Item 2. Management’s Discussion and Analysis
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 Annual Report on Form 10-K for the fiscal year ended December 31, 2020. The statements in this discussion regarding industry outlook, our expectations regarding our future performance, liquidity, and capital resources, and all other non-historical statements in this discussion 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 entitled “Special Note Regarding Forward-Looking Statements” and “Risk Factors” of this Quarterly Report.
Executive Overview
We accelerate medicines to patients using biosimulation software and technology 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 2020 revenue, we provide an integrated, end-to-end platform used by more than 1,650 biopharmaceutical companies and academic institutions across 61 countries, including all of the top 35 biopharmaceutical companies by R&D spend in 2019. Since 2014, customers who use our biosimulation software and technology-enabled services have received over 90% of all new drug approvals by the U.S. Food and Drug Administration (“FDA”). Moreover, 17 global regulatory authorities license our biosimulation software to independently analyze, verify, and review regulatory submissions, including the FDA, Europe’s European Medicines Agency (“EMA”), Health Canada, Japan’s Pharmaceuticals and Medical Devices Agency, and China’s National Medical Products Administration. Demand for our offerings continues to expand rapidly.
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. 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 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 200 regulatory submissions over the past four years. Our team of more than 200 regulatory professionals has extensive experience applying industry guidelines and global regulatory requirements.
The final hurdle to delivering medicines to patients is market access, defined as strategies, processes, and activities to ensure that therapies are available to patients at the right price. We believe that biosimulation and market access will continue to be increasingly intertwined as health systems and countries move toward outcomes-based pricing. We have recently expanded into technology-enabled market access solutions, which help our customers understand the real-world impact of therapies and dosing regimens earlier in the process and effectively communicate this to payors and health authorities. Our solutions are underpinned by technologies such as Bayesian statistical software and SaaS-based value communication tools.
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With continued innovation in and adoption of our biosimulation software and technology-enabled 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 safety and efficacy of medicines for all patients.
Initial Public Offering
On December 15, 2020, the Company completed its IPO, pursuant to which the Company issued and sold 14,630,000 shares of common stock and certain selling stockholders, including 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 $316.3 million after deducting underwriters’ discounts and commissions. In addition, $4.4 million of legal, accounting and other offering costs, net of the tax effect of $0.3 million 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.
Secondary Public Offering
On March 29, 2021, the Company completed an underwritten secondary public offering in which certain selling stockholders, including EQT, sold 10,000,000 shares of its common stock, including an additional 1,500,000 shares of common stock pursuant to the full exercise of the underwriters’ option to purchase additional shares. 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 cost of $1.1 million in relation to the secondary public offering.
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 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.
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The table below summarizes our quarterly bookings and renewal rate trends:
2021
2020
Q1
Q2
Q1
Q2
Bookings (in millions)
$
81.9
75.1
$
61.0
70.1
Renewal Rate
92
%
90
%
92
%
96
%
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 (i) in scientific talent to expand our ability to deliver solutions across the drug development spectrum; (ii) in sales and marketing to promote our solutions to new and existing customers and in existing and expanded geographies; (iii) in research and development to support existing solutions and innovate new technology; and (iv) in other operational and administrative functions to support our expected growth. We expect that our headcount will increase over time and also expect our total operating expenses will continue to increase over time, albeit, at a rate lower than revenue growth.
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 to 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-enabled 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. 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
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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 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.
Impact of COVID-19
The continued spread of COVID-19 may adversely impact our business, financial condition or results of operations as a result of increased costs, negative impacts to our healthy workforce or a sustained economic downturn. The extent to which the COVID-19 pandemic may impact our business in the future is highly uncertain and cannot be predicted. In addition, a recession or a prolonged period of depressed economic activity related to COVID-19 and measures taken to mitigate its spread could have a material adverse effect on our business, financial condition and results of operations. As of June 30, 2021, there have been no material adverse impacts on the Company’s financial condition, results of operations or cash flows.
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, 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, acquisition and integration expense, and other items not indicative of our ongoing operating performance.
