What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-05 compared with 2021-11-09 · 178 added, 261 removed, 211 unchanged (68% of the section changed)

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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.

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 period to period, 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, technology, and services to transform traditional drug discovery and development.

Biosimulation is a powerful technology used to conduct virtual trials using virtual patients to predict how drugs behave in different individuals.

Biopharmaceutical companies use our proprietary biosimulation software throughout drug discovery and development to inform critical decisions that not only save significant time and money but also advance drug safety and efficacy, improving millions of lives each year.

As a global leader in biosimulation based on 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.

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.

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.

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.

Other Public Offering

On September 13, 2021, the Company 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 the Company’s common stock, including an additional 3,000,000 shares of common stock pursuant to the full exercise of the underwriters’ option to purchase additional shares.

The Company 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.

We have expanded into 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 SaaS-based value communication tools.

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 Offering

On March 29, 2021, we completed an underwritten secondary public offering in which certain selling stockholders, including EQT, sold 11,500,000 shares of our common stock, which included 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 cost of $1.1 million 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 we sold 4,500,000 shares of our common stock, and certain selling stockholders sold 18,500,000 shares of our common stock, which included 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 our 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 our 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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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.

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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 September 30, 2021, there have been no material adverse impacts on the Company’s financial condition, results of operations or cash flows.

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 workforce, delay or cancellation of projects due to disruption of our customers’ clinical trials, or a sustained economic downturn.

Although the spread of the virus has subsided in much of the world, the extent to which the COVID-19 pandemic may continuet to impact the global economy and our business in the future remains uncertain and cannot be predicted.

As of March 31, 2022, we believe there have been and will be short-term but immaterial impacts on our business due to the Omicron variant of COVID-19.

The presence of the Omnicron variant has caused a slowdown in closing out clinical trials and delays in regulatory services projects.

Furthermore, the increase in COVID-19 cases associated with the Omicron variant has impacted our and our customer’s workforce, resulting in unexpected but temporary reductions in employee utilization rates due to illness.

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

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.

Management uses various financial metrics, including total revenues, income from operations, net income, and certain metrics that are not required by, or presented in accordance with, GAAP, such as Adjusted EBITDA, Adjusted Net Income, and Adjusted Diluted Earnings Per Share, to measure and assess the performance of our business, to evaluate the effectiveness of our business strategies, to make budgeting decisions, to make certain compensation decisions, and to

compare our performance against that of other peer companies using similar measures.

We believe that presentation of the GAAP and the non-GAAP metrics in this filing will aid investors in understanding our business.

Management measures operating performance based on Adjusted EBITDA defined for a particular period as net income (loss) excluding interest expense, provision (benefit) for income taxes, depreciation and amortization expense, intangible asset amortization, equity-based compensation expense, 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 and adjusted net income are non-GAAP measure and are presented for supplemental purposes only and should not be considered as an alternative or substitute to financial information presented in accordance with GAAP.

Adjusted EBITDA and adjusted net income have certain limitations in that they do 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 these measures and may calculate it differently than as presented on this report, limiting the usefulness as comparative measures.

The following table reconciles Net income (loss) to Adjusted EBITDA:

THREE MONTHS ENDED SEPTEMBER 30,

NINE MONTHS ENDED SEPTEMBER 30,

(in thousands)

Management also measures operating performance based on Adjusted Net Income defined for a particular period as net income (loss) excluding, equity-based compensation expense, amortization of acquisition-related intangible assets, acquisition and integration expense, and other items not indicative of our ongoing operating performance.

Further, management measures operating performance based on Adjusted Diluted Earnings Per Share defined for a particular period as Adjusted Net Income divided by the weighted-average diluted common shares outstanding.

We believe Adjusted EBITDA, Adjusted Net Income, and Adjusted Diluted Earnings Per Share are helpful to investors, analysts, and other interested parties because they can assist in providing a more consistent and comparable overview of our operations across our historical periods.

In addition, these measures are frequently used by analysts, investors, and other interested parties to evaluate and assess performance.

