Cameron Donahue - IR Walt Woltosz - Chairman Shawn O’Connor - CEO John Kneisel - CFO Brett Howell - DILIsym, Division President Cynthia Walawander - VP, Operations and Co-founder of Cognigen Corporation

Good afternoon. It’s Tuesday, July 10, 2018.

On behalf of Simulations Plus, I welcome you to our Third Quarter Fiscal Year 2018 Financial Results Conference Call and Webinar. Presenting this afternoon will be Chairman of the Board, Walt Woltosz; Chief Financial Officer, John Kneisel; and President of DILIsym Services Division, Brett Howell; and will also be joined by our new Chief Executive Officer, Shawn O’Connor.

An opportunity to ask questions will follow today’s presentations. You may send your written questions using the questions pane on your control panel or you may use the hand-raising icon on the control panel to ask your question directly.

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

Before we get started with the presentation, we’ll begin by reading the 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 on a timely fashion, the company's ability to continue to attract and retain skilled personnel, and the company's ability to sustain or improve the current levels of productivity. Further information of the company's risk factors is contained in the company's quarterly and annual reports and filed with the Securities and Exchange Commission.

Now it's my pleasure to introduce Walt Woltosz, Chairman of Simulations Plus. Walt?

Thank you, Cameron and thanks to everyone who joined the call today. This was another strong quarter for Simulations Plus.

We’ve had 26.7% revenue growth compared to last year's third quarter, and a 15.7% improvement to our net income. We continue to benefit from outsourcing trends in the industries we serve, and our three divisions are working well together.

More importantly though, just after the conclusion of the quarter, we made a milestone announcement naming Shawn O’Connor as our new Chief Executive Officer effective June 25. Shawn becomes only the second CEO in our history as most of you know, I’ve been reducing my time allocation to Simulations Plus for about four years, and with it my compensation initially starting with our acquisition of Cognigen division in 2014.

I’ve been asked about our succession plan a number of times, that’s been a topic of increased importance, and in my opinion and in an unanimous opinion of Board of Directors, the nominating committee has emphatically answered this question with this announcement. Shawn is a proven executive.

He brings more than three decades of experience in the pharmaceutical software industry to Simulations Plus, including as both the public company CEO and CFO. He joins us from Entelos, a provider of unique quantitative systems pharmacology or QSP, modeling and simulation software similar to the genre with our DILIsym division works and services to the pharmaceutical drug development market, where as President, CEO, and the Director he designed and executed an asset repurchase strategy to secure intellectual property and other assets; recruited and directed new management team, established a new strategic direction and secured privacy.

Prior to Entelos, Shawn served as Chairman, President, and Chief Executive Officer of Pharsight Corporation, a developer and marketer of software products and services that help pharmaceutical and biotech companies improve their decision making in drug development and commercialization. Shawn joined Pharsight at a challenging time when the stock had just been delisted and the company was contemplating an offer to be acquired for $0.10 a share.

The Board decided not to accept the offer and then named Shawn as CEO. Shawn oversaw the development of the software product strategy resulting in significant revenue, gross profit with cash flow improvements, which resulted in about a 20x increase in valuation with the valuation rising from $3.2 million just before Shawn was named CEO to approximately $60 million.

Shawn also served as CFO of Diasonics, Incorporated, demonstrating his financial expertise. Each of these companies operate in a similar product and market space as Simulations Plus.

Accordingly, I’m confident in his unique qualifications to lead the company toward further growth and profitability. As for my role, I will remain engaged with the company to assist Shawn during the transition as an employee through August 31 and thereafter as an outside Director and Chairman of the Board.

Although I cannot be considered an Independent Director for three years with the NASDAQ rule, I would still be an Outside Director and after three years I will be an Independent Director. I will also assist with special projects such as working to further monetize our nearly 20-year investment in artificial intelligence in new industries.

While I expect this will be the last time I join one of these conference calls like other Board members, my involvement with the company I founded continues. I'm not going to turn my back on my 5.5 million shares for sure.

I’m confident that we’re in good hands going forward. I'd now like to turn the call over to Shawn, so he can introduce himself to our shareholders.

Shawn?

Thank you, Walt. It's an honor to be with all of you today and I appreciate those kind words.

I’m excited to assume the challenging position, and I believe Simulations Plus is very well-positioned for future success. Under Walt's leadership, Simulations Plus has built an impeccable reputation for quality and innovation, delivering proven software solutions for drug discovery and development, as well as consulting services for the clinical pharmacology.

I believe the opportunity lies ahead -- that lies ahead for Simulations Plus is enormous and I’m honored and eager to be leading the company going forward. I have devoted the last 15 years in my career to the development of in silico modeling for use in drug development in personalized medicine applications that impact patient outcomes positively and reduce health care costs, [technical difficulty] benefits of this approach, and I have never been more optimistic that the industry will increase its adoption of modeling tools to improve outcomes and reduce cost.