We believe Adjusted EBITDA is helpful to investors, analysts, and other interested parties because it can assist in providing a more consistent and comparable overview of our operations across our historical periods. In addition, this measure is frequently used by analysts, investors, and other interested parties to evaluate and assess performance.
Adjusted EBITDA is a non-GAAP measure and is 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 has certain limitations in that it does not include the impact of certain expenses that are reflected in our consolidated statement of operations that are necessary to run our business. Other companies, including other companies in our industry, may not use this measure and may calculate it differently than as presented on this report, limiting the usefulness as a comparative measure.
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The following table reconciles Net income (loss) to Adjusted EBITDA:
THREE MONTHS ENDED JUNE 30,
SIX MONTHS ENDED JUNE 30,
2021
2020
2021
2020
(in thousands)
(in thousands)
Net (loss) income (a)
$
(2,857)
$
2,777
$
(1,805)
$
3,823
Interest expense (a)
6,332
7,023
10,260
13,881
Interest income (a)
(100)
(13)
(171)
(24)
Provision for income taxes (a)
1,453
3,725
1,980
4,346
Depreciation and amortization expense (a)
552
669
1,154
1,222
Intangible asset amortization (a)
10,125
9,918
20,227
19,848
Currency gain (loss) (a)
164
55
356
(227)
Equity-based compensation expense (b)
7,530
567
12,681
1,105
Acquisition-related expenses (c)
556
494
2,152
949
Transaction-related expenses (d)
937
—
1,622
—
Severance expense (e)
—
16
—
211
Reorganization expense (f)
—
102
—
107
Loss on disposal of fixed assets (g)
282
—
282
—
Executive recruiting expense (h)
327
—
327
—
First-year Sarbanes-Oxley implementation costs (i)
233
—
340
—
Adjusted EBITDA
$
25,534
$
25,333
$
49,405
$
45,241
The following table reconciles Net income (loss) to Adjusted Net Income:
THREE MONTHS ENDED JUNE 30,
SIX MONTHS ENDED JUNE 30,
2021
2020
2021
2020
(in thousands)
(in thousands)
Net (loss) income (a)
$
(2,857)
$
2,777
$
(1,805)
$
3,823
Currency gain (loss) (a)
164
55
356
(227)
Equity-based compensation expense (b)
7,530
567
12,681
1,105
Acquisition-related expenses (c)
556
494
2,152
949
Transaction-related expenses (d)
937
—
1,622
—
Severance expense (e)
—
16
—
211
Reorganization expense (f)
—
102
—
107
Loss on disposal of fixed assets (g)
282
—
282
—
Executive recruiting expense (h)
327
—
327
—
First-year Sarbanes-Oxley implementation costs (i)
233
—
340
—
Income tax expense impact of adjustments (j)
(1,594)
(162)
(2,346)
(265)
Adjusted Net Income
$
5,578
$
3,849
$
13,609
$
5,703
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The following table reconciles Diluted Earnings Per Share to Adjusted Diluted Earnings Per Share:
THREE MONTHS ENDED JUNE 30,
SIX MONTHS ENDED JUNE 30,
2021
2020
2021
2020
(in thousands)
Diluted earnings per share (a)
$
(0.02)
$
0.02
$
(0.01)
$
0.03
Currency gain (loss) (a)
—
—
—
—
Equity-based compensation expense (b)
0.05
—
0.08
0.01
Acquisition-related expenses (c)
—
—
0.01
—
Transaction-related expenses (d)
0.01
—
0.02
—
Severance expense (e)
—
—
—
—
Reorganization expense (f)
—
—
—
—
Loss on disposal of fixed assets (g)
—
—
—
—
Executive recruiting expense (h)
—
—
—
—
First-year Sarbanes-Oxley implementation costs (i)
—
—
—
—
Income tax expense impact of adjustments (j)
(0.01)
—
(0.01)
—
Adjusted Diluted Earnings Per Share
$
0.03
$
0.02
$
0.09
$
0.04
Diluted weighted average common shares outstanding
147,485,566
132,407,786
147,323,724
132,407,786
Effect of potentially dilutive shares outstanding (k)
4,979,042
—
4,952,002
—
Diluted weighted average common shares outstanding
152,464,608
132,407,786
152,275,726
132,407,786
(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 costs associated with mergers and acquisitions and any retention bonuses pursuant to the acquisitions.
