CERT 10-Q
Certara, Inc. (CERT)
10-Q
2023-11-08
For: 2023-09-30
View Original
Added on
April 08, 2026
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
FORM 10-Q
_________________________
| (Mark One) | |||||
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES | |||||
| EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended September 30, 2023
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES | |||||
| EXCHANGE ACT OF 1934 | |||||
For the transition period from ______________ to ______________
Commission File Number: 001-39799
_________________________
(Exact name of registrant as specified in its charter)
_________________________
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | ||||
(Address of Principal Executive Offices)
(609 ) 716-7900
(Registrant’s telephone number)
_________________________
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading symbol | Name of Exchange on which registered | ||||||||||||
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| x | Accelerated filer | o | |||||||||||||||
| Non-accelerated filer | o | Smaller reporting company | Emerging growth company | ||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of November 01, 2023, the registrant had 159,844,780 shares of common stock, par value $0.01 per share, outstanding.
Certara, Inc.
Unless otherwise indicated, references to the “Company,” “Certara,” “we,” “us,” and “our” refer to Certara, Inc. and its consolidated subsidiaries.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this “Quarterly Report”) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are subject to the “safe harbor” created by those sections. All statements (other than statements of historical facts) in this Quarterly Report regarding the prospects of the industry and our prospects, plans, financial position and business strategy may constitute forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “should,” “expect,” “might,” “intend,” “will,” “estimate,” “anticipate,” “plan,” “believe,” “predict,” “potential,” “continue,” “suggest,” “project” or “target” or the negatives of these terms or variations of them or similar terminology. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot provide any assurance that these expectations will prove to be correct. Such statements reflect the current views of our management with respect to our operations, results of operations and future financial performance. The following factors are among those that may cause actual results to differ materially from the forward-looking statements:
•our ability to compete within our market;
•any deceleration in, or resistance to, the acceptance of model-informed biopharmaceutical discovery and development;
•our ability to retain key personnel or recruit additional qualified personnel;
•changes or delays in government regulation relating to the biopharmaceutical industry;
•increasing competition, regulation and other cost pressures within the pharmaceutical and biotechnology industries;
•trends in research and development (“R&D”) spending, the use of third parties by biopharmaceutical companies and a shift toward more R&D occurring at smaller biotechnology companies;
•our ability to successfully enter new markets, increase our customer base and expand our relationships with existing customers;
•our ability to sustain recent growth rates;
•any future acquisitions and our ability to successfully integrate such acquisitions;
•consolidation within the biopharmaceutical industry;
•reduction in the use of our products by academic institutions;
•pricing pressures due to increased customer utilization of our products;
•any delays or defects in our release of new or enhanced software or other biosimulation tools;
•failure of our existing customers to renew their software licenses or any delays or terminations of contracts or reductions in scope of work by our existing customers;
•our ability to accurately estimate costs associated with our fixed-fee contracts;
•risks related to our contracts with government customers, including the ability of third parties to challenge our receipt of such contracts;
•the accuracy of our addressable market estimates;
•the length and unpredictability of our software and service sales cycles;
•our ability to successfully operate a global business;
•our ability to comply with applicable anti-corruption, trade compliance and economic sanctions laws and regulations;
•our ability to perform our services in accordance with contractual requirements, regulatory standards and ethical considerations;
•the loss of more than one of our major customers;
•our future capital needs;
•adverse developments affecting the financial services industry may delay or prevent us or our customers’ ability to access cash, cash equivalents, or investments which could impact the timely payment to vendors and others or timely receipt of payment from customers;
•our ability to realize the anticipated revenue reflected in our bookings;
•any disruption in the operations of the third-party providers who host our software solutions or any limitations on their capacity or interference with our use;
•the occurrence of natural disasters and epidemic diseases, such as the COVID-19 pandemic, which may result in delays or cancellations of customer contracts or decreased utilization by our employees;
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•our ability to reliably meet our data storage and management requirements, or the experience of any failures or interruptions in the delivery of our services over the internet;
•our ability to comply with the terms of any licenses governing our use of third-party open source software utilized in our software solutions;
•any unauthorized access to or use of customer or their proprietary or confidential data or other breach of our cybersecurity measures;
•our ability to comply with applicable privacy and cybersecurity laws;
•our ability to adequately enforce or defend our ownership and use of our intellectual property and other proprietary rights;
•any allegations that we are infringing, misappropriating or otherwise violating a third party’s intellectual property rights;
•risks related to litigation against us;
•the adequacy of our insurance coverage and our ability to obtain adequate insurance coverage in the future;
•our ability to meet the obligations under our current or future indebtedness as they become due and have sufficient capital to operate our business and react to changes in the economy or industry;
•any limitations on our ability to pursue our business strategies due to restrictions under our current or future indebtedness or inability to comply with any restrictions under such indebtedness;
•any impairment of goodwill or other intangible assets;
•our ability to use our net operating loss (“NOLs”) and R&D tax credit carryforwards to offset future taxable income;
•the accuracy of our estimates and judgments relating to our critical accounting policies and any changes in financial reporting standards or interpretations;
•any inability to design, implement, and maintain effective internal controls when required by law, or inability to timely remediate internal controls that are deemed ineffective; and
•the other factors described elsewhere in this Quarterly Report, in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (“2022 Annual Report”), and in the other documents and reports we file with the Securities and Exchange Commission (the “SEC”).
You should not rely upon forward-looking statements as predictions of future events. The forward-looking statements in this Quarterly Report are based on our beliefs, assumptions and expectations of future performance, taking into account the information currently available to us. These statements are only predictions based upon our current expectations and projections about future events. There are important factors, including those described in the section titled “Risk Factors” and elsewhere in this Quarterly Report and in our 2022 Annual Report and and subsequent SEC filings, which could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time and it is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make in this Quarterly Report. Such risk factors may be updated from time to time in our periodic filings with the SEC. Our periodic filings are accessible on the SEC’s website at www.sec.gov.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance and events and circumstances reflected in the forward-looking statements will be achieved or occur. The forward-looking statements made in this Quarterly Report relate only to events as of the date on which the statements are made. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Quarterly Report to conform these statements to actual results or to changes in our expectations.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements..
Channels for Disclosure of Information
Investors and others should note that we may announce material information to the public through filings with the SEC, our Investors Relations website (https://ir.certara.com), press releases, public conference calls and public webcasts. We use
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these channels to communicate with the public about the Company, our products, our services and other matters. We encourage our investors, the media and others to review the information disclosed through these channels as such information could be deemed to be material information. The information on such channels, including on our website, is not incorporated by reference in this Quarterly Report and shall not be deemed to be incorporated by reference into any other filing under the Securities Act or the Exchange Act, except as expressly set forth by specific reference in such a filing. This list of disclosure channels may be updated from time to time.
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CERTARA, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
| Item | Page | |||||||||||||
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2023 and 2022 | ||||||||||||||
2. | ||||||||||||||
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PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
| CERTARA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) | ||
| (IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA) | SEPTEMBER 30, 2023 | DECEMBER 31, 2022 | ||||||||||||
| Assets | ||||||||||||||
| Current assets: | ||||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||
Accounts receivable, net of allowance for credit losses of $ | ||||||||||||||
| Restricted cash | ||||||||||||||
| Prepaid expenses and other current assets | ||||||||||||||
| Total current assets | ||||||||||||||
| Other assets: | ||||||||||||||
| Property and equipment, net | ||||||||||||||
| Operating lease right-of-use assets | ||||||||||||||
| Goodwill | ||||||||||||||
Intangible assets, net of accumulated amortization of $ | ||||||||||||||
| Deferred income taxes | ||||||||||||||
| Other long-term assets | ||||||||||||||
| Total assets | $ | $ | ||||||||||||
| Liabilities and stockholders’ equity | ||||||||||||||
| Current liabilities: | ||||||||||||||
| Accounts payable | $ | $ | ||||||||||||
| Accrued expenses | ||||||||||||||
| Current portion of deferred revenue | ||||||||||||||
| Current portion of long-term debt | ||||||||||||||
| Other current liabilities | ||||||||||||||
| Total current liabilities | ||||||||||||||
| Long-term liabilities: | ||||||||||||||
| Deferred revenue, net of current portion | ||||||||||||||
| Deferred income taxes | ||||||||||||||
| Operating lease liabilities, net of current portion | ||||||||||||||
| Long-term debt, net of current portion and debt discount | ||||||||||||||
| Other long-term liabilities | ||||||||||||||
| Total liabilities | ||||||||||||||
| Commitments and contingencies | ||||||||||||||
| Stockholders' equity: | ||||||||||||||
Preferred shares, $ | ||||||||||||||
Common shares, $ | ||||||||||||||
| Additional paid-in capital | ||||||||||||||
| Accumulated deficit | ( | ( | ||||||||||||
| Accumulated other comprehensive loss | ( | ( | ||||||||||||
Treasury stock at cost, | ( | ( | ||||||||||||
| Total stockholders’ equity | ||||||||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||||||||
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CERTARA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED) | ||
| THREE MONTHS ENDED SEPTEMBER 30, | NINE MONTHS ENDED SEPTEMBER 30, | |||||||||||||||||||||||||
| (IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA) | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||||||||||||
| Cost of revenues | ||||||||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||
| Sales and marketing | ||||||||||||||||||||||||||
| Research and development | ||||||||||||||||||||||||||
| General and administrative | ||||||||||||||||||||||||||
| Intangible asset amortization | ||||||||||||||||||||||||||
| Depreciation and amortization expense | ||||||||||||||||||||||||||
| Goodwill impairment expense | ||||||||||||||||||||||||||
| Total operating expenses | ||||||||||||||||||||||||||
| Income (loss) from operations | ( | ( | ||||||||||||||||||||||||
| Other income (expenses): | ||||||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | ||||||||||||||||||||||
| Net other income | ||||||||||||||||||||||||||
| Total other expenses | ( | ( | ( | ( | ||||||||||||||||||||||
| Income (loss) before income taxes | ( | ( | ||||||||||||||||||||||||
| Provision (benefit) for income taxes | ( | |||||||||||||||||||||||||
| Net income (loss) | ( | ( | ||||||||||||||||||||||||
| Other comprehensive income (loss): | ||||||||||||||||||||||||||
| Foreign currency translation adjustment | ( | ( | ( | ( | ||||||||||||||||||||||
Change in fair value from interest rate swap, net of tax of $ | ||||||||||||||||||||||||||
| Total other comprehensive income (loss) | ( | ( | ( | |||||||||||||||||||||||
| Comprehensive loss | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||
| Net income (loss) per share attributable to common stockholders: | ||||||||||||||||||||||||||
| Basic | $ | ( | $ | $ | ( | $ | ||||||||||||||||||||
| Diluted | $ | ( | $ | $ | ( | $ | ||||||||||||||||||||
| Weighted average common shares outstanding: | ||||||||||||||||||||||||||
| Basic | ||||||||||||||||||||||||||
| Diluted | ||||||||||||||||||||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements
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| CERTARA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED) | ||
| (IN THOUSANDS, EXCEPT SHARE DATA) | COMMON STOCK | ADDITIONAL PAID-IN CAPITAL | ACCUMULATED DEFICIT | ACCUMULATED OTHER COMPREHENSIVE LOSS | TREASURY STOCK | TOTAL STOCKHOLDERS' EQUITY | ||||||||||||||||||||||||||||||||||||||||||||
| SHARES | AMOUNT | SHARES | AMOUNT | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2022 | $ | $ | $ | ( | $ | ( | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||
| Equity-based compensation awards | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Common shares issued for share-based compensation awards and shares withheld for tax | — | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||
| Restricted stock forfeiture | ( | ( | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Change in fair value from interest rate swap, net of tax | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of September 30, 2022 | $ | $ | $ | ( | $ | ( | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2021 | $ | $ | $ | ( | $ | ( | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||
| Equity-based compensation awards | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Common shares issued for share-based compensation awards and shares withheld for tax | ( | — | — | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Restricted stock forfeiture | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||
| Change in fair value from interest rate swap, net of tax | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Balance as of September 30, 2022 | $ | $ | $ | ( | $ | ( | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements
8
| CERTARA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED) | ||
| (IN THOUSANDS, EXCEPT SHARE DATA) | COMMON STOCK | ADDITIONAL PAID-IN CAPITAL | ACCUMULATED DEFICIT | ACCUMULATED OTHER COMPREHENSIVE LOSS | TREASURY STOCK | TOTAL STOCKHOLDERS' EQUITY | ||||||||||||||||||||||||||||||||||||||||||||
| SHARES | AMOUNT | SHARES | AMOUNT | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2023 | $ | $ | $ | ( | $ | ( | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||
| Equity-based compensation expense, net of forfeiture | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Common shares issued for share-based compensation awards and shares withheld for tax | ( | — | — | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Restricted stock forfeiture* | ( | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Change in fair value from interest rate swap, net of tax | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment, net of tax | — | — | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Balance as of September 30, 2023 | $ | $ | $ | ( | $ | ( | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2022 | $ | $ | $ | ( | $ | ( | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||
| Equity-based compensation expense, net of forfeiture | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Common shares issued for share-based compensation awards and shares withheld for tax | ( | — | — | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Restricted stock forfeiture* | ( | ( | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Change in fair value from interest rate swap, net of tax | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment, net of tax | — | — | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Balance as of September 30, 2023 | $ | $ | $ | ( | $ | ( | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||
•Legal forfeiture 66,220 shares occurred in Q1 2023; and the accounting forfeiture occurred in Q3 2022.
The accompanying notes are an integral part of the condensed consolidated financial statements
9
| CERTARA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) | ||
| NINE MONTHS ENDED SEPTEMBER 30, | ||||||||||||||
| (IN THOUSANDS) | 2023 | 2022 | ||||||||||||
| Cash flows from operating activities: | ||||||||||||||
| Net income (loss) | $ | ( | $ | |||||||||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||||||
| Depreciation and amortization of property and equipment | ||||||||||||||
| Amortization of intangible assets | ||||||||||||||
| Amortization of debt issuance costs | ||||||||||||||
| Provision for credit losses | ||||||||||||||
| Loss on retirement of assets | ||||||||||||||
| Equity-based compensation expense | ||||||||||||||
| Change in fair value of contingent considerations | ||||||||||||||
| Goodwill impairment | ||||||||||||||
| Lease abandonment expense | ||||||||||||||
| Deferred income taxes | ( | ( | ||||||||||||
| Changes in assets and liabilities: | ||||||||||||||
| Accounts receivable | ( | |||||||||||||
| Prepaid expenses and other assets | ||||||||||||||
| Accounts payable and accrued expenses | ( | ( | ||||||||||||
| Deferred revenue | ( | ( | ||||||||||||
| Other liabilities | ( | ( | ||||||||||||
| Net cash provided by operating activities | ||||||||||||||
| Cash flows from investing activities: | ||||||||||||||
| Capital expenditures | ( | ( | ||||||||||||
| Capitalized development costs | ( | ( | ||||||||||||
| Investment in intangible assets | ( | |||||||||||||
| Business acquisitions, net of cash acquired | ( | ( | ||||||||||||
| Net cash used in investing activities | ( | ( | ||||||||||||
| Cash flows from financing activities: | ||||||||||||||
| Payments on long-term debt and finance lease obligations | ( | ( | ||||||||||||
| Payments on financing component of interest rate swap | ( | |||||||||||||
| Payment of taxes on shares withheld for employee taxes | ( | ( | ||||||||||||
| Net cash used in financing activities | ( | ( | ||||||||||||
| Effect of foreign exchange rate changes on cash and cash equivalents, and restricted cash | ( | ( | ||||||||||||
| Net increase in cash and cash equivalents, and restricted cash | ||||||||||||||
| Cash and cash equivalents, and restricted cash, at beginning of period | ||||||||||||||
| Cash and cash equivalents, and restricted cash, at end of period | $ | $ | ||||||||||||
| Supplemental disclosures of cash flow information | ||||||||||||||
| Cash paid for interest | $ | $ | ||||||||||||
| Cash paid for taxes | $ | $ | ||||||||||||
| Supplemental schedule of non-cash investing and financing activities | ||||||||||||||
| Contingent liabilities established in connection with business acquisition | $ | $ | ||||||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements
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CERTARA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
1. Description of Business
Certara, Inc. and its wholly-owned subsidiaries (together, the “Company”) deliver software products and technology-driven services to customers to efficiently carry out and realize the full benefits of biosimulation in drug discovery, preclinical and clinical research, regulatory submissions and market access. The Company is a global leader in biosimulation, and the Company’s biosimulation software and technology-driven services help optimize, streamline, or even waive certain clinical trials to accelerate programs, reduce costs, and increase the probability of success. The Company’s regulatory science and market access software and services are underpinned by technologies such as regulatory submissions software, natural language processing, and Bayesian analytics. When combined, these solutions allow the Company to offer customers end-to-end support across the entire product life cycle.
