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Item 7. Management’s Discussion and Analysis

2022-03-01 compared with 2021-03-15 · 231 added, 258 removed, 390 unchanged (56% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion of our financial condition and results of operations in conjunction with our audited consolidated financial statements and the related notes and other financial information included elsewhere in this Annual Report and our audited consolidated financial statements and notes thereto.

As discussed in the section titled “Special Note Regarding Forward Looking Statements,” the following discussion and analysis, in addition to historical financial information, contains forward-looking statements that involve risks and uncertainties.

For purposes of this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") section, we use the terms "Certara Inc.", "the Company","we", "us", and "our"

to refer to Certara, Inc.

You should read the following discussion of our financial condition and results of operations in conjunction with our audited consolidated financial statements and the related notes and other financial information included elsewhere in this Form 10K and our audited consolidated financial statements and notes thereto.

uncertainties.

Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the section titled “Risk Factors” under Part I, Item 1A above.

We operate on a fiscal year that ends on December 31.

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 Consolidated Financial Statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles, policies and estimates affect our Consolidated Financial Statements.

Executive Overview

We accelerate medicines to patients using biosimulation software and technology to transform traditional drug discovery and development.

We accelerate medicines to patients using biosimulation software, technolog, 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 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 2020.

Since 2014, customers who use our biosimulation software and technology-enabled services have received over 90% of all new drug approvals by the FDA.

Moreover, 17 global regulatory authorities license our biosimulation software to independently analyze, verify, and review regulatory submissions, including the FDA, Europe’s EMA, Health Canada, Japan’s PMDA, and China’s NMPA.

As a global leader in biosimulation based on 2021 revenue, we provide an integrated, end-to-end platform used by more than 2,000 clients including biopharmaceutical companies, regulatory agencies and academic institutions across 62 countries, including 38 of the top 40 biopharmaceutical companies by R&D spend in 2020.

Since 2014, customers who use our biosimulation software and technology-driven services have received 90% of all new drug approvals by the FDA.

Moreover, 17 global regulatory authorities license our biosimulation software to independently analyze, verify, and review regulatory submissions, including the FDA, Health Canada, Japan’s PMDA, and China’s NMPA.

Demand for our offerings continues to expand rapidly.

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Our differentiated regulatory services are powered by submissions management software and natural language processing for scalability and speed, allowing us to deliver more than 250 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.

Our team of 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.

We have recently expanded into technology-driven 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.

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.

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 safety and efficacy of medicines for all patients.

Public Offerings

On December 15, 2020, we completed our IPO, pursuant to which we issued and sold 14,630,000 shares of our common stock and certain selling stockholders 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.

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In connection with the closing of our IPO, we repaid in full the $80.0 million outstanding principal amount and $3.0 million accrued interest on our Loan Agreement.

On March 29, 2021, we completed an underwritten secondary public offering in which certain selling stockholders, including EQT, sold 11,500,000 shares of the Company’s common stock, including 1,500,000 shares of common stock pursuant to the full exercise of the underwriters’ option to purchase additional shares.

We 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.

We incurred costs of $1.1 million, recorded in general and administrative expenses, in relation to the secondary public offering.

On September 13, 2021, we completed another public offering, at a public offering price of $31.00 per share, pursuant to which the Company sold 4,500,000 shares of its common stock, and certain selling stockholders sold 18,500,000 shares of our common stock, including 3,000,000 shares of common stock pursuant to the full exercise of the underwriters’ option to purchase additional shares.

We received net proceeds of $134.1 million after deducting underwriters' discounts and commissions.

In addition, $0.7 million of legal, accounting and other offering costs incurred in connection with the sale of the Company's common stock in the public offering were capitalized and offset against the proceeds received.

On November 22, 2021, we completed another secondary public offering in which certain selling stockholders, including EQT, sold 10,000,000 shares of the Company’s common stock.

We 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.

We incurred costs of $0.6 million, recorded in general and administrative expenses, in relation to the secondary public offering.

Key Factors Affecting Our Performance

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(1) Due to late renewals by several large biosimulation software customers.

(2) Due to the completion of a large contract for a regulatory submission software.

Investments in Growth

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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 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.

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 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.

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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 December 31, 2020, there have been no material adverse impacts on the Company’s financial condition, results of operations or cash flows.

As of December 31, 2021, we believe there have been and will be short-term impacts on our business due to the Omicron variant.

With the COVID-19-related slowdown in closing out clinical trials, there have been delays in regulatory services projects.

Furthermore, the increase in COVID-19 cases with the Omicron variant reduced the capacity of our employees and clients.

We believe that these are transitory factors that we are well-equipped to manage going forward.

non-GAAP measures

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Intangible asset amortization (a)

Currency loss (a)

Currency (gain) loss (a)

Equity-based compensation expense (b)

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Executive recruiting expense (i)

First-year Sarbanes-Oxley and ASC 842 implementation costs (j)

Adjusted EBITDA

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(in thousands)

Currency loss (a)

Currency (gain) loss (a)

Equity-based compensation expense (b)

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Executive recruiting expense(i)

Income tax expense impact of adjustments (j)

Adjusted Net Income(Loss)

First-year Sarbanes-Oxley and ASC 842 implementation costs(j)

Income tax expense impact of adjustments (k)

Adjusted Net Income

The following table reconciles diluted earnings per share to Adjusted Diluted Earnings Per Share:

YEAR ENDED DECEMBER 31,

(in thousands)

Diluted earnings per share (a)

Currency loss (a)

Currency (gain) loss (a)

Equity-based compensation expense (b)

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Executive recruiting expense (i)

Income tax expense impact of adjustments (j)

Effect of using adjusted diluted shares (k)

Adjusted Diluted Earnings Per Share

Diluted weighted average common shares outstanding

First-year Sarbanes-Oxley and ASC 842 implementation costs (j)

Income tax expense impact of adjustments (k)

Adjusted Diluted Earnings Per Shares

Basic weighted average common shares outstanding

Effect of potentially dilutive shares outstanding (l)

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(d) Represents integration costs related to post-acquisition integration activities.

(e) Represents costs associated with our initial public offering that are not capitalized.

(e) Represents costs associated with our public offerings that are not capitalized.

(f) Represents charges for severance provided to former executives and non-executives.

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(h) Represents the gain/loss related to disposal of fixed assets.

(i) Represents recruiting and relocation expenses related to hiring a CEO and other senior executives.

(j) Represents the income tax effect of the non-GAAP adjustments calculated using the applicable statutory rate by jurisdiction.

(k) Represents the effect of using the Adjusted diluted weighted average common shares outstanding.

(l) 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.