Walt discussed most of my career achievements. In addition, I spent approximately 6 years with QRS Corporation.

I was initially hired in 1995 as CFO and was promoted to CFO and COO in 1997. I was then tasked with identifying the replacement CFO, who joined in 1998 leading to my title being changed to President and COO.

In September of 2000, I resigned as President and COO, but remained as a consultant to the company for approximately one year. I was also a founder of Aisle411 with three other partners.

There were two different companies with similar names founded at approximately the same time, and ultimately we changed our name to TradePoint Solutions when we completed our initial funding. I remained on the advisory board with TradePoint until I joined Pharsight.

And in 2006, TradePoint was acquired by DemandTec, who shortly thereafter went -- completed an IPO in 2007 and then was subsequently acquired by IBM. The original product services initially developed beginning with Aisle411 continue to be offered to the grocery industry, retail segment by IBM today.

Over the next few weeks, I look forward to meeting with the entire Simulations Plus team in all three operating locations. I'm impressed with the management team in place and the skilled and committed team at Simulations Plus and look forward to leading them to new successes in the future.

I appreciate Walt's support through the transition and he is carrying the load on this, his last earnings conference call. I will no doubt be speaking with many of you who follow the company closely in the coming months and look forward to our year-end earnings conference call to communicate our fourth year results and more with regard to my view of the company going forward.

With that, I will now turn the call back to Walt to continue the discussion [technical difficulty]. Walt?

Thank you, Shawn. Next slide please.

So I will give a quick overview and then I will turn it over to John Kneisel for more detail from our CFO. So third quarter, a nice --very nice quarter, revenues up $1.8 million or 26.7% to a total of $8.6 million.

Income from operations, up 10.4%, $323,000 to $3.4 million. Our net income, up 15.7%, $327,000 to $2.4 million.

Our diluted earnings per share increased to $0.13, up $0.01. Our software renewal rates continue to be very nice, 90% based on a number of accounts and 97% based on the actual fees received.

We added 20 new software clients during the third quarter. For the first nine months, revenues were up 28.6% to $23.0 million, up $5.1 million.

Our income from operations, up $1.6 million or 23.2% to $8.4 million. Net income, up $3 million or 63.8% to $7.6 million.

That includes a one-time, non-cash $1.5 million deferred tax adjustment that was booked in the second quarter. That still would have been up $1.5 million or some 37% even without that.

Diluted earnings per share increased to $0.43 a share, up $0.16 and software renewal rates 87% based on accounts and 93% based on fees received, and we added 56 new software clients during the first nine months. Also our consulting pipeline resulted in a significant increase in revenues and consulting continues to grow.

Next slide please. So now I will turn it over to John Kneisel, our Chief Financial Officer for a little more detail on the financials.

John?

All right. Thanks, Walt, and thanks Shawn.

I'll go to the first slide. The sales, we go to the first quarter -- this last quarter.

The -- our consolidated net revenues were up 26.7% like Walt said, about $1.8 million to $8.6 million for the third quarter compared to last year. Lancaster was up $706,000, about 14%, had a good growth this quarter.

Buffalo was up $141,000, about 8% increase and DILIsym was about $1,000,957 actually and this was the end of their first year with us and so it's been a good year for them. Consolidated software and software related sales are up $830,000, about 17.4% and analytical study revenues are up 974,000 or 49%.

Moving on to our cost of revenues, we are up about $578,000 labor increases. We account for most of that.

It's a combination of increased labor count, salaries and bonuses that were occurring as we were going along, including 167,000 of that expense coming from DILIsym being their first time with us in this quarter. Other significant increases are also contract costs that we are incurring for testing that division.

Those costs come in on certain contracts, so they will pop in from some quarters, some quarters we don't have much in way of those costs, this quarter there were. We also seen an increase in our software amortization in this quarter as well as amortization expense associated with the technologies that we acquired during the acquisition last year.

Our cost of revenues as a percentage of revenue increased by about 2% -- little over 2% this quarter in comparison with the prior year and most of that comes from the higher salaries and direct cost of the contract studies. Our gross profit increased about $1.2 million overall, by about 23% and $600,000 of that came from California, which showed the biggest increase in the divisions.

Our overall gross margin as a percentage was 76.4% and that's down from 78.6%, but that's mainly from the blending of adding little more consulting services in comparison to the software services that we are -- dominate in the Lancaster division. SG&A expenses increased to $649,000 for the quarter and as a percentage of revenue they were up just about 1% or 1.4% over the prior year.

Again most of that’s in labor related costs as we’ve had some increases in labor and headcount in Lancaster and Buffalo, and also for sign cost at DILI for the first quarter after the acquisition. We actually had some professional and accounting costs increases of $77,000 this quarter in comparison to last year.