The Company has operations in the United States, Australia, Canada, China, France, Germany, India, Italy, Japan, Luxembourg, Netherlands, Philippines, Poland, Portugal, Spain, Switzerland, Egypt, and the United Kingdom.
2. Summary of Significant Accounting Policies
There have been no changes other than what is discussed herein to the Company’s significant accounting policies as compared to the significant accounting policies described in Note 2 to the Company’s audited consolidated financial statements included in our 2022 Annual Report. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes as of and for the year ended December 31, 2022.
(a) Basis of Presentation and Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include, among other estimates, assumptions used in the allocation of the transaction price to separate performance obligations, estimates towards the measure of progress of completion on fixed-price service contracts, the determination of fair values and useful lives of long-lived assets as well as intangible assets, goodwill, allowance for credit losses for accounts receivable, recoverability of deferred tax assets, recognition of deferred revenue, valuation of interest rate swaps, determination of fair value of equity-based awards, measurement of fair value of contingent consideration, and assumptions used in testing for impairment of long-lived assets. Actual results could differ from those estimates, and such differences may be material to the condensed consolidated financial statements.
(b) Unaudited Interim Financial Statements
The accompanying condensed consolidated balance sheet as of September 30, 2023, the condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2023 and 2022, the condensed consolidated statements of stockholders’ equity for the three and nine months ended September 30, 2023 and 2022, the condensed consolidated statements of cash flows for the nine months ended September 30, 2023 and 2022, and the related interim disclosures are unaudited.
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(c) Accounting Pronouncements Not Yet Adopted
In March 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-01, “Common Control Arrangements (Topic 842),” which provide private companies and not-for-profit organizations that are not conduit bond obligors with a practical expedient to use the written terms and conditions of a common control arrangement to determine whether a lease exists and, if so, the classification of and accounting for that lease. In addition, the ASU requires all entities including public companies to amortize leasehold improvements associated with common control leases over the useful life to the common control group. This ASU is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. The Company is currently evaluating the impact of adopting this guidance on its condensed consolidated financial statements.
(d) Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
(e) Fair Value Measurements
The Company follows FASB Accounting Standards Codification (“ASC”) 820 10, “Fair Value Measurements” (“ASC 820-10”), which defines fair value, establishes a framework for measuring fair value in U.S. GAAP, and requires certain disclosures about fair value measurements.
ASC 820 - 10 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the most advantageous market for the asset or liability in an orderly transaction. Fair value measurement is based on a hierarchy of observable or unobservable inputs. The standard describes three levels of inputs that may be used to measure fair value.
Level 1 — Inputs to the valuation methodology are quoted prices available in active markets for identical securities as of the reporting date;
Level 2 — Inputs to the valuation methodology are other significant observable inputs, including quoted prices for similar securities, interest rates, credit risk etc. as of the reporting date, and the fair value can be determined through the use of models or other valuation methodologies; and
Level 3 — Inputs to the valuation methodology are unobservable inputs in situations where there is little, or no market activity of the securities and the reporting entity makes estimates and assumptions relating to the pricing of the securities including assumptions regarding risk.
If the inputs used to measure fair value fall at different levels of the fair value hierarchy, the hierarchy is based on the lowest level of input that is significant to the fair value measurement. For the acquisitions noted in Note 5, the fair value measurement methods used to estimate the fair value of the assets acquired and liabilities assumed at the acquisition dates utilized a number of significant unobservable inputs of Level 3 assumptions. These assumptions included, among other things, projections of future operating results, implied fair value of assets using an income approach by preparing a discounted cash flow analysis, and other subjective assumptions.
Interest rate swaps are valued in the market using discounted cash flows techniques. These techniques incorporate Level 1 and Level 2 inputs. The market inputs are utilized in the discounted cash flows’ calculation considering the instrument’s
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term, notional amount, discount rate and credit risk. Significant inputs to the derivative instrument valuation model for interest rate swaps are observable in active markets and are classified as Level 2 in the hierarchy.
Contingent liabilities related to acquisitions are measured at fair value using Level 3 unobservable inputs. The Company's estimates of fair value are based upon assumptions believed to be reasonable, but that are uncertain and involve significant judgments by management. Any changes in the fair value of these contingent liabilities are included in the earnings in the condensed consolidated statements of operations and comprehensive income (loss).
To estimate the fair value of the contingent consideration liability for Vyasa Analytics, LLC ("Vyasa"), management utilized a Monte Carlo simulation model to value the earn-outs based on the likelihood of reaching certain eligible revenue thresholds. To measure the fair value of the contingent consideration liability for the Drug Interaction Database ("DIDB"), management initially utilized present value discounted based on a multiple of eligible revenue over two separate measurement periods. Significant inputs used in the fair value measurement of contingent consideration is the amount and timing of the acquired entity’s eligible revenue over certain periods subsequent to the acquisition date. At the acquisition date, the fair value of the contingent consideration liabilities was $19,813 and $790 for the Vyasa acquisition and DIDB, respectively.
The following table sets forth the assets and liabilities that were measured at fair value on a recurring basis by their levels in the fair value hierarchy at September 30, 2023:
| LEVEL 1 | LEVEL2 | LEVEL 3 | TOTAL | |||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||
| Money market funds | $ | $ | $ | $ | ||||||||||||||||||||||
| Interest rate swap assets | ||||||||||||||||||||||||||
| Total assets | $ | $ | $ | $ | ||||||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||||
| Contingent liabilities | $ | $ | $ | $ | ||||||||||||||||||||||
| Total liabilities | $ | $ | $ | $ | ||||||||||||||||||||||
The following table sets forth the assets and liabilities that were measured at fair value on a recurring basis by their levels in the fair value hierarchy at December 31, 2022:
| LEVEL 1 | LEVEL2 | LEVEL 3 | TOTAL | |||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||
| Money market funds | $ | $ | $ | $ | ||||||||||||||||||||||
| Interest rate swap assets | ||||||||||||||||||||||||||
| Total assets | $ | $ | $ | $ | ||||||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||||
| Contingent liabilities | $ | $ | $ | $ | ||||||||||||||||||||||
| Total liabilities | $ | $ | $ | $ | ||||||||||||||||||||||
For the period ended September 30, 2023, there were no transfers between the levels within the fair value hierarchy. The Company’s Level 3 liabilities that were measured at fair value on a recurring basis are acquisition related contingent consideration liabilities.
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The following table summarizes the Level 3 activity of the changes in the contingent consideration liability.
| SEPTEMBER 30, | ||||||||
| 2023 | ||||||||
| (In thousands) | ||||||||
Beginning balance at December 31, 2022 | $ | |||||||
| Additions | ||||||||
| Payments | ||||||||
| Change in fair value | ||||||||
Ending balance at September 30, 2023 | $ | |||||||
Non-Recurring Fair Value Measurements:
Certain assets are measured at fair value on a non-recurring basis. These assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments when events or circumstances indicate a significant adverse effect on the fair value of the asset. During the third quarter of 2023, the Company performed an interim goodwill impairment test for its Regulatory and Writing business reporting unit. It was determined that the fair value of the reporting unit was less than its carrying value, resulting in the recording of a $46,984 goodwill impairment charge and a corresponding reduction in the goodwill carrying amount for the reporting unit.
(f) Cash and Cash Equivalents, and Restricted Cash
Cash equivalents include highly liquid investments with maturities of three months or less from the date purchased.
Restricted cash represents cash that is reserved for unexpended restricted grant funds and for a Company's credit card program. The restricted cash balance was $0 and $3,102 at September 30, 2023 and December 31, 2022, respectively.
The following table provides a reconciliation of cash and cash equivalents and restricted cash to the amounts presented in the condensed consolidated statements of cash flows:
| SEPTEMBER 30, 2023 | DECEMBER 31, 2022 | ||||||||||
| (In thousands) | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash, current | |||||||||||
| Total cash and cash equivalents and restricted cash | $ | $ | |||||||||
(g) Accounts Receivable
Accounts receivable includes current outstanding invoices billed to customers. Invoices are typically issued with net 30 days to net 90 days terms upon delivery of the product or upon achievement of billable events for service-based contracts.
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Unbilled receivables relate to the Company’s rights to consideration for performance obligations satisfied but not billed at the reporting date on contracts. Unbilled receivables are billed and transferred to customer accounts receivable when the rights become unconditional. The carrying amount of accounts receivable is reduced by a valuation allowance.
The Company estimates the expected credit losses for accounts receivables using historical loss data adjusted for current economic conditions, including reasonable and supportable forecasts to estimate the relative size of credit losses to be expected. The Company generally writes off a receivable or records a specific allowance for credit losses if the Company determines that the receivable is not collectible. Allowances for credit losses of $678 and $1,250 were provided in the accompanying condensed consolidated financial statements as of September 30, 2023 and December 31, 2022, respectively.
Accounts receivable consists of the following:
| SEPTEMBER 30, 2023 | DECEMBER 31, 2022 | ||||||||||
| (In thousands) | |||||||||||
| Trade receivables | $ | $ | |||||||||
| Unbilled receivables | |||||||||||
| Other receivables | |||||||||||
| Allowances for credit losses | ( | ( | |||||||||
| Accounts receivable, net | $ | $ | |||||||||
The following table presents the information regarding the allowance of accounts receivable:
| SEPTEMBER 30, 2023 | DECEMBER 31, 2022 | ||||||||||
| (In thousands) | |||||||||||
| Beginning balance | $ | $ | |||||||||
| Provision for credit losses | |||||||||||
| Charge-offs, net of recoveries | ( | ( | |||||||||
| Ending balance | $ | $ | |||||||||
(h) Derivative Instruments
In the normal course of business, the Company is subject to risk from adverse fluctuations in interest rates. The Company has chosen to manage this risk through the use of derivative financial instruments that consist of interest rate swap contracts. Counterparties to these contracts are major financial institutions. The Company is exposed to credit loss in the event of nonperformance by these counterparties. The Company does not use derivative instruments for trading or speculative purposes. The objective in managing exposure to market risk is to limit the impact on cash flows. To qualify for hedge accounting, the interest rate swaps must effectively reduce the risk exposure that they are designed to hedge. In addition, at the inception of a qualifying cash flow hedging relationship, the underlying transaction or transactions must be, and be expected to remain, probable of occurring in accordance with the related assertions.
FASB ASC 815, “Derivatives and Hedging,” requires the Company to recognize all derivatives on the balance sheet at fair value. The Company may enter into derivative contracts such as interest rate swap contracts that effectively convert portions of the Company’s floating rate debt to a fixed rate, which serves to mitigate interest rate risk. The Company’s objectives in using interest rate swaps are to add stability to interest expense and to manage its exposure to interest rate movements. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
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The Company entered into an interest rate swap agreement in May 2022 that pays a fixed interest rate and receives a variable interest rate to modify the interest rate characteristics of term loan debt from variable to fixed in order to reduce the impact of changes in future cash flows due to market interest rate changes. The swap agreement has a notional amount of $230,000 , a fixed rate of 2.8 % and a termination date of August 31, 2025. During the quarter ended at September 30, 2023, the Company and the counter party amended the floating rate of the swap agreement from term LIBOR to term SOFR due to LIBOR cessation. At September 30, 2023 and December 31, 2022, the interest swap had a fair value of $9,344 and $8,374 , respectively. The fair value recognized in accumulated other comprehensive income was $9,344 and $8,374 , respectively, at September 30, 2023 and December 31, 2022.
The Company uses derivatives to manage certain interest exposures and designated all the derivatives as cash flow hedges. The Company records derivatives at fair value on its condensed consolidated balance sheets. Changes in the fair value of derivatives designated as cash flow hedges are recorded as a component of accumulated other comprehensive income (loss). Those amounts are reclassified into interest expense in the same period during which the hedged transactions impact earnings. The amount of derivative gains reclassified from accumulated other comprehensive income on this derivative instrument recognized in the Company’s condensed consolidated statements of operations and comprehensive income (loss) was $1,489 , $(355 ), $3,751 , and $(700 ) for the three and nine months ended September 30, 2023 and 2022, respectively.
The notional amounts, fair values, and classification of derivative instruments in the condensed consolidated balance sheets as of September 30, 2023 and December 31, 2022 were as follows:
| Interest rate swap derivative designated as cash flow hedging instrument: | SEPTEMBER 30, 2023 | DECEMBER 31, 2022 | ||||||||||||
| (In thousands) | ||||||||||||||
| Notional amounts | $ | $ | ||||||||||||
| Prepaid expenses and other current assets | $ | $ | ||||||||||||
| Other long-term assets | $ | $ | ||||||||||||
The net amount of deferred gains related to derivative instruments designated as cash flow hedges that is expected to be reclassified from accumulated other comprehensive gains into earnings over the next twelve months is $5,888 .
(i) Goodwill
The goodwill impairment test is performed at least annually at the reporting unit level. An interim test is performed when events or circumstances occur that may indicate that it is more likely than not that the fair value of any reporting unit may be less than its carrying value.
During the third quarter of 2023, the Company performed interim goodwill impairment tests for Regulatory Writing reporting unit. The fair value of Regulatory Writing reporting unit was determined to be less than its carrying value, resulting in a goodwill impairment charge of $46,984 for the reporting unit. The fair value of that reporting unit was estimated using a combination of the discounted cash flow method and the guideline public company method. The decline in the fair value of the Regulatory Writing reporting unit was driven by revised revenue growth and profitability forecasts resulting from certain reductions in our financial planning assumptions. These reductions were primarily attributable to a decrease in demand from certain customer groups for the legacy reporting unit.