(i) Represents recruiting and relocation expenses related to hiring senior executives.

(j) 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, as well as implementing cost of ASC 842.

(k) Represents the income tax effect of the non-GAAP adjustments calculated using the applicable statutory rate by jurisdiction.

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.

Components of Results of Operations

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Software maintenance revenue is recognized ratably over the contract term, usually one year.

Our services business generates revenues primarily from technology-enabled services and professional services, which include software implementation 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.

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● 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 .

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We expect income tax expense to increase over time as the Company continues to grow net income.

BaseCase Acquisition

On January 25, 2018, we acquired 100% of the equity of BaseCase, a SaaS company in the life sciences industry.

The purchase price of $25.3 million was funded through proceeds of $25.0 million received from an additional tranche of term debt and cash on hand.

See Note 5, "Business Combinations,"

of the consolidated financial statements.

Analytica Laser Acquisition

On April 3, 2018, we acquired 100% of the equity of Analytica Laser, a provider of real-world evidence and health economics outcomes research, value and access consultancy, cost and comparative effectiveness modeling, and collection and analysis of real-world data for use in market and payor communications.

The purchase price of $40.0 million was funded through proceeds of $40.0 million received from an additional tranche of term debt and cash on hand.

See Note 5, "Business Combinations,"

of the consolidated financial statements.

On March 2, 2021, we completed a transaction which qualified as a business combination for a total consideration of $2.7 million.

The business combination was not material to our consolidated financial statements.

Based on the Company’s preliminary purchase price allocation, approximately $1.2 million, $0.1 million and $1.2 million of the purchase price was assigned to customer relationships, non-compete agreements and goodwill, respectively.

On June 7, 2021, we completed a transaction which qualified as a business combination for a total consideration of $15.2 million.

The business combination was not material to our 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.

On October 1, 2021, we completed the acquisition of 100% of the equity of Pinnacle for a total consideration of $339.1 million, consisting of cash $266.3 million ($246.9 million net with cash acquired from the acquisition) and 2,239,717 shares of restricted common stock of the Company.

Based on the Company’s preliminary purchase price allocation, approximately $15.8 million, $103.0 million, $24.6 million and $183.9 million of the purchase price was assigned to trademark, acquired software, customer relationships, and goodwill, respectively.

Pinnacle has been included in our consolidated results of operations since the date of acquisition.

Also, after year end 2021, on January 3, 2022, we completed the acquisition of Integrated Nonclinical Development Solutions, Inc.

(INDS), a company that provides the SEND Explorer® software and drug development consulting, for total

consideration of $7.1 million.

We will complete the initial accounting for the acquisition of INDS, including the allocation of purchase consideration, in the first quarter of 2022.

For more information about our acquisitions, see NOTE 5.

“Business Combinations” in the notes to the Consolidated Financial Statements.

Results of Operations

YEAR ENDED DECEMBER 31,

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(dollars in thousands)

Statement of operations data:

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Total other expenses

Loss from operations before income taxes

(Benefit from) provision for income taxes

Comparison of the Year Ended December 31, 2020 and 2019

Loss before income taxes

Provision for (benefit from) income taxes

Comparison of the Years Ended December 31, 2021 and 2020

YEAR ENDED DECEMBER 31,

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(dollars in thousands)

Total revenues

Revenues increased by $42.6 million, or 17%, to $286.1 million for the year ended December 31, 2021, as compared to the same period in 2020.

The increase in revenues was a direct result of growth in our technology enabled services and software product offerings from strong renewal rates and client expansions.

Software revenue increased by $5.1 million, or 7%, to $73.5 million for the year ended December 31, 2020 as compared to the same period in 2019, driven primarily by growth in sales of our software licenses of 10%, or $3.3 million and subscriptions revenue of 8%, or $2.3 million, partially offset by a decline in software maintenance revenue or $0.5 million.

The growth is attributable to maintaining high net revenue retention rates and renewal rates for our core software products.

Services revenue increased by $29.9 million, or 21%, to $170.1 million for the year ended December 31, 2020 as compared to the same period in 2019, primarily driven by organic growth in our technology-enabled services product lines of 23%, or $30.6 million, partially offset by a $0.7 million decrease in professional services offerings.

The growth is primarily attributable to strong growth in biosimulation and regulatory services from client expansions and new customer acquisition.

Excluding $6.1 million revenue from Pinnacle 21, which was acquired in the fourth quarter of 2021, the revenues increased $36.4 million, or 15% for the year ended December 31, 2021 as compared to the same period in 2020.

The overall increase in revenues was primarily a result of growth in our technology enabled services and software product offerings from strong renewal rates, client expansions and new customers.

Software revenue increased by $13.4 million, or 18%, to $86.8 million for the year ended December 31, 2021 as compared to the same period in 2020, driven primarily by growth in sales of our software subscriptions of 29%, or $9.6 million and sales of our software licenses of 10%, or $3.7 million.

Excluding $5.7 million revenue from Pinnacle 21, the revenue from software subscription increased $3.9 million, or 12%.

The overall growth is primarily attributable to maintaining high net revenue retention rates and renewal rates for our core software products, growth from acquisitions and new customers.

Services revenue increased by $29.2 million, or 17%, to $199.3 million for the year ended December 31, 2021, as compared to the same period in 2020, primarily driven by growth in our technology-driven services product lines, which increased by 18%, or $29.5 million.

The growth in overall services revenue is primarily attributable to strong growth in biosimulation and regulatory services from client expansions with ACV greater than $0.1 million and new customers.

Cost of Revenues

YEAR ENDED DECEMBER 31,

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(dollars in thousands)

Cost of revenues

Cost of revenues increased by $10.9 million, or 11%, to $111.6 million for the year ended December 31, 2021, as compared to 2020.

The increase was primarily due to a $8.6 million increase in stock-based compensation driven by the exchange of performance vesting Class B Units in connection with the December 2020 offering and an increase to employee-related costs of $8.6 million related to increased headcount.

The remaining increase is due to consulting costs and bonus expense, partially offset by decreases in travel related costs, retention, and software expenses.

The increase was primarily due to a $10.0 million increase in employee-related costs resulting from billable head count growth, a $2.8 million increase in consulting costs, and $1.4 million increase in intangible assets amortization, partially offset by a $3.6 million decrease in stock-based compensation cost.

Excluding $0.8 million expense from Pinnacle, the cost of revenue increased $10.1 million.

Sales and Marketing Expense

YEAR ENDED DECEMBER 31,

(in thousands)

(dollars in thousands)

Sales and marketing

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Sales and marketing increased by $0.9 million, or 5%, to $20.1 million for the year ended December 31, 2021, as compared to 2020.