(d) Represents costs associated with directly expensed costs from the secondary offerings and debt modification.
(e) Represents charges for severance provided to former executives and non-executives.
(f) Represents expense related to reorganization, including legal entity reorganization.
(g) Represents the gain/loss related to disposal of fixed assets.
(h) Represents recruiting and relocation expenses related to hiring senior executives.
(i) 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 in 2021.
(j) Represents the income tax effect of the non-GAAP adjustments calculated using the applicable statutory rate by jurisdiction.
(k) Represents potentially dilutive shares that were excluded from the Company's GAAP diluted weighted average common shares outstanding because the Company had a reported net loss and therefore including these shares would have been anti-dilutive.
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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 up front that is not recognized in the current period is included in deferred revenue in our 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-enabled 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, 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 . R&D expense accounts for a significant portion of our operating expenses. We recognize expenses as incurred. Research and development expenses consist primarily of employee-related expenses, 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 expense also includes professional fees for external legal, accounting and other consulting services, allocated overhead costs, and other general operating expenses.
We expect to increase the size of our general and administrative staff to support the anticipated growth of our business. As a public company, we expect to incur significant expenses on an ongoing basis that we did not incur as a private company. Those costs include additional director and officer liability insurance expense, as well as third-party and internal resources related to accounting, auditing, SOX compliance, legal, and investor and public relations expenses. As a result, we expect
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the amount of our general and administrative expense to increase for the foreseeable future. Excluding public company expenses, we expect general and administrative expense to grow at a rate lower than revenues.
● Intangible Asset Amortization . Intangible asset amortization consists primarily of amortization expense related to intangible assets recorded in connection with acquisitions and amortization of capitalize 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 Facilities, including amortization of debt issuance costs and discounts. We expect interest expense to decline as a result of lower outstanding indebtedness going forward.
● Miscellaneous . Miscellaneous expense consists of miscellaneous non-operating expenses primarily comprised of 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 net income.
Acquisition
On March 2, 2021, we completed a transaction which qualified as a business combination. The business combination was not material to our condensed consolidated financial statements. Based on the Company’s preliminary purchase price allocation, approximately $1.2 million, $0.1 million and $1.1 million of the purchase price was assigned to customer relationships, non-compete agreements and goodwill, respectively.
On June 7, 2021, the Company completed a transaction which qualified as a business combination. The business combination was not material to our condensed consolidated financial statements. Based on the Company’s preliminary purchase price allocation, approximately $7.4 million and $4.7 million of the purchase price was assigned to customer relationships and goodwill, respectively.
Results of Operations
We have included the results of operations of acquired companies in our 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 six months ended June 30, 2021 to the three and six months ended June 30, 2020.
Three Months Ended June 30, 2021 Versus Three Months Ended June 30, 2020
The following table summarizes our unaudited statements of operations data for the three months ended June 30, 2021 and 2020:
Revenues
THREE MONTHS ENDED JUNE 30,
CHANGE
2021
2020
$
%
( in thousands)
Software
$
20,112
$
17,947
$
2,165
12
%
Services
49,984
43,176
6,808
16
%
Total revenues
$
70,096
$
61,123
$
8,973
15
%
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Revenues increased $9.0 million, or 15%, to $70.1 million for the three months ended June 30, 2021 as compared to the same period in 2020. The increase in revenues was due to growth in both our services and software product offerings, primarily related to client expansions in both our technology-enabled service product lines and software.
Software revenue increased by $2.2 million, or 12%, to $20.1 million for the three months ended June 30, 2021 as compared to the same period in 2020, driven primarily by growth in renewal of software subscriptions of 10%, or $1.5 million. The remaining increase was primarily due to growth in the subscription products from new clients.
Services revenue increased by $6.8 million, or 16%, to $50.0 million for the three months ended June 30, 2021 as compared to the same period in 2020, driven by growth in our technology-enabled services, primarily in biosimulation offerings.
