Simulations Plus, Inc. Q3 FY2021 Earnings Call

Greetings, and welcome to the Simulations Plus' Third Quarter Fiscal 2021 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce Brian Siegel from Hayden IR. Thank you, Mr. Siegel, you may begin.

Good afternoon, everyone. Welcome to our third quarter fiscal 2021 financial results conference call. Hosting the call today are Simulations Plus' CEO, Shawn O'Connor; and CFO, Will Frederick. An opportunity to ask questions will follow today's presentation. Before beginning, I would like to remind everyone that with the exception of historical information, the matters discussed in this presentation are forward-looking statements that involve risks and uncertainties. The actual results of the company could differ significantly from those statements. Factors that can cause or contribute to such differences include, but are not limited to, continued 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 the 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. With that said, I would like to turn the call over to Shawn O'Connor. Shawn?

Thank you, Brian. Simulations Plus delivered another quarter of top and bottom line growth. The quarter was highlighted by continued strong performance from our software solutions with growth exceeding 21%, well above 10% to 15% historical growth rates. Accordingly, we believe that going forward, software revenues will contribute more heavily to our consolidated growth rates than they have in the past. Our service business encountered several project disruptions, which impacted the quarter, leading to an 18% service revenue decline. This decline was due to an unusually high number of projects, 9 in total, impacted by delays, holds, or drug development program cancellations, all of which occurred during the latter part of the quarter. Despite these near-term factors, we remain confident in the mid- to long-term view on the service business as we saw solid bookings and backlog growth and overall pipeline expansion during the quarter. Given our strong software mix, we were able to grow our bottom line faster than the top line, as evidenced by our strong profitability in the quarter. In fact, our net income through 9 months exceeded our total net income for all of fiscal 2020. These results reflect the accelerating growth of our software revenues and inherent leverage in our business model, and the progress we have made in expanding our profit margin. As I mentioned, this was a strong quarter for our software solutions. GastroPlus and ADMET Predictor continued to increase growth rates with drug-drug interaction or DDI and high-throughput pharmacokinetic, or HTPK, module growth of 114% and 58%, respectively. We added five new customers to the 100,000-plus license club and had 23 transactions during the quarter, demonstrating the strength of our product portfolio combined with our efforts to both cross-sell and upsell. Monolix revenues continued to outperform our expectations with revenue up 64% from last year due to a combination of robust demand and early license renewals. This growth is now entirely organic as we have passed the one-year anniversary of our acquisition. We also completed the training of a new distributor in China during the quarter, significantly expanding our addressable market. Our business development investments are paying off by increasing our sales pipeline and creating a cross-selling opportunity and deeper relationship with customers. We also continue to add new capabilities and extend our industry leadership position with the latest release of ADMET Predictor, which will allow for enhanced lead selection, enhanced performance and accuracy, improved automation, and a better overall user experience. Additionally, the newest version of the MonolixSuite is on target for release in the fourth quarter, and GPx10 is on track for release by calendar year-end. Turning to our service offerings. Our service revenue is nonrecurring and can, therefore, exhibit some measure of volatility. During the quarter, our PK/PD and QSP/QST services encountered project disruptions and mix changes that impacted the revenue growth. PK/PD projects are typically in the $100,000 to $200,000 range. We see projects accelerate to meet the aggressive timelines or delayed by issues that are out of our control. Historically, delays have been largely offset by new projects or projects pulled forward from backlog. But this quarter, several significant customer