The increase was primarily due to a $7.3 million increase in stock-based compensation driven by the exchange of performance vesting Class B Units in connection with the December 2020 offering.

The remainder of the increase is due to sales commissions, employee-related costs, and other marketing costs, offset by decreases in advertising and tradeshow, travel and entertainment, bonus, and consulting expenses.

Sales and marketing expenses increased primarily due to a $5.4 million increase in employee-related costs resulting from head count growth and a $0.5 million increase in professional and consulting costs as well as $0.1 million increase in equipment and software expenses, partially offset by a $5.2 million decrease in stock-based compensation cost.

Research and Development Expense

YEAR ENDED DECEMBER 31,

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(dollars in thousands)

Research and development

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Research and development expenses increased by $0.7 million, or 4%, to $20.4 million for the year ended December 31, 2021 as compared to 2020.

The increase was primarily due to a $7.0 million increase in stock-based compensation driven by the exchange of performance vesting Class B Units in connection with the December 2020 offering.

The remaining increase was due to employee-related costs, consulting expenses, and bonus expense, partially offset by lower capitalization of software development costs, tax credits, and travel and entertainment spend.

The increase in R&D expenses was primarily due to a $5.1 million increases in employee-related costs resulting from head count growth, partially offset by a $4.3 million decrease in stock-based compensation cost.

Excluding $1.3 million expense in research and development from Pinnacle, the research and development expense decreased $0.6 million.

General and Administrative Expense

YEAR ENDED DECEMBER 31,

(in thousands)

(dollars in thousands)

General and administrative

% of total revenues

General and administrative expenses increased by $40.6 million, or 85%, to $88.5 million for the year ended December 31, 2020 as compared to 2019.

The increase was primarily due to a $39.8 million increase in stock-based compensation driven by the exchange of performance vesting Class B Units in connection with the December 2020 offering.

The remaining increase is due to increases in professional fees, IPO transaction costs, employee-related costs, bonus expense, IT-related costs, and D&O insurance coverage, partially offset by decreases in travel and entertainment spend, severance expenses, restructuring costs, acquisitions and integration costs, and office supply expense.

General and administrative expenses decreased by $8.9 million, or 10 %, to $79.5 million for the year ended December 31, 2021 as compared to 2020.

The decrease was primarily due to a $24.4 million decrease in employee-related costs resulting from a $22.0 million decrease in stock-based compensation cost and a $2.4 million decrease in other-employee related costs.

The decreases were partially offset by increase of $10.7 million in acquisition costs, $2.7 million in insurance expenses, $1.0 million increase in public company expense, and $0.8 million increase in stock offering transaction cost.

Intangible Asset Amortization Expense

YEAR ENDED DECEMBER 31,

(in thousands)

Intangibles asset amortization

(dollars in thousands)

Intangible asset amortization

% of total revenues

Intangible asset amortization expense increased by $1.3 million, or 3%, to $38.7 million for the year ended December 31, 2021 as compared to 2020.

The increase in intangible asset amortization was a direct result of increases in capitalized software development costs and increases in acquired intangible assets.

The increase in intangible asset amortization was primarily the result of increased amortization in acquired intangible assets.

Excluding $2.4 million expense in intangible asset amortization from Pinnacle, the intangible asset amortization expense decreased $1.1 million.

Depreciation and Amortization Expense

YEAR ENDED DECEMBER 31,

(in thousands)

(dollars in thousands)

Depreciation and amortization

% of total revenues

Depreciation and amortization expense of $2.4 million was relatively flat for the year ended December 31, 2020 as compared to 2019.

Depreciation and amortization expense decreased by $0.3 million, or (13) %, to $2.1 million for the year ended December 31, 2021 as compared to 2020.

The decrease in depreciation and amortization expense was primarily due to the decrease in average carrying balances of fixed assets in 2021 compared to 2020.

Interest Expense

YEAR ENDED DECEMBER 31,

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(dollars in thousands)

Interest expense

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Interest expense decreased by $8.5 million, or 33%, to $16.8 million for the year ended December 31, 2021 as compared to 2020.

The decrease in interest expense was primarily due to lower outstanding debt resulting from payoff of our higher interest term loans and lower interest rates on the outstanding debt.

The decrease in interest expense was primarily due to lower average outstanding principal balances on our credit facilities in 2021 compared to the same period in 2020.

The decrease in interest expense was partially offset by interest expense reclassified as interest from other comprehensive income due to hedge ineffectiveness.

Miscellaneous, net

YEAR ENDED DECEMBER 31,

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(dollars in thousands)

Miscellaneous, net

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Miscellaneous expenses decreased by $0.3 million, or 75%, to $0.1 million for the year ended December 31, 2021 as compared to 2020.

The decrease in miscellaneous expenses was primarily due to a $0.2 million decrease in asset disposals and sublease losses and a $0.2 million Australian stimulus income provided by the Australian government, partially offset by a $0.3 million unfavorable foreign currency exchange rate fluctuations compared to the U.S.

dollar, particularly with the pound sterling.

The decrease in miscellaneous expenses was primarily due to increase in currency gain, partially offset by increase in loss from fixed asset disposals.

(Benefit from) Provision for Income Taxes

YEAR ENDED DECEMBER 31,

( in thousands)

(Benefit from) income taxes

Effective income tax rate

Our income tax benefit was $0.8 million, resulting in an effective income tax rate of 1.6%, for the year ended December 31, 2020, as compared to an income tax benefit of $0.2 million, or an effective income tax rate of 2.5%, in 2019.

Our income tax benefit for the year ended December 31, 2020 was primarily due to the tax effects of the U.S.

pre-tax loss and the impact of tax rate changes in certain jurisdictions.

(dollars in thousands)

Provision for (benefit from) income taxes

Effective tax rate

Our income tax expense was $9.9 million, resulting in an effective income tax rate of (293.1)%, for the year ended December 31, 2021, as compared to an income tax benefit of $0.8 million, or an effective income tax rate of 1.6%, in 2020.

Our income tax expense for the year ended December 31, 2021 was primarily due to the impact of rate changes in certain jurisdictions, the impact of non-deductible items, and the relative mix of domestic and international earnings.

YEAR ENDED DECEMBER 31,

(in thousands)

Net loss increased by $40.5 million, or 453%, to $49.4 million for the year ended December 31, 2020 as compared to the same period in 2019.

The increase was primarily due to an increase in operating expenses, namely general and administrative expenses, sales and marketing, and research and development expenses.

(dollars in thousands)

Net loss decreased by $36.1 million, or 73%, to $13.3 million for the year ended December 31, 2021, as compared to the same period in 2020.

