Jan 22, 2008
Executives
Walter S. Waltosz – Chairman of the Board, President & Chief Financial Officer
Analysts
Howard Halpern – Taglich Brothers Dick Mills – Private Investor Frank Gristina – MicroCapital Fred Milligan – Sanders Morris Harris Group Inc.
Operator
Thanks so much for holding everyone. Welcome to the Simulations Plus first quarter fiscal year 2008 financial results conference call.
Just a reminder today’s conference is being recorded. And now at this time I would like to turn the conference over to our host Mr.
Walter Woltosz, Chief Executive Officer. Please go ahead sir.
Walter S. Waltosz
Thank you very much and welcome everyone to our conference call to discuss the first quarter of fiscal year 2008 which ended on November 30th. I am required to read this Safe Harbor statement so 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 or 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 personal, the company’s ability to identify evaluate and close suitable acquisitions 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. Okay, so the lawyers are happy now and now we can have a discussion.
First, I’ll discuss the first quarter 2008 results and then a brief discussion of our strategy going forward and then I will welcome any questions that you might have. In the first quarter our gross revenues were $1.98 million.
This is up over 36% from first quarter of 2007. Our pharmaceutical software and services portion of the business was $1.438 million up about 75% or 74.5% from the first quarter last year.
That was in large part due to a large order where the customer renewed in November to avoid having a gap in some software licenses at some of their sites. That order was received in December of last year.
We expect that it will be in November from now on because of the licensing timing they don’t want to have a gap where the software is unusable for a few days. However, the pharmaceuticals software and services business would have exceeded first quarter of 07 without it.
Someone is going to ask me by how much and if I tell you that you will know how much the order was for and I am not allowed to reveal that by contract, so I can’t be any more specific than that. Words + subsidiary revenues were $545,000 this was down 13.8% from first quarter of last year.
This was largely due to an inability to ship the handheld PDA system that we call Say-it!SAM. It is based on a Hewlett Packard PDA, personal digital assistant.
For most of the quarter we just began shipping those in the last few days of the quarter. We had a delay in some injection molding cases that we have customized for this product and finally got all of that resolved and began shipping right at the end of November and then really good shipments in December which were greater than any month in all of last fiscal year.
SG&A for the first quarter was $930,000 this is 47% of sales, down from 52% of sales in the first quarter of 07. R&D expenses were $226,000 for the quarter up from $184,000 in the first quarter of 07.
Income before income taxes $405,000 that is up 332% from $94,000 from the first quarter of 2007. As most of you know in the software business once we exceed breakeven the margins go up quite nicely and so the additional revenues on the pharmaceutical side here contributed to that very large increase in income before income taxes.
Net income $243,000 or about $0.013 per fully diluted share and that is up 232% from about $0.043 per share in first quarter of 2007. That is also with an increase of almost 8% in the number of fully diluted shares over that time.
Cash position now approaching $5 million, $4.854 million. That is up 118% from the first quarter of last year.
And, shareholders equity which is a number I tend to pay a lot of attention to is a little over $8 million, $8.075 million that is up 40.3% from the first quarter of last year and amounts to an increase of 5.3% just during the first quarter. I am going to have a short discussion of income tax because I know that has been on everybody’s mind.
Why did we have the glitch that we had last year on our income tax estimate? We’ve had some long discussion with our independent accounting firm to try and understand our tax situation better and how we can communicate things a little bit better.
First of all and I have to admit that some of this is a little bit new information even for me after 10 years. Tax returns are filed after the 10K so the taxes are estimated for the 10K and they sometimes change as the returns are prepared because of changes in rules for tax credits and other accounting factors from year-to-year.
So we often don’t know exactly what the taxes are and we have to make an estimate at the filing of the 10K. Last year for example, there was an exclusion called the extra territorial income exclusion.
This was for income generated outside the United States. That expired during the year and so we had a much lower exclusion, much lower tax benefit from that exclusion last year than from the year before and there will be none this year.