delays impacted our revenue and will continue to do so into the fourth quarter. Customers are quicker to cancel challenging drug development programs in this pandemic environment, and we saw several drug development program cancellations. Our technology allows customers to make decisions more quickly on whether or not to proceed with the development of a compound. Fail fast is an industry objective, and this can contribute to our service project volatility. We also saw delays with service projects sourced in Israel this past quarter, as well as from the tail end of the COVID impact. With respect to the latter, projects are often initiated based on feedback from the FDA requesting more research into specific elements of the compound. During the pandemic, the normal workflow of the FDA and with other regulators has been somewhat disruptive, and this has impacted the schedule for certain drugs to be submitted to the FDA and the timeline for FDA reviews as well as clinical trial time. As a result, we saw a large number of changes, and many of these notifications came late in the quarter. Since our sales cycle had been somewhat elongated during COVID already, our backlog was not at the levels typical of this business, limiting our ability to backfill and reallocate resources to make up for these changes. On a positive note, our bookings during the quarter were good. And the backlog for service projects increased by approximately 5% despite the cancellation. We also added 5 new clients during the quarter, which reinforces our optimism. On the QSP/QST side, these projects tend to be larger in terms of dollars, making the revenue for this work more volatile. QSP/QST had 3 very large projects that concluded late in fiscal 2020, driving higher-than-normal revenue. Further, smaller toxicology projects that are usually the result of feedback from the FDA when regulators want a sponsor to provide additional data on potential liver issues with a compound, and we have the gold standard of capabilities in this area. As COVID continues to diminish, we think the overall pharma development pipeline will normalize, and we will see opportunities convert to backlog and ultimately revenue. That said, our sales pipeline remains large, in fact, larger than normal with significant opportunities. Separately, we did add an additional member to the liver model consortium in the quarter, furthering our integration with industry leaders. Finally, our PBPK services reported solid performance in the quarter, and our regulatory services resources are operating at capacity. Overall, this was a challenging quarter for our service division, but the trends are more encouraging than the results show. Our services continue to enjoy healthy demand, and our sales pipeline is robust and growing. The nature of these project-based revenues results in some periods of over performance and some periods of underperformance. Our outlook for the services revenue in the long run remains unchanged in its ability to contribute to our overall revenue growth, and with the accelerating growth of our software business, we continue to minimize our exposure to service fluctuations and improve profitability. Based on the slowdown in our services revenue, we are now expecting full year total revenue growth of 5% to 10%. The service volatility encountered this quarter is not reflective of any market disruption or business executions that change our long-term outlook for modeling and simulations adoption or our growth prospects as a company. While we are not yet releasing fiscal 2022 guidance, we believe that we will grow over the longer term by more than 15% annually. Breaking our fiscal year '21 full year guidance down, we expect our software revenue to grow 20% to 25% for the full year. This takes into account the 32% year-to-date growth and anticipated flat Monolix revenue in Q4 due to the renewals that were accelerated in the third quarter. Year-to-date, our services revenue was down 6%, and we're expecting full year to see a decline of 7% to 12%. The timing of the delays, holds, and drug development program cancellations means that the fourth fiscal quarter is likely to see lower service revenues, and we don't yet have the necessary visibility to predict when these projects will move forward. Again, we view this situation as temporary and strictly related to the timing of customer projects. Let me now turn the call to our CFO, Will Frederick, to discuss the financial results.