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| Balance as of December 31, 2022 | $ | ||||
| Goodwill acquired in connection with acquisition | |||||
| Foreign currency translation | |||||
| Impairment expense | ( | ||||
| Balance as of September 30, 2023 | $ | ||||
(j) Revenue Recognition
In accordance with ASC Topic 606, “Revenue from Contracts with Customers”, the Company determines revenue recognition through the following steps:
i. Identification of the contract, or contracts, with a customer
ii. Identification of the performance obligations in the contract
iii. Determination of the transaction price
iv. Allocation of the transaction price to the performance obligations in the contract
v. Recognition of revenue when, or as, the Company satisfies a performance obligation
The Company’s revenue consists of fees for perpetual and term licenses for its software products, post-contract customer support (referred to as maintenance), software as a service (“SaaS”), and professional services including training and other revenue. Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for promised goods or services.
The following describes the nature of the Company’s primary types of revenues and the revenue recognition policies as they pertain to the types of transactions the Company enters into with its customers.
Software Licenses Revenues
Software license revenue consists primarily of sales of software licenses downloaded and installed by our customers on their own hardware. The license period is generally one year or less and includes an insignificant amount of customer support to assist the customer with the software. Software license performance obligations are generally recognized upfront at the point in time when the software license has been delivered.
Software as a Service (SaaS) Revenues
SaaS revenues consist of subscription fees for access to, and related support for, the Company’s cloud-based solutions. The Company typically invoices subscription fees in advance in annual installments. The invoice is initially deferred and revenue is recognized ratably over the life of the contract. The Company’s software contracts do not typically include, variable consideration, or options for future purchases that would not be similar to the original goods.
Software Service Revenues
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Maintenance services agreements on perpetual software consist of fees for providing software updates and for providing technical support for software products for a specified term. Revenue allocated to maintenance services is recognized ratably over the contract term beginning on the delivery date of each offering. Maintenance contracts generally have a term of one year . While the transfer of control of the software training and implementation performance obligations are over time, the services are typically started and completed within a few days. Due to the quick nature of the performance obligation from start to finish and the insignificant amounts, the Company recognizes any software training or implementation revenue at the completion of the service. Any unrecognized portion of amounts paid in advance for licenses and services is recorded as deferred revenue.
Consulting Service Revenues
The Company’s primary professional services offering includes consulting services, which may be either strategic consulting services, reporting and analysis services, regulatory writing services, or any combination of the three. The Company’s professional services contracts are either time-and-materials or fixed fee. Service revenues are generally recognized over time as the services are performed. Generally, these services are delivered to customers electronically. Revenue from time-and-material contracts is recognized on an output basis as labor hours are delivered and/or direct expenses are incurred. Revenues for fixed-price services are generally recognized over time by applying input methods to estimate progress to completion. Accordingly, the number of resources being paid for and the varying lengths of time they are being paid for determine the measure of progress.
Arrangements with Multiple Performance Obligations
For contracts with multiple performance obligations, such as a software license plus software training, implementation, and/or maintenance/support, or in contracts where there are multiple software licenses, the Company determines if the products or services are distinct and allocates the consideration to each distinct performance obligation on a relative standalone selling price basis. The delivery of a particular type of software and each of the user licenses would be one performance obligation. Additionally, any training, implementation, or support and maintenance promises sold as part of the software license agreement would be considered separate performance obligations, as those promises are distinct and separately identifiable from the software licenses. The payment terms in these arrangements are less than one year such that there is no significant financing component.
Contract Balances
The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and customer advances and deposits (deferred revenue, contract liabilities) on the condensed consolidated balance sheets. Amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals (e.g., quarterly or monthly) or upon achievement of contractual milestones.
Contract assets relate to the Company’s rights to consideration for performance obligations satisfied but not billed at the reporting date on contracts (i.e., unbilled revenue, a component of accounts receivable in the condensed consolidated balance sheets). Contract assets are billed and transferred to customer accounts receivable when the rights become unconditional. The Company typically invoices customers for term licenses, subscriptions, maintenance and support fees in advance with payment due before the start of the subscription term, ranging from to three years . The Company records the amounts collected in advance of the satisfaction of performance obligations, usually over time, as a contract liability or deferred revenue. Invoiced amounts for non-cancelable services starting in future periods are included in contract assets and deferred revenue. The portion of deferred revenue that will be recognized within 12 months is recorded as current deferred revenue, and the remaining portion is recorded as deferred revenue in the condensed consolidated balance sheets.
Contract balances at September 30, 2023 and December 31, 2022 were as follows:
| SEPTEMBER 30, 2023 | DECEMBER 31, 2022 | |||||||||||||
| (In thousands) | ||||||||||||||
| Contract assets | $ | $ | ||||||||||||
| Contract liabilities | ||||||||||||||
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During the nine months ended at September 30, 2023, the Company recognized revenue of $47,230 related to contract liabilities at December 31, 2022.
The unsatisfied performance obligations as of September 30, 2023, were approximately $118,704 . We expect to recognize approximately $105,409 or 88.8 % of this revenue over the next 12 months and the remainder thereafter.
Deferred Contract Acquisition Costs
Under ASC Topic 606, sales commissions paid to the sales force and the related employer payroll taxes, collectively deferred contract acquisition costs, are considered incremental and recoverable costs of obtaining a contract with a customer.
The Company recognizes an asset for the incremental costs of obtaining a contract with a customer if the Company expects the benefit of those costs to be longer than one year. The Company has determined that certain sales incentive programs meet the requirements to be capitalized. The costs capitalized are primarily sales commissions for our sales force personnel. Capitalized costs to obtain a contract are amortized on a straight-line basis over the expected period of benefit. Amortization of capitalized costs is included in sales and marketing expenses in our condensed consolidated statements of operations and comprehensive income (loss).
Capitalized contract acquisition costs were $654 and $981 as of September 30, 2023, and December 31, 2022, respectively, and were included in prepaid expenses and other current assets in the condensed consolidated balance sheets.
Grant Revenue
The Company receives grant funding for certain specific projects from time to time. These grants specify the funds provided are to be used exclusively to satisfy the deliverables outlined in the grant agreements. In these agreements, both involved parties receive and sacrifice approximately commensurate value so these are accounted for as exchange transactions and revenue is recognized according to ASC Topic 606. Grant funding is generally provided near contract inception, so a contract liability is initially recorded and revenue is recognized as the performance obligations are satisfied over time.
Sources and Timing of Revenue
The Company’s performance obligations are satisfied either over time or at a point in time. The following table presents the Company’s revenue by timing of revenue recognition to understand the risks of timing of transfer of control and cash flows:
| THREE MONTHS ENDED SEPTEMBER 30, | NINE MONTHS ENDED SEPTEMBER 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Software licenses transferred at a point in time | $ | $ | $ | $ | |||||||||||||||||||
| Software licenses transferred over time | |||||||||||||||||||||||
| Service revenues earned over time | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
(k) Earnings per Share
Basic earnings per common share is computed by dividing the net earnings by the weighted-average number of shares outstanding during the reporting period, without consideration for potentially dilutive securities. Diluted earnings per share
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3. Public Offerings and Other significant Shareholder Transactions
On December 11, 2020, the Company completed its initial public offering (“IPO”), pursuant to which the Company issued and sold 14,630,000 shares of common stock and certain selling stockholders, including former controlling shareholder, EQT AB (“EQT”), sold 18,783,250 shares of our common stock (representing the full exercise of the underwriters’ option to purchase additional shares), at a public offering price of $23.00 per share. The Company received net proceeds of $316,301 , after deducting underwriters’ discounts and commissions. In addition, $4,408 of legal, accounting and other offering costs, net of the tax effect of $259 , were incurred in connection with the sale of the Company's common stock in the IPO, were capitalized and offset against the proceeds received in the IPO.
The Company was party to a registration rights agreement with EQT and its affiliates, Arsenal Capital Partners (“Arsenal”), and certain other stockholders, dated December 8, 2020. That agreement was terminated following the sale of all of EQT’s 29,954,521 common shares in the Company to Arsenal on December 8, 2022 (the “Arsenal Transaction”). Arsenal and the Company entered into a new registration rights agreement, dated November 3, 2022 (the “Registration Rights Agreement”), which contains provisions that entitle Arsenal to certain rights to have their securities registered by the Company under the Securities Act. While the Registration Rights Agreement is in effect, Arsenal is entitled to (i) four “demand” registrations, (ii) one underwritten offering in any consecutive 90-day period, and (iii) two underwritten offerings in any consecutive 360-day period, subject in each case to certain limitations. In addition, the Registration Rights Agreement provides that the Company will share certain expenses of Arsenal relating to such registrations and indemnify Arsenal against certain liabilities that may arise under the Securities Act. In connection with the Arsenal Transaction, the Company also entered into a letter agreement, effective December 8, 2022, with Arsenal providing that, subject to certain exceptions, Arsenal is prohibited from transferring the shares from EQT until December 8, 2024. Also in connection with the Arsenal Transaction, the Company entered into a stockholders agreement with Arsenal, effective December 8, 2022, which, among other things, grants certain conditional rights to Arsenal to nominate up to two directors to our Board.
On August 11, 2022, the Company completed a secondary public offering in which certain selling stockholders, including EQT, sold 7,000,000 shares of the Company’s common stock. The Company did not offer any common stock in this transaction and did not receive any proceeds from the sale of the shares of common stock by the selling stockholders. The Company incurred costs of $596 , recorded in general and administrative expenses, in relation to the secondary public offering.
4. Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk have consisted principally of cash and cash equivalent investments and trade receivables. The Company invests available cash in bank deposits, investment-grade securities, and short-term interest-producing investments, including government obligations and other money market instruments. At September 30, 2023 and December 31, 2022, the investments were bank deposits, overnight sweep accounts, and money market funds. The Company has adopted credit policies and standards to evaluate the risk associated with sales that require collateral, such as letters of credit or bank guarantees, whenever deemed necessary. Management believes that any risk of loss is significantly reduced due to the nature of the customers and distributors with which the Company does business.
As of September 30, 2023 and December 31, 2022, no single customer accounted for more than 10% of the Company’s accounts receivable. No single customer accounted for more than 10% of the Company’s revenues during the nine months ended September 30, 2023 and 2022.
5. Acquisitions
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by an independent third party. The results of operations have been included in the Company’s results of operations prospectively from the date of acquisition.
Since its inception, and as of September 30, 2023, the Company has completed 18 acquisitions, of which 13 have included software or technology. Details of acquisitions that have closed since the beginning of fiscal year 2022 are provided below.
Integrated Nonclinical Development Solutions, Inc.
On January 3, 2022, the Company completed the acquisition of Integrated Nonclinical Development Solutions, Inc. (“INDS”), a company that provides the SEND Explorer software and drug development consulting for a total consideration of $8,048 . The business combination was not significant to the Company’s condensed consolidated financial statements. Based on the Company’s purchase price allocation, approximately $2,380 , $1,040 , $100 , and $2,910 of the purchase price were assigned to customer relationships, developed technology, non-compete agreements, and goodwill, respectively.
Vyasa Analytics, LLC (“Vyasa”)
On December 28, 2022, the Company completed the acquisition of Vyasa, a company that provides an artificial intelligence ("AI") powered, scalable deep learning software and analytics platform for organizations within healthcare and life sciences for a total consideration of $29,276 . The business combination was not significant to the Company’s condensed consolidated financial statements.
Based on the Company’s purchase price allocation, approximately $11,400 , $1,500 , $120 , $80 and $16,589 of the purchase price were assigned to developed technology, customer relationships, trademarks, non-compete agreements and goodwill, respectively.
The total estimated consideration includes a portion of contingent consideration that is payable over the next three years in a combination of 70 % cash and 30 % common stock of the Company. Future payments of contingent consideration are based on achieving certain eligible revenue thresholds for each of the twelve-month periods ended at December 31, 2023, 2024, and 2025. Potential payments range from $0 to $60,000 over the three-year period. The fair value of the contingent consideration was estimated to be $19,813 as of the acquisition date.
The contingent consideration was classified as a liability and included in other long term liabilities on the Company’s condensed consolidated balance sheet, which is remeasured on a recurring basis at fair value for each reporting period. Any changes in the fair value of these contingent liabilities are included in the earnings in the condensed consolidated statements of operations and comprehensive income (loss). At September 30, 2023, the contingent consideration was remeasured to $31,512 , resulting in a fair value adjustment of $11,699 and recorded in general and administrative (“G&A”) on the accompanying condensed consolidated statement of operations and comprehensive income (loss).
Drug Interaction Solutions, University of Washington ("DIDB")
On June 20, 2023, the Company entered into an asset purchase agreement with the University of Washington and completed the acquisition of DIDB, including the Drug Interaction Database and related products, from The University of Washington for a total estimated consideration of $8,340 . The business combination was not significant to the Company’s condensed consolidated financial statements.
The total estimated consideration includes a portion of contingent consideration that is payable over the next two years in cash, not to exceed $2,000 . Future payments of contingent consideration are based on eligible revenue for the period from July 1, 2023 through June 30, 2025. The fair value of the contingent consideration was estimated to be $790 as of the acquisition date. At September 30, 2023, the contingent consideration was remeasured to $407 , resulting in a negative fair value adjustment of $383 and recorded in G&A on the accompanying condensed consolidated statement of operations and comprehensive income (loss).
The current purchase price allocation is preliminary. The primary areas of the preliminary purchase price allocations that are not yet finalized relate to the fair value of certain tangible and intangible assets acquired and liabilities assumed, and residual goodwill. The Company expects to continue to obtain information to assist in determining the fair values of the net assets acquired at the acquisition date during the measurement period. Any adjustments to the preliminary purchase price allocation identified during the measurement period, which will not exceed one year from the acquisition date, will be accounted for prospectively.
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Based on the Company’s preliminary purchase price allocation, approximately $330 , $5,600 , $360 , and $2,316 of the purchase price were assigned to trademarks, database content/technology, customer relationships and goodwill, respectively.
6. Prepaid Expenses and Other Current Assets and Other Long-Term Assets
| SEPTEMBER 30, 2023 | DECEMBER 31, 2022 | ||||||||||
| (In thousands) | |||||||||||
| Prepaid expenses | $ | $ | |||||||||
| Income tax receivable | |||||||||||
| Research and development tax credit receivable | |||||||||||
| Current portion of interest rate swap asset | |||||||||||
| Other current assets | |||||||||||
| Prepaid expenses and other current assets | $ | $ | |||||||||
| SEPTEMBER 30, 2023 | DECEMBER 31, 2022 | ||||||||||
| (In thousands) | |||||||||||
| Long-term deposits | $ | $ | |||||||||
| Interest rate swap asset - long-term | |||||||||||
| Deferred financing cost | |||||||||||
| Total other long-term assets | $ | $ | |||||||||
7. Long-Term Debt and Revolving Line of Credit
The Company has been a party to a Credit Agreement since August 2017 that provides for a senior secured term loan and commitments under a revolving credit facility. The Company and the lenders most recently modified the Credit Agreement on June 17, 2021, which provides for, among other things, (i) the extension of the termination date applicable to the revolving credit commitments to August 2025, (ii) the extension of the maturity date applicable to the term loans under the Credit Agreement to August 2026, and (iii) an increase of approximately $80,000 in commitments available under the revolving line of credit (resulting in an aggregate amount of commitments of $100,000 ). The term loan under this amendment has substantially the same terms as the existing term loans and revolving credit commitments. The Credit Agreement is collateralized by substantially all U.S. assets and stock pledges for the non-U.S. subsidiaries and contains various financial and nonfinancial covenants.
As of September 30, 2023 and December 31, 2022, available borrowings under the revolving lines of credit were $100,000 120 and $120 , respectively, of standby letters of credit issued to a landlord in lieu of a security deposit in addition to any outstanding borrowings.