The R&D tax credit, our R&D tax credit for last year was lower than the previous years because of an overestimate in previous fiscal year and the difference in R&D spending. The tax credit is based on how much additional money you spend on R&D over the previous time period.
Also there are differences in state and federal allowances for various deductions and credits. So taxes are quite complex.
We follow the statement of financial accounting standard or SFAS 109. We have had discussions with our accounting firm and we will be in engaging now a tax analyst company to insure that we are taking advantage of all proper deductions and credits.
We are currently using an estimated tax rate of 40%. The actual tax rate is 39.87% or something like that if you have no credits, no adjustments.
So that is just state and federal when you are doing business in California. Congress allowed the R&D tax credit to expire on December 31st so we are not including any estimate for that credit for now.
On the other hand congress has renewed the R&D tax credit for 25 years and about 13 of those they were late in doing so and made it retroactive so we pretty well expect that there will be one but until we know for sure we can’t include this credit in our estimate of tax. So the 40% we believe is a very safe and conservative tax rate we expect and hope that it will be lower than that.
In terms of progress in the company let me just take our pharmaceutical software and services in alphabetical order; ADMET Predictor and ADMET Modeler, we completed the NIH SBIR Phase I Grant and we submitted our Phase II proposal which is for a $750,000 effort spread over two years. In this effort we have developed a method for very fast calculations of some unique quantum mechanical descriptors and we have seen that these descriptors give us improved accuracy on a number of the property predictions that we have in ADMET Predictor.
That probably sounds like a lot of gobbly gook if you are not in the field but basically it says that there are methods of calculating these descriptors that usually take on the order of a day to calculate a single molecule. We have come up with an estimate, a way of doing this that estimates these descriptors very, very closely, very small errors from the more detailed calculation and we can calculate millions of molecules in day.
So, this is a very significant improvement in this capability and these kinds of descriptors are important whenever there are reactions involved with a molecule. Things like metabolism which is a very important thing in our field and synthesis of molecules are often governed by these charges on the atoms within a molecule that are calculated in this way.
So we feel quite optimistic that we will be awarded a Phase II. Phase II’s I am told are a little easier to get than Phase I.
If you do a good job on Phase I you have a pretty good chance. We are optimistic about that.
We have done quite a bit of work in integrating ADMET Predictor with both the GastroPlus and ClassPharmer so that ADMET Predictor can be called from these other programs automatically or semi-automatically with a click of a mouse and numbers that are needed, property estimates that are needed for those two programs can be calculated quickly and brought back into those programs. In the past we could do that with a lot of file manipulation but it was kind of a manual process where you had to go out, save a file, import it into the next program and then export that file and import it back into the first program.
Now, this is much more convenient and the interest has been very good in having this capability both in GastroPlus and ClassPharmer. We have a module for predicting metabolism in final testing; we call it the [Ensline] Metabolism Module.
This is work we have discussed in the past where we have collaborated with Kurt [Ensline] back in Rochester, New York where I grew up actually. This is prediction of metabolism kinetics for key enzymes and by that we mean that we can estimate the rate at which a molecule will be metabolized by different enzymes.
There are some programs on the market that will predict whether or not a molecule is likely to be metabolized by a certain enzyme but, as far as I can note, I can tell you right now I don’t think that there are any that predict the rate. So, we would predict not only whether its likely it will be metabolized but also how fast.
With that information if a molecule appears to be metabolized by more than one enzyme you could look at the difference in rates and see which one is the dominant enzyme. We have also made enhancements to the ADMET Modeler portion of the program.
Those of you that have followed us for a few years know that we used to have a separate program and ADMET Modeler and we merged it into ADMET Predictor. So, ADMET Predictor and ADMET Modeler are now a single program.
This is a program that builds the mathematical models, the predicted models that we use in ADMET Predictor. The model building process is quite sophisticated and apparently works very well because in all of the independent comparison studies that we know of ADMET Predictor has been ranked number one in accuracy in predicting the properties that were being evaluated in those studies.
No other company that I am aware of was even consistently in the top four and so that, we feel is an excellent validation of the methodology that we have used in developing the models in ADMET Predictor. The next program is ClassPharmer and we released version 4.4 with quite a number of improvements in response to customer requests.