Adjusted EBITDA, Adjusted Net Income, and Adjusted Diluted Earnings Per Share are non-GAAP measures and are presented for supplemental purposes only and should not be considered as an alternative or substitute to financial information presented in accordance with GAAP.

Adjusted EBITDA, Adjusted Net Income and Adjusted Diluted Earnings Per Share have certain limitations in that they do not include the impact of certain expenses that are reflected in our consolidated statements of operations that are necessary to run our business.

Other companies, including other companies in our industry, may not use these measures and may calculate both differently than as presented, limiting the usefulness as a comparative measure.

The following table reconciles Net income to Adjusted EBITDA:

THREE MONTHS ENDED MARCH 31,

(in thousands)

Net (loss) income (a)

Net income (a)

Interest expense (a)

Interest income (a)

(Benefit) provision for income taxes (a)

Provision for income taxes (a)

Depreciation and amortization expense (a)

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Equity-based compensation expense (b)

Acquisition-related expenses (c)

Integration expense (d)

Acquisition-related expenses (d)

Transaction-related expenses (e)

Severance expense (f)

Reorganization expense (g)

Loss on disposal of fixed assets (h)

Executive recruiting expense (i)

First-year Sarbanes-Oxley implementation costs (j)

Loss on disposal of fixed assets (f)

First-year Sarbanes-Oxley implementation costs (g)

Adjusted EBITDA

The following table reconciles Net income (loss) to Adjusted Net Income:

THREE MONTHS ENDED SEPTEMBER 30,

NINE MONTHS ENDED SEPTEMBER 30,

(in thousands)

The following table reconciles Net income to Adjusted Net Income:

THREE MONTHS ENDED MARCH 31,

(in thousands)

Net (loss) income (a)

Net income (a)

Currency (gain) loss (a)

Equity-based compensation expense (b)

Acquisition-related expenses (c)

Integration expense (d)

Amortization of acquisition-related intangible assets (c)

Acquisition-related expenses (d)

Transaction-related expenses (e)

Severance expense (f)

Reorganization expense (g)

Loss on disposal of fixed assets (h)

Executive recruiting expense (i)

First-year Sarbanes-Oxley implementation costs (j)

Income tax expense impact of adjustments (k)

Loss on disposal of fixed assets (f)

First-year Sarbanes-Oxley implementation costs (g)

Income tax expense impact of adjustments (h)

Adjusted Net Income

The following table reconciles Diluted Earnings Per Share to Adjusted Diluted Earnings Per Share:

THREE MONTHS ENDED SEPTEMBER 30,

NINE MONTHS ENDED SEPTEMBER 30,

(in thousands)

Diluted earnings per share (a)

THREE MONTHS ENDED MARCH 31,

Net income (a)

Currency (gain) loss (a)

Equity-based compensation expense (b)

Acquisition-related expenses (c)

Integration expense (d)

Amortization of acquisition-related intangible assets (c)

Acquisition-related expenses (d)

Transaction-related expenses (e)

Severance expense (f)

Reorganization expense (g)

Loss on disposal of fixed assets (h)

Executive recruiting expense (i)

First-year Sarbanes-Oxley implementation costs (j)

Income tax expense impact of adjustments (k)

Loss on disposal of fixed assets (f)

First-year Sarbanes-Oxley implementation costs (g)

Income tax expense impact of adjustments (h)

Adjusted Diluted Earnings Per Share

Diluted weighted average common shares outstanding

Effect of potentially dilutive shares outstanding (l)

Effect of potentially dilutive shares outstanding (i)

Diluted weighted average common shares outstanding

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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.

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

(e) Represents costs associated with directly expensed costs from the stock offerings and debt modification.

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

(g) Represents expense related to reorganization, including legal entity reorganization.

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

(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.

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

(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.

(d) Represents costs associated with mergers and acquisitions and any retention bonuses pursuant to the acquisitions.

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

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

(g) 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.

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

(i) Represents potentially dilutive shares that were included from the Company's GAAP diluted weighted average common shares outstanding.

Components of Results of Operations

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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.