Cost of Revenues
THREE MONTHS ENDED JUNE 30,
CHANGE
2021
2020
$
%
(in thousands)
Cost of revenues
$
27,542
$
20,647
$
6,895
33
%
Cost of revenues increased by $6.9 million, or 33%, to $27.5 million for the three months ended June 30, 2021 as compared to the same period in 2020. The increase was primarily due to a $3.9 million increase in employee-related costs resulting from head count growth and a $1.4 million increase in stock-based compensation costs. The remaining increase is primarily due to consulting costs.
Sales and Marketing Expenses
THREE MONTHS ENDED JUNE 30,
CHANGE
2021
2020
$
%
(in thousands)
Sales and marketing
$
4,589
$
2,729
$
1,860
68
%
% of total revenues
7
%
4
%
Sales and marketing expenses increased by $1.9 million, or 68%, to $4.6 million for the three months ended June 30, 2021 as compared to the same period in 2020. Sales and marketing expenses increased primarily due to a $1.1 million increase in employee-related costs resulting from head count growth and a $0.6 million increase in stock-based compensation costs.
Research and Development Expenses
THREE MONTHS ENDED JUNE 30,
CHANGE
2021
2020
$
%
(in thousands)
Research and development
$
4,626
$
2,969
$
1,657
56
%
% of total revenues
7
%
5
%
Research and development expenses increased by $1.7 million, or 56%, to $4.6 million for the three months ended June 30, 2021 as compared to the same period in 2020. The increase in R&D expenses was primarily due to a $1.3 million net increases in employee-related costs resulting from head count growth and a $0.5 million increase in stock-based compensation costs. The increase was partially offset by higher R&D credits and decrease in consulting costs.
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General and Administrative Expenses
THREE MONTHS ENDED JUNE 30,
CHANGE
2021
2020
$
%
(in thousands)
General and administrative
$
18,034
$
11,181
$
6,853
61
%
% of total revenues
26
%
18
%
General and administrative expenses increased by $6.9 million, or 61%, to $18.0 million for the three months ended June 30, 2021 as compared to the same period in 2020. The increase in general and administrative expenses was primarily due to a $4.4 million increase in stock-based compensation costs, $0.7 million increase in insurance expenses, and $0.5 million increase in business acquisition cost. The remaining increases are primarily due to increases in secondary offering costs. and public company costs. The increases were partially offset by decreases in consulting related costs.
Intangible Asset Amortization
THREE MONTHS ENDED JUNE 30,
CHANGE
2021
2020
$
%
(in thousands)
Intangible asset amortization
$
9,479
$
9,323
$
156
2
%
% of total revenues
14
%
15
%
Intangible asset amortization expense increased by $0.2 million, or 2%, to $9.5 million for the three months ended June 30, 2021 as compared to the same period in 2020. The increase in intangible asset amortization expense is due to increased capitalized software development costs.
Depreciation and Amortization Expense
THREE MONTHS ENDED JUNE 30,
CHANGE
2021
2020
$
%
(in thousands)
Depreciation and amortization
$
552
$
669
$
(117)
(17)
%
% of total revenues
1
%
1
%
Depreciation and amortization expense decreased $0.1 million for the three months ended June 30, 2021 as compared to the same period in 2020. The decrease was primarily due to decrease in depreciation from computer equipment and lease improvement for the three months ended June 30, 2021 as compared to the same period in 2020.
Interest Expense
THREE MONTHS ENDED JUNE 30,
CHANGE
2021
2020
$
%
(in thousands)
Interest expense
$
6,332
$
7,023
$
(691)
(10)
%
% of total revenues
9
%
11
%
Interest expense decreased $0.7 million, or 10%, to $6.3 million for the three months ended June 30, 2021 as compared to the same period in 2020. The decrease in interest expense was primarily due to lower average outstanding principal balances on our credit facilities in the second quarter of 2021 compared to the same period in 2020. The decrease in interest
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expense was partially offset by interest expense reclassed in from other comprehensive income due to hedge ineffectiveness.
Miscellaneous, net
THREE MONTHS ENDED JUNE 30,
CHANGE
2021
2020
$
%
(in thousands)
Miscellaneous, net
$
346
$
80
$
266
333
%
% of total revenues
0
%
0
%
Miscellaneous expense was $0.3 million for the three months ended June 30, 2021 as compared to miscellaneous expenses of $0.1 million for the same period in 2020. The change was primarily due to $0.3 million loss on disposal of fixed assets.