We have released last year a molecule design capability in the program that was new area for us to get into and we now have additional capabilities for molecule design that are nearing release. We expect that to be out during the current quarter.
And again, even tighter integration with ADMET Predictor is in progress. We have a way of calling ADMET Predictor and doing the calculation and bringing back information but we think that can be improved and make it an even tighter integration.
Particularly in the molecule design area, as you have a program that is generating new molecules you want to know if they’re any good. The way you can tell if they are any good or can estimate if they are any good is to predict their properties so the integration of Predictor and ClassPharmer is really a key to having a very strong molecule design capability.
The next program is DDDPlus, this is the program that simulates the in vitro or laboratory dissolution experiments that are run in a variety of apparatus to see how fast tablets and capsules and powders will dissolve. This has been a speculative effort for several years now, no one else has tried to make a program like this and so we kind of went out on a limb here about four years ago and started developing DDDPlus.
When you go out and sell or try to sell something like this to people who have never used a tool like it does take a while before the industry learns how a tool like this can be used and I think we are past that point now. The industry acceptance appears to be accelerating.
Licenses are increasing steadily. Customers now in the US, Europe, Japan and India, including two at the FDA so we are quite excited about the potential of DDDPlus to provide a capability and formulation that just has not existed before.
The kinds of improvements to the program have been basically to the physical model, the equations that model how things dissolve in different kinds of formulations as well as some improvements in the friendliness of the user interface. The next product, alphabetically is GastroPlus, this was our first product on the market in 1998.
It remains a very strong product in its niche. It’s the gold standard.
We like to say it really has enjoyed that position now for a number of years. We released version 5.3 in October and that included the integration of ADMET Predictor so that a scientist now can take a file of molecular structures and import them into GastroPlus and it will automatically call ADMET Predictor and generate the specific properties that GastroPlus needs to run simulation.
Of course, if the user has some experimental data they can replace in silico estimates or the computer estimates with the actual numbers as they progress in their project. We also incorporated a faster numerical integrator.
The program can run for hours sometimes if we are optimizing a very complex solution to a complex set of data so speed is important and we were able to gain quite a bit of speed with the new integrator. We have added the ability to handle some new types of formulations and we’ve added the monkey physiology to a complicated physiologically based pharmacokinetics model.
This is the model that models individual tissues in the human or animal that you are simulating. We’ve got new capabilities in development for ocular delivery and for transdermal delivery.
These are two areas where we’ve had customers express interest. We think the underlying engine in GastroPlus lends itself nicely and we have beta tested both of these, or alpha tested both of these capabilities and they are coming along very nicely.
We also have more accurate simulation of renal clearance, a clearance through the kidney as a result of a new kidney model developed by one of our newer PhD scientists who just joined us in the last six months or so. The formal collaboration that we have with one of the major pharmaceutical companies is continuing and this is continuing to advance the state of the art in this area.
This has been a wonderful collaboration. The guidance that we’ve received and the data that we‘ve had access to order to check out some of the new features that we’ve been putting into the program has been just exceptional and the fact that it’s a funded collaboration makes it even sweeter.
We’ve had a steady stream of consulting contracts coming in to assist pharmaceutical companies world wide in analyzing both pre-clinical and clinical data with GastroPlus. This, I think is a real telltale sign of the respect of the team that we have here and the expertise they have in doing this type of work.
In our Words+ subsidiary we are finally able to release the new Say-it SAM PDA based communication system at the end of the first quarter. Again the injection molding issues held up the project for a bit of time and we’ve had very strong reception to the new product.
Excellent response from both dealers and clinicians and end users in the field. We developed some new vocabularies that are used with the communications software.
When you have one of these devices it is one thing to be able to make a selection and have something spoken for you but how do you decide what to put into the device for a particular age group or particular language level and so a predefined vocabularies that allow a good starting point are a tremendous convenience for the speech pathologist or special-ed teacher or other professional who might be working, for example with children of different ages and different language skills. Instead of having to make up all of these pages of vocabulary themselves, we have a very strong set of vocabularies that we have licensed from our UK distributor who originally developed them and that has now been released.