Any subscription revenue paid upfront that is not recognized in the current period is included in deferred revenue in our consolidated balance sheet until earned.

● Software maintenance :

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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 service arrangements are time and materials, fixed

fee, or prepaid.

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

Our service arrangements are time and materials, fixed fee, or prepaid.

Revenues are recognized over the time services are performed for time and materials, and over time by estimating progress to completion for fixed fee and prepaid services.

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● 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.

Sales and marketing expense consists primarily of employee-related expenses, equity-based compensation, sales commissions, brand development, advertising, travel-related expenses and industry conferences and events.

We plan to continue to invest in sales and marketing to increase penetration of our existing client base and expand to new clients.

● Research and Development .

R&D expense accounts for a significant portion of our operating expenses.

Research and development 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.

Research and development expenses consist primarily of employee-related expenses, equity-based compensation, third-party consulting, allocated software costs and tax credits.

We plan to continue to invest in our R&D efforts to enhance and scale our software product offerings by development of new features and increased functionality.

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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 the amount of our general and administrative expense to increase for the foreseeable future.

Those costs include additional director and officer liability insurance expenses, 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 the dollar 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 .

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● Interest Expense .

Interest expense consists primarily of interest expense associated with the Credit Facilities, including amortization of debt issuance costs and discounts.

Interest expense consists primarily of interest expense associated with the Credit Agreement, including amortization of debt issuance costs and discounts.

We expect interest expense to decline as a result of lower outstanding indebtedness going forward.

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

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.

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.

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

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.

Subsequent to the quarter end, on October 1, 2021, we completed our acquisition of Pinnacle 21, LLC (“Pinnacle”), a company that develops advanced software for standards-based data management for regulatory submissions, for total consideration of $250.0 million cash and 2,239,717 shares of restricted common stock of the Company.

We expect to complete the initial accounting for the acquisition of Pinnacle 21, LLC, including the allocation of purchase consideration, in the fourth quarter of 2021.

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.

On January 3, 2022, we completed the acquisition of Integrated Nonclinical Development Solutions, Inc., a company that provides the SEND Explorer software and drug development consulting.

This acquisition, for a total consideration of $8,148, qualified as a business combination.

The business combination was not material to the Company’s condensed consolidated financial statements.

Based on the our preliminary purchase price allocation, approximately $2.5 million,

$0.9 milllion and $2.9 million of the purchase price was assigned to customer relationships, acquired software, and goodwill, respectively.

For more information about our acquisitions, see NOTE 5.

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

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 nine months ended September 30, 2021 to the three and nine months ended September 30, 2020.

Three Months Ended September 30, 2021 Versus Three Months Ended September 30, 2020

The following table summarizes our unaudited statements of operations data for the three months ended September 30, 2021 and 2020:

THREE MONTHS ENDED SEPTEMBER 30,

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 months ended March 31, 2022 to the three months ended March 31, 2021.

Three Months Ended March 31, 2022 Versus Three Months Ended March 31, 2021

The following table summarizes our unaudited statements of operations data for the three months ended March 31, 2022 and 2021:

THREE MONTHS ENDED MARCH 31,

( in thousands)

Total revenues

Revenues increased $13.6 million, or 23%, to $73.9 million for the three months ended September 30, 2021 as compared to the same period in 2020.

The increase in revenues was due to growth in our technology-enabled services and software product offerings from strong renewal rates, client expansion and new customers.

Software revenue increased $1.6 million, or 9%, to $19.3 million for the three months ended September 30, 2021 as compared to the same period in 2020, driven primarily by $1.5 million growth in the revenues attributable to maintaining high net revenue retention rates, renewal rates and new customers for our core software products.

Services revenue increased by $12.1 million, or 28%, to $54.7 million for the three months ended September 30, 2021 as compared to the same period in 2020, driven by growth in our technology-enabled services which resulted from strong growth in biosimulation and regulatory services.

Revenues increased $14.8 million, or 22%, to $81.6 million for the three months ended March 31, 2022 as compared to the same period in 2021.