Provision for Income Taxes
THREE MONTHS ENDED JUNE 30,
CHANGE
2021
2020
$
%
( in thousands)
Provision for income taxes
$
1,453
$
3,725
$
(2,272)
(61)
%
Effective income tax rate
(103)
%
57
%
Our income tax expense was $1.5 million, resulting in an effective income tax rate of (103) % for the three months ended June 30, 2021 as compared to income tax expense of $3.7 million, or an effective income tax rate of 57%, for the same period in 2020. Our income tax expense for the three months ended June 30, 2021 was primarily due to the discrete tax effect of certain prior period swap losses that are required to be excluded from the EAETR calculation, thereby resulting in the tax benefit from such losses being measured at the statutory tax rate, which is much lower than the EAETR applied to all other components of pre-tax book income. Our income tax expense for the three months ended June 30, 2020 was primarily due to the tax effects of U.S. pre-tax income, the impact of non-deductible items, the effects of tax elections made for U.K. earnings, the relative mix of domestic and international earnings and discrete tax items.
Net Income (loss)
THREE MONTHS ENDED JUNE 30,
CHANGE
2021
2020
$
%
(in thousands)
Net income (loss)
$
(2,857)
$
2,777
$
(5,634)
(203)
%
Net loss was $2.9 million for the three months ended June 30, 2021 as compared to net income of $2.8 million for the same period in 2020. The loss was primarily due to $7.0 million increase in stock based compensation expense for the three months ended June 30, 2021 compared to the same period last year.
Six Months Ended June 30, 2021 Versus Six Months Ended June 30, 2020
The following table summarizes our unaudited statements of operations data for the six months ended June 30, 2021 and 2020:
Revenues
SIX MONTHS ENDED JUNE 30,
CHANGE
2021
2020
$
%
( in thousands)
Software
$
42,016
$
38,208
$
3,808
10
%
Services
94,798
80,364
14,434
18
%
Total revenues
$
136,814
$
118,572
$
18,242
15
%
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Revenues increased $18.2 million, or 15%, to $136.8 million for the six months ended June 30, 2021 as compared to the same period in 2020. The increase in revenues was due to growth in both our services and software product offerings, primarily related to client expansions in both our technology-enabled service product lines and software.
Software revenue increased by $3.8 million, or 10%, to $42.0 million for the six months ended June 30, 2021 as compared to the same period in 2020, driven primarily by growth in our renewal subscriptions revenue of 10%, or $3.0 million. The remaining increase is primarily due to growth in the subscriptions products from new clients.
Services revenue increased by $14.4 million, or 18%, to $94.8 million for the six months ended June 30, 2021 as compared to the same period in 2020, driven by growth in our technology-enabled services, primarily in biosimulation offerings.
Cost of Revenues
SIX MONTHS ENDED JUNE 30,
CHANGE
2021
2020
$
%
(in thousands)
Cost of revenues
$
53,558
$
42,830
$
10,728
25
%
Cost of revenues increased by $10.7 million, or 25%, to $53.6 million for the six months ended June 30, 2021 as compared to the same period in 2020. The increase was primarily due to a $6.4 million increase in employee-related costs resulting from head count growth and a $2.2 million increase in stock-based compensation costs. The remaining increase is primarily due to increase in consulting costs.
Sales and Marketing Expenses
SIX MONTHS ENDED JUNE 30,
CHANGE
2021
2020
$
%
(in thousands)
Sales and marketing
$
8,341
$
5,667
$
2,674
47
%
% of total revenues
6
%
5
%
Sales and marketing expenses increased by $2.7 million, or 47%, to $8.3 million for the six months ended June 30, 2021 as compared to the same period in 2020. Sales and marketing expenses increased primarily due to a $1.8 million increase in employee-related costs resulting from head count growth and a $1.0 million increase in stock-based compensation costs, partially offset by decreases in travel related costs, marketing costs.