The decrease was primarily due to increase in revenues and decrease in stock-based compensation expense and interest costs in 2021 compared to 2020, partially offset by increase in cost of revenue, employee-related costs, acquisition costs, and taxes.

Comparison of the Year Ended December 31, 2020 and 2019

YEAR ENDED DECEMBER 31,

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(dollars in thousands)

Total revenues

Revenues increased by $35.0 million, or 17%, to $243.5 million for the year ended December 31, 2020 as compared to the same period in 2019.

The increase in revenues was a direct result of growth in our services and software product offerings, strong renewal rates and client expansions in software, as well as growth in our technology-enabled services, primarily in biosimulation, market access, and regulatory writing offerings.

Software revenue increased by $21.5 million, or 46%, to $68.3 million for the year ended December 31, 2019 as compared to the same period in 2018, driven primarily by an increase in sales of our software licenses of 16%, or $4.6 million, as well as an increase in subscriptions revenue of 8%, or $2.3 million, and software maintenance revenue of 8%, or $0.3 million.

In addition to organic growth, we incurred a reduction in 2018 software licenses and software subscriptions of $8.3 million and $6.1 million respectively, as compared to $0 and $0.3 million in 2019, relating to purchase accounting fair value adjustments of deferred revenue.

Services revenue increased by $23.3 million, or 20%, to $140.2 million for the year ended December 31, 2019 as compared to the same period in 2018, primarily driven by both organic and acquisition growth in our technology-enabled services product lines of 20%, or $22.7 million and professional service offerings of $0.5 million.

The increase in revenues was the result of growth in our technology enabled services and software product offerings from strong renewal rates and client expansions.

The growth is attributable to maintaining high net revenue retention rates and renewal rates for our core software products.

Services revenue increased by $29.9 million, or 21%, to $170.1 million for the year ended December 31, 2020 as compared to the same period in 2019, primarily driven by organic growth in our technology-driven services product lines of 23%, or $30.6 million, partially offset by a $0.7 million decrease in professional services offerings.

The growth is primarily attributable to strong growth in biosimulation and regulatory services from client expansions and new customer acquisition.

Cost of Revenues

YEAR ENDED DECEMBER 31,

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(dollars in thousands)

Cost of revenues

Cost of revenues increased by $21.0 million, or 26%, to $100.8 million for the year ended December 31, 2020 as compared to 2019.

The increase in cost of revenues was primarily due to increases in employee-related costs, including bonus expense, of $6.0 million.

The remaining increase is due to consulting costs, distributor fees, and software expenses, partially offset by a decrease in amortization of software development costs and integration costs.

The remaining increase is due to consulting costs and bonus expense, partially offset by decreases in travel related costs, retention, and software expenses.

Sales and Marketing Expense

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(dollars in thousands)

Sales and marketing

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Sales and marketing increased by $8.5 million, or 79%, to $19.2 million for the year ended December 31, 2020 as compared to 2019.

Sales and marketing increased primarily due to increases in employee-related costs, including bonus expense, of $0.7 million.

The remaining increase is due to sales commissions, consulting expenses, and travel and entertainment costs, partially offset by a decrease in other marketing costs.

The increase was primarily due to a $7.3 million increase in stock-based compensation driven by the exchange of performance vesting Class B Units in connection with the December 2020 offering.

Research and Development Expense

YEAR ENDED DECEMBER 31,

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(dollars in thousands)

Research and development

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Research and development expenses increased by $8.0 million, or 69%, to $19.6 million for the year ended December 31, 2020 as compared to 2019.

The increase in R&D expenses was primarily due to increases in employee-related costs, including bonus expense, of $2.2 million.

This was partially offset by higher capitalization of software development costs, tax credits, and a decrease in startup costs.

The increase was primarily due to a $7.0 million increase in stock-based compensation driven by the exchange of performance vesting Class B Units in connection with the December 2020 offering.

General and Administrative Expense

YEAR ENDED DECEMBER 31,

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(dollars in thousands)

General and administrative

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General and administrative expenses increased by $40.6 million, or 85%, to $88.5 million for the year ended December 31, 2020 as compared to 2019.

The increase in general and administrative expenses was primarily due to increases in employee-related costs, including bonus expense, of $3.7 million.

The remaining increase is due to facilities costs, software expenses, accounting fees, and severance, integration, restructuring, and reorganization costs, partially offset by decreases in travel and entertainment costs and acquisition-related synergies.

The increase was primarily due to a $39.8 million increase in stock-based compensation driven by the exchange of performance vesting Class B Units in connection with the December 2020 offering.

Intangible Asset Amortization Expense

YEAR ENDED DECEMBER 31,

(in thousands)

(dollars in thousands)

Intangibles asset amortization

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YEAR ENDED DECEMBER 31,

(in thousands)

(dollars in thousands)

Depreciation and amortization

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YEAR ENDED DECEMBER 31,

(in thousands)

(dollars in thousands)

Interest expense

% of total revenues

Interest expense increased by $0.2 million, or 1%, to $28.0 million for the year ended December 31, 2019 as compared to 2018.

The increase in interest expense was primarily due to the full year effect of interest on acquisition-related borrowings.

Interest expense decreased by $2.7 million, or 10%, to $25.3 million for the year ended December 31, 2020 as compared to 2019.

The decrease in interest expense was primarily due to lower outstanding debt resulting from the payoff of our higher interest term loans and lower interest rates on the outstanding debt.

Miscellaneous, net

YEAR ENDED DECEMBER 31,

(in thousands)

(dollars in thousands)

Miscellaneous, net

% of total revenues

Miscellaneous expenses increased by $0.7 million, or 610%, to $0.8 million for the year ended December 31, 2019 as compared to 2018.

The increase in miscellaneous expenses was primarily due to unfavorable foreign exchange rates compared to the U.S.

Miscellaneous expenses decreased by $0.3 million, or 39%, to $0.5 million for the year ended December 31, 2020 as compared to 2019.

The decrease in miscellaneous expenses was primarily due to a $0.2 million decrease in asset disposals and sublease losses and $0.2 million of Australian stimulus income provided by the Australian government, partially offset by $0.3 million of unfavorable foreign currency exchange rate fluctuations compared to the U.S.

dollar, particularly with the pound sterling.

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YEAR ENDED DECEMBER 31,

(in thousands)

(dollars in thousands)

(Benefit from) provision for income taxes

Effective income tax rate

Our income tax benefit was $0.2 million, resulting in an effective income tax rate of 2.5%, for the year ended December 31, 2019, as compared to an income tax expense of $0.7 million, or an effective income tax rate of (2.1%), in 2018.