Thank you, Shawn. As Shawn mentioned, our consolidated growth rate slowed to 4% in the quarter due to the challenges facing our services business. When combined with an acceleration in our software revenue growth rate to 21% versus 18% last year, we saw a mix shift towards software, which accounted for 65% of revenue for the quarter. These mix shift and growth rate changes also impacted our year-to-date revenue growth, although the mix shift was not as pronounced, with software making up 61% of revenue year-to-date, as growth increased to 32% versus 15% last year. As you would expect, these revenue mix trends positively impacted our total gross margin for the quarter. Software and services gross margins were both consistent with last year at 90% and 63%, respectively, leading to an overall gross margin increase from 78% last year to 81% this year. On a year-to-date basis, the mix shift had a larger impact on gross margin expansion with software increasing from 86% last year to 89%, while services were roughly flat at 63%, leading to an overall gross margin increase from 75% to 79%. We continue to enjoy a diverse mix of software revenue in the quarter with solid growth across our entire portfolio of products. GastroPlus represented 65% of software revenue for the quarter. ADMET Predictor represented 18% of Q3 software revenue. And Monolix Suite was 11%, with other software representing 6% of software revenue in the quarter. Year-to-date, GastroPlus represented 60% of software revenue, ADMET Predictor was 17% and the Monolix Suite was 16%. For the quarter, our renewal rate was 91% based on fees. We had 1 client renewal slip into the fourth fiscal quarter, causing the dip in our historic level. Had this renewal occurred in this quarter, our renewal rate by fees would have been 93% consistent with prior years. Our renewal rate was 83% based on customers this quarter due to the turnover of nonprofit and academic licenses. We offer licenses to these groups at discounted prices or at no charge, and they tend not to be renewed beyond the initial 1-year license term. This turnover with the lower priced or no charge nonprofit and academic licenses is reflected in the difference between the fees and accounts-based renewals. We continue to see improvement in our average revenue per customer at around $98,000 for commercial customers and $71,000 for all customers, including nonprofits and academics. The average revenue per customer demonstrates the success we've had in upselling and cross-selling software solutions across our customer base. Year-to-date, our renewal rate was also in line with historical rates at 91% based on fees and 84% based on customers. Had the late renewal I just mentioned occurred in this quarter, the year-to-date renewal rate by fees would have been 92%. We also continued to see improvement in our average revenue per customer at around $112,000 for commercial customers and $81,000 for all customers, including nonprofits and academics. Let me shift now to our services business. For the quarter, our services revenue breakdown was as follows: 43% from PK/PD services, 27% from QSP/QST services, 17% from PBPK services, and 13% from other services. Year-to-date, services revenues were similarly dispersed by type. With regard to a couple of key service metrics, total service projects during the quarter decreased 4% compared to the same period last fiscal year due to the project disruptions and mix changes Shawn previously mentioned. We closed the quarter with $12.4 million in service backlog, up $0.6 million compared to the same period last fiscal year. Turning to our consolidated income statement for the quarter. SG&A expense was $5.1 million or 40% of revenue compared to $5 million or 41% of revenue in the same period last fiscal year. The modest increase in SG&A expenses was primarily the result of higher payroll-related expenses. Total R&D costs for the quarter were $1.5 million or 11% of revenue compared to $1.4 million, also 11% of revenue in the same period last fiscal year. R&D expenses for the quarter were $0.7 million or 5% of revenue compared to $0.8 million or 6% of revenue in the same period last fiscal year. Capitalized R&D for the quarter was $0.8 million or 6% of revenue compared to $0.6 million or 5% of revenue in the same period last fiscal year. Income from operations was $4.5 million, an increase of 18% compared to $3.9 million in the same period last fiscal year. This increase was primarily driven by a higher gross margin on increased revenue, partially offset by a modest increase in operating expenses. The provision for income taxes was $0.7 million for an effective tax rate of 16% compared to $0.8 million in the same period last fiscal year, which had an effective tax rate of 22%. The lower effective tax rate was primarily driven by the tax benefit associated with disqualifying dispositions that we saw again this quarter similar to last quarter. The effective tax rate for the quarter was in line with the 15% to 18% we mentioned on last quarter's earnings call and where we expect to end the year subject to factors, including profitability and any additional disqualifying dispositions. Net income increased 29% to $3.8 million compared to $2.9 million for the same period last fiscal year. And diluted earnings per share increased to $0.18 compared to $0.16 for the same period last fiscal year. EBITDA increased 15% to $5.3 million compared to $4.6 million for the same period last fiscal year. When looking at our overall profitability metrics, in Q3, we demonstrated a significant amount of leverage in the model as the 2% overall gross margin expansion drove a 5% EBITDA margin expansion and 13% growth in EPS. In summary, these metrics demonstrate our ability to balance revenue growth and profitability to deliver continued increases in earnings per share to our shareholders, even if quarter-to-quarter revenue fluctuates. Turning to our year-to-date consolidated income statement. SG&A expenses were $15 million or 41% of revenue compared to $12.6 million or 39% of revenue in the same period last fiscal year. Similar to last quarter, the year-to-date increase in SG&A expenses was primarily the result of higher payroll-related expenses due to increased compensation and headcount, as well as increases in contract labor, insurance, and professional fees. Total R&D costs were $5.1 million or 14% of revenue compared to $3.7 million or 12% of revenue in the same period last fiscal year. R&D expenses were $2.8 million or 8% of revenue compared to $2 million or 6% of revenue in the same period last fiscal year. Capitalized R&D for the year was $2.3 million or 6% of revenue compared to $1.7 million, also 6% of revenue in the same period last fiscal year. Income from operations was $11.1 million, an increase of 18% compared to $9.4 million in the same period last fiscal year. Similar to Q3, this increase was primarily driven by a higher gross margin on increased revenue, which was partially offset by an increase in operating expenses. Net income increased 33% to $9.5 million compared to $7.1 million for the same period last fiscal year. And diluted earnings per share increased to $0.46 compared to $0.39 for the same period last fiscal year. EBITDA increased 17% to $13.4 million compared to $11.5 million for the same period last fiscal year. We continue to have a strong balance sheet. At the end of the quarter, our cash and short-term investments balance was $119.8 million compared to $116 million at the end of last fiscal year, reflecting significant cash reserves to support our continued expansion through internal investment and M&A activity. We also continue to have no debt on the balance sheet. I'll now turn the call back to you, Shawn.