Research and Development Expenses
SIX MONTHS ENDED JUNE 30,
CHANGE
2021
2020
$
%
(in thousands)
Research and development
$
9,332
$
5,844
$
3,488
60
%
% of total revenues
7
%
5
%
Research and development expenses increased by $3.5 million, or 60%, to $9.3 million for the six months ended June 30, 2021 as compared to the same period in 2020. The increase in R&D expenses was primarily due to a $2.1 million net increases in employee-related costs resulting from head count growth and a $0.9 million increase in stock-based compensation costs. The remaining increases are primarily due to lower software capitalization. The increase was partially offset by higher R&D credits.
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General and Administrative Expenses
SIX MONTHS ENDED JUNE 30,
CHANGE
2021
2020
$
%
(in thousands)
General and administrative
$
34,596
$
22,722
$
11,874
52
%
% of total revenues
25
%
19
%
General and administrative expenses increased by $11.9 million, or 52%, to $34.6 million for the six months ended June 30, 2021 as compared to the same period in 2020. The increase in general and administrative expenses was primarily due to a $7.4 million increase in stock-based compensation costs. The remaining increases are due to increases in secondary offering costs, acquisition related costs, employee related costs, D&O insurance and public company costs. The increases were partially offset by decreases in restructuring, reorganization, consulting travel related costs, office supplies and facilities costs.
Intangible Asset Amortization Expense
SIX MONTHS ENDED JUNE 30,
CHANGE
2021
2020
$
%
(in thousands)
Intangible asset amortization
$
18,935
$
18,682
$
253
1
%
% of total revenues
14
%
16
%
Intangible asset amortization expense increased by $0.3 million, or 1%, to $18.9 million for the six months ended June 30, 2021 as compared to the same period in 2020. The increase in intangible asset amortization expense is due to increased capitalized software development costs.
Depreciation and Amortization Expense
SIX MONTHS ENDED JUNE 30,
CHANGE
2021
2020
$
%
(in thousands)
Depreciation and amortization
$
1,154
$
1,222
$
(68)
(6)
%
% of total revenues
1
%
1
%
Depreciation and amortization expense of $1.2 million was relatively flat for the six months ended June 30, 2021 as compared to the same period in 2020.
Interest Expense
SIX MONTHS ENDED JUNE 30,
CHANGE
2021
2020
$
%
(in thousands)
Interest expense
$
10,260
$
13,881
$
(3,621)
(26)
%
% of total revenues
7
%
12
%
Interest expense decreased by $3.6 million, or 26%, to $10.3 million for the six months ended June 30, 2021 as compared to the same period in 2020. The decrease in interest expense was primarily due to lower average outstanding principal balances on our credit facilities in the first six months of 2021 compared to the same period in 2020. The decrease in interest expense was partially offset by interest expense reclassed in from other comprehensive income due to hedge ineffectiveness.
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Miscellaneous, net
SIX MONTHS ENDED JUNE 30,
CHANGE
2021
2020
$
%
(in thousands)
Miscellaneous, net
$
463
$
(445)
$
908
(204)
%
% of total revenues
0
%
(0)
%
Miscellaneous expense, net increased by $0.9 million for the six months ended June 30, 2021 as compared for the same period in 2020. The increase was primarily due to loss from foreign currency exchange rate fluctuations and loss from disposal of fixed assets.
Provision for Income Taxes
SIX MONTHS ENDED JUNE 30,
CHANGE
2021
2020
$
%
( in thousands)
Provision for income taxes
$
1,980
$
4,346
$
(2,366)
(54)
%
Effective income tax rate
1,131
%
53
%
Our income tax expense was $2.0 million, resulting in an effective income tax rate of 1,131% for the six months ended June 30, 2021 as compared to income tax expense of $4.3 million, or an effective income tax rate of 53%, for the same period in 2020. Our income tax expense for the six months ended June 30, 2021 was primarily due to the discrete tax effect of certain prior period swap losses that are required to be excluded from the EAETR calculation, thereby resulting in the tax benefit from such losses being measured at the statutory tax rate, which is much lower than the EAETR applied to all other components of pre-tax book income. Our income tax expense for the six months ended June 30, 2020 was primarily due to the tax effects of U.S. pre-tax income, the impact of non-deductible items, the effects of tax elections made for U.K. earnings, the relative mix of domestic and international earnings and discrete tax items.
