money is being spent. And so the ability to identify potential issues with drug induced liver injury is very important as they disclosed.

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

And just a final summary slide, before we go to questions, so third quarter revenue is up 12.2%, 6.75 million, net income up 8.9% to little over 2 million and nine months revenue is up by 11.6% to just under 18 million and net income up 11.4%, so you are 4.64 million.

Again the net income for both the quarter and for the nine months were affected, were reduced as a result of expenses for the one time charges for the DILIsym acquisition. Diluted earnings per share up just under 10% for the nine months. Both California and Buffalo divisions are performing very well.

We are very pleased with the efforts going on in both divisions. Now the DILIsym services acquisition will expand the offering that we have into both drug induced liver injury and non-alcoholic fatty liver disease. And the synergies that exist between the three divisions I believe are going to play together quite well.

We are now in our first quarter with DILIsym included and so June, July, August is our fourth fiscal quarter. And at the end of this quarter you will see the effect on revenues and earnings of adding the additional division.

We believe that the company as a whole continues to lead the trend towards greater use of modeling and simulation in research and development not only in pharmaceutical industry but also in food, cosmetics, and agrotech. And with that I'll turn it back to Renee who will handle the questions..

Thank you, Walt. The acquisition of DILIsym is of great interest out there, Howard Halpern has sent some questions. .

Prior to acquiring DILIsym how many new scientists and support staff did you hire to support the increase in demand for consulting service projects and how many new project requests are you currently seeing?.

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

Well, in Lancaster we've added three consulting type people here, three PhD's and over in Buffalo I think they're up in net five people.

Cindy would know the exact number because we've got a retirement or two through there but I think they're up five people in the last nine months over there because we're handling the major contract and looking to expand to handle the work there..

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

Okay, so DILIsym is involved in what's called QSP or quantitative systems pharmacology. Some people refer to it in another term in my mind at this point is biological systems simulation or something like that, I have forgotten the term. But basically everything that we do other than DILIsym involves what's happening outside of cells for the most part.

We don't really deal in how proteins interact with each other inside of cells in very complex ways. Systems pharmacology deals with that. So this adds a whole new realm of science and capability. The DILIsym science advisory board is absolutely world class when it comes to drug induced liver injury and diseases of the liver.

The person who runs the - or who chairs the DILI-sym which is what's the consortium or initiatives call is Dr. Paul Watkins of University of North Carolina.

Paul is a -- he is the man on the mountain when it comes to drug induced liver injury and he combined with the science advisory board and the consortium which consists right now of about dozen companies whose scientists also many are specialists in drug induced liver injury are guiding this development effort, give us a really unique capability, I don't know of any other capability in the world that has the sophistication and understanding of drug induced liver injury of the DILIsym team and the consortium.

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

Okay, next question concerns the new FDA Director.

How do you see the new FDA Director impacting the future of simulation modeling since it appears he wants to accelerate the timeline for generics and biosimilars coming to market?.

Well it's always good when the FDA wants to accelerate things because the highest leverage capability that I know of myself is [Indiscernible] simulation.

When we can predict things well enough to avoid failing trials or to avoid unnecessary experiments that maybe successful experiments but we can show they are not necessary then time and money is saved.

And having that added to the [tone] [ph] at the top as we say at the FDA I hope –[Indiscernible] industry we certainly expect modeling simulation will be a key element in satisfying his desire to accelerate drug development and reduce cost. .

Okay, next question is how are sales into non-pharmaceutical markets tracking and are they skewed to either software sales or consulting services?.

Oh boy, I will leave John the bolus for that one and he seemed pretty -- I don’t know the answer to that, John K or anybody else, any ideas?.

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

Okay, and next question, I know in prior announcements that the acquisition of DILIsym would be accretive to the bottom line.

I do have some modeling questions, will revenue from DILIsym be broken out as coming from North Carolina Division or will it be folded into Lancaster sales?.

I think we will continue to show each division’s performance so that you'll be able to see that. You know as we reported earlier DILIsym last year, calendar year 2016 was their fiscal year also and during that fiscal year they did just over 3 million in sales and netted about 720,000 in net earnings. Again we expect to grow the company.

They don't have quite the seasonality that we have in the West Coast, in particular where software license renewals tend to fall in the same quarter that the company initially signed up. And so you see in the bar charts you could see a pattern where the fourth quarter, June, July, August was always the lowest quarter.

Even though the fourth quarter now is better than the third quarter which has typically been our highest quarter if you look at just three or four years ago fourth quarter is now exceeding where the third quarter used to be as a record. So I think DILIsym will be a little bit more linear and again we expect to grow the division. .

Okay, that pretty much answers the next question if there was any quarterly seasonality for DILIsym sales and what could their contribution be in 4Q 2017 based on historic numbers?.

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

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

I don't know those numbers. They're certainly not public at this point. We see synergies more I would say in the ability to co-market to cross sell.

The customer base that we have between Buffalo and Lancaster is much larger than the customer base in ITP and so we definitely plan to be introducing and already have begun to introduce DILIsym to our other customers and have had conference calls and things like that to begin to try to expand the market for DILIsym..

Okay Walt. The next question is from Walter Ramsley [ph]..

Please describe DILIsym's business model also how does the group of 17 companies work, how large is the backlog, and what is the revenue run rate?.

Okay, well 17 companies is the number that has been participating one time or another. There are 12, right now if I remember the number correctly. It is a consortium model so consortium dues are low six figures dues. As part of the dues they are able to use the software and so they get access to the software. They also get reduced consulting rights.

Overall the consortium dues run -- I'm just going to ballpark it very roughly about a third of the total revenues ballparkish and the rest is consulting. Consulting is done with companies who are not part of the consortium. They did not get the software that the DILIsym team uses the software in performing the studies for them.

And that includes the non-alcoholic fatty liver disease simulation software as well. That software is tailored more per customer where DILIsym itself as a software product is more of what we might think is a shrink wrap product. It's a product that you develop the software, you send it out to all the consortium members, and they all get the same copy.

For the non-alcoholic fatty liver disease the software has to be tailored for the specific interests of the customer. So it is not as amenable to our consortium efforts that we have with DILIsym. I think that pretty much answers the question. .

Okay, and Walter Ramsey's next question is has the competition undercut the PKPlus launch either with performance upgrades or more attractive pricing, if not what is holding up the sales acceleration?.

Well what's holding this up is as I mentioned when we put the software out almost a year ago for evaluation. The feedback we got was wow, this is pretty slick, well can we make it do this and that. And it has been far more difficult to make it do this in the aftermath we've been doing.

It's coming along, it's coming quite far from what it was say a year ago. I think it was year ago in September or August when we released version 1. So we have been working very hard to kind of wrap that up and be able to put up version 2 with all of the requests that we got from different folks around the world during the evaluations. .

Okay and Walter Ramsey asks what was the tax rate on DILIsym's 2016 income?.

It is not public and I wouldn’t even know what it is. John..

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

Thank you John. .

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

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

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