And, we have a national sales manager working to improve our marketing and sales activities and dealer relationships to be a little bit more aggressive on the sales side. A couple of miscellaneous items, we did announce in September that Dr.
John Crisen has joined us as the new onsite life sciences director. Mike Folger served in that capacity for about 10 years but chose to live up in Petaluma north of San Francisco so it is quite a long distance from there to here and with the growing team he and the rest of the management team and the board agreed that we do need someone here onsite.
John has come in and has made some very nice contributions in a relatively short time that he has been here. We expected that.
He is a very experienced guy. He is both a pharmacist and a PhD.
He worked for Pfizer; worked for some other companies and worked with our alliance partner Dr. Gordon Amidon who was our partner on GastroPlus for about 10 years.
So he was a GastroPlus user way back when GastroPlus was a very new product. We had another PhD scientist that just joined us after the first of the year replacing one who left to work at Pfizer so we now have a Simulations Plus graduate, another one, working at Pfizer.
He is obviously using our software when he is there. Acquisitions, well they are taking longer than we expected but we are still actively working on acquisitions for both the pharmaceutical business and the Words+ subsidiary and of course the deal has to be right.
We are not going to rush into an acquisition just to be able to say we did one. We are looking for things that are accretive things that are going to add to revenues and earnings right away.
We had one of the acquisitions, we kind of expected a bit of delay until after the first of the year just because of a tax situation that was more beneficial to the person or company that we would be acquiring some portion of there assets. And so now that we are after the first of the year we expect that to move forward a little bit more quickly.
Our strategy going forward: expand the product line and services on the pharmaceutical software side, seek and complete strategic acquisitions and more than one if we can afford to. Again, cash is moving up now close to $5 million.
Cash flow continues to be positive. We have got a little bit of a war chest to go out there.
We are not fooling ourselves we’re still a small company and $5 million is not a huge amount of money but there are opportunities that can fit in with our size business that can be a win-win situation both for us and for those who are on the side of being acquired. Continuing to enhance our current products, of course in any software company that it just standard motive of doing business.
We are also looking for opportunities to partner and/or acquire new products. We have a number of collaborations that we are in the process of developing within academia, government and industry organizations.
So those things as news is available of course we will be putting that out. On the pharmaceutical consulting side we have expanded our simulation technologies team and we are handling the growing demand for consulting services.
John Crisen our new life sciences director has also jumped in and is contributing in those studies as well. On the Words+ subsidiary side again seek and complete strategic acquisitions, one or more and look for SBIR funding opportunities that fit our expertise on that side of the business.
There are SBIR opportunities in technology for people with disabilities and we really have not pursued that for many years. We did apply for one in 1995; the first one that we ever applied for and we were awarded a Phase I and then a Phase II follow-on for that one.
That developed into the FutureLab software that we are still selling today after ten years of not even updating it. We don’t sell much of it but the fact that we sell anything at all after 10 years I think speaks well for how well it was designed back at the time.
We are also going to continue aggressive marketing and sales activities in both companies as far as the number of scientific meetings, for example that we attend on the pharmaceutical side or product demonstrations and conferences that we attend on the disabilities side. We are taking advantages of all of those that look like they have a reasonable chance of increasing sales.
In summary then the company financially strong with an excellent cash position and no debt. We now have I think, as much cash in the bank as we had after our IPO before we started spending it.
So, that has taken us 10 years to get there but we are there. Revenues are up in the first quarter again, a major software license was renewed in November instead of December but we expect that one will remain in November now on.
Again, the issue of timing of licenses they did not want any dead time between expiration and re-activation. Pharmaceutical software and services revenues would have increased even without that license; I want to make sure you know that.
Words+ revenues were down primarily due to the delay in the new hand held PDA based communication aid but that is now shipping in very nice quantities. All products of course will continue to be enhanced both in response to customer request and to expand the utility to new users as we identify new needs.