Borrowings under the Credit Agreement were subject to a variable interest rate at LIBOR plus a margin. The applicable margins were based on achieving certain levels of compliance with financial covenants. Due to the cessation of LIBOR, the Company signed a LIBOR transition amendment on June 26, 2023, agreeing to replace LIBOR with the Secured Overnight Funding Rate (“SOFR”). In order to make SOFR similar to LIBOR in terms of the overall interest rate being earned by the
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lenders under the Credit Agreement, a Credit Spread Adjustment (“CSA”) is added to the SOFR. The CSA varied depending on the selected interest period.
The effective interest rate was 8.67 % and 4.60 % for the nine months ended September 30, 2023 and 2022 for the term loan debt. As discussed previously, the Company entered into interest rate swap agreements to mitigate the interest risk.
Interest incurred on the Credit Agreement with respect to the term loan amounted to $6,844 , $4,366 , $19,283 , and $10,344 for the three and nine months ended September 30, 2023 and 2022, respectively. Accrued interest payable on the Credit Agreement with respect to the term loan amounted to $2,340 and $130 at September 30, 2023 and December 31, 2022, respectively, and is included in accrued expenses. Interest incurred on the Credit Agreement with respect to the revolving line of credit was $65 , $65 , $193 , and $193 for both the three and nine months ended September 30, 2023 and 2022, respectively. There was $1 and $66 accrued interest payable on the revolving line of credit at September 30, 2023 and December 31, 2022, respectively.
Long-term debt consists of the following:
| SEPTEMBER 30, 2023 | DECEMBER 31, 2022 | ||||||||||
| (In thousands) | |||||||||||
| Term loans | $ | $ | |||||||||
| Revolving line of credit | |||||||||||
| Less: debt issuance costs | ( | ( | |||||||||
| Total | |||||||||||
| Current portion of long-term debt | ( | ( | |||||||||
| Long-term debt, net of current portion and debt issuance costs | $ | $ | |||||||||
The principal amount of long-term debt outstanding as of September 30, 2023 matures in the following years:
| Remainder of 2023 | 2024 | 2025 | 2026 | TOTAL | |||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||
| Maturities | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
The Credit Agreement requires the Company to make an annual mandatory prepayment as it relates to the Company’s Excess Cash Flow calculation. For the year ended December 31, 2022, the Company was not required to make a mandatory prepayment on the term loan. For the Credit Agreement, the Company is required to make a quarterly principal payment of $755 on the term loan each quarter.
The fair values of the Company’s variable interest term loan and revolving line of credit are not significantly different than their carrying value because the interest rates on these instruments are subject to change with market interest rates.
8. Leases
The Company leases certain office facilities and equipment under non-cancelable operating leases with remaining terms from to six years . The Company also had finance leases until the first quarter of this year.
Operating lease right-of-use (“ROU”) assets are included in other assets while finance lease ROU assets are included in "property and equipment, net" in the condensed consolidated balance sheets. With respect to operating lease liabilities, current operating lease liabilities are included in other current liabilities and non-current operating lease liabilities are included in long-term liabilities in the condensed consolidated balance sheets. Current finance lease liabilities are included in other current liabilities in the condensed consolidated balance sheets. At September 30, 2023, the weighted average remaining lease terms were 3.44 3.38
23
The following table summarizes the lease-related assets and liabilities recorded in the condensed consolidated balance sheets at September 30, 2023 and December 31, 2022:
| Lease Position | Balance Sheet Classification | SEPTEMBER 30, 2023 | DECEMBER 31, 2022 | |||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| Assets | ||||||||||||||||||||
| Operating lease assets | Operating lease right-of-use assets | $ | $ | |||||||||||||||||
| Finance lease assets | ||||||||||||||||||||
| Total lease assets | $ | $ | ||||||||||||||||||
| Liabilities | ||||||||||||||||||||
| Current | ||||||||||||||||||||
| Operating | Other current liabilities | $ | $ | |||||||||||||||||
| Finance | ||||||||||||||||||||
| Noncurrent | ||||||||||||||||||||
| Operating | Operating lease liabilities, net of current portion | |||||||||||||||||||
| Total lease liabilities | $ | $ | ||||||||||||||||||
The following table summarizes by year the maturities of our minimum lease payments as of September 30, 2023.
| OPERATING LEASES | |||||
| (In thousands) | |||||
| Remainder of 2023 | $ | ||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| Thereafter | |||||
| Total future lease payments | |||||
| Less: imputed interest | ( | ||||
| Total | $ | ||||
Lease abandonment
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9. Accrued Expenses and Other Liabilities
Accrued expenses consist of the following:
| SEPTEMBER 30, 2023 | DECEMBER 31, 2022 | ||||||||||
| (In thousands) | |||||||||||
| Accrued compensation | $ | $ | |||||||||
| Legal and professional accruals | |||||||||||
| Interest payable | |||||||||||
| Income taxes payable | |||||||||||
| Short-term contingent liabilities | |||||||||||
| Accrued business acquisition liabilities | |||||||||||
| Other | |||||||||||
| Total accrued expenses | $ | $ | |||||||||
Other long-term liabilities consist of the following:
| SEPTEMBER 30, 2023 | DECEMBER 31, 2022 | ||||||||||
| (In thousands) | |||||||||||
| Uncertain tax position liability | $ | $ | |||||||||
| Contingent consideration | |||||||||||
| Total other long-term liabilities | $ | $ | |||||||||
10. Equity-Based Compensation
The Company’s equity-based compensation programs are intended to attract, retain and provide incentives for employees, officers and directors. The Company has the following equity-based compensation plans and programs.
Restricted Stock
The majority of the Company’s restricted stock awarded to its employees was originally issued on December 10, 2020 in exchange for the Class B Profits Interest Unit (the “Class B Units”) of EQT, which was the former parent of the Company.
Share-based compensation for the restricted stock exchanged for the time-based Class B Units is recognized on a straight-line basis over the requisite service period of the award, which is generally five years . Share-based compensation for the restricted stock exchanged for the performance-based Class B Units is recognized using the accelerated attribution approach.
In 2021, the Company granted 87,127 replacement shares of restricted stock in connection with the Pinnacle acquisition under which equity-based awards are outstanding. The fair value of the restricted stock awarded was initially based on the fair value of our common stock on the date of grant, then adjusted for time restrictions due to unregistered shares and lack of marketability. Total grant date fair value was $2,762 . The restricted stock issued in 2021 generally has a three-year vesting period except for one holder whose shares vest equally on a monthly basis for two years .
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| SHARES | WEIGHTED- AVERAGE GRANT DATE FAIR VALUE | ||||||||||
| Non-vested restricted stock as of December 31, 2022 | $ | ||||||||||
| Granted | |||||||||||
| Vested* | ( | ||||||||||
| Forfeited | ( | ||||||||||
| Non-vested restricted stock as of September 30, 2023 | $ | ||||||||||
•The number of the restricted stock vested includes 5,430 shares that were withheld on behalf of employees to satisfy the statutory tax withholding requirements.
Equity-based compensation expenses (income) related to the restricted stock exchanged for performance-based Class B Units were $333 , $(319 ), $497 , and $3,758 for the three and nine months ended September 30, 2023 and 2022, respectively. At September 30, 2023, the total unrecognized equity-based compensation expense related to outstanding restricted stock recognized using the accelerated attribution approach was $1,237 , which is expected to be recognized over a weighted-average period of 16.2 months.
Equity-based compensation expenses related to the restricted stock exchanged for time-based Class B Units were $252 , $1,174 , $1,062 , and $2,705 for the three and nine months ended September 30, 2023 and 2022, respectively. At September 30, 2023, the total unrecognized equity-based compensation expense related to outstanding restricted stock recognized using the straight-line attribution approach was $1,421 , which is expected to be recognized over a weighted-average period of 19.7 months.
Equity-based employee compensation expense related to the time-based restricted stock for the Pinnacle acquisition was $292 , $292 , $877 , and $877 for the three and nine months ended September 30, 2023 and 2022, respectively. At September 30, 2023, the total unrecognized equity-based compensation expenses related to outstanding restricted stock recognized using the straight-line attribution approach was $425 , which is expected to be recognized over a weighted-average period of 12 months.
2020 Incentive Plan
In order to align the Company’s equity compensation program with public company practices, the Company’s Board of Directors adopted and stockholders approved the 2020 Incentive Plan. The 2020 Incentive Plan allows for grants of non-qualified stock options, incentive stock options, restricted stock, restricted stock units (“RSUs”), and performance stock units (“PSUs”) to employees, directors, officers, and consultants or advisors of the Company. The 2020 Incentive Plan allows for 20,000,000 shares (the “plan share reserve”) of common stock to be issued. No more than the number of shares of common stock equal to the plan share reserve may be issued in the aggregate pursuant to the exercise of incentive stock options. The maximum number of shares of common stock granted during a single fiscal year to any non-employee director, taken together with any cash fees paid to such non-employee director during the fiscal year, may not exceed $1,000,000 in total value, except for certain awards made to a non-executive chair of our Board of Directors.
Restricted Stock Units ("RSU")
RSUs represent the right to receive shares of the Company’s common stock at a specified date in the future. The fair value of the RSUs is based on the fair value of the underlying shares on the date of grant.
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A summary of the Company’s RSU activity is as follows:
| UNITS | WEIGHTED- AVERAGE GRANT DATE FAIR VALUE | ||||||||||
| Non-vested RSUs as of December 31, 2022 | $ | ||||||||||
| Granted* | |||||||||||
| Vested** | ( | ||||||||||
| Forfeited | ( | ||||||||||
| Non-vested RSUs as of September 30, 2023 | $ | ||||||||||
___________________________________
*The majority shares granted during 2023 were issued on April 1, 2023 under the 2020 Incentive Plan.
**The number of the RSUs vested includes 275,516 shares that were withheld on behalf of employees to satisfy the statutory tax withholding requirements. The vested shares included 9,324 shares vested but deferred in connection with our director deferral plan.
Equity-based compensation expenses related to the RSUs were $7,260 , $5,312 , $19,397 , and $14,538 for three and nine months ended September 30, 2023 and 2022, respectively. At September 30, 2023, the total unrecognized equity-based compensation expense related to outstanding RSUs was $47,479 , which is expected to be recognized over a weighted-average period of 23.9 months.
Performance Stock Units ("PSU")
PSUs granted in April 2021, 2022, and 2023 were issued under the 2020 Incentive Plan and represent the right to receive shares of the Company’s common stock at a specified date in the future based on the satisfaction of various service conditions and the achievement of certain performance thresholds for individual PSU plans including year over year revenue growth, unlevered free cash flow growth, annual revenue, and annual EBITDA. The PSUs granted in 2023 also contain a market condition.
Share-based compensation for the PSUs is only recognized to the extent a threshold is probable of being achieved and is recognized using the accelerated attribution approach. The Company will continue to assess the probability of each condition being achieved at each reporting period to determine whether and when to recognize compensation cost.
A summary of the Company’s PSU activity for the period ended September 30, 2023 is as follows:
| UNITS | WEIGHTED- AVERAGE GRANT DATE FAIR VALUE | ||||||||||
| Non-vested PSUs as of December 31, 2022 | $ | ||||||||||
| Granted | |||||||||||
| Vested | ( | ||||||||||
| Forfeited | ( | ||||||||||
| Non-vested PSUs as of September 30, 2023 | $ | ||||||||||
Equity-based compensation expenses (income) related to the PSUs were $506 , $345 , $(1,035 ), and $1,940 for the three and nine months ended at September 30, 2023 and 2022, respectively. At September 30, 2023, the total unrecognized equity-based compensation expense related to outstanding PSUs was $780 , which is expected to be recognized over a weighted-average period of 9.8 months.
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The following table summarizes the components of total equity-based compensation expense included in the condensed consolidated statements of operations and comprehensive income (loss) for each period presented:
| THREE MONTHS ENDED SEPTEMBER 30, | NINE MONTHS ENDED SEPTEMBER 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Cost of revenues | $ | $ | $ | $ | |||||||||||||||||||
| Sales and marketing | |||||||||||||||||||||||
| Research and development | |||||||||||||||||||||||
| General and administrative | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
11. Commitments and Contingencies
Contingent consideration
In connection with the Vyasa and DIDB acquisitions, the Company is required to pay additional consideration if the acquired businesses achieve certain eligible revenue thresholds for certain periods. The maximum contingent considerations for Vyasa and DIDB to be earned are $60,000 and $2,000 , respectively. The fair value of the contingent consideration was $31,919 and $19,813 at September 30, 2023 and December 31, 2022, respectively.
Legal proceedings
The Company does not have any pending or threatened litigation which, individually or in the aggregate, would have a material adverse effect on its condensed consolidated financial statements as of September 30, 2023.
Assurance-type warranty
The Company includes an assurance commitment warranting that the application software products will perform in accordance with written user documentation and the agreements negotiated with customers. Since the Company does not customize its application software, warranty costs have historically been insignificant and expensed as incurred.
For information related to commitments for future minimum lease payments, please see Note 8 – Leases.
12. Segment Data
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker (“CODM”), in deciding how to allocate resources and in assessing performance.
The Company has determined that its chief executive officer is its CODM. The Company manages its operations as a single segment for the purposes of assessing and making operating decisions. The Company’s CODM allocates resources and assesses performance based upon financial information at the consolidated level. Since the Company operates in one operating segment, all required financial segment information can be found in the condensed consolidated financial statements.
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The following table summarizes revenue by geographic area for the three and nine months ended September 30, 2023 and 2022:
| THREE MONTHS ENDED SEPTEMBER 30, | NINE MONTHS ENDED SEPTEMBER 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Revenue(1): | |||||||||||||||||||||||
| Americas | $ | $ | $ | $ | |||||||||||||||||||
| EMEA | |||||||||||||||||||||||
| Asia Pacific | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
___________________________________
(1) Revenue is attributable to the countries based on the location of the customer.
13. Income Taxes
The Company generally records its interim tax provision based upon a projection of the Company's estimated annual effective tax rate ("EAETR"). This EAETR is applied to the year-to-date consolidated pre-tax income to determine the interim provisions for income taxes before discrete items. The effective tax rate ("ETR") each period is impacted by a number of factors, including the relative mix of domestic and international earnings, permanent differences adjustments to the valuation allowances, and discrete items. The currently forecasted ETR may vary from the actual year-end due to the changes in these factors.
The Company's global ETR for the three and nine months ended September 30, 2023 and 2022 were 9 %, 54 %, (0.3 )%, and 63 %, respectively, including discrete tax items. The current year decrease in the ETR was principally due to the combined effect of the overall decrease in pre-tax book income, the impact of non-deductible items, and the tax effect of certain discrete items.