For more internal tax and compliance costs, we start a little later in the fiscal year in comparison to last year and those we did see an offset in legal costs due to less acquisition related activities in this period of time. Our research and development costs increased $522,000 this year in comparison to last year.

Those costs, we incurred 993 in R&D this quarter. Of that 485,000 was capitalized and a $508,000 was expensed.

So our total costs was up 522 over the prior year. In the prior year, $344,000 was capitalized and $254,000 was expensed.

We saw the expansible portion of our R&D a little bit higher this year as we have some -- a couple of projects that are in their expansible phase, especially in our North Carolina division got a couple of -- couple of projects which had finished off and released and now we are in our development phase there, couple of new products and updates. Overall income from operations was up $323,000 in this year compared to last year.

Our provision for income taxes which actually doesn’t have a line item on this slide, we saw a drop in our tax rates due to the new tax rates enacted in January. So our provision for income taxes was $991,000 compared to $1 million last year and that gave us a 29.1% effective rate, which was lower than the 32% that we had last year at that time.

That came from the tax rate decrease even though -- and that comes really from a blending of how we do the calculation. And we actually had a little bit lower effect of our tax credits on higher income this year, which is pushing our rate a little bit higher than originally anticipated.

Our net income increased by $327,000 or 15.7% this quarter in comparison to last year.EPS is up $0.13 -- to $0.13 from $0.12 last year. It shows us $0.02 on the slide.

The prior summary showed as $0.01. It's actually 1.6 if you get to the detail of it, so it rounds up to $0.02 on this formatted slide.

EBITDA, it is up 13.5%, little over $4 million for this quarter. Moving on to the nine month slide.

Consolidated net revenues increased 28.6% or $5 million to 20 -- just under $23 million for the first nine months of the year. That was a 12% increase at Lancaster, a 10% increase in Buffalo, and just $3 million in revenues in North Carolina.

So our software and software related revenues were up 13% and our study revenues were up 59% overall. Cost of revenues were up $1.6 million.

Again, about half of that was labor related costs. Around 800 and some thousand are a combination of increased labor counts, including $288,000 of salary expense in North Carolina.

The other increases were in software amortization of $88,000 and then 400 -- the other major portions $460,000 of direct contract costs for testing in North Carolina. As a percentage cost, revenue increased .6% overall from year-to-year.

Our consolidated gross profit is up $3.6 million from the prior year and overall the gross margin actually has decreased about 1.4 and that’s just the blending of the new consulting revenue and for the divisions as we move forward. General and administration increased $1.6 million.

But as a percentage of revenues, the SG&A's remain fairly stable at 32% versus 32.3% the prior year. Bigger -- big increases in SG&A came in commission expense for increased international sales, that was up about $141,000, marketing expenses up about $174,000, that's mostly tradeshows and conference attendance.

And then we have a larger increase in salaries and salaries and G&A related $400 some thousand and in combination of increased stock compensation costs, first-time salaries of about $197,000 at DILIsym and all the attendant health care costs and payroll taxes that go with those higher salaries. Our professional and accounting was up about $100,000 in this period over the prior year.

And that was offset by legal decrease of about $228,000. One other major increase in SG&A is amortization expense of 158 and that’s on the newly acquired amortization on the intangible from the acquisition that we did with North Carolina.

Total research and development costs for the year, we had incurred additional $1 million in this nine-month period in comparison to last year. And of that we -- of that amount, it was about $3 million and $1.6 million was capitalized software development and about $1,000,004 was expensed.

Consolidated net income from operations was up $1.6 million, up 23% over the prior year and of that $607,000 was from North Carolina. Lancaster was up about 14.5% and Buffalo was up 13%.

Inside our other income is a imputed interest on the debt -- the market value of future payments, let's call it that, but it's future payments for the acquisition that is being applied. It's not cash yet until we pay it out and that is what that $100,000 of other expense is in there.

Income before taxes was up $1,000,005 or 21%, 21.4% [ph]. The provision for income taxes was $700,000 so far this year compared to a $1,000,002 last year.

The difference is basically being that $1,000,005 that we posted as a benefit in the second quarter. Our overall effective rate for the nine months was about 8.5% compared to 32% last year.

Again, we talked about it last period with the tax benefit coming through and that rate will still -- that will come up a little bit from there before the end of the year. Going into 2019, we should see tax rates -- overall tax rate somewhere in the low 20s percent income increases.

The effect of our permanent differences for R&D tax credits is starting to be lower as a total of a percentage that we still should see low 20s as a rate. Net income for the year has increased by $2.96 million or $3 million of which $1,000,005 of that increase was the one-time effect of the tax change.

Earnings per share $0.43 compared to $0.27 the prior year, an increase of $0.16 and $0.08 of that is related to the tax benefit that we post. And looking at EBITDA, we reached the $10 million EBITDA number through the nine months end of the third quarter and we can move on to the other slide.