Some of the needs that we have identified were satisfied here recently with the addition of in GastroPlus the ability to simulate dosing through the oral cavity so an oral spray or a past dissolving tablet was of interest to a customer and they actually funded a collaborative effort for us to incorporate that into GastroPlus. The ocular and transdermal methods of delivery are being developed now again, in response to the interest from customers.
So we are going to continue to do that and the same has been true in ClassPharmer and ADMET Predictor, we have very nice relationships with our customers. We get good feedback from them and they know pretty well if they tell us they want something, if it is doable, they will see it show up in the very near future.
The work forces in both companies is dedicated and extremely talented. The life sciences team is growing and we will continue to grow that.
If we are not able to do acquisitions, I think we are, but if it turns out we’re not, we’re not going to let our cash sit in the bank we will expand our staff. We do have a variety of projects that we can go into but of course if you can acquire something that is already developed and on the market then the growth is a little faster.
We are not going to relax at all in our work going forward to complete these acquisitions. I can’t assure you that any of them will be completed.
I have to say that to keep the lawyers happy but we are certainly trying very hard. Guidance for 2008 we projected earlier that we expected revenues to increase by at least $3 million in this fiscal year; we are not changing that for the moment.
But, upon the completion of any acquisition we expect to provide updated guidance at that time. As usual I am using a set of power point slides as speaking notes and those are available on request through [email protected].
Now Bo I would be happy to take any questions. Bo is our moderator.
Operator
(Operator Instructions) We will go first to Mr. Howard Halpern at Taglich Brothers.
Howard Halpern – Taglich Brothers
I’ll dive in on a little bit about the shift in the revenues from the second quarter into the first quarter. Based on what you are seeing because last year in the pharmaceutical software area you did about $1.8 million in revenue.
Do you believe that you will be able to grow that number even with that shift?
Walter S. Waltosz
I am not sure where your $1.8 million comes from. Last year we did over $5 million in pharmaceutical.
Howard Halpern – Taglich Brothers
No, for the second quarter.
Walter S. Waltosz
Oh, for the second quarter. Well we haven’t said anything publicly about the second quarter but, the second quarter is looking very good at this time.
I will leave it at that.
Howard Halpern – Taglich Brothers
Okay, so then with just my general math calculations and I know there’s seasonality in the quarter, based on the first quarter increasing by $3 million year-over-year on a whole. On average you have to do in excess of $3 million dollars per quarter.
Do I have that math correct? Walter S.
Waltosz Yes. We did just under $9 million last year.
So, we would have to do just under $12 million and in order to that we would have to be up on average $750 per quarter.
Howard Halpern – Taglich Brothers
I know that the third quarter normally tends to be seasonally strong based on past history at least.
Walter S. Waltosz
First quarter is almost always is the lowest. Not always but almost always the lowest.
Howard Halpern – Taglich Brothers
You know I think we have talked about it before but, the consulting contracts it is sort of getting your name out there and it is almost as good as marketing too. Have you seen recently conversions into customers buying the product?
Walter S. Waltosz
Yes. That’s the good news and the bad news.
The good news is that when they do license the product it becomes renewed year-after-year. The bad news is that we lose the consulting income.
You can’t have both. Once you teach them to use the product on their own then they are off on their own.
It’s a very good entrée, it’s a good point you make there. Once we work with the customer and they see, not just what the product does but the thinking process and how to apply it to different kinds of analysis then they get comfortable with it and they start to think, “Well gee, why should we pay these guys to consult?
We’ll just license the software and do it ourselves.” And, that is a good thing.
Operator
We have a question now from Dick Mills a private investor.
Dick Mills – Private Investor
Kind of almost a trivia question, I guess, the year ending August, why did you do that? And, have you considered going to a calendar year ending in December?
Walter S. Waltosz
Well when we started Words+ in 1981 we incorporated in September of that year and so we made that the beginning of our fiscal year and we just kind of stuck with that ever since. When we founded Simulations Plus we incorporated Simulations Plus in July of that year so we said, “Hey we’re coming up on the fiscal year beginning for Words+.