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14. Earnings per Share
Basic earnings per share is computed by dividing net income (loss) attributable to common stockholders by the weighted-average common shares outstanding for the period. Diluted net income (loss) per share is computed by dividing the net income (loss) attributable to stockholders by the weighted-average number of shares and dilutive potential common shares during the period.
| THREE MONTHS ENDED SEPTEMBER 30, | NINE MONTHS ENDED SEPTEMBER 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| (In Thousands, Except Per Share and Share Data) | |||||||||||||||||||||||
| Basic earnings per share | |||||||||||||||||||||||
| Net income (loss) available to common shareholders | $ | ( | $ | $ | ( | $ | |||||||||||||||||
| Basic weighted-average common shares outstanding | |||||||||||||||||||||||
| Basic earnings per common share | $ | ( | $ | $ | ( | $ | |||||||||||||||||
| Diluted earnings per share | |||||||||||||||||||||||
| Net income (loss) available to common shares | $ | ( | $ | $ | ( | $ | |||||||||||||||||
| Basic weighted-average common shares outstanding | |||||||||||||||||||||||
| Dilutive potential common shares | |||||||||||||||||||||||
| Diluted weighted-average common shares outstanding | |||||||||||||||||||||||
| Diluted earnings per common share | $ | ( | $ | $ | ( | $ | |||||||||||||||||
15. Subsequent Event
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion summarizes the significant factors affecting the operating results, financial condition, liquidity, and cash flows of our Company as of and for the periods presented below. The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report and our 2022 Annual Report. The statements in this discussion regarding industry outlook, our expectations regarding our future performance, liquidity, and capital resources, and all other non-historical statements are forward-looking statements and are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Quarterly Report, particularly in the sections “Special Note Regarding Forward-Looking Statements” and “Risk Factors” of this Quarterly Report.
We intend the discussion of our financial condition and results of operations that follows to provide information that will assist the reader in understanding our condensed consolidated financial statements, the changes in certain key items in those financial statements from period to period, and the primary factors that accounted for those changes, as well as how certain accounting principles, policies and estimates affect our condensed consolidated financial statements.
Executive Overview
We accelerate medicines to patients using biosimulation software, technology, and services to transform traditional drug discovery and development. Biosimulation is a powerful technology used to conduct virtual trials using virtual patients to predict how drugs behave in different individuals. Biopharmaceutical companies use our proprietary biosimulation software throughout drug discovery and development to inform critical decisions that not only save significant time and money but also advance drug safety and efficacy, improving millions of lives each year.
As a global leader in biosimulation based on 2022 revenue, we provide an integrated, end-to-end platform used by more than 2,300 clients including biopharmaceutical companies, regulatory agencies and academic institutions across 70 countries, including 39 of the top 40 biopharmaceutical companies by research and development spend in 2021. Since 2014, customers who use our biosimulation software and technology-driven services have received 90% of all new drug approvals by the FDA. Moreover, 20 global regulatory authorities license our biosimulation software to independently analyze, verify, and review regulatory submissions, including the FDA, Health Canada, Japan’s Pharmaceuticals and Medical Devices Agency, and UK’s Medicines and Healthcare Products Regulatory Agency.
We build our biosimulation technology on first principles of biology, chemistry, and pharmacology with proprietary mathematical algorithms that model how medicines and diseases behave in the body. For over two decades, we have honed and validated our biosimulation technology with an abundance of data from scientific literature, lab research, and preclinical and clinical studies. Many of our solutions are underpinned by artificial intelligence (machine learning) and SaaS-based value communication tools. In turn, our customers use biosimulation to conduct virtual trials to answer critical questions, such as: What will be the human response to a drug based on preclinical data? How will other drugs interfere with this new drug? What is a safe and efficacious dose for children, the elderly, or patients with pre-existing conditions? Virtual trials may be used to optimize dosing on populations that are otherwise difficult to study for ethical or logistical reasons, such as infants, pregnant women, the elderly, and cancer patients.
Biosimulation results need to be incorporated into regulatory documents for compelling submissions. Accordingly, we provide regulatory science and market access solutions and integrate them with biosimulation so that our customers can navigate the complex and evolving regulatory landscape and maximize their chances of approval. Our differentiated regulatory services are powered by submissions management software and natural language processing for scalability and speed, allowing us to deliver more than 300 regulatory submissions over the past five years. Our team of regulatory professionals has extensive experience applying industry guidelines and global regulatory requirements.
With continued innovation in and adoption of our biosimulation software, technology, and services, we believe more biopharmaceutical companies worldwide will leverage more of our end-to-end platform to reduce cost, accelerate speed to market, and ensure the safety and efficacy of medicines for all patients.
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Public Offerings and Other Key Shareholders Transactions
On August 11, 2022, the Company completed a secondary public offering in which certain selling stockholders, including EQT, sold 7,000,000 shares of the Company’s common stock. The Company did not offer any common stock in this transaction and did not receive any proceeds from the sale of the shares of common stock by the selling stockholders. The Company incurred costs of $0.6 million, recorded in general and administrative expenses, in relation to the secondary public offering.
On December 8, 2022, Arsenal acquired an aggregate of 29,954,521 shares of our common stock from EQT at a price of $15.00 per share. In connection with this transaction, we entered into (i) a letter agreement, effective December 8, 2022, with Arsenal providing that, subject to certain exceptions, Arsenal is prohibited from transferring the acquired shares until December 8, 2024; (ii) a stockholders agreement with Arsenal, effective December 8, 2022, which, among other things, grants certain conditional rights to Arsenal to nominate up to two directors to our Board; and (iii) a Registration Rights Agreement, which contains provisions that entitle Arsenal to certain rights to have their securities registered by the Company under the Securities Act.
Key Factors Affecting Our Performance
We believe that the growth of and future success of our business depends on many factors. While each of these factors presents significant opportunities for our business, they also pose important challenges that we must successfully address to sustain our growth and improve results of operations.
Customer Retention and Expansion
Our future operating results depend, in part, on our ability to successfully enter new markets, increase our customer base, and retain and expand our relationships with existing customers. We monitor two key performance indicators to evaluate retention and expansion: new bookings and renewal rates.
•Bookings: Our new bookings represent the estimated annual contract value of a signed contract or purchase order where there is sufficient or reasonable certainty about the customer’s ability and intent to fund and commence the software and/or services. Bookings vary from period to period depending on numerous factors, including the overall health of the biopharmaceutical industry, regulatory developments, industry consolidation, and sales performance. Bookings have varied and will continue to vary significantly from quarter to quarter and from year to year.
•Renewal Rates: Our renewal rates measure the percentage of software customers who renew their licenses or subscriptions at the end of the license or subscription periods. The renewal rate is based on revenues and excludes the effect of price increases or expansions.
The table below summarizes our quarterly bookings and renewal rate trends:
| 2023 | 2022 | |||||||||||||||||||||||||||||||||||||
| Q1 | Q2 | Q3 | Q1 | Q2 | Q3 | |||||||||||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||||||||
| Bookings | $ | 112.7 | $ | 85.9 | $ | 84.8 | $ | 108.5 | $ | 100.3 | $ | 79.8 | ||||||||||||||||||||||||||
| Renewal Rate | 90 | % | 93 | % | 86 | % | 92 | % | 92 | % | 93 | % | ||||||||||||||||||||||||||
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Investments in Growth
We have invested and intend to continue to invest in expanding the breadth and depth of our solutions, including through acquisitions and international expansion. We expect to continue to invest in (i) scientific talent to expand our ability to deliver solutions across the drug development spectrum; (ii) sales and marketing to promote our solutions to new and existing customers and in existing and expanded geographies; (iii) research and development to support existing solutions and innovate new technology; (iv) other operational and administrative functions to support our expected growth; and (v) complementary business. We expect that our headcount and our total operating expenses will continue to increase over time.
Our Operating Environment
The acceptance of model-informed biopharmaceutical discovery and development by regulatory authorities affects the demand for our products and services. Support for the use of biosimulation in discovery and development from regulatory bodies, such as the FDA and EMA, has been critical to its rapid adoption by the biopharmaceutical industry. There has been a steady increase in the recognition by regulatory and academic institutions of the role that modeling and simulation can play in the biopharmaceutical development and approval process, as demonstrated by new regulations and guidance documents describing and encouraging the use of modeling and simulation in the biopharmaceutical discovery, development, testing, and approval process, which has directly led to an increase in the demand for our services. Changes in government or regulatory policy, or a reversal in the trend toward increasing the acceptance of and reliance upon in silico data in the drug approval process, could decrease the demand for our products and services or lead regulatory authorities to cease use of, or recommend against the use of, our products and services.
Governmental agencies throughout the world, but particularly in the United States where the majority of our customers are based, strictly regulate the biopharmaceutical development process. Our business involves helping biopharmaceutical companies strategically and tactically navigate the regulatory approval process. New or amended regulations are expected to result in higher regulatory standards and often additional revenues for companies that service these industries. However, some changes in regulations, such as a relaxation in regulatory requirements or the introduction of streamlined or expedited approval procedures, or an increase in regulatory requirements that we have difficulty satisfying or that make our regulatory strategy services less competitive, could eliminate or substantially reduce the demand for our regulatory services.
Competition
The market for our biosimulation products and related services for the biopharmaceutical industry is competitive and highly fragmented. In biosimulation software, we compete with other scientific software providers, technology companies, in-house development by biopharmaceutical companies, and certain open source solutions. In the technology-driven services market, we compete with specialized companies, in-house teams at biopharmaceutical companies, and academic and government institutions. In some standard biosimulation services, and in regulatory and market access, we also compete with contract research organizations, who may also offer more traditional methods of drug development and clinical trial design that are used in lieu of biosimulation. Some of our competitors and potential competitors have longer operating histories in certain segments of our industry than we do and could have greater financial, technical, marketing, R&D, and other resources. Some of our competitors offer products and services directed at more specific markets than those we target, enabling these competitors to focus a greater proportion of their efforts and resources on those specific markets. Some competing products are developed and made available at a lower cost by government organizations and academic institutions, and these entities may be able to devote substantial resources to product development. Some clinical research organizations or technology companies may decide to enter into or expand their offerings in the biosimulation area, whether through acquisition or internal development. We also face competition from open source software initiatives, in which developers provide software and intellectual property free of charge, such as R and PK-Sim software. In addition, some of our customers spend significant internal resources in order to develop their own solutions.
Macroeconomic challenges
Uncertain macroeconomic conditions, including higher inflation, rising interest rates and instability in the financial system, geopolitical conflicts, and the residual effects of the COVID-19 pandemic, may pose challenges to our business. We believe that any impacts these conditions may have on our business would be transitory and that we are well-equipped to manage them going forward.
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Non-GAAP Measures
Management uses various financial metrics, including total revenues, income from operations, net income, and certain metrics that are not required by, or presented in accordance with, GAAP, such as adjusted EBITDA, adjusted net income, and adjusted diluted earnings per share, to measure and assess the performance of our business, to evaluate the effectiveness of our business strategies, to make budgeting decisions, to make certain compensation decisions, and to compare our performance against that of other peer companies using similar measures. We believe that presentation of the GAAP and the non-GAAP metrics in this filing will aid investors in understanding our business.
Management measures operating performance based on adjusted EBITDA defined for a particular period as net income (loss) excluding interest expense, provision (benefit) for income taxes, depreciation and amortization expense, intangible asset amortization, equity-based compensation expense, goodwill impairments, change in fair value of contingent consideration, acquisition and integration expense, and other items not indicative of our ongoing operating performance. Management also measures operating performance based on adjusted net income defined for a particular period as net income (loss) excluding, equity-based compensation expense, amortization of acquisition-related intangible assets, goodwill impairments, change in fair value of contingent consideration, acquisition and integration expense, and other items not indicative of our ongoing operating performance. Further, management measures operating performance based on adjusted diluted earnings per share defined for a particular period as adjusted net income divided by the weighted-average diluted common shares outstanding.
We believe adjusted EBITDA, adjusted net income, and adjusted diluted earnings per share are helpful to investors, analysts, and other interested parties because they can assist in providing a more consistent and comparable overview of our operations across our historical periods. In addition, these measures are frequently used by analysts, investors, and other interested parties to evaluate and assess performance.
Adjusted EBITDA, adjusted net income, and adjusted diluted earnings per share are non-GAAP measures and are presented for supplemental purposes only and should not be considered as an alternative or substitute to financial information presented in accordance with GAAP. Adjusted EBITDA, adjusted net income and adjusted diluted earnings per share have certain limitations in that they do not include the impact of certain expenses that are reflected in our condensed consolidated statements of operations and comprehensive income (loss) that are necessary to run our business. Other companies, including other companies in our industry, may not use these measures and may calculate both differently than as presented, limiting the usefulness as a comparative measure.
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The following table reconciles net income (loss) to adjusted EBITDA:
| THREE MONTHS ENDED SEPTEMBER 30, | NINE MONTHS ENDED SEPTEMBER 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Net income (loss)(a) | $ | (48,965) | $ | 3,936 | $ | (42,901) | $ | 5,557 | |||||||||||||||
| Interest expense(a) | 5,903 | 5,221 | 17,046 | 12,328 | |||||||||||||||||||
| Interest income(a) | (2,864) | (322) | (6,428) | (347) | |||||||||||||||||||
| (Benefit from) Provision for income taxes(a) | (4,644) | 4,557 | 142 | 9,473 | |||||||||||||||||||
| Depreciation and amortization expense(a) | 367 | 417 | 1,139 | 1,321 | |||||||||||||||||||
| Intangible asset amortization(a) | 13,813 | 12,846 | 40,099 | 38,007 | |||||||||||||||||||
| Currency (gain) loss(a) | (2,179) | (2,376) | (165) | (5,639) | |||||||||||||||||||
| Equity-based compensation expense(b) | 8,645 | 6,804 | 20,798 | 23,818 | |||||||||||||||||||
| Change in fair value of contingent consideration(d) | 8,757 | — | 11,316 | — | |||||||||||||||||||
| Goodwill impairment expense(e) | 46,984 | — | 46,984 | — | |||||||||||||||||||
| Acquisition-related expenses(f) | 1,392 | 253 | 3,276 | 1,331 | |||||||||||||||||||
| Integration expense(g) | 33 | — | 190 | — | |||||||||||||||||||
| Transaction-related expenses(h) | — | 596 | — | 724 | |||||||||||||||||||
| Severance expenses(i) | — | 722 | — | 722 | |||||||||||||||||||
| Reorganization expense(j) | 1,602 | — | 1,602 | — | |||||||||||||||||||
| Loss on disposal of fixed assets(k) | — | 49 | 29 | 56 | |||||||||||||||||||
| Executive recruiting expense(l) | — | — | 396 | — | |||||||||||||||||||
| First-year Sarbanes-Oxley implementation costs(m) | — | — | — | 961 | |||||||||||||||||||
| Adjusted EBITDA | $ | 28,844 | $ | 32,703 | $ | 93,523 | $ | 88,312 | |||||||||||||||
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The following table reconciles net income (loss) to adjusted net income:
| THREE MONTHS ENDED SEPTEMBER 30, | NINE MONTHS ENDED SEPTEMBER 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Net income (loss) (a) | $ | (48,965) | $ | 3,936 | $ | (42,901) | $ | 5,557 | |||||||||||||||
| Currency (gain) loss(a) | (2,179) | (2,376) | (165) | (5,639) | |||||||||||||||||||
| Equity-based compensation expense(b) | 8,645 | 6,804 | 20,798 | 23,818 | |||||||||||||||||||
| Amortization of acquisition-related intangible assets(c) | 11,377 | 10,921 | 33,892 | 32,900 | |||||||||||||||||||
| Change in fair value of contingent consideration(d) | 8,757 | — | 11,316 | — | |||||||||||||||||||
| Goodwill impairment expense(e) | 46,984 | — | 46,984 | — | |||||||||||||||||||
| Acquisition-related expenses(f) | 1,392 | 253 | 3,276 | 1,331 | |||||||||||||||||||
| Integration expense(g) | 33 | — | 190 | — | |||||||||||||||||||
| Transaction-related expenses(h) | — | 596 | — | 724 | |||||||||||||||||||
| Severance expenses(i) | — | 722 | — | 722 | |||||||||||||||||||
| Reorganization expense(j) | 1,602 | — | 1,602 | — | |||||||||||||||||||
| Loss on disposal of fixed assets(k) | — | 49 | 29 | 56 | |||||||||||||||||||
| Executive recruiting expense(l) | — | — | 396 | — | |||||||||||||||||||
| First-year Sarbanes-Oxley implementation costs(m) | — | — | — | 961 | |||||||||||||||||||
| Income tax expense impact of adjustments(n) | (10,572) | (4,257) | (20,669) | (12,236) | |||||||||||||||||||
| Adjusted net income | $ | 17,074 | $ | 16,648 | $ | 54,748 | $ | 48,194 | |||||||||||||||
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The following table reconciles diluted earnings per share to adjusted diluted earnings per share:
| THREE MONTHS ENDED SEPTEMBER 30, | NINE MONTHS ENDED SEPTEMBER 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| (in thousands except share and per share data) | |||||||||||||||||||||||
| Diluted earnings per share(a) | $ | (0.31) | $ | 0.02 | $ | (0.27) | $ | 0.03 | |||||||||||||||
| Currency (gain) loss(a) | (0.01) | (0.01) | — | (0.04) | |||||||||||||||||||
| Equity-based compensation expense(b) | 0.06 | 0.05 | 0.13 | 0.16 | |||||||||||||||||||
| Amortization of acquisition-related intangible assets(c) | 0.07 | 0.07 | 0.21 | 0.21 | |||||||||||||||||||
| Change in fair value of contingent consideration(d) | 0.05 | — | 0.07 | — | |||||||||||||||||||
| Goodwill impairment expense(e) | 0.30 | — | 0.30 | — | |||||||||||||||||||
| Acquisition-related expenses(f) | 0.01 | — | 0.02 | 0.01 | |||||||||||||||||||
| Integration expense(g) | — | — | — | — | |||||||||||||||||||
| Transaction-related expenses(h) | — | — | — | — | |||||||||||||||||||
| Severance expenses(i) | — | — | — | — | |||||||||||||||||||
| Reorganization expense(j) | 0.01 | — | 0.01 | — | |||||||||||||||||||
| Loss on disposal of fixed assets(k) | — | — | — | — | |||||||||||||||||||
| Executive recruiting expense(l) | — | — | — | — | |||||||||||||||||||
| First-year Sarbanes-Oxley implementation costs(m) | — | — | — | 0.01 | |||||||||||||||||||
| Income tax expense impact of adjustments(n) | (0.07) | (0.03) | (0.13) | (0.08) | |||||||||||||||||||
| Adjusted diluted earnings per share | $ | 0.11 | $ | 0.10 | $ | 0.34 | $ | 0.30 | |||||||||||||||
| Basic weighted average common shares outstanding | 159,165,206 | 157,140,166 | 158,769,638 | 156,523,022 | |||||||||||||||||||
| Effect of potentially dilutive shares outstanding (o) | 742,488 | 2,447,479 | 1,078,382 | 2,869,512 | |||||||||||||||||||
| Adjusted diluted weighted average common shares outstanding | 159,907,694 | 159,587,645 | 159,848,020 | 159,392,534 | |||||||||||||||||||
___________________________________
(a)Represents amounts as determined under GAAP.