Our income tax benefit for the year ended December 31, 2020 was primarily due to the tax effects of the U.S.

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YEAR ENDED DECEMBER 31,

(in thousands)

Net loss decreased by $24.3 million, or 73%, to $8.9 million for the year ended December 31, 2019 as compared to the same period in 2018.

The decrease was primarily due to an increase in operating income and positive change in taxes, partially offset by increase in other expenses, each as described above.

(dollars in thousands)

Net loss increased by $40.5 million, or 453%, to $49.4 million for the year ended December 31, 2020 as compared to the same period in 2019.

The increase was primarily due to an increase in operating expenses, namely general and administrative expenses, sales and marketing, and research and development expenses.

Liquidity and Capital Resources

As of December 31, 2020, we had cash and cash equivalents of $271.4 million, of which $19.9 million represents cash and cash equivalents held outside of the United States.

We have consistently generated positive cash flow from operations, providing $60.4 million, $44.8 million, and $38.0 million as a source of funds each year for the years ended December 31, 2021, 2020, and 2019.

Our additional liquidity comes from several sources:

maintaining adequate balances of cash and cash equivalents, issuing common stock, and

accessing credit facilities and revolving line of credit.

The following table provides a summary of the major sources of liquidity as of and for the years ended December 31, 2019, through 2021.

(in thousands)

Net cash from operating activities

Cash and cash equivalents (1)

proceeds from issuing common stock

Term loan credit facilities

Revolving line of credit

(1) Cash balance as of December 31, 2021 included $39.8 million cash and cash equivalents held outside of the United States.

Our material cash requirements from known contractual obligations as of December 31, 2021 is as follows:

(in thousands)

Lease obligations:

Operating leases

Finance leases (1)

Principal payments of long-term debt

Interest on long-term debt (2)

(1) Inclusive of interest expense.

(2) Represents the expected cash payments for interest on our long-term debt based on the amounts outstanding as of the end of each period and the interest rates applicable on such debt as of December 31, 2021.

We believe our existing sources of liquidity will be sufficient to meet our working capital, capital expenditures, and contractual obligations for the foreseeable future.

We believe we will meet 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” elsewhere in this filing.

The following table presents a summary of our cash flows for the periods shown:

YEAR ENDED DECEMBER 31,

(in thousands)

Net cash provided by operating activities

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Effect due to foreign exchange rate changes on cash, cash equivalents, and restricted cash

Net increase (decrease) in cash, cash equivalents and restricted cash

Net(decrease) increase in cash, cash equivalents and restricted cash

Cash paid for interest

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Operating Activities

During the year ended December 31, 2021, operating activities provided approximately $60.4 million.

The $15.6 million increase in cash from operating activities compared to 2020 was primarily due to a decrease in cash paid in interest and taxes, partially offset by cash paid for accounts payable and accrued expense.

During the year ended December 31, 2020, operating activities provided approximately $44.8 million of cash and cash equivalents, primarily resulting from a net loss of $49.4 million, offset by $100.9 million of non-cash operating expenses inclusive of depreciation and amortization, amortization of debt issuance costs, equity-based compensation costs, and deferred income taxes.

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Changes in our operating assets and liabilities provided cash and cash equivalents of approximately $8.7 million.

During the year ended December 31, 2018, operating activities provided approximately $11.6 million of cash and cash equivalents, primarily resulting from a net loss of $33.3 million, offset by $36.4 million of non-cash operating expenses inclusive of depreciation and amortization, amortization of debt issuance cost, equity-based compensation costs, deferred income taxes, and a $0.1 million non-cash loss on retirement of assets.

Changes in our operating assets and liabilities provided cash and cash equivalents of approximately $8.3 million.

Investing Activities

During the year ended December 31, 2021, investing activities used approximately $269.9 million of cash, an increase of $261.3 million, compared to $8.6 million in 2020.

Cash used in investing activities was primarily for investing in business acquisitions and capitalized software development to support our growth.

During the year ended December 31, 2020, investing activities used approximately $8.6 million of cash, primarily for investing in capital expenditures and capitalized software development to support our growth.

During the year ended December 31, 2019, investing activities used approximately $9.5 million of cash, primarily for investing in capital expenditures and capitalized software development to support our growth.

During the year ended December 31, 2018, investing activities used approximately $73.9 million of cash, primarily for business acquisitions of $62.4 million, and investing in capital expenditures and capitalized software development to support our growth.

Financing Activities

During the year ended December 31, 2021, financing activities provided approximately $123.4 million, compared to $208.2 million in the same period of 2020.

The $84.8 million decrease in cash from financing activities was primarily due to $183.0 million less proceeds from stock offerings in 2021 compared to 2020.

The decrease was partially offset by $100.4 million decrease in debt payment in 2021.

During the year ended December 31, 2020, financing activities provided approximately $208.2 million of cash, primarily attributable to proceeds from issuance of common stock in connection with our IPO, partially offset by payments on long-term debt.

During the year ended December 31, 2019, financing activities used approximately $8.5 million of cash, primarily attributable to payments on long-term debt, capital lease obligations, and our revolving credit facility, and unit repurchases, partially offset by proceeds from capital contributions.

During the year ended December 31, 2018, financing activities provided approximately $57.3 million of cash, consisting of proceeds from borrowings on long-term debt and our revolving credit facility, and capital contributions, partially offset by payments on contingent consideration obligations, long-term debt, capital lease obligations, and our revolving credit facility, units repurchases, and debt issuance costs.

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 filing.

During the year ended December 31, 2019, financing activities used approximately $8.5 million of cash, primarily attributable to payments on long-term debt, capital lease obligations, our revolving credit facility, and unit repurchases, partially offset by proceeds from capital contributions.

Credit Facilities

Loan Agreement

During the year ended December 31, 2020, we were party to a loan agreement, dated July 6, 2017, (the “Loan Agreement”) providing for a $100.0 million senior unsecured term loan.

The Loan Agreement was set to mature on August 14, 2025.

Borrowings under the Loan Agreement bore interest at a rate per annum equal to 8.25% payable semi-annually on January 15 th and July 15 th and on the final maturity date.

During the year ended December 31, 2020, we

repaid the $100.0 million aggregate principal amount owed, plus $7.1 million in interest owed, under the Loan Agreement.

As we could voluntarily repay outstanding loans without premium or penalty, we did not incur any early termination penalties or write offs of any deferred financing costs as a result of the repayment of the indebtedness.

Our obligations under the Loan Agreement were discharged on December 28, 2020, the date of the final prepayment and the agreement was terminated.

Credit Agreement

Certain of our wholly owned indirect subsidiaries, Certara Holdco, Inc.

and Certara USA, Inc.