Net Income (loss)
SIX MONTHS ENDED JUNE 30,
CHANGE
2021
2020
$
%
(in thousands)
Net income (loss)
$
(1,805)
$
3,823
$
(5,628)
(147)
%
Net loss was $1.8 million for the six months ended June 30, 2021 as compared to net income of $3.8 million for the same period in 2020. The loss was primarily due to $11.6 million increase in stock based compensation expense for the first six months of 2021 compared to the same period last year. The expense increase was partially offset by increased gross profits.
Liquidity and Capital Resources
We assess our liquidity in terms of our ability to generate adequate amounts of cash to meet current and future needs. 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 have historically funded our operations primarily through cash generated from operations. We have historically used long-term debt and cash on hand to fund acquisitions. We hold our cash balances in the United States and numerous locations in the rest of the world.
As of June 30, 2021, we had cash and cash equivalents $267.8 million, of which $30.6 million represents cash and cash equivalents held outside of the United States.
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Cash Flows
The following table presents a summary of our cash flows for the periods shown:
SIX MONTHS ENDED JUNE 30,
2021
2020
(in thousands)
Net cash provided by operating activities
$
19,556
$
16,641
Net cash used in investing activities
(17,999)
(5,241)
Net cash provided by (used in) financing activities
(5,165)
17,186
Effect due to foreign exchange rate changes on cash, cash equivalents, and restricted cash
(88)
1,005
Net (decrease) increase in cash, cash equivalents, and restricted cash
$
(3,696)
$
29,591
Cash paid for interest
$
7,114
$
13,160
Cash paid for income taxes
$
4,420
$
5,081
Operating Activities
During the six months ended June 30, 2021, operating activities provided approximately $19.6 million of cash and cash equivalents, primarily resulting from net loss of $1.8 million adjusted by $35.4 million of non-cash operating expenses inclusive of depreciation and amortization, amortization of debt issuance costs, provision for doubtful accounts, loss on retirement of assets, equity-based compensation costs, unrealized loss on hedge and deferred income taxes. Changes in our operating assets and liabilities used cash and cash equivalents of approximately $14.1million primarily due to payments of interest, taxes, accrued bonuses and other operational payments related to business acquisition.
During the six months ended June 30, 2020, operating activities provided approximately $16.6 million of cash and cash equivalents, primarily resulting from net income of $3.8 million, adjusted by $24.8 million of non-cash operating expenses inclusive of depreciation and amortization, amortization of debt issuance costs, equity-based compensation costs and deferred income taxes. Changes in our operating assets and liabilities used cash and cash equivalents of approximately $12.0 million.
Investing Activities
During the six months ended June 30, 2021, investing activities used approximately $18.0 million of cash, primarily for investing in business acquisitions, capitalized software development, and capital expenditures to support our growth.
During the six months ended June 30, 2020, investing activities used approximately $5.2 million of cash, primarily for investing in capitalized software development, business acquisition, and capital expenditures to support our growth.
Financing Activities
During the six months ended June 30, 2021, financing activities used approximately $5.2 million of cash, primarily attributable to payments on long-term debt and capital lease obligations as well as payments related to the cost of debt modification.
During the six months ended June 30, 2020, financing activities provided approximately $17.2 million of cash, primarily due to proceeds from borrowings on our line of credit, partially offset by payments on long-term debt and capital lease obligations.
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Funding Requirements
We believe that our existing cash and cash equivalents will be sufficient to fund our operations and capital expenditure requirements for the foreseeable future. Our future capital requirements will depend on many factors, including funding for potential acquisitions, investments, and other growth and strategic opportunities that might require use of existing cash, borrowings under our revolving credit facility, or additional long-term financing. We may also use existing cash and cash flows from operations to pay down long-term debt from time to time.
While we believe we have sufficient liquidity to fund our operations for the foreseeable future, our sources of liquidity could be affected by factors described under “Risk Factors” elsewhere in this Quarterly Report.