(b)Represents expense related to equity-based compensation. Equity-based compensation has been, and will continue to be for the foreseeable future, a recurring expense in our business and an important part of our compensation strategy.
(c)Represents amortization costs associated with acquired intangible assets in connection with business acquisitions.
(d)Represents expense associated with remeasuring fair value of contingent consideration of business acquisition.
(e)Represents expense associated with goodwill impairment charge.
(f)Represents costs associated with mergers and acquisitions and any retention bonuses pursuant to the acquisitions.
(g)Represents integration costs related to post - acquisition integration activities.
(h)Represents costs associated with our public offerings that are not capitalized.
(i)Represents charges for severance provided to former executives.
(j)Represents expense related to reorganization, including legal entity reorganization and lease abandonment cost associated with the evaluation of our office space footprint.
(k)Represents the gain/loss related to disposal of fixed assets.
(l)Represents recruiting and relocation expenses related to hiring senior executives.
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(m)Represents the first-year Sarbanes-Oxley costs for accounting and consulting fees related to the Company's preparation to comply with Section 404 of the Sarbanes-Oxley Act, as well as implementation cost of adopting ASC 842.
(n)Represents the income tax effect of the non-GAAP adjustments calculated using the applicable statutory rate by jurisdiction.
(o)Represents potentially dilutive shares that were included from our GAAP diluted weighted average common shares outstanding.
Components of Results of Operations
Revenues
Our business generates revenue from the sales of software products and delivery of consulting services.
•Software. Our software business generates revenues from software licenses, software subscriptions and software maintenance as follows:
•Software licenses: We recognize revenue for software license fees up front, upon delivery of the software license.
•Software subscription: Subscription revenue consists of subscription fees to provide our customers access to and related support for our cloud-based solutions. We recognize subscription fees ratably over the term of the subscription, usually one to three years. Any subscription revenue paid upfront that is not recognized in the current period is included in deferred revenue in our condensed consolidated balance sheet until earned.
•Software maintenance: Software maintenance revenue includes fees for providing updates and technical support for software offerings. Software maintenance revenue is recognized ratably over the contract term, usually one year.
•Services. Our services business generates revenues primarily from technology-driven services and professional services, which include software implementation services. Our service arrangements are time and materials, fixed fee, or prepaid. Revenues are recognized over the time services are performed for time and materials, and over time by estimating progress to completion for fixed fee and prepaid services.
Cost of Revenues
Cost of revenues consists primarily of employee related expenses, equity-based compensation, the costs of third-party subcontractors, travel costs, distributor fees, amortization of capitalized software and allocated overhead. We may add or expand computing infrastructure service providers, make additional investments in the availability and security of our solutions, or add resources to support our growth.
Operating Expenses
•Sales and Marketing. Sales and marketing expense consists primarily of employee-related expenses, equity-based compensation, sales commissions, brand development, advertising, travel-related expenses and industry conferences and events. We plan to continue to invest in sales and marketing to increase penetration of our existing client base and expand to new clients.
•Research and Development. Research and development expense consist primarily of employee-related expenses, equity-based compensation, third-party consulting, allocated software costs and tax credits. We plan to continue to invest in our R&D efforts to enhance and scale our software product offerings by development of new features and increased functionality.
•General and Administrative. General and administrative expense consists of personnel-related expenses associated with our executive, legal, finance, human resources, information technology, and other administrative functions, including salaries, benefits, bonuses, and equity-based compensation. General and administrative
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expense also includes professional fees for external legal, accounting and other consulting services, allocated overhead costs, and other general operating expenses.
•Intangible Asset Amortization. Intangible asset amortization consists primarily of amortization expense related to intangible assets recorded in connection with acquisitions and amortization of capitalized software development costs.
•Depreciation and Amortization Expense. Depreciation and amortization expense consists of depreciation of property and equipment and amortization of leasehold improvements.
Other Expenses
•Interest Expense. Interest expense consists primarily of interest expense associated with the Credit Agreement, including amortization of debt issuance costs and discounts.
•Net Other Income (Expense). Net other income (expense) consists of miscellaneous non-operating expenses primarily comprised of interest income and foreign exchange transaction gains and losses.
•Provision for (Benefit from) Income Taxes. Provision for (benefit from) income taxes consists of U.S. federal and state income taxes and income taxes in certain foreign jurisdictions in which we conduct business. We expect income tax expense to increase over time as the Company continues to grow more profitable.
Acquisitions
Since our inception, and as of September 30, 2023, we have completed 18 acquisitions, of which 13 have included software or technology. Details of acquisitions that have closed since the beginning of fiscal year 2022 are provided below. We continually seek and assess a range of highly focused opportunities in our immediately addressable market and in related adjacent markets, whether through acquisitions, licenses, or partnerships.
Integrated Nonclinical Development Solutions, Inc.
On January 3, 2022, we completed the acquisition of INDS for a total consideration of $8.0 million, which qualified as a business combination. The business combination was not significant to our consolidated financial statements. Based on the purchase price allocation, approximately $2.4 million, $1.0 million, $0.1 million, and $2.9 million of the purchase price were assigned to customer relationships, developed technology, non-compete agreements, and goodwill, respectively.
Vyasa Analytics, LLC
On December 28, 2022, the Company completed the acquisition of Vyasa, a company that provides an AI-powered, scalable deep learning software and analytics platform for organizations within healthcare and life sciences, higher education and state and local governments for total consideration of $29.3 million. The business combination was not significant to the Company’s condensed consolidated financial statements.
Based on the Company’s purchase price allocation, approximately $11.4 million, $1.5 million, $0.1 million, $0.1 million and $16.6 million of the purchase price were assigned to developed technology, customer relationships, trademarks, non-compete agreements and goodwill, respectively.
The fair value of the contingent consideration was estimated to be $19.8 million as of the acquisition date. The contingent consideration was classified as a liability and included in accrued liabilities and other long-term liabilities on the Company’s condensed consolidated balance sheet, which is remeasured on a recurring basis at fair value for each reporting period. Any changes in the fair value of these contingent liabilities are included in the earnings in the condensed consolidated statements of operations and comprehensive income (loss). At September 30, 2023, the contingent consideration was remeasured to $31.5 million, resulting in $11.7 million adjustment to fair value.
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Drug Interaction Solutions, University of Washington ("DIDB")
On June 20, 2023, the Company entered into an asset purchase agreement with the University of Washington and completed the acquisition of Drug Interaction Solutions, including the Drug Interaction Database and related products, from the University of Washington for total estimated consideration of $8.3 million. The business combination was not significant to the Company’s condensed consolidated financial statements.
The total estimated consideration includes a portion of contingent consideration that is payable over the next two years in cash, not to exceed $2.0 million. Future payments of contingent consideration are based on eligible revenue for the period from July 1, 2023 through June 30, 2025. The fair value of the contingent consideration was estimated to be $0.8 million as of the acquisition date. At September 30, 2023, the contingent consideration was remeasured to $0.4 million, resulting in a negative fair value adjustment of $0.4 million and recorded in general and administrative (“G&A”) on the accompanying condensed consolidated statement of operations and comprehensive income (loss).
Based on the Company’s preliminary purchase price allocation, approximately $0.3 million, $5.6 million, $0.4 million, and $2.3 million of the purchase price were assigned to trademarks, database content/technology, customer relationships and goodwill, respectively. The current purchase price allocation is preliminary. Any adjustments to the preliminary purchase price allocation identified during the measurement period, which will not exceed one year from the acquisition date, will be accounted for prospectively.
For more information about our acquisitions, see Note 5. “Acquisitions” in the notes to the condensed consolidated financial statements.
Results of Operations
We have included the results of operations of acquired companies in our condensed consolidated results of operations from the date of their respective acquisitions, which impacts the comparability of our results of operations when comparing results for the three and nine months ended September 30, 2023 to the three and nine months ended at September 30, 2022.
Three Months Ended September 30, 2023 Versus Three Months Ended September 30, 2022
The following table summarizes our unaudited statements of operations data for the three months ended September 30, 2023 and 2022:
Revenues
| THREE MONTHS ENDED SEPTEMBER 30, | CHANGE | ||||||||||||||||||||||
| 2023 | 2022 | $ | % | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Software | $ | 31,331 | $ | 28,392 | $ | 2,939 | 10 | % | |||||||||||||||
| Services | 54,245 | 56,308 | (2,063) | (4) | % | ||||||||||||||||||
| Total revenues | $ | 85,576 | $ | 84,700 | $ | 876 | 1 | % | |||||||||||||||
Revenues increased $0.9 million, or 1%, to $85.6 million for the three months ended September 30, 2023 as compared to the same period in 2022. The overall increase in revenues was primarily due to growth in our technology-driven services and software product offerings from strong demand within existing customers, new product introductions, and client expansions. The increase was partially offset by a decline in regulatory revenue.
Software revenues increased $2.9 million, or 10%, to $31.3 million for the three months ended September 30, 2023 as compared to the same period in 2022, primarily driven by strong demand within existing customers, new product introductions, and expanding relationships with customers.
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Services revenues decreased $2.1 million, or 4% to $54.2 million for the three months ended September 30, 2023, as compared to the same period in 2022. The decrease in overall services revenue is primarily attributable to a decline in regulatory revenue.
Cost of Revenues
| THREE MONTHS ENDED SEPTEMBER 30, | CHANGE | ||||||||||||||||||||||
| 2023 | 2022 | $ | % | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Cost of revenues | $ | 35,876 | $ | 32,812 | $ | 3,064 | 9 | % | |||||||||||||||
Cost of revenues increased by $3.1 million, or 9%, to $35.9 million for the three months ended September 30, 2023 as compared to the same period in 2022. The increase was primarily due to a $2.3 million increase in employee-related costs resulting from billable head count growth, a $0.7 million increase in stock-based compensation costs, a $0.4 million increase in intangible assets amortization, and a $0.1 million increase in travel and entertainment expense, partially offset by a $0.4 million decrease in miscellaneous operating expense and other items.
Sales and Marketing Expenses
| THREE MONTHS ENDED SEPTEMBER 30, | CHANGE | ||||||||||||||||||||||
| 2023 | 2022 | $ | % | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Sales and marketing | $ | 7,238 | $ | 6,376 | $ | 862 | 14 | % | |||||||||||||||
| % of total revenues | 8 | % | 8 | % | |||||||||||||||||||
Sales and marketing expenses increased by $0.9 million, or 14%, to $7.2 million for the three months ended September 30, 2023 as compared to the same period in 2022. Sales and marketing expenses increased primarily due to a $0.8 million increase in employee-related costs primarily resulting from head count growth, a $0.2 million increase in stock-based compensation costs, partially offset by a $0.2 million decrease in marketing expense.
Research and Development Expenses
| THREE MONTHS ENDED SEPTEMBER 30, | CHANGE | ||||||||||||||||||||||
| 2023 | 2022 | $ | % | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Research and development | $ | 8,980 | $ | 6,318 | $ | 2,662 | 42 | % | |||||||||||||||
| % of total revenues | 10 | % | 7 | % | |||||||||||||||||||
Research and development expenses increased by $2.7 million, or 42%, to $9.0 million for the three months ended September 30, 2023, as compared to the same period in 2022. The change in research and development expenses was primarily due to a $2.2 million increase in employee-related costs primarily resulting from head count growth and a $1.0 million increase in stock-based compensation costs, partially offset by a $0.6 million increase in capitalized cost in R&D.
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General and Administrative Expenses
| THREE MONTHS ENDED SEPTEMBER 30, | CHANGE | ||||||||||||||||||||||
| 2023 | 2022 | $ | % | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| General and administrative | $ | 27,760 | $ | 17,327 | $ | 10,433 | 60 | % | |||||||||||||||
| % of total revenues | 32 | % | 20 | % | |||||||||||||||||||
General and administrative expenses increased by $10.4 million, or 60%, to $27.8 million for the three months ended September 30, 2023 as compared to the same period in 2022. The increase in general and administrative expenses was primarily due to a $8.8 million increase related to change in the fair value of contingent considerations, a $1.6 million increase in lease abandonment expense, $0.8 million increase in merger and acquisition expenses, $0.6 million increase in equipment and software expense, partially offset by a $0.6 decrease in transaction cost, a $0.3 million decrease in employee-related costs, and a $0.3 million decrease in insurance expense.