The first slide here just shows the growth you can see where we -- each one of the last bars here we actually saw an increase both from our acquisition, the jump that came from that along with what is ultimately from just core growth from the other divisions really shows the increase with the two of them combined moving on. Consolidated income by quarter is still -- we still have a little bit of seasonality in our income.

The third quarter is always been a good income quarter for us and -- but still moving upward trends throughout each of these periods. Next slide.

Next slide shows our net income. You can see in the second quarter where we had the additional $1.5 million we sort of shaded that and to show that benefit of that.

The dark purple line is being what it would be without it. So doesn’t -- you can see whether -- it's not so skewed as we move forward.

So relatively consistent growth each quarter as we’ve -- going back the last three, four years. Next slide.

And as expected, EPS will track with the income on and so -- showing the tax benefit pulled out also in the last quarter. On the slide to next one.

EBITDA little more stable looking, but it continues its growth producing the cash, cash for company and which we can reinvest for future growth also. Next slide please.

The slide goes back over -- about four years now showing the blue bar down below. The consistent dividend payouts in the last -- beginning this fiscal year the Board added a $0.01 per share to the dividend.

With that we still maintained our cash assets throughout this time to allow us to put money into do potential investments, payout the acquisition money and return money to the shareholders at the same time as we go forward. Next slide.

Few statistics to go, you can see actually in the current liability slide, you can see from end of the year we jumped up total current liabilities. That increase is really just the acquisition related liabilities for payouts, that will be about $2.5 million paid out over the next six months or so for the acquisition and that's what caused that increase over the August period last year.

Outside of that everything else is relatively stable, cash wise, equity -- healthy equity for a company of our size and -- our size and nature of our business. And moving forward, Walt -- back to you, Walt.

Go for the division with John off in Korea, I believe right now.

Okay. Thank you, John.

And as he mentioned, John DiBella is in Korea doing the training workshops. So it fell to me.

I’m hoping that -- expect Shawn to take over this just yet, having only being on the job for a couple of weeks. So I want you to do this.

So software product wise, Lancaster division, we released version 9.6 GastroPlus in May. This enhanced couple of add-on modules for special population physiologies and improvements all of our mechanistic absorption models, oral, ocular, dermal and so on, formal drip.

ADMET Predictor we released version 9 in June 2018. Both of these were many, many months and in the works significant improvements, a lot of testing.

Our Q&A -- our QA testing which has become quite, quite extensive for all the different versions of operating systems and languages, German, Japanese, French and so on. And so every time we change anything, we’ve got quite a bit of testing to do on these, finally made it to the government and has been released.

We expect to release version 6 of DDDPlus this summer and here we will be releasing the long-acting injectable microsphere model where these are typically injected into muscle. So this added our intramuscular capability and GastroPlus actually that’s part of the changes there.

And this was all funded from one of our FDA funded grants and this will expand our user base we believe. Also adds new precipitation assays in two phase -- biphasic dissolution models.

MembranePlus, we released version 2 in September 2017. Very stable product at this point.

We do have some new models that were released back that allows us to test -- to stimulate testing in liver cells or hepatocytes and also improved our integration with the ADMET Predictor module so that we can use predicted properties of certain molecules when they have a lot of them measured to run the MembranePlus software. Version 2 of PKPlus released in January, we added quite a few capabilities to that as a result of the feedback that received from Version 1 and I wish John DiBella was on the call so that I could ask him how the evaluations are going?

I know there were a quite a number of companies evaluate PKPlus at the last time that I asked about that. Next slide please.

For the Lancaster division, revenue up 14.3% over last year's third quarter. Software license units up.

We got software renewal rate of 90% based on accounts, 97% based on fees, 14% increase in the number of license unit, [indiscernible] new commercial companies. Again, continued penetration in generic and also with some non-pharma markets such as chemicals and consumer goods and nine new nonprofit groups added.

Consulting and training revenue up 38%. Consulting is just growing quite fast.

I think the demand in the industry outstrips the industries capability of getting the software in on their own and using it. And so until we can get folks in some of our new -- newer customers trained and up to speed, then they pay us to do the work.

So that project is with 21 companies and two of our FDA funded collaborations ongoing during this last past quarter. Next slide.

And for nine months revenues up little over 12% versus last year's first nine months. For the Lancaster division, software revenue up 8%, consulting and training up 63%, and you can see a similar trend in terms of license units and fees, number of new commercial companies and new nonprofit goods.

Next slide please. Globally we are a global company.

The distribution in terms of percentages, still it's relatively constant with North America of course dominating about 43% of revenues, about 29% in Europe, 27% in Asia with Japan being the dominant part. Very quickly growing markets in India and China and now mentioned John DiBella is in Korea right now.

Korea is starting to come on as well. Next slide please.

For marketing activities we worked a lot on the Web site, particularly on the content and production of video content for promoting and branding purposes. Labor increased our focus on the search engine optimization or SCO performance so when you Google something we want you see our name coming up from the first page.