(collectively, the “Borrowers”), are party to a Credit Agreement that provides 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 Credit Agreement matures 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, the Borrowers amended the Credit Agreement to borrow incremental term loans in the amount of $25.0 million to be used for general corporate purposes.

Additionally, in April 2018, the Borrowers amended the Credit Agreement to (i) borrow incremental term loans in the amount of $40.0 million to be used for 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 the Borrowers’ 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.

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 alternate 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.

The ABR is 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%.

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 lenders 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, or (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 (c) 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.

The Credit Agreement provides that the Borrowers may request increased commitments and additional term loans or additional term or revolving facilities under the Credit Agreement, in each case, subject to certain conditions and in an aggregate principal amount not to exceed the sum of (a) the greater of (i) $50.0 million and (ii) 100% of Consolidated Adjusted EBITDA (as defined in the Credit Agreement) for the most recently completed four fiscal quarter period for which internal financial statements have been delivered (or are required to be delivered) prior to the date of any such incurrence, plus (b) an additional amount, subject to compliance on a pro forma basis with (i) a consolidated first lien leverage ratio of no greater than 5.00 to 1.00 for incremental first lien debt or (ii) if incurred in connection with a permitted acquisition, the first lien leverage ratio immediately prior to such acquisition, plus (c) certain other amounts as specified in the Credit Agreement.

The Credit Agreement also provides for the incurrence of junior secured and unsecured debt, subject to certain conditions and ratios specified in the Credit Agreement.

The term loan under the Credit Agreement amortizes at a rate of approximately 1.00% per annum, paid in quarterly installments approximately equal to the product of (a) 0.25% times (b) the aggregate principal amount of the initial term loan outstanding immediately after the borrowing of the initial term loan on the closing date and each incremental term loan outstanding immediately after the borrowing thereof on the applicable closing date (with respect to each term loan repayment date prior to the term loan maturity date, as such product may be reduced by, and after giving pro forma effect to, any voluntary and mandatory prepayments as described in the Credit Agreement).

The Credit Agreement requires the Borrowers to prepay, subject to certain exceptions, outstanding term loans thereunder with:

● 50% (which percentage will be reduced to 25% and 0% based upon the achievement and maintenance of first lien leverage ratios equal to or less than 4.50 to 1.00 and 4.00 to 1.00, respectively) of the Borrowers’ annual excess cash flow;

● 100% (which percentage will be reduced to 50% and 0% based upon the achievement and maintenance of first lien leverage ratios equal to or less than 4.50 to 1.00 and 4.00 to 1.00, respectively) of net cash proceeds of certain non-ordinary course asset sales or other dispositions of property, in excess of certain amounts specified in the Credit Agreement and subject to customary reinvestment rights;

● 100% of net cash proceeds of certain issuances of debt obligations of the Borrowers and their restricted subsidiaries, except as permitted under the Credit Agreement.

There is no scheduled amortization under the revolving credit facility.

The Borrowers may voluntarily reduce the unutilized portion of the commitment amount and repay outstanding loans under the Credit Agreement at any time without premium or penalty.

All obligations under the Credit Agreement are unconditionally guaranteed by our wholly owned indirect subsidiary and the parent of the Borrowers, Certara Intermediate, Inc.

(“Holdings”), the Borrowers and certain of the Borrowers’ existing and future direct and indirect wholly owned domestic 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 Holdings’ and the Borrowers’ assets and the assets of the other guarantors.

The Credit Agreement contains covenants that, among other things, limit the ability of the Borrowers to incur additional debt;

create liens against their assets;

make acquisitions;

pay dividends on their capital stock or redeem, repurchase, or retire their capital stock;

make investments, acquisitions, loans, and advances;

create negative pledges;

merge or consolidate with another entity;

transfer or sell assets;

and enter into certain transactions with their affiliates.

In addition, the revolving credit facility under the Credit Agreement is subject to a first lien leverage ratio test of 7.50 to 1.00, tested quarterly if, and only if, on the last day of any fiscal quarter, the revolving credit facility and letters of credit (to the extent not cash collateralized or backstopped or, in the aggregate, not in excess of $5.0 million) are outstanding and/or issued, as applicable, in an aggregate principal amount exceeding 35% of the total amount of the revolving credit facility commitments thereunder.

The Credit Agreement also contains certain customary representations and warranties, affirmative covenants and reporting obligations.

In addition, the lenders under the Credit Agreement will be permitted to accelerate the loans and terminate commitments thereunder or exercise other specified remedies available to secured creditors upon the occurrence of certain events of default, subject to certain grace periods and exceptions, which include, among others, payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to certain material indebtedness, certain events of bankruptcy and insolvency, certain pension plan related events, material judgments, and any change of control.

As of December 31, 2020, we had $304.1 million of outstanding borrowings on the term loan, and $19.9 million of availability under the revolving credit facility, and outstanding letters of credit of $0.1 million under the Credit Agreement.

As of December 31, 2020, we and the Borrowers were in compliance with the covenants of each of the Credit Agreement.

Contractual Obligations and Commercial Commitments

We enter into long-term contractual obligations and commitments in the normal course of business, including operating leases.

The following table summarizes our contractual obligations as of December 31, 2020:

(in thousands)

Lease obligations:

Operating leases

Capital leases (2)

Principal payments of long-term debt

Interest on long-term debt (3)

(1) Includes the initial lease term and optional renewal terms that are included in the lease term of our headquarters and other office leases.

(2) Inclusive of interest expense.

(3) Represents the expected cash payments for interest on our long-term debt based on the amounts outstanding as of the end of each period and the interest rates applicable on such debt as of December 31, 2020.

As of December 31, 2020, contractual obligations for lease obligations decreased by $4.3 million from December 31, 2019, due to payments.

As of December 31, 2020, contractual obligations for principal payments of long-term debt and interest on debt decreased by $104.1 million and $82.8 million, respectively, from December 31, 2019.

The decrease in principal payments of long-term debt is due to scheduled payments on our Credit Agreement plus a $100 million prepayment on the Loan Agreement.

The decrease in interest on debt is due to lower outstanding debt balances and lower interest rates.

We recorded income tax benefit of $0.8 million for the year ended December 31, 2020 and income tax benefit of $0.2 million for the year ended December 31, 2019.

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 December 31, 2021, we had $300.5 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 $0.2 million under the Credit Agreement.

As of December 31, 2021, we were in compliance with the covenants of the Credit Agreement .

We recorded income tax expense of $9.9 million for the year ended December 31, 2021 and income tax benefit of $0.8 million for the year ended December 31, 2020.