Let’s just make them the same.” There are some advantages, we end up hitting our auditing firms when they are not as busy as we would if we used the calendar year and everybody’s doing there tax returns at the same time.
We have a little bit of advantage that way. But, that is really why, it just kind of was tradition from 1981 with Words+.
Operator
(Operator instructions) We will go next now to Mr. Frank Gristina at MicroCapital
Frank Gristina – MicroCapital
I was hoping you could help those of us that are trying to drive revenue by explaining, I guess, in the Simulations revenue, what percent of that, you have been doing this for quite a while, what percentage of that would be renewal of licenses versus new seats sold? Is that something you can give us color on?
Walter S. Waltosz
Let me check with my CFO. Do you have an estimate for new licenses as opposed to renewals approximate in terms of revenue?
She says it’s probably our marketing and sales department that would be the better one to reply to that. But what you can typically see from year-to-year our renewals are very, very high.
They are well over 90% typically. We do give a renewal discount but, in the majority of cases that I have seen, even with the discount we end up with a higher license fee because more seats are added or more software licenses are added for different programs that weren’t licensed in the first year.
So by and large the growth that you see, I would say that the new licenses taken by existing customers probably balances out the renewal discount to some extent. So, most of what you see in increases is going to be from new business from companies or department within very large companies that were not licensing software the year before.
Frank Gristina – MicroCapital
Okay. Just in terms of you have so many different products with different price points, is there any way that you can either give us an idea of how many active licenses you have, in terms of seats?
Or, kind of an average AST for the difference seats?
Walter S. Waltosz
It is a little difficult to do that because some of the licenses are site licenses and so they’re essentially unlimited, as many people that want to log on. But I would say what I tend to count is number of customers and even that is a bit misleading because Pfizer or GlaxoSmithKline or Lilly; any of the large companies count as one customer and yet they may have four, five or six sites and each site they may have 10 to 50 people working on projects that use our software.
But, I would say it is probably reasonable to say that there are around 100 companies total, somewhere in that neighborhood and probably I am going to guess 500 users overall. Just to pull a number out of the air.
Frank Gristina – MicroCapital
Okay. I will take your guess out of the air over mine.
And then, can you just in terms of the market size, again you are adding products and that is going to open up new markets but, I mean if you have 100 companies doing R&D and using these different seats what do you think the real addressable market is in terms of how many companies could you sell one or all of these products to over the next five years?
Walter S. Waltosz
Yeah, that is something that we, over the years we have kind of hesitated to answer but I think our confidence is building now because we are seeing so many of these smaller companies coming in now for initially for consulting work or sometimes coming right into a software license. Companies that we may not have even heard there name a year or two ago and now we have a relationship with them and these are world wide.
These are in Asia, Europe and the United States. Years ago we looked at something called the Atlas Directory, I have referred to it before in conference calls and there were 3,600 or something like that, firms that were in businesses either biotech or drug delivery and formulation companies or actual drug companies.
And so if you count all of those and figure probably 20% maybe would be a reasonable number that might end up being able to use one or more of our software products you would see that we have just really scratched the surface. We have a long way to go.
Now, the size of the company does make a difference but what we have found now is that the smaller companies are beginning to realize that these in silico tools are tremendous equalizers. They can develop analysis or design new drugs almost as fast as the big guys if they have the right piece of software and the expertise and the computing horsepower to run the programs.
I think that is why we are seeing more and more adoption of the in silico or the computer based methods by the smaller companies. They are finally recognizing that it is not really an expense it is something that pays for itself.
Frank Gristina – MicroCapital
Great and last question, I mean when you think about you just said 20% of the directory.
Walter S. Waltosz
That came out of the same air as the other number.
Frank Gristina – MicroCapital
You would think that those are companies that are actually doing drug research and development. Out of that Atlas I imagine there are companies that probably don’t develop or try to formulate new drugs.
Is that how you are getting the 20%?
Walter S. Waltosz
Yes and that is a totally, totally wild guess. I can’t substantiate that at all.