Continued migration content from different division site, so from the Buffalo side and the North Carolina site to remain Simulations Plus domains with people who coming in through one entry point and get to whichever technology or service they’re looking for. So workshops and conferences, we will continue to do many of these PBPK in workshops we held in San Diego, Frankfurt and Shanghai.

During the third quarter, we hosted seven on-site trainings at individual companies during the third quarter and we attended 16 scientific conferences and workshops and delivered 16 poster of podium presentations. Our strategic digital marketing initiatives, we held some three webinars on modeling and simulation applications and we continued with our very active social media campaigns of Twitter, LinkedIn, YouTube, and followers have increased 22% over the last year and our GastroPlus group membership increased 6% over last year.

And Ted is in -- I believe he is in Seattle. Working with our large foundation there on $5 million 5-year grant project.

So I will also review Cognigen. We also have Cynthia Walawander, Vice President of Cognigen Online, who can help me with any question that may come up the line to help you.

And so Cognigen pharmacometric services, had relationships in the fiscal year so far with 26 companies, 43 different drugs and 72 different projects across those drugs. Three new companies, 34 new projects, 27 projects expanded scope.

For projects, reduced scope and it's happening in clinical trial sometimes that are not what you hope for and then you don't need so much analysis. 41 outstanding proposals right now with 28 different companies, so the pipeline is very full.

In 2018 so far, we presented 15 posters and 6 peer reviewed publications and are currently working on 15 publications and four conference extract. So very active in the publication side.

Most common therapeutic area for Cognigen is oncology, followed by neurology, endocrinology and infectious disease. And about 45% of the projects that we work that result directly into regulatory interaction.

So a quick summary, we've increased our marketing and sales activities and publications. We continue our recruitment of new scientific talent through satisfied a demand for pharmacometrics services which again continuously expand.

We’ve got a healthy pipeline of new projects include -- including global health initiative projects. We are bridging global regulatory filing so where not just dealing with the FDA, we are dealing with the other regulatory agencies around the world through our customers.

Embedded client partner opportunities from first-in-human to commercialization of new medicines. So when a company first comes out of preclinical work and they’re going to go into human.

It's got a big question mark. Just how much should we dose humans for the first time since we know that animal pharmacokinetics don’t always translate perfectly into human.

So that's a big part of the -- we offer support there and then finally all of the efforts through Phase 2, Phase 3 and commercialization. Cognigen is also recognized and that supported with cross-selling opportunities with both the Lancaster division, we call Simulations Plus and DILIsym in North Carolina.

So we are creating broader spectrum business models of clients, an expanding the synergies that we have among company scientist. The Kiwi platform, which is a communication platform, data integration and management platform.

The design and development of that is accelerating under the 5-year -- $5 million contract with the research foundation up in Washington state. And with that ,I will turn it over to Brett Howell, President of DILIsym Services, Brett?

All right. Thank you, Walt.

So I’m going to give a little bit of background information on reflecting the quarter that we just closed and John Kneisel discussed earlier. Just for a reminder, for those of you not familiar with DILIsym Services in our division, we do detailed or more mechanistic call it modeling in simulation in the area of both pharmacodynamics or the efficacy of drugs and also in area of toxicology or the safety of drugs we used two primary platforms right now, NAFLDsym and DILIsym.

DILIsym focuses on drug-induced liver injury and NAFLDsym focuses on the treatment of nonalcoholic fatty liver disease or NASH nonalcoholic steatohepatitis. So these are our two primary areas of focus currently in terms of building products and using those products for consulting along with the DILIsym work comes from in vitro assay design and outsourcing as John alluded to prior in the financial discussion.

In addition, I will talk about a third product that we envision briefly here today. In terms of our fiscal Q3 sales review, some quick highlights.

The breakdown shown in the left shows was about 60% coming from the DILIsym consulting, about a quarter of it coming from NAFLDsym consulting and then the remainder of 15% or so coming from licensing DILIsym software. We've got 13 projects active during that period.

We earned revenue on. We have a good reason to believe that the pipeline is solid and the DILIsym consulting projects are looking good for the future in terms of projects lined up currently in various stages, whether it would be working towards signature or starting a proposal and filling it out.

So we’ve got good leads there.

On the NAFLDsym side, we continue to work on a few larger projects. One primary project that focuses on expanding the capabilities of the software which is very important for us to be able to cover the various most important areas of the disease.

So once we complete that towards the end of this year, calendar year, NAFLDsym will be equipped to do even more in the area of evaluating targets and compounds. And on the consortium or DILIsym software licensing front.

We have non-active licenses, We have some leads for additional ones and we also are working towards integration with GastroPlus, so that we can expand our user base as well. The news that we announced this quarter in that regard regarding the DILIsym software licensing that the FDA has now acquired licenses and we put out a press release on that a while back during this quarter.