As of December 31, 2021, we had federal and state NOLs of approximately $2.4 million and $2.6 million, respectively, which are available to reduce future taxable income and expire between 2024 and 2040 and 2029 and 2039, respectively.

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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 will start to expire 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.

Additionally, we carried forward foreign NOLs of approximately $24.5 million which will start to expire in 2022, foreign research and development credits of $0.4 million which expire in 2029, and Canadian investment tax credits of approximately $3.8 million which expire between 2030 and 2039.

Our carryforwards are subject to review and possible adjustment by the appropriate taxing authorities.

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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.

Additionally, the Company released the valuation allowance against certain U.S.

carryforwards and foreign investment tax credits, as management deemed such attributes more likely than not to be realized.

As a result, a valuation allowance of $18.2 million is recorded at December 31, 2021.

Off-Balance Sheet Arrangements

During the periods presented, we did not have, and currently we do not have, any off-balance sheet arrangements, as defined under the rules and regulations of the SEC.

During the periods presented, we did not have, and currently we do not have, any significant off-balance sheet arrangements, as defined under the rules and regulations of the SEC.

Critical Accounting Policies and Estimates

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While our significant accounting policies are described in more detail in the notes to our consolidated financial statements appearing elsewhere in this filing, we believe the following accounting policies used in the preparation of our consolidated financial statements require the most significant judgments and estimates.

Revenue Recognition

Application of GAAP related to the measurement and recognition of revenue requires us to make judgments and estimates.

Specifically, complex arrangements with nonstandard terms and conditions may require significant contract interpretation to determine the appropriate accounting, including whether promised goods and services specified in an arrangement are distinct performance obligations.

Revenue recognition is also impacted by our ability to determine when a contract is probable of collection and to estimate variable consideration.

We consider various factors when making these judgments.

Our revenue is primarily derived from the sale of software products and delivery of consulting services.

On January 1, 2019, we adopted ASC 606, Revenue from Contracts with Customers , on a modified retrospective basis.

Prior to January 1, 2019 size we applied ASC 605, Revenues Recognition, and Recognized Revenue , when the following criteria have been met:

(1) persuasive evidence of an arrangement exists;

(2) delivery has occurred or services have been rendered;

(3) the price is fixed and determinable;

and (4) collectability is reasonably assured.

Under ASC 606, we recognize revenue when control of the promised good or service is transferred to the customer in an amount that reflects the consideration for which we are expected to be entitled in exchange for those services.

We recognize revenue when control of the promised good or service is transferred to the customer in an amount that reflects the consideration for which we are expected to be entitled in exchange for those services.

Software Licenses and Support

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Software Services

For contracts that include 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 transaction price is allocated to each of the performance obligations on a pro-rata basis based on the relative standalone selling price

of each performance obligation.

Maintenance services agreements consist of fees for providing software updates and for providing technical support for software products for a specified term.

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Services primarily represent advisory services, which may be either strategic consulting services, reporting and analysis services, regulatory writing services, or any combination of the three.

Strategic consulting services consists of consulting, training, and process redesign that enables customers to identify which uncertainties are greatest and matter most and then to design development programs, trial sequences, and individual trials in such a way that those trials systematically reduce the identified uncertainties, in the most rapid and cost-effective manner possible.

Strategic consulting services consists of consulting,

training, and process redesign that enables customers to identify which uncertainties are greatest and matter most and then to design development programs, trial sequences, and individual trials in such a way that those trials systematically reduce the identified uncertainties, in the most rapid and cost-effective manner possible.

Our professional services contracts are time and materials, fixed fee, or prepaid.

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As the simulation license was determined to be a functional license with the right to access, the license revenue is recognized evenly over the contract period.

Revenue Recognition under ASC 605

The adoption of ASC 606 changed the way we recognize revenue related to term and bundled license agreements.

Prior to ASC 606, the Company recognized software licenses and support revenue in accordance with ASC 985, Software.

Revenues from software license agreements are recognized when all of the following criteria are met as set forth in ASC 985:

(1) persuasive evidence of an arrangement exists;

(2) delivery has occurred;

(3) the fee is fixed or determinable;

and (4) collectability is reasonably assured.

A source of software license revenue is from term and bundled licenses that are time-based arrangements for one or multiple software products that are sold together with maintenance and support for the term of the license arrangement.

The Company does not have vendor specific objective evidence (“VSOE”) to determine fair value of the maintenance and support in term arrangements and, therefore, recognizes revenues from these bundled time-based licenses ratably over the license term, which typically ranges from one to three years.

We allocate revenues from perpetual software arrangements involving multiple elements to each element based on the relative fair values as determined by the VSOE for each element.

We limit our assessment of VSOE for each element to the price charged when the same element is sold separately.

We analyzed all of the elements included in multiple-element arrangements and determined that the Company has sufficient VSOE to allocate revenues to maintenance and support, deployment, and training.

We sell training separately and have established VSOE on this basis.

VSOE for maintenance and support is determined based upon the renewal rates in contracts themselves, which is based on a fixed percentage of the current perpetual license list price.

Deployment services are charged based on standard hourly rates.

Accordingly, assuming all other revenue recognition criteria are met, revenues from perpetual licenses are recognized upon delivery of the software using the residual method in accordance with ASC 985.

Software maintenance agreements provide for technical support and the right to unspecified enhancements and upgrades on a “when-and-if-available” basis.

Post-contract support revenues on perpetual agreements are recognized ratably over the term of the support period (generally one year).

Deployment, training, and other service revenues are recognized as the related services are provided.

Any unrecognized portion of amounts paid in advance for licenses and services is recorded as deferred revenue.

Equity-Based Compensation

Upon consummation of the IPO, vested Class B Units were exchanged by EQT for shares of common stock of the Company held by EQT, and unvested Class B Units were exchanged for shares of restricted common stock issued by the Company.

While the Class B Units are no longer outstanding, the grant date fair value of the time-based vesting Class B Units will continue to be recognized over the remaining service period of the restricted common stock, and therefore our methods for estimating fair value of our Class B Units remains relevant.

We estimated the fair value of the Class B Units granted by EQT to certain Company employees using the Monte Carlo option pricing model in 2019 and the Black-Scholes option-pricing model in 2018.

Equity-based compensation expense is calculated based on the fair value on the grant date.

Upon consummation of the IPO, vested class B units were exchanged for shares of restricted common stock issued by the Company.

Although the class B units are not longer outstanding, the grant date fair value of the time based vested class B units will continue to be recognized over the remaining service period of the restricted common stock, and therefore our methods for estimating fair value of our class B units remains relevant.