Thank you, Will. In conclusion, accelerated software growth rates and a richer mix of software revenues are enhancing profitability metrics, but near-term delays in our service revenue will slow our consolidated growth rate. This is a short-term phenomenon and bookings and backlog improvements point to normalization of our service revenue and the associated growth rates, putting us back in a position to deliver consistent growth in excess of 15%. Strategically, we continue to reinforce our leadership in the pharmaceutical industries in model-based drug development tools and techniques. We remain well integrated with both academia and regulatory agencies, giving us scientific credibility as we look to the future. Our investments in business development are generating the expected results. We have good market momentum with the close of new business, renewal, and growth of existing relationships, key collaborations, and grants. Finally, I want to mention that we are embarking on a celebration of the 25th anniversary of the founding of Simulations Plus. The company will host a series of exciting events throughout the year as part of our 25th anniversary, including charitable contributions and exciting user conferences. We have come a long way in the past 2.5 decades, and it is encouraging to see that while our vision of accelerating the drug development process through software and modeling is increasingly embraced by the industry. With that, we'd be happy to take your questions. Operator?

Operator Instructions. Our first question comes from Matt Hewitt with Craig-Hallum Capital Group.

Just a couple for me. First on the service side. Thank you for providing the color. I'm just wondering if you could dig in a little bit more as far as what you're seeing from customers. You mentioned that the fail fast and move on to new projects early. How has that changed over the past year in maybe prepandemic? And how quickly when they kind of move on to the next project, are you able to kind of get things ramped back up for the various projects?

Yes, Matt. "Fail fast" has been a guiding principle in the industry for some time, and the modeling and simulation tools and services we offer are geared towards achieving that goal. The possibility of project cancellations has always existed, and we are seeing it increase, likely due to the adoption of modeling-based techniques. During the COVID period, priorities shifted and some development programs faced delays. As conditions have begun to stabilize, some of those programs have reemerged, while a few more drug development programs have faced cancellation. We have consistently experienced such phenomena each quarter, but not to this extent. Nine projects were delayed, put on hold, or canceled in the latter part of the quarter. Our usual response has been to reallocate resources to other projects, whether they are new ones with quick start dates or from our backlog, adjusting project priorities and timelines as best we can. Often, the initiation of projects depends on the completion of clinical trials. In these cases, even though we are aware we will undertake the work, we can't start early if the trial hasn’t concluded, which complicates our ability to reorganize project work. Typically, we've managed to adjust. However, in this instance, while our backlog is increasing, it is only now reaching pre-COVID levels. Consequently, our capacity to sift through the backlog and substitute delayed projects has been limited. This is due to both the number of delays and the fact that our backlog of projects is growing but not as strong as before.

Okay. That's helpful. You mentioned that some of the disruptions are likely to continue into the fourth quarter. However, you've indicated that you expect these issues to be short-lived. Are you anticipating a rebound on the service side in fiscal Q1, or is there still some uncertainty regarding how quickly this business will recover?

Yes. Fair enough. Yes, some of these projects were projects that weren't anticipated to be completed in the third quarter and were slotted in to continue into the fourth quarter and contribute revenue over the second half of the year. So, their delay or cancellation does impact the fourth quarter as well. And while we're looking to do what we normally do, which is identify other projects to slot in and utilize those resources and drive revenue, our ability to do that is not in full at this point in time. And so, there will be some impact as a result of some of those projects being canceled. And some of the delayed projects, the indication from the client is not yet firm in terms of this is a 1-month delay or is it a 6-month delay. And so, we're being cautious in terms of anticipating those delayed projects starting back up real quick and contributing into the fourth quarter. So our fourth quarter will be disrupted. As we look out in the longer term, we're not in a position just yet to put out our fiscal '22 guidance as yet. I can say in the long run, I don't see anything in what's occurred over this past quarter that changes the outlook in terms of the use of consulting services by the industry in general. Those clients that we've worked with over a long period of time, the pipeline of activity that we're engaged in, in terms of open proposals and leads and our backlog has risen, and so to the extent that the service business has contributed to our outlook of growing 15% to 20% organically. No change from that perspective, a difficult quarter in terms of the timing of a number of projects, but expect that services will rebound in time here, not as quick as the fourth quarter but will rebound and play its part in terms of our 15% to 20% growth objective. Now on the positive side, the need for it to rebound to some of its heights in the past is diminished as our software business has really performed well, a software business that historically has grown 10% to 15%, closer to the 10% in the past and today has stepped up and is growing in that 20% to 25% range and contributing 60% higher percentage of revenues. Our focus has been in terms of being the tool supplier to the industry and enjoy the recurring revenue and the profitability of the software model, and that side of our strategy is very successful today.