Next slide please. In terms of product news, DILIsym we continue to move forward with the existing code base and adding new features and capabilities, largely that is determined by the consortium members that we have in the DILIsym initiative and licenses software but they also get an opportunity to vote.

Currently we have the voting ballot outstanding waiting on to be returned from the company in the consortium, so they will help determine what goes into the next version of the software. In parallel, we have a large refactoring and recoding effort in progress to redesign the software to be much more nimble, much more modern quicker, in terms of competition resources but also very synergistically GastroPlus and ADMET Predictor.

On the NAFLDsym side, the specific areas where we're doing a lot of work now is in fibrosis and inflammation and as I mentioned where getting near the end of that large building phase and then the area that I mentioned the potential for new product is in the area of drug-induced kidney injury, we are waiting a final funding decision on a potentially large grant to help us develop that product, We don't have the information yet on whether that will get funded or not. Next slide.

In terms of marketing, we had a good quarter. We were able to sponsor the nonalcoholic steatohepatitis or Nash Summit in Boston.

In April we were one of the key sponsors that generated a lot of interest and we had a very large number of companies there from large to small pharma, who now are potential clients of ours in the area of NAFLD to NASH. We have simulated abstracts along with the other divisions to multiple meanings in the fall coming up, so it look forward to having opportunity to co-exhibit with our colleagues in Buffalo and Lancaster.

And we have training workshops that are offered in the fall as well, both to our consortium members, but also to nonmembers and academic and regulatory individuals. So next slide please.

So just to summarize, we have a lot of R&D going on. We are developing what we think are going to be great products for the future and updating the current ones.

And we're also enjoying the process of working with our colleagues, the other divisions and now that we've been involved our part of the larger group for three quarters that is becoming more, and more comments. With that, I will turn it back over.

Thank you. We will go into the question-and-answer session now.

[Operator Instructions] We will start off with few of the written questions from Howard Halpern with Taglich Brothers. First question Mr.

O’Connor, let me congratulate you on your appointment as CEO. What drew you to SLP?

This is Shawn O’Connor. Howard, thanks for the question.

That’s interesting. My visibility to the company has not been a short time frame.

I’ve followed the company for many years now, I believe that’s close to 10 years that Walt and I’ve known each other, but from a vantage point, both at Entelos as well as at Pharsight we have operated in a similar space, not significant in terms of direct competition over the years, relatively complementary, but I’ve known the company for a long time. I guess there's both sides of the business in terms of its software products as well as its service capabilities have always impressed me.

The installed base of custom software, it sits in, is large, healthy and quite frankly, quite happy with the functionality that Simulations Plus provides to them and that provides a tremendous foundation upon which to grow the business over the years in terms of expanding services, the functionality of our software that we can deliver to those clients. Always easier to sell more to a happy customer than to go out and acquire a new customer.

Both are required, but that installed base is a tremendous asset for a company like Simulations Plus. On the service side of the business, the company has a wealth of scientific capability, knowledge, and skillset that shows up both in the software functionality and new releases that are periodically delivered on a very consistent and frequent basis compared to many other companies out there.

But also in terms of the direct service that we provide to our clients through projects assisting them, accelerating, providing them increased speed in addressing their needs as they work a molecule through the drug development cycle. So both the software and the service side of the business is a tremendous asset, but from my vantage point coming in, it provides me a good foundation to help lead the team that is here forward in growing the business, and that growth comes both inorganically as well as organically.

Opportunities exist to extend the footprint of our software products, through internal development, and the company in its recent years has demonstrated its ability to as well and to its growth with organic opportunities, inorganic opportunities I should say, and I think in the acquisition in bringing companies into the whole, and successfully integrating them and moving forward without a hiccup. That isn't always easy, and the company has done a relatively good job in that regard setting itself up to – to continue growing the company in that fashion as well.

So all of these positives add up to something that I’ve viewed as a good match for my skillset, my background, my experience along with the company and I guess the only downside is that Walt will play a lesser role, but I’m thankful he will be involved on the Board assisting us as we move forward as well. Hope that answers your question, Howard.

Great. Next question also from Howard is what type of traction are your Simulation software products seeing in Korea and India?

Okay. I will take that one.

John DiBella is really the person to give you the most insightful answer to that, but Brett can you go back to slide 20, please. Thank you.

So as you can see of the Asia 27%, India is now 20% of that 27% and China is 16% of that 27%. A few years ago, Japan was pretty well the only thing going there.

Japan has been a great market for us, continues to sustain and grow, but the untapped potential in India and China has realized over the last few years, and I know John DiBella has spent significant number of trips over there in support of the dealers, so we now have dealers in all four of those countries that are helping us to reach the markets there.

Great. Next question is what is your penetration into nonpharmaceutical customer stand and how do you anticipate future growth in that space?