Indebtedness
We are a party to a Credit Agreement that originally provided for a $250.0 million senior secured term loan and commitments under a revolving credit facility in an aggregate principal amount of $20.0 million, with a sub-commitment for issuance of letters of credit of $10.0 million. The loans were originally scheduled to mature on August 14, 2024, with respect to the term loan thereunder, and August 14, 2022, with respect to the revolving credit facility thereunder.
In January 2018, we and the lenders amended the Credit Agreement to add incremental term loans in the amount of $25.0 million to be used for our general corporate purposes. Additionally, in April 2018, we and the lender amended the Credit Agreement to (i) add incremental term loans in the amount of $40.0 million to be used for our general corporate purposes and (ii) provide a reduction of 50 basis points in the margin under the term loan. The terms of such incremental term loans were the same as the terms of our existing term loans, including in respect of maturity, and are considered an increase in the aggregate principal amount of the existing term loans outstanding under the Credit Agreement and are part of the existing term loan.
We entered into a third restated and amended loan agreement on June 17, 2021 (“Third Amendment”), 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 $80.0 million in commitments available under the revolving line of credit (resulting in an aggregate amount of commitments of $100.0 million). The term loan under the Third 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 contain various financial and nonfinancial covenants.
Borrowings under the Credit Agreement currently bear interest at a rate per annum equal to either (i) the Eurocurrency rate, with a floor of 0.00%, as adjusted for the reserve percentage required under regulations issued by the Federal Reserve Board for determining maximum reserve requirements with respect to Eurocurrency funding, plus an applicable margin rate of 3.50% for the term loan and between 4.00% and 3.50% for revolving credit loans, depending on the applicable first lien leverage ratio, (ii) an alternative base rate (“ABR”), with a floor of 1.00%, plus an applicable margin rate of 2.50% for the term loan or between 3.00% and 2.50% for revolving credit loans, depending on the applicable first lien leverage ratio (with the ABR determined as the greatest of (a) the prime rate, (b) the federal funds effective rate, plus 0.50%), and (iii) the Eurocurrency rate plus 1.00%.
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
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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 June 30, 2021, we had $302.0 million of outstanding borrowings on the term loan, and $99.9 million of availability under the revolving credit facility, and outstanding letters of credit of $0.1 million under the Credit Agreement.
As of June 30, 2021, we were in compliance with the covenants of each of the Credit Agreement.
Contractual Obligations and Commercial Commitments
There have been no material changes to our contractual obligations during the six months ended June 30, 2021 from those disclosed in our Annual Report on Form 10-K, except for payment made in the ordinary course of business.
Income Taxes
We recorded income tax expense of $1.5 million and $2.0 million for the three and six months ended June 30, 2021, respectively, and income tax expense of $3.7 million and $4.3 million for the three and six months ended June 30, 2020, respectively.
As of June 30, 2021, we had federal and state NOLs of approximately $3.3 million and $3.0 million, respectively, which are available to reduce future taxable income and expire between 2024 and 2036 and 2029 and 2038, respectively. We had federal and state R&D tax credit carryforwards of approximately $2.3 million and $0.6 million, respectively, to offset future income taxes, which expire between 2024 and 2040. We also had foreign tax credits of approximately $12.5 million, which will start to expire in 2025. 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 $16.1 million which expire starting in 2022, foreign research and development credits of $2.5 million which expire between 2029 and 2030, and Canadian investment tax credits of approximately $2.7 million which expire between 2030 and 2039. Our carryforwards are subject to review and possible adjustment by the appropriate taxing authorities.
As required by Accounting Standards Codification (‘‘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, R&D credit 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 $16.7 million was recorded at December 31, 2020. As of June 30, 2021, the valuation allowance remained unchanged from December 31, 2020.
Off-Balance Sheet Arrangements
During the periods presented, we did not have, and currently we do not have, any material off-balance sheet arrangements, as defined under the rules and regulations of the SEC.
Critical Accounting Policies and 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 Annual Report on Form 10-K for the year ended December 31, 2020. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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
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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 Annual Report on 2020 Form 10-K for the year ended December 31, 2020. There were no significant changes to our critical accounting policies and estimates during the six months ended June 30, 2021.
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.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.