That's great. And I guess, that's a perfect segue to the software. Obviously, a fantastic quarter. This is now several quarters in a row where you've outperformed expectations. It sounds like that's going to continue. How much of that is a contribution from Lixoft and some of the new modules versus just a broader acceptance of simulation software? And as we look out to next year, I think at one point, maybe last year, you had talked about implementing some price increases. Given the pandemic, those kind of got put on hold. Is it your expectation now that we're kind of getting through the pandemic that you might be in a position to implement some of those price increases next year?

In terms of the sourcing of the growth, it has been across the board. Our three primary platforms, GastroPlus, ADMET Predictor, and Monolix are all performing very well, and our historical platforms of GastroPlus and ADMET Predictor have accelerated their growth rates from the past. Yes, in part, as I pointed out in the earnings presentation, the modules of DDI for GastroPlus and HTPK for ADMET Predictor have driven some of that growth, a good portion of that growth, and it's either module sales to existing customers that are upgrading their platforms to include that new technology or it's motivating a new license holder to acquire the full suite, the base product of GastroPlus and the module and/or the full ADMET Predictor license and its module. So, that new technology, which opens up new capabilities for clients is a good motivator for both upselling existing clients as well as bringing new clients into the fold. As I mentioned, we hit five additional clients that exceeded the 100,000 mark in terms of our annual software sales. That's indicative of a client that's either building a number of seats in their company and/or beefing up their instance of the seat by adding more modules to the platform. Monolix has performed very well throughout the course of the year. And today, it's the entirely organic revenue growth in our reported numbers as well. They have benefited from being part of the business development infrastructure of SLP. They benefited from their new releases, both right at the time we acquired them a year ago, and then earlier this year that has brought new functionality and attracted more eyeballs to their capability. And we've expanded distribution both in terms of Monolix into a Chinese distributor capability and in terms of Monolix, the GastroPlus side, ADMET Predictor side down into South America with a new distributor in that direction. So the software's growth is being contributed to across the board and is quite strong today. On the pricing side, while we may not have been as aggressive as we might have due to the COVID environment, there is an element of a price increase in the numbers as we move forward. We'll continue to do that. Annually, we update the price list, if you will. And later this year, with a significant release of GPx, presents a larger new platform that would also price would be a consideration in its introduction as well. So price is always going to be a contributor. But from my perspective right now, most importantly, it's the expanding revenue growth of the products upon which that price increase sits on top of that is really very pleasing to see the fruits of our labor in terms of business development investments over the last 6 to 12 months.

Our next question comes from François Brisebois with Oppenheimer.

Just a quick one here. Just can you give any more color, maybe some more granularity on the delays and cancellations? You mentioned 9, you break down how many of those are delays versus cancellations. And can you share anything as to why these would have happened?

Well, each, Frank, has its own anecdotal story. I don't know that I can get the breakout between delays and holds and cancellations. I think the cancellations were 2 or 3 in number. That gives you a little bit of a feel to the magnitude. Most of them were on the PK/PD service side of our business where our average projects are $100,000 to $200,000 in terms of size. One of them, interestingly enough, was a deal that the contract had just been signed within 30 days, and the decision was made to discontinue the program. So we were quite surprised by some of them, and each of them has their own anecdotal story as to what caused them.

Understood. And just because of that surprising factor, can you just remind us what gives you the confidence for the long term here? When you did kind of give guidance as to 25% to 30% growth on software for the year, and now you've adjusted your guidance. Can you just remind us how that guidance comes about? Is it based on projects? Is it outbound interest, inbound interest? How do you guys get to your guidance?

On the service side, I believe you mentioned software. The guidance is based on our backlog, pipeline, and resources, all of which help us project revenue driven by the sequence of project completions. This quarter was particularly challenging. We experienced nine projects that were impacted, which is more than the typical one or two we see each quarter. There isn't a common factor; each project has its unique circumstances, and I don't observe any consistency in the details. Several of these projects were with long-term clients, who will continue to work with us on other projects currently in progress or in the backlog, so this doesn't indicate any loss of clients. There was a disruption related to a project for an Israeli client due to the situation in the Middle East. The combination and timing of these surprises significantly affected our expectations for the quarter. Our guidance reflects our outlook on project flow and what we see in the pipeline. Despite the cancellations impacting our backlog, we saw an increase in backlog, which isn't typical. We've adopted a more cautious approach in our guidance due to this quarter's experiences. While we hope to exceed these expectations, we will remain cautious in the near term next quarter. Looking ahead into next year and beyond, I still don't foresee any changes in the marketplace or our ability to execute that would alter our typically consistent outlook for service revenue growth.