I will take a cut at that. John Kneisel may be able to help me, because he sees where the checks are coming from sometimes and so we have sold to cosmetics, we have sold to food companies and general chemical companies, agrotech companies.

I cannot give you percentages or dollar amounts. I just don't have those in my head, John Kneisel, do you have any more information on that?

I can't be too precise of the percentages right now Walt that John seen some recent good activity in that area for them. So what he mentioned in some of these slides there, this time.

So just leave it at that for now without going too granular.

Moving on to additional question. From Howard where does the sales pipeline -- with this the sales pipeline look for -- look like for PKPlus and when might they ramp and orders occur?

Oh boy, that’s another John DiBella question. Maybe we should have woken up at 4 o'clock in the morning in Korea to be on this call.

I don't know the answer to that John Kneisel do you have any information?

Not that I think I can share right now, Walt. I would rather relate that and deal with that on the next call with John I think.

Okay.

The next question, what is the long-term goal for KIWI? And could it eventually become an industry standard?

Cindy, you want to take and crack at that one?

Hi. Yes, absolutely.

This is Cynthia Walawander. I would happy to answer it.

We are actually in the beginning of a third year of a 5-year contract to develop KIWI, and we’re on track with that contract, hoping to expand it. And we are also on track for being, I mean the modeling and simulation platform or communication of pharmacometric results.

And collaboration among drug companies that are using our modeling form to approach to their drug development program, we’re continuing to have an interest in KIWI. For licensing, we are expanding into academic department and we do anticipate an increase in sales of the foundation of our platform continues to be solidified.

Great. Thank you.

Thank you. Next question, how many outgoing consulting proposals are outstanding for the Lancaster California division as you enter the fourth quarter of 2018.

I have no idea. John Kneisel, you.

I don't know what the actual number of outstanding proposals are. John tells several going, but they usually closes and then they become projects as they go.

So although it keeps an outstanding list on it that’s usually just become proposals just they hit or become projects they hit. One final one from Howard Halpern.

What -- just want to thank you for all the hard work in building the company with regard to the special projects in AI. Do you see other opportunities beyond AEROModeler and MRIModeler?

Well, the AI is such as general purpose tool. That the capability that we built over nearly 20 years, we’ve applied in a number of defense-related applications and in the magnetic resonance imaging application that MRI modeler addresses.

Right now we are focusing on those two areas, trying to break through to some of the DoD organizations, Department of Defense organizations that we have some connection with either through the aerospace engineering at Auburn University or right out close to Lancaster office at Edwards Air Force Base where I use to work many, many years ago. So we are focusing right now on those two.

Big Data Analytics is a big thing. It's a big thing where the best work seem to be done by small teams as opposed to necessarily a Googler or Microsoft or IBM.

In fact, I think IBM just announced a cut back in that area. So I think there is a lot of small startups.

We’ve talked to a few of them in the Bay Area, a lot of people are getting venture capital money for relatively small operations, no bigger than what we have. We have nearly 20 years experience in the area and I think there are opportunities here, I’m excited about it and we will see where it goes from here.

And the next question from Scott [indiscernible] kind of piggybacks on the previous question, but just as the company as a whole, the business development pipeline look like as well as M&A strategy going forward, if there is a formal or just an opportunistic focus on that standpoint, M&A.

Yes, I would say our strategy has not changed over the years. We have always been shopping, we have no debt, we got for our size we got on adequate supply of cash, investment bankers are constantly giving us opportunities to borrow money if we needed to, needed to.

But we are constantly looking, we probably look at oh and when I guess, well over a dozen companies a year. Most of them don't meet our criteria, which is fairly conservative.

We want immediately accretive to both revenues and earnings. We want technology that is synergistic with what we do, that can be merged in businesswise.

Customer support lies, marketing lies. We want your personal chemistry between the teams and the price is going to be right.

So those four criteria, it's pretty easy to get two or three out of four of it -- getting four out of four is not so easy. We did Cognigen in 2014, that was nine years after our previous acquisitions in 2005.

We did DILIsym last year only three years after Cognigen and I'm hoping to reduce the time in between DILIsym in the next acquisition, So that’s a very active area for this. We are constantly meeting with folks, talking with folks, assessing technologies, assessing finances, assessing people.

And so I can't comment any further in that. But we are always shopping and I see you going through slides, if you go to the summary slide, I will do the summary after we finish the Q&A here.

Thank you.

We have one follow-up from Scott [indiscernible]. Is the software or the consulting, is there a preference on M&A side.

Say that again.

On the M&A side, is there a preference for either software or consulting business?

Well I like software. The margins are really nice.

But the truth is consulting is in such high demand that bolstering our current staff by adding consulting scientists who are already experienced, could be a valuable thing for us to do when we hire new scientists almost all of them are pretty well right out of school and it takes them a while to get up to speed, but if we could acquire an operation that had Scientists that are in the group and able to turn around studies of high-quality, back to our customers and that’s certainly would be attracted to. But software is -- it's definitely a better play in terms of the margins, but consulting eventually sell software.