Intangible Asset Amortization
| THREE MONTHS ENDED SEPTEMBER 30, | CHANGE | ||||||||||||||||||||||
| 2023 | 2022 | $ | % | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Intangible asset amortization | $ | 11,155 | $ | 10,591 | $ | 564 | 5 | % | |||||||||||||||
| % of total revenues | 13 | % | 13 | % | |||||||||||||||||||
Intangible asset amortization expense increased by $0.6 million, or 5%, to $11.2 million for the three months ended September 30, 2023, as compared to the same period in 2022. The increase in intangible asset amortization expense was primarily due to higher amortization expense from capitalized software.
Depreciation and Amortization Expense
| THREE MONTHS ENDED SEPTEMBER 30, | CHANGE | ||||||||||||||||||||||
| 2023 | 2022 | $ | % | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Depreciation and amortization | $ | 367 | $ | 417 | $ | (50) | (12) | % | |||||||||||||||
| % of total revenues | — | % | — | % | |||||||||||||||||||
Depreciation and amortization expense of $0.4 million was relatively flat for the three months ended September 30, 2023, as compared to the same period in 2022.
Goodwill Impairment Expense
| THREE MONTHS ENDED SEPTEMBER 30, | CHANGE | ||||||||||||||||||||||
| 2023 | 2022 | $ | % | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Goodwill impairment expense | $ | 46,984 | $ | — | $ | 46,984 | nm | ||||||||||||||||
Goodwill impairment expense was $47.0 million for the three months ended September 30, 2023 as compared to no goodwill impairment expense for the same period in 2022. The increase in goodwill impairment expense was primarily due to record goodwill impairment for legacy Regulatory and Writing reporting unit as the carrying value exceeded its fair value.
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Interest Expense
| THREE MONTHS ENDED SEPTEMBER 30, | CHANGE | ||||||||||||||||||||||
| 2023 | 2022 | $ | % | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Interest expense | $ | 5,903 | $ | 5,221 | $ | 682 | 13 | % | |||||||||||||||
| % of total revenues | 7 | % | 6 | % | |||||||||||||||||||
Interest expense increased by $0.7 million, or 13%, to $5.9 million for the three months ended September 30, 2023 as compared to the same period in 2022. The increase in interest expense was primarily due to an increase in market interest rates reflected on our term loan floating rate debt. The increase in interest expense was partially offset by a $1.5 million gain from interest swap hedge activities.
Net Other Income
| THREE MONTHS ENDED SEPTEMBER 30, | CHANGE | ||||||||||||||||||||||
| 2023 | 2022 | $ | % | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Net other income | $ | (5,078) | $ | (2,855) | $ | (2,223) | 78 | % | |||||||||||||||
| % of total revenues | (6) | % | (3) | % | |||||||||||||||||||
Net other income increased by $2.2 million, to $5.1 million for the three months ended September 30, 2023 as compared to the same period in 2022. The increase in net other income was primarily due to a $2.5 million increase in interest income primarily from cash investments, and partially offset by a $0.3 million decrease in gains related to the fluctuation of foreign currency exchange rates.
Provision (benefit) for Income Taxes
| THREE MONTHS ENDED SEPTEMBER 30, | CHANGE | ||||||||||||||||||||||
| 2023 | 2022 | $ | % | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
Provision (benefit) for income taxes | $ | (4,644) | $ | 4,557 | $ | (9,201) | (202) | % | |||||||||||||||
| Effective income tax rate | 9 | % | 54 | % | |||||||||||||||||||
Income tax benefit was $4.6 million, resulting in an effective income tax rate of 9% for the three months ended September 30, 2023 as compared to an income tax expense of $4.6 million, or an effective income tax rate of 54%, for the same period in 2022. Our income tax (benefit) expense for the three months ended September 30, 2023 and 2022 were primarily tax effects of U.S. pre-tax income, the relative mix of domestic and international earnings, the impact of non-deductible items, adjustments to the valuation allowances, the effects of tax elections made for U.K. earnings, and discrete tax items.
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Net Income (loss)
| THREE MONTHS ENDED SEPTEMBER 30, | CHANGE | ||||||||||||||||||||||
| 2023 | 2022 | $ | % | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Net income (loss) | $ | (48,965) | $ | 3,936 | $ | (52,901) | nm | ||||||||||||||||
Net loss was $49.0 million representing a $52.9 million decrease in net income for the three months ended September 30, 2023 as compared to a net income of $3.9 million in the same period of 2022. The decrease in net income was primarily due to a $47.0 million increase in goodwill impairment expense, a $8.8 million increase related to change in the fair value of contingent considerations, a $1.6 million increase in lease abandonment expense, a $4.1 million increase in other operating expenses, and a $3.1 million increase in cost of revenue, partially offset by a $9.2 million decrease in tax expense, and a $2.5 million increase in interest income.
Nine Months Ended September 30, 2023 Versus Nine Months Ended September 30, 2022
The following table summarizes our unaudited statements of operations data for the nine months ended September 30, 2023 and 2022:
Revenues
| NINE MONTHS ENDED SEPTEMBER 30, | CHANGE | ||||||||||||||||||||||
| 2023 | 2022 | $ | % | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Software | $ | 98,058 | $ | 86,309 | $ | 11,749 | 14 | % | |||||||||||||||
| Services | 168,269 | 162,702 | 5,567 | 3 | % | ||||||||||||||||||
| Total revenues | $ | 266,327 | $ | 249,011 | $ | 17,316 | 7 | % | |||||||||||||||
Revenues increased $17.3 million, or 7%, to $266.3 million for the nine months ended September 30, 2023 as compared to the same period in 2022. The increase in revenues was primarily due to growth in our technology-driven services and software product offerings from strong demand within existing customers, client expansions, and new customers. The increase was partially offset by the negative impact on our revenue from the fluctuation of foreign currency exchange rates.
Software revenues increased $11.7 million, or 14%, to $98.1 million for the nine months ended September 30, 2023 as compared to the same period in 2022. The overall growth is primarily attributable to growth in strong demand within existing customers, new product introductions, and expanding relationships with customers.
Services revenues increased $5.6 million, or 3%, to $168.3 million for the nine months ended September 30, 2023 as compared to the same period in 2022. The growth in overall services revenue is primarily attributable to continued growth in biosimulation. The increase was partially offset by the decline in regulatory revenues.
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Cost of Revenues
| NINE MONTHS ENDED SEPTEMBER 30, | CHANGE | ||||||||||||||||||||||
| 2023 | 2022 | $ | % | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Cost of revenues | $ | 106,956 | $ | 100,795 | $ | 6,161 | 6 | % | |||||||||||||||
Cost of revenues increased by $6.2 million, or 6%, to $107.0 million for the nine months ended September 30, 2023 as compared to the same period in 2022. The increase was primarily due to a $4.2 million increase in employee-related costs resulting from billable head count growth, a $1.5 million increase in stock-based compensation costs, a $0.9 million increase in intangible assets amortization, and a $0.5 million increase in travel, partially offset by a $0.4 million increase in capitalized software cost, a $0.3 million decrease in miscellaneous operation expenses, and a $0.2 million decrease in consulting and professional services.
Sales and Marketing Expenses
| NINE MONTHS ENDED SEPTEMBER 30, | CHANGE | ||||||||||||||||||||||
| 2023 | 2022 | $ | % | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Sales and marketing | $ | 23,351 | $ | 19,608 | $ | 3,743 | 19 | % | |||||||||||||||
| % of total revenues | 9 | % | 8 | % | |||||||||||||||||||
Sales and marketing expenses increased by $3.7 million, or 19%, to $23.4 million for the nine months ended September 30, 2023 as compared to the same period in 2022. Sales and marketing expenses increased primarily due to a $3.2 million increase in employee-related costs resulting from head count growth, a $0.5 million increase in travel, a $0.2 million increase in marketing, and a $0.2 million increase in miscellaneous operating expense, partially offset by a $0.4 million decrease in stock-based compensation cost.
Research and Development Expenses
| NINE MONTHS ENDED SEPTEMBER 30, | CHANGE | ||||||||||||||||||||||
| 2023 | 2022 | $ | % | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Research and development | $ | 26,155 | $ | 21,607 | $ | 4,548 | 21 | % | |||||||||||||||
| % of total revenues | 10 | % | 9 | % | |||||||||||||||||||
Research and development expenses increased by $4.5 million, or 21%, to $26.2 million for the nine months ended September 30, 2023 as compared to the same period in 2022. The increase in research and development expenses was primarily due to a $5.3 million increase in employee-related costs primarily resulting from headcount growth, a $0.7 million increase in stock-based compensation cost, and a $0.3 million increase in travel, partially offset by a $1.5 million increase in capitalized cost in research & development, and a $0.3 million decrease in consulting and professional expense.
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General and Administrative Expenses
| NINE MONTHS ENDED SEPTEMBER 30, | CHANGE | ||||||||||||||||||||||
| 2023 | 2022 | $ | % | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| General and administrative | $ | 61,777 | $ | 53,444 | $ | 8,333 | 16 | % | |||||||||||||||
| % of total revenues | 23 | % | 21 | % | |||||||||||||||||||
General and administrative expenses increased by $8.3 million, or 16%, to $61.8 million for the nine months ended September 30, 2023, as compared to the same period in 2022. The increase in general and administrative expenses was primarily due to a $11.3 million increase related to the change in fair value of contingent consideration, a $1.6 million increase in lease abandonment expense, a $1.1 million increase in equipment expenses, a $0.8 million increase in merger and acquisition cost, a $0.6 million increase in consulting and professional services expense, a $0.4 million increase in executive recruiting expense, and a 0.3 million increase in employee-related costs resulting from head count growth, partially offset by a $4.8 million decrease in stock-based compensation costs, a $1.0 million decrease in first-year Sarbanes-Oxley implementation costs, a $0.9 million decrease in insurance expense, a $0.7 million decrease in transaction expense, and a $0.3 million decrease in facility and lease related expense.
Intangible Asset Amortization
| NINE MONTHS ENDED SEPTEMBER 30, | CHANGE | ||||||||||||||||||||||
| 2023 | 2022 | $ | % | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Intangible asset amortization | $ | 32,272 | $ | 31,095 | $ | 1,177 | 4 | % | |||||||||||||||
| % of total revenues | 12 | % | 12 | % | |||||||||||||||||||
Intangible asset amortization expense increased by $1.2 million, or 4%, to $32.3 million for the nine months ended September 30, 2023 as compared to the same period in 2022. The increase in intangible asset amortization expense is primarily due to increased amortization expense from capitalized software.
Depreciation and Amortization Expense
| NINE MONTHS ENDED SEPTEMBER 30, | CHANGE | ||||||||||||||||||||||
| 2023 | 2022 | $ | % | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Depreciation and amortization | $ | 1,139 | $ | 1,321 | $ | (182) | (14) | % | |||||||||||||||
| % of total revenues | — | % | 1 | % | |||||||||||||||||||
Depreciation and amortization expense decreased by $0.2 million, or 14%, to $1.1 million for the nine months ended September 30, 2023, as compared to the same period in 2022. The decrease was primarily due to a decrease in depreciation and amortization from finance lease and furniture for the nine months ended September 30, 2023 as compared to the same period in 2022.
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Goodwill Impairment Expense
| NINE MONTHS ENDED SEPTEMBER 30, | CHANGE | ||||||||||||||||||||||
| 2023 | 2022 | $ | % | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Goodwill Impairment Expense | $ | 46,984 | $ | — | $ | 46,984 | nm | ||||||||||||||||
Goodwill impairment expense was $47.0 million for the nine months ended September 30, 2023 as compared to no goodwill impairment expense for the same period in 2022. The increase in goodwill impairment expense was primarily due to record goodwill impairment for legacy Regulatory and Writing reporting unit as the carrying value exceeded its fair value.
Interest Expense
| NINE MONTHS ENDED SEPTEMBER 30, | CHANGE | ||||||||||||||||||||||
| 2023 | 2022 | $ | % | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Interest expense | $ | 17,046 | $ | 12,328 | $ | 4,718 | 38 | % | |||||||||||||||
| % of total revenues | 6 | % | 5 | % | |||||||||||||||||||
Interest expense increased by $4.7 million, or 38%, to $17.0 million for the nine months ended September 30, 2023 as compared to the same period in 2022. The increase in interest expense was primarily due to an increase in market interest rates reflected on our term loan floating rate debt. The increase in interest expense was partially offset by a $3.8 million gain from interest swap hedge activities.
Net other income
| NINE MONTHS ENDED SEPTEMBER 30, | CHANGE | ||||||||||||||||||||||
| 2023 | 2022 | $ | % | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Net other income | $ | (6,594) | $ | (6,217) | $ | (377) | 6 | % | |||||||||||||||
| % of total revenues | (2) | % | (2) | % | |||||||||||||||||||
Net other income increased by $0.4 million to $6.6 million for the nine months ended September 30, 2023 as compared to the same period in 2022. The increase in net other income was primarily due to a $6.1 million increase in interest income, partially offset by a $5.7 million remeasurement losses related to the fluctuation of foreign currency exchange rates.
Provision for Income Taxes
| NINE MONTHS ENDED SEPTEMBER 30, | CHANGE | ||||||||||||||||||||||
| 2023 | 2022 | $ | % | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Provision for income taxes | $ | 142 | $ | 9,473 | $ | (9,331) | (99) | % | |||||||||||||||
| Effective income tax rate | (0.3) | % | 63 | % | |||||||||||||||||||
Income tax expense was $0.1 million, resulting in an effective income tax rate of (0.3)% for the nine months ended September 30, 2023 as compared to an income tax expense of $9.5 million, or an effective income tax rate of 63%, for the same period in 2022. Our income tax expense for the nine months ended September 30, 2023 and 2022 was primarily due to the tax effects of U.S. pre-tax income, the relative mix of domestic and international earnings, the impact of non-
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deductible items, adjustments to the valuation allowances, the effects of tax elections made for U.K. earnings, and discrete tax items.
Net (Loss) income
| NINE MONTHS ENDED SEPTEMBER 30, | CHANGE | ||||||||||||||||||||||
| 2023 | 2022 | $ | % | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Net (loss) income | $ | (42,901) | $ | 5,557 | $ | (48,458) | (872) | % | |||||||||||||||
Net loss was $42.9 million, representing a $48.5 million decrease in net income for the nine months ended September 30, 2023, as compared to a net income of $5.6 million in the same period of 2022. The decrease in net income was primarily due to a $47.0 million increase in goodwill impairment charge, a $11.3 million increase in expense related to change in the fair value of contingent considerations, a $6.2 million increase in cost of revenue, a $5.7 million remeasurement losses related to the fluctuation of foreign currency exchange rates, a $4.7 million increase in other operating expense items, a $4.7 million increase in interest expense, and a $1.6 million increase in lease abandonment expense, partially offset by a $17.3 million increase in total revenue, a $9.3 million decrease in tax expense, a $6.1 million increase in interest income.