Excellent. And then I have to ask, in terms of M&A, the pullback in valuations across the board, has that made a potential M&A a little more attractive? Or are we still thinking the same way there in terms of what could make sense, whether it's geographical expansion? Any color there on the M&A strategy?

Yes, I believe you're correct. It does help. The high valuation environment we experienced over the past year made some discussions quite challenging. There tends to be a delay as valuations decrease overall, and individuals or companies might take a while to recognize that their own value could be declining as well. However, the softening of valuations is beneficial because it has made those discussions a bit easier. Nonetheless, it remains a tough environment due to high expectations and the flow of funds from potential acquirers, private equity, and venture capital for small private companies that offer solid software products or services fitting our portfolio. These companies still have options, which complicates discussions. I am confident that, as we have in the past, we will successfully identify the right targets to integrate into the Simulations Plus family and will continue striving toward that goal.

Our next question comes from Dane Leone with Raymond James.

Any chance just so we can get granularity in terms of the difference in the growth rates you could give us the revenues by division, like how you've historically broken out by Lancaster, Simulations Plus, Buffalo Cognigen, and North Carolina, assuming they’re still flat basically?

Yes, Dane, I appreciate the question. I don't think we've ever given guidance at that sort of level. And in fact, as we've been transitioning over the last more than a year, we're really managing the business on a consolidated basis in terms of our software business and our service business. It fosters internally our ability to make progress in terms of sharing resources on the service side amongst divisions and things like that. So no, that's not a level of guidance that we've historically handed out, nor is it fully tracked internally now as we manage the business from a software-service basis.

Are you guys not reporting that anymore? You had it in your last quarter filing. I wasn't asking for guidance by division, but I was just asking for the revenues for the current quarter; you can see the year-on-year?

Yes, I think we still report that segment through to the Q and anticipate in the 10-K as we closed the year. It is one of those things that we're looking at as to whether we continue that segment to break down after this fiscal year. But that Q will be reported here soon. Will, when is that going, is it Wednesday?

Yes, it will go out on Wednesday.

Okay. Can you give us any granularity in terms of, I guess, the growth in the actual software segments or service segments, like for example, on like maybe Slide 12, just because you only give the year-to-date into Q3, so we can't really do the year-on-year in terms of the revenue generation. You know what I'm saying?

Yes, yes. I think in each quarter we've delivered that quarter's revenue breakout across the three major software platforms and the three primary sources of service revenue. We've reported that each quarter on a for the quarter and year-to-date basis. So the information is there. Maybe we'll follow up in terms of helping going back and tracking to those previous slide decks that are out there.

Yes, I would add as well. I mean, probably Slide 8 and Slide 9, as you're looking at those for year-to-date sort of breakdowns and Q3 breakdowns between software and services, those might be helpful, Dane.

What was the reasoning behind the contracts or projects that were canceled? Were they randomly selected, or were they concentrated in specific areas like NASH or other sectors that may have shown some decline in development interest?

They were quite random and did not demonstrate any specific pattern. There was no consistency based on therapeutic area or customer segment. We had a COVID program and programs in other therapeutic areas, as well as both international and domestic initiatives. Essentially, we encountered a situation where several of our projects faced delays, holds, or cancellations, but we couldn't identify any underlying pattern.

Okay, last question from me. How is the backlog actually calculated? Did these projects come out of the backlog from the previous quarter, or were they ongoing and not included in the backlog?

Once the contract is closed it goes into backlog. And I'd say with the exception of the 1 deal that I mentioned that was a quick contract signing with a start date that was almost immediate that got canceled within the first 30 days. I believe the other 8 programs would have been in backlog at the beginning of the quarter.

Okay. And how long is your backlog realization about one quarter or longer than that?

Backlog in total about $12 million. And I would say that it is 3 to 6 months typically in terms of its planned timing, although there is some component of that, that extends for up to 12 months in backlog.

Thank you. There are no further questions at this time. I would like to turn the floor back over to Mr. Shawn O'Connor for any closing comments.

Very good. Well, I appreciate everyone's attention. And I certainly look forward to speaking again very soon at the end of our next quarter, and appreciate your continued support. Take care, everyone.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful evening.