So I'd say we're opened to both.

Two final questions from Donald Bossier [ph]. The first one is there any concern for a software piracy especially in the Asian markets?

We’ve been concerned about it. We haven't had an issue.

We use what we believe is the best security software on the market called Flexera. It's very commonly used in the pharmaceutical industry.

Some years ago we discovered a Chinese Web site with how to crack through various pieces of software and we were not one of them that they could crack. So we feel pretty confident, we are doing the best that can be done in today's world and certainly if someone had the resources of an NSA or equivalent, they would probably get around it.

But we haven't seen that a real problem with it as of now.

Great. Well, our final question for you can finalize the summary sidewalk.

What the status of monetizing the software in the MRI and missile guidance markets?

Well, we continue to probe different DoD agencies. We write white papers and submit them and typically the way these agencies work.

They either have a broad agency announcement, BAA, they call it, where they got a whole bunch of different things that they’re going to fund over the next months or year. And you try to find a slot to fit into their and contact the people or you just submit a white paper which could be 5 to 10 pages typically describing what it is you think you could give for them and then solicit interest.

And so we are doing those things. There's nothing public yet, so I probably shouldn't go any further than that, but it is something that I have very keen interest in myself and will stay remaining on a project basis without being paid as an employee just kind of volunteering my time to promote that.

I do have the aerospace engineering background and experience with 00 many years experience with proposals and DoD contracts. That’s something that I’m very interested in.

The MRI, I’ve worked -- we’ve been working. I’m sitting right now in Auburn, Alabama, right next to Auburn University.

We have a state-of-the-art MRI facility with both 3T7T for machine and a significant amount of research is done there. And that's where we partnered originally to do the MRI work.

We pulled off our folks to work on PKPlus and now on the conversion of GastroPlus to C++ in large part. So our resources on the AI side have been less than what they were, but I intend to try to step up and support that area going forward.

I think it's the scenario where the time still good to get in. Lot of startups as I mentioned are trying to get in now.

We have a significant amount of experience. We got the best-in-class AI engine for the pharmaceutical industry and the types of predictions that we do for molecular properties.

That stands down and that's not us saying that’s a comparison studies. So we need to not just sit on our laurels, we need to make sure we stay ahead of the game and do what we can to provide this capability not only to pharmaceutical, but other industries.

That was -- go ahead, there is no more questions. If you want to go ahead and finalize the wrap up slide.

Yes, okay. So, Shawn O’Connor, very, very pleased that he is on board.

My wife is too. She's been asking me when I was going to retire for the last seven years or so.

But this is not -- this was not sudden. It may have appeared to be sudden from the outside world but this is something that was a many months in the works with the search committee searching, with me saying you are really would like to retire by the end of the fiscal year beginning of August.

And thank goodness, John was available Ron was available and we found him like I don’t think we could have found anyone with better credentials to take over running a public company in the pharmaceutical software and consulting services business, I will remain as chairman and I will remain involved the project basis on the side. Again/ the compensated for that work with compensation as a director will be like all the other upside directions.

Our third quarter again great quarter. Revenues up 26.7%, income from operations a little over 10%, and net income up almost 16%.

And for the nine months revenues up 28.6%, income from operations 23.2%; net income almost 64% which includes the year one-time $1.5 million deferred tax adjustment. but even though without that it would be up $1.5 million that should be in the 30% range.

Diluted earnings per share increased $0.43 a share, up $o.16 that would've been increased to $0.35 a share without the deferred tax over $0.27 last year. So again the substantial increase in diluted earnings per share.

The Board did declare a $0.06 share quarterly dividend payable on August 2. I think shareholders of record, I believe the July 26, our three divisions California, Buffalo, New York and RTP North Carolina all performing well for realizing the synergies that we expected from these divisions.

We are addressing regulatory agency focus on PBPK modeling of the clinical pharmacology and safety research and new guidance documents that have been issued by the FDA and the European medicines agency have been helping to drive interest. I think they’re driving not only interest in the software, but the considerable amount of increase in consulting demand that we've been seeing in the industry.

The industry knows that modeling at simulation are going away. They are the highest productivity tools available.

We generate tons of data in the pharmaceutical industry in our labs and animal studies in human and the only way to integrate that data and make sense out of it is through Simulation model. We just can't do it by humans doing it databases and spreadsheets and reports.

So we believe that we continue to lead the trend toward greater use of modeling in simulation, in research and development, in pharmaceutical also now in cosmetics, through agrotech and general chemicals. And we thank you for your attendance today.

And I will turn it back to Cameron to wrap it up.

Thank you, Walt. This does conclude today’s conference call and webinar.

If you missed any part of today's presentation, the replay will be available on the Web site www. simulations-plus.com.

Thank you for joining us today and have a great summer.