Liquidity and Capital Resources
We have consistently generated positive cash flow from operations, providing $59.4 million and $57.1 million as a source of funds for the nine months ended September 30, 2023 and 2022, respectively. Our additional liquidity comes from several sources: maintaining adequate balances of cash and cash equivalents, issuing common stock, and accessing credit facilities and revolving lines of credit. The following table provides a summary of the major sources of liquidity for the nine and twelve months periods ended at September 30, 2023 and December 31, 2022 and as of September 30, 2023 and December 31, 2022.
| September 30, 2023 | December 31, 2022 | ||||||||||
| (in thousands) | |||||||||||
Net cash from operating activities(a) | 59,429 | 92,543 | |||||||||
Cash and cash equivalents(b) | 272,312 | 236,586 | |||||||||
| Term loan credit facilities | 295,205 | 297,470 | |||||||||
Revolving line of credit (c) | 100,000 | 100,000 | |||||||||
___________________________________
(a) Net cash from operating activities for nine months ended at September 30, 2023 and twelve months ended at December 31, 2022.
(b) Cash balance as of September 30, 2023 and December 31, 2022 included $70.0 million and $56.4 million cash and cash equivalents, respectively, held outside of the United States.
(c) Available borrowings under the revolving lines of credits as of September 30, 2023 and December 31, 2022 were reduced by $0.1 million and $0.1 million standby letters of credit issued to a landlord in lieu of a security deposit in addition to any outstanding borrowings.
Our material cash requirements from known contractual obligations are principal and interest payments of long-term debt. We also have future cash obligations of $12.7 million for lease contracts, which have remaining terms of one to six years.
The principal amount of long-term debt outstanding as of September 30, 2023 matures in the following years:
| Remainder of 2023 | 2024 | 2025 | 2026 | TOTAL | |||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||
| Maturities | $ | 755 | $ | 3,020 | $ | 3,020 | $ | 288,410 | $ | 295,205 | |||||||||||||||||||
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We assess our liquidity in terms of our ability to generate adequate amounts of cash to meet current and future needs. We believe our existing sources of liquidity will be sufficient to meet our working capital, capital expenditures, and contractual obligations for the foreseeable future. Our expected primary uses on a short-term and long-term basis are for repayment of debt, interest payments, working capital, capital expenditures, geographic or service offering expansion, acquisitions, investments, and other general corporate purposes. We believe we will meet short and longer-term expected future cash requirements and obligations through a combination of cash flows from operating activities, available cash balances, and potential future equity or debt transactions.
Our future capital requirements, however, will depend on many factors, including funding for potential acquisitions, investments, and other growth and strategic opportunities, which could increase our cash requirements. While we believe we have, and will be able to generate, sufficient liquidity to fund our operations for the foreseeable future, our sources of liquidity could be affected by factors described under “Risk Factors” in our 2022 Annual Report.
Cash Flows
The following table presents a summary of our cash flows for the periods shown:
| NINE MONTHS ENDED SEPTEMBER 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| (in thousands) | |||||||||||
| Net cash provided by operating activities | $ | 59,429 | $ | 57,058 | |||||||
| Net cash used in investing activities | (18,503) | (15,238) | |||||||||
| Net cash used in financing activities | (8,195) | (6,395) | |||||||||
| Effect of foreign exchange rate changes on cash and cash equivalents, and restricted cash | (107) | (8,266) | |||||||||
| Net increase in cash and cash equivalents, and restricted cash | $ | 32,624 | $ | 27,159 | |||||||
| Cash paid for interest | $ | 13,668 | $ | 12,310 | |||||||
| Cash paid for income taxes | $ | 12,365 | $ | 7,784 | |||||||
Operating Activities
Our cash flows from operating activities primarily include net income adjusted for (i) non-cash items included in net income, such as provisions for credit losses, depreciation and amortization, stock-based compensation, deferred taxes and other non-cash items and (ii) changes in the balances of operating assets and liabilities. Net cash provided by operating activities in the first nine months of 2023 was $59.4 million, compared to $57.1 million in the same period of 2022. The $2.4 million increase in cash from operating activities was primarily due to higher cash collections from accounts receivable, reduced cash payments for accounts payable and accrued expenses, and partially offset by increased cash utilization for obtaining prepaid and other assets, as well as higher payments for taxes and interest.
Investing Activities
Net cash used in investing activities in the first nine months of 2023 was $18.5 million, an increase of $3.3 million, compared to $15.2 million in the same period of 2022. The change in investing activities was primarily due to a $1.7 million increase in cash payments in connection with business acquisitions, and a $1.9 million increase in cash utilized in capitalized development costs, partially offset by a $0.4 million decrease in cash utilized in capital expenditures to support our growth.
Financing Activities
Net cash used in financing activities in the first nine months of 2023 was $8.2 million, compared to $6.4 million cash used in the same period of 2022. The $1.8 million decrease in cash flow in financing activities was primarily due to a $3.1 million increase in cash payments in connection with share awards vested and withheld for payroll tax, partially offset by a $1.1 million decrease in cash payments on the financing component of the interest rate swap.
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Indebtedness
We have been a party to a Credit Agreement since August 2017 that provided for a senior secured term loan and commitments under a revolving credit facility. The Company and the lenders modified the Credit Agreement on June 17, 2021, which provides for, among other things, (i) the extension of the termination date applicable to the revolving credit commitments under the Credit Agreement to August 2025, (ii) the extension of the maturity date applicable to the term loans under the Credit Agreement to August 2026, and (iii) an increase of approximately $80,000 in commitments available under the revolving line of credit (resulting in an aggregate amount of commitments of $100,000). The term loan under the modified Credit Agreement has substantially the same terms as the existing term loans and revolving credit commitments. The Credit Agreement is collateralized by substantially all U.S. assets and stock pledges for the non-U.S. subsidiaries and contains various financial and nonfinancial covenants.
Borrowings under the Credit Agreement were subject to a variable interest rate at LIBOR plus a margin. The applicable margins were based on achieving certain levels of compliance with financial covenants. We signed a LIBOR transition amendment on June 26, 2023 to adopt a new benchmark interest rate, SOFR, determined in accordance with the Credit Agreement to replace LIBOR. In order to make SOFR similar to LIBOR in terms of the overall interest rate being earned by the lenders under the Credit Agreement, a Credit Spread Adjustment (“CSA”) is added to the SOFR. The CSA varied depending on the selected interest period.
Additionally, we are obligated to pay under the revolving credit facility (i) a commitment fee of between 0.50% and 0.25% per annum of the unused amount of the revolving credit facility, depending on the applicable first lien leverage ratio, (ii) customary letter of credit issuance and participation fees, and (iii) other customary fees and expenses of the letter of credit issuers.
All obligations under the Credit Agreement are unconditionally guaranteed by our wholly owned direct and indirect subsidiaries, subject to certain exceptions. All obligations under the Credit Agreement, and the guarantees of those obligations, are secured on a first lien basis, subject to certain exceptions, by substantially all of our assets and the assets of the other guarantors.
As of September 30, 2023, we had $295.2 million of outstanding borrowings on the term loan, and $100.0 million of availability under the revolving credit facility under the Credit Agreement, and outstanding letters of credit of $0.1 million under the Credit Agreement.
As of September 30, 2023, we were in compliance with the covenants of the Credit Agreement.
Contractual Obligations and Commercial Commitments
There have been no material changes to our contractual obligations during the nine months ended September 30, 2023 from those disclosed in our 2022 Annual Report, except for payments made in the ordinary course of business.
Income Taxes
We recorded income tax expense of $0.1 million for the nine months ended September 30, 2023 and income tax expense of $9.5 million for the nine months ended September 30, 2022.
As of September 30, 2023, we had federal and state NOLs of approximately $1.8 million and $0.05 million, respectively, which are available to reduce future taxable income and expire between 2024 and 2036 and 2029 and 2040, respectively. We had federal and state R&D tax credit carryforwards of approximately $0.4 million and $0.1 million, respectively, to offset future income taxes, which expire between 2025 and 2042. We also had foreign tax credits of approximately $10.6 million, which will start to expire in 2027. These carryforwards that may be utilized in a future period may be subject to limitations based upon changes in the ownership of our stock in a future period. Additionally, we carried forward foreign NOLs of approximately $65.8 million which will start to expire in 2023, foreign research and development credits of $0.3 million which expire in 2029, and Canadian investment tax credits of approximately $3.5 million which expire between 2030 and 2040. Our carryforwards are subject to review and possible adjustment by the appropriate taxing authorities.
As required by ASC Topic 740, Income Taxes, our management has evaluated the positive and negative evidence bearing upon the realizability of our deferred tax assets, which are composed principally of NOL carryforwards, Section 174
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carryforwards, investment tax credit carryforward, and foreign tax credit carryforwards. Management has determined that it is more likely than not that we will not realize the benefits of foreign tax credit carryforwards. At the foreign subsidiaries, management has determined that it is more likely than not that we will not realize the benefits of certain NOL carryforwards. As a result, a valuation allowance of $25.7 million is recorded at December 31, 2022. As of September 30, 2023, the valuation allowance remained unchanged from December 31, 2022.
Off-Balance Sheet Arrangements
During the periods presented, we did not have, and currently do not have, any off-balance sheet arrangements, as defined under the rules and regulations of the SEC, that have, or are reasonably likely to have, a material effect on our current or future financial condition, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Estimates
Our accounting policies are more fully described in Note 2, “Summary of Significant Accounting Policies,” in our audited consolidated financial statements included in our 2022 Annual Report. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We monitor estimates and assumptions on a continuous basis and update these estimates and assumptions as facts and circumstances change and new information is obtained. Actual results could differ materially from those estimates and assumptions. We discussed the accounting policies that we believe are most critical to the portrayal of our results of operations and financial condition and require management’s most difficult, subjective and complex judgments in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our 2022 Annual Report. There were no significant changes to our critical accounting estimates during the three months ended September 30, 2023.
Recently Adopted and Issued Accounting Standards
We have reviewed all recently issued standards and have determined that, other than as disclosed in Note 2 to our condensed consolidated financial statements appearing elsewhere in this Quarterly Report, such standards will not have a material impact on our condensed consolidated financial statements or do not otherwise apply to our operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For information regarding our exposure to certain market risks, see “Quantitative and Qualitative Disclosures about Market Risk,” in Part II, Item 7A of the Company’s 2022 Annual Report. There were no material changes to the Company’s market risk exposure during the nine months ended September 30, 2023.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the period covered by this report. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objective and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have
51
concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of September 30, 2023.
Changes in Internal Control over Financial Reporting
During the period ended September 30, 2023, there were no changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II — OTHER INFORMATION
Item 1. Legal Proceedings
There have been no material changes to our legal proceedings as previously disclosed in our 2022 Annual Report.
Item 1A. Risk Factors
Except as described below, there have been no significant changes to the risk factors previously disclosed in our 2022 Annual Report that we believe are material to our business, financial condition, results of operations, cash flows or growth prospects.
Adverse developments affecting the financial services industry, including events or concerns involving liquidity, defaults or non-performance by financial institutions or transactional counterparties, could impair our ability or our customers’ ability to access existing cash, cash equivalents and investments, which could negatively impact the timely payment to key vendors and others or timely receipt of accounts payable from customers.
Events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions, transactional counterparties or other companies in the financial services industry or the financial services industry generally or concerns or rumors about any events of these kinds or other similar risks, have in the past and may in the future lead to market-wide liquidity problems. For example, on March 10, 2023, Silicon Valley Bank (“SVB”) was placed into receivership with the Federal Deposit Insurance Corporation (“FDIC”), which resulted in all funds held at SVB being temporarily inaccessible by SVB’s customers. Although the Company did not hold cash deposits or securities at SVB if other banks and financial institutions with which we have banking relationships are placed into receivership or go bankrupt in the future, we may not be able to access our current cash, cash equivalents, and investments and we may lose some or all of them, to the extent that those funds are not insured or otherwise protected by the FDIC. We maintain substantially all of our cash and cash equivalents in accounts with U.S. and multi-national financial institutions, and our deposits at these institutions exceed insured limits. In addition, investor concerns regarding the U.S. or international financial systems could result in less favorable commercial financing terms, including higher interest rates or costs and tighter financial and operating covenants, or systemic limitations on access to credit and liquidity sources, thereby making it more difficult for us to acquire financing on acceptable terms or at all. Our customers are also exposed to this same risk, and any delay in our customer's ability to access their cash and cash equivalents to make timely payments to us could have a materially negative impact on our operations and necessitate the need for additional capital sooner than anticipated. Any of these the foregoing could have material adverse impacts on our liquidity and our business, financial condition or results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table illustrates the activities of equity security repurchases during the three months ended at September 30, 2023.
| Total Number of Shares Purchased(a) | Weighted Average Price Paid per Share | Total Number of Shares Purchased Under Announced Programs | Approximate Dollar Value of Shares That May Yet be Purchased Under Announced Programs | |||||||||||||||||||||||
| 7/1/2023 to 7/31/2023 | 568 | $ | 18.21 | — | $ | — | ||||||||||||||||||||
| 8/1/2023 to 8/31/2023 | 5,108 | $ | 19.40 | — | $ | — | ||||||||||||||||||||
| 9/1/2023 to 9/30/2023 | 31,268 | $ | 14.43 | — | $ | — | ||||||||||||||||||||
| Total | 36,944 | $ | 15.18 | — | $ | — | ||||||||||||||||||||
___________________________________
(a) Shares purchased were due to shares delivered by employees to the Company for the payment of taxes resulting from issuance of common stock upon the vesting of restricted stock or RSUs relating to stock-based compensation plans.
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Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Our directors and officers may adopt written plans, known as Rule 10b5-1 plans
The Company previously announced on March 1, 2023, on Form 8-K that it entered into an employment agreement with John E. Gallagher III, the Company’s Chief Financial Officer (the “Employment Agreement”), On November 7, 2023, the Company entered into an Amended and Restated Employment Agreement with Mr. Gallagher (the “A&R Employment Agreement”), pursuant to which, in addition to the consideration previously disclosed, the Company agreed to pay Mr. Gallagher $235,750.00, representing an unpaid annual bonus from a prior employer and to reimburse Mr. Gallagher for legal fees and expenses in pursuing the unpaid bonus claim against his prior employer. Pursuant to the A&R Employment Agreement, Mr. Gallagher agreed to reimburse the Company with any funds recovered from his prior employer up to the amount paid by the Company.
Item 6. Exhibits
See Exhibit Index.
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EXHIBIT INDEX
| Incorporated by Reference | |||||||||||||||||||||||
| Exhibit Number | Exhibit Title | Form | File No. | Exhibit | Filing Date | ||||||||||||||||||
| 10.1 | |||||||||||||||||||||||
| 31.1 | |||||||||||||||||||||||
| 31.2 | |||||||||||||||||||||||
| 32.1 | |||||||||||||||||||||||
| 32.2 | |||||||||||||||||||||||
| 101.INS | XBRL Instance Document –the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | ||||||||||||||||||||||
| 101.SCH | XBRL Taxonomy Extension Schema Document | ||||||||||||||||||||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | ||||||||||||||||||||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | ||||||||||||||||||||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | ||||||||||||||||||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | ||||||||||||||||||||||
| 104 | Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101) | ||||||||||||||||||||||
___________________________________
+ This certification is deemed not filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, duly authorized.
| CERTARA, INC. | ||||||||
Date: November 8, 2023 | By: | /s/ William F. Feehery | ||||||
| Name: | William F. Feehery | |||||||
| Title: | Chief Executive Officer (Principal Executive Officer) | |||||||
Date: November 8, 2023 | By: | /s/ John Gallagher | ||||||
| Name: | John Gallagher | |||||||
| Title: | Chief Financial Officer (Principal Financial Officer) | |||||||
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