We estimated the fair value of the class B units using the Monte Carlo option pricing model in 2019 and the Black-Scholes option-pricing model in 2018.

In order to derive an estimate of each security class of EQT, we first determined the enterprise value of EQT.

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Treasury zero-coupon issue with a term that closely approximates the expected life of the option grant at the date nearest the option grant date.

The concluded fair value of the Class A Units was taken into consideration as the strike price of some of the newly issued Class B Units through an iterative process, in order to determine the fair value of those newly issued Class B Units, since management’s intent was to issue those units as at-the-money equity awards.

The assumptions underlying these valuations represent management’s best estimates, which involve inherent uncertainties and the application of management’s judgment.

As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our equity-based compensation expense could be materially different.

Following the completion of the IPO, the fair value of our common stock is determined based on the quoted market price.

Goodwill and Other Intangible Assets

We assess goodwill for impairment at least annually, during the fourth quarter based on balances as of October 1st, and more frequently on an interim basis if we believe indicators of impairment exist.

Goodwill is tested for impairment at the reporting unit level, which is one level below or the same as an operating segment.

When testing goodwill for impairment, the Company first performs a qualitative assessment to determine whether it is necessary to perform step one of a two-step annual goodwill impairment test for each reporting unit.

The Company is required to perform step one only if it concludes that it is more likely than not that a reporting unit’s fair value is less than its carrying value.

Should this be the case, the first step of the two-step process is to identify whether a potential impairment exists by comparing the estimated fair values of the Company’s reporting units with their respective book values, including goodwill.

If the estimated fair value of the reporting unit exceeds book value, goodwill is considered not to be impaired, and no additional steps are necessary.

If, however, the fair value of the reporting unit is less than book value, then the second step is performed to determine if goodwill is impaired and to measure the amount of impairment loss, if any.

The amount of the impairment loss is the excess of the carrying amount of the goodwill over its implied fair value.

The estimate of implied fair value of goodwill is primarily based on an estimate of the discounted cash flows expected to result from that reporting unit but may require valuations of certain internally generated and unrecognized intangible assets such as the Company’s software, technology, patents, and trademarks.

If the carrying

amount of goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess.

The application of an interim or the annual goodwill impairment test begins with the identification of reporting units, which requires judgment.

We determined that we have four reporting units:

the software reporting unit (“Software”), the SimCyp reporting unit (“SimCyp”), the Integrated Drug Development reporting unit (“IDD”), and the regulatory writing reporting unit (“Regulatory Writing”), which are within a single operating segment of the Company.

The process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment.

Our review of impairment starts with performing a qualitative assessment to determine whether events or circumstances lead to a determination that it is more-likely-than-not that the fair value of the reporting units are less than their carrying amounts.

Our qualitative assessment of the recoverability of goodwill considers various macroeconomic, industry-specific and company-specific factors.

These factors include:

(1) the nature of the business and the history of the Company and its reporting units from their inception;

(2) the economic outlook in general and the condition and outlook of the industry in which the Company and its reporting units operate;

(3) the financial condition of the Company and its reporting units;

(4) the earnings capacity of the Company and its reporting units;

(5) the dividend-paying capacity of the Company and its reporting units;

(6) whether goodwill or other intangible value exists within the Company and/or its reporting units;

(7) previous sales of the Company’s and/or reporting units’ stock and the size of the block of stock to be valued;

and (8) the market prices of stocks of corporations engaged in the same or a similar line of business having their stocks actively traded in a free and open market, either on an exchange or over-the-counter.

After assessing the totality of events and circumstances, if we determine that it is not more-likely-than-not that the fair values of our reporting units are less than their net book values, no further assessment is performed.

If we determine that it is more-likely-than-not that the fair values of our reporting units are less than carrying value or if we elect to bypass the qualitative assessment, we proceed to a quantitative assessment or test of goodwill.

If a quantitative assessment of goodwill is required, the determination of the fair value of a reporting unit will involve the use of significant estimates and assumptions.

Our quantitative goodwill impairment test uses both the income approach and the market approach to estimate fair value.

The income approach is based on the discounted cash flow method that discounts forecasted future cash flows expected to be generated which are based on the Company's estimates of financial performance including revenues, adjusted EBITDA, taxes, and working capital and capital asset requirements.

When performing our market approach, we rely specifically on the guideline public company method.

Our guideline public company method incorporates revenues and EBITDA multiples from publicly traded companies with operations and other characteristics similar to our entity.

If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.

We performed the annual goodwill impairment analysis during the fourth quarter.

The quantitative assessments resulted in no impairment as the estimated fair value of each reporting unit significantly exceeded its carrying value.

Our other intangible assets primarily consist of customer relationship assets, software products acquired in acquisitions, tradenames, software development costs, and non-compete agreements.

Other identifiable intangible assets with finite lives, such as software products acquired in acquisitions, non-compete agreements, tradenames, and customer relationship assets, are amortized over their estimated lives using either a straight-line method or a method based on pattern of expected economic benefit of the asset as follows:

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Software development costs are amortized on a product-by-product basis commencing on the date of general release of the products (for software to be marketed) or the date placed in service (for internal-use software).

JOBS Act Election

We qualify as an “emerging growth company” as defined in the JOBS Act.

An emerging growth company may take advantage of reduced reporting requirements that are not otherwise applicable to public companies.

These provisions include, but are not limited to:

● being permitted to present only two years of audited financial statements and only two years of related ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ in our periodic reports and registration statements, including in this filing;

● not being required to comply with the auditor attestation requirements on the effectiveness of our internal controls over financial reporting;

● not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion of critical audit matters);

● reduced disclosure obligations regarding executive compensation arrangements in our periodic reports, proxy statements and registration statements, including in this filing;

● exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

We may use these provisions until the last day of our fiscal year in which the fifth anniversary of the completion of our IPO occurs.

However, if certain events occur prior to the end of such five-year period, including if we become a “large accelerated filer,” our annual gross revenues exceed $1.07 billion, or we issue more than $1.0 billion of non-convertible debt in any three-year period, we will cease to be an emerging growth company prior to the end of such five-year period.

The JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards until those standards apply to private companies.

We have elected to take advantage of the benefits of this extended transition period and, therefore, we will not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards.

Until the date that we are no longer an emerging growth company or affirmatively and irrevocably opt out of the exemption provided by Section 7(a)(2)(B) of the Securities Act of 1933, as amended, upon issuance of a new or revised accounting standard that applies to our financial statements and that has a different effective date for public and private companies, we will disclose the date on which we will adopt the recently issued accounting standard.

Recently Adopted and Issued Accounting Standards

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What changed 10-K

Item 7. Management’s Discussion and Analysis