It’s just a feeling that when we look at all the companies that we see, you see a lot of companies that are supplying different kinds of equipment or supplies and stuff and obviously they are not going to use this type of software. But, just kind of a gut feel just looking at companies names that pop up in the different newsletters that I get, I would say about a fifth of them maybe are the ones that would be doing the kind of work where if we can convince them, they would be potential users of software.
Operator
We go now to Fred Milligan at Sanders Morris Harris
Fred Milligan – Sanders Morris Harris Group Inc.
With capitalized computer software development costs and the amortization of that, how much does that come to in a quarter? And could you break that up because potentially helps in regards to determining cash flow.
Walter S. Waltosz
[Inaudible] capitalized software developing costs per quarter. I am asking my CFO now if she has got that handy.
I am finding that on the computer here. While she is looking that up let me point out for those that may not be familiar with this, when you develop new software tools some of the work that we do is ordinary maintenance, bug fixes or minor improvements and that is expense.
When you are developing a new capability either within an existing program or brand new program, if it’s a new capability once management has established that what you are doing is technically feasible, you know it can be done you just have to do it then, you can begin to capitalize the labor and so it becomes a capital asset. Until the time that that new capability is offered for sale and then you begin to amortize that and you can’t capitalize that anymore unless you are developing something else that is a new capability.
You also have in this category acquired capitalized software development costs. So, when we did the Bioreason and Sage Informatics acquisitions in the fall of 2005 there was a certain amount of a couple $100,000 or so as I recall that also went into that capitalized software development asset.
And, those began to be written down right away of course because as soon as we acquired the products we were selling them. So, we have in the asset itself right now we have a mix of both labor of our own that is capitalized and then the Bioreason acquisition capitalized assets.
So, for this quarter we looked at about $106,000 for Simulations Plus for the pharmaceutical side and about $10,000 for Words+ as the amortized part of the capitalized software development cost.
Fred Milligan – Sanders Morris Harris Group Inc.
Is that a [inaudible] quarter?
Walter S. Waltosz
Yes.
Fred Milligan – Sanders Morris Harris Group Inc.
Okay. You mentioned the R&D credit, tax credit that you get.
What does it amount to roughly?
Walter S. Waltosz
Well it depends on the year and it depends on the law. They change the law every time they renew it.
The house HR 2138 I think it is, that is under consideration now has proposed to make it up to 20% and permanent.
Fred Milligan – Sanders Morris Harris Group Inc.
20% of the R&D expenses?
Walter S. Waltosz
That would be 20% of the R&D expenses over a base. So, you have a base that you calculate.
Originally, I think the base was calculated based on several years back in the 1980’s if you were in business then, if not then you used an average over a certain period of years since you had started your business. But, the law changes every time they renew it and we just have to wait.
Again, it is expected they always have done it for 25 years but more than half the time they have been late.
Fred Milligan – Sanders Morris Harris Group Inc.
On another subject, would it make any sense you mentioned consulting and actually over the last few years consulting has become a bigger part of the story, actually. Does it make any sense to break that out in terms of what the consulting fees are on a quarter-by-quarter basis?
Walter S. Waltosz
We haven’t thought about that. You mean just for reporting purposes?
Fred Milligan – Sanders Morris Harris Group Inc.
You know for reporting to shareholders.
Walter S. Waltosz
I will talk with our CFO about that and see if it makes any sense.
Fred Milligan – Sanders Morris Harris Group Inc.
That would give you some idea as to the potential coming out of it.
Operator
(Operator Instructions) Walter it appears that we have no further questions this afternoon. Sir, I would like to turn the conference back to you for any closing or additional remarks.
Walter S. Waltosz
Okay well just to remind everyone I do use PowerPoint slides as a set of speaking notes for the conference call and if you would like a copy of those you can request those either by calling the company or just send us an email at [email protected]. Thank you all for attending and I’ll see you at the end of next quarter.
Operator
Again, that does conclude our conference call. We would like to thank you all for joining us and wish you all a great afternoon.
Goodbye.