Excluding $6.0 million revenue from Pinnacle 21, which was acquired in late 2021, the revenues increased $8.9 million, or 13%.

The overall increase in revenues was primarily due to growth in our technology-driven services and software product offerings from strong renewal rates, client expansion, and new customers as well as business acquisitions.

Software revenues increased $7.3 million, or 33%, to $29.2 million for the three months ended March 31, 2022 as compared to the same period in 2021.

Excluding $5.6 million revenue from Pinnacle 21, the revenues from software increased $1.7 million, or 8%.

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 revenues increased $7.5 million, or 17%, to $52.4 million for the three months ended March 31, 2022 as compared to the same period in 2021.

The growth in overall services revenue is primarily attributable to strong growth in biosimulation and regulatory services from client expansions and new customers.

Cost of Revenues

THREE MONTHS ENDED SEPTEMBER 30,

THREE MONTHS ENDED MARCH 31,

(in thousands)

Cost of revenues

Cost of revenues increased by $5.7 million, or 25%, to $28.8 million for the three months ended September 30, 2021 as compared to the same period in 2020.

The increase was primarily due to a $4.0 million increase in employee-related costs resulting from billable head count growth and a $1.4 million increase in stock-based compensation costs.

The remaining increase is primarily due to consulting costs.

Cost of revenues increased by $6.8 million, or 26%, to $32.8 million for the three months ended March 31, 2022 as compared to the same period in 2021.

The increase was primarily due to a $4.5 million increase in employee-related costs resulting from billable head count growth, a $1.7 million increase in intangible assets amortization, a $0.9 million increase in stock-based compensation cost, and a $0.7 million increase related to cost of licenses and other operating expenses, partially offset by a $1.2 million decrease in consulting and professional services.

Sales and Marketing Expenses

THREE MONTHS ENDED SEPTEMBER 30,

THREE MONTHS ENDED MARCH 31,

(in thousands)

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% of total revenues

Sales and marketing expenses increased by $2.0 million, or 64%, to $5.1 million for the three months ended September 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.

Sales and marketing expenses increased by $2.4 million, or 63%, to $6.1 million for the three months ended March 31, 2022 as compared to the same period in 2021.

Sales and marketing expenses increased primarily due to a $1.8 million increase in employee-related costs resulting from head count growth, a $0.3 million increase in stock based compensation cost, and a $0.3 million increase in professional and consulting costs, and other marketing costs.

Research and Development Expenses

THREE MONTHS ENDED SEPTEMBER 30,

THREE MONTHS ENDED MARCH 31,

(in thousands)

1 unchanged sentence

% of total revenues

Research and development expenses increased by $1.2 million, or 37%, to $4.5 million for the three months ended September 30, 2021 as compared to the same period in 2020.

The increase in R&D expenses was primarily due to a $0.9 million increases in employee-related costs primarily resulting from head count growth and a $0.5 million increase in stock-based compensation costs.

Research and development expenses increased by $2.8 million, or 60%, to $7.5 million for the three months ended March 31, 2022 as compared to the same period in 2021.

The increase in R&D expenses was primarily due to a $2.8 million increases in employee-related costs primarily resulting from head count growth and a $1.0 million increase in stock-based compensation cost, partially offset by a $1.0 million increase in capitalized cost in research and development.

General and Administrative Expenses

THREE MONTHS ENDED SEPTEMBER 30,

THREE MONTHS ENDED MARCH 31,

(in thousands)

1 unchanged sentence

% of total revenues

General and administrative expenses increased by $12.8 million, or 95%, to $26.2 million for the three months ended September 30, 2021 as compared to the same period in 2020.

The increase in general and administrative expenses was primarily due to a $7.5 million increase in business acquisition costs, a $4.6 million increase in stock-based compensation costs, a $0.7 million increase in insurance expenses, and a $0.3 milllion increase in employee related costs.

General and administrative expenses increased by $1.8 million, or 11%, to $18.3 million for the three months ended March 31, 2022 as compared to the same period in 2021.

The increase in general and administrative expenses was primarily due to a $1.5 million increase in employee-related costs resulting from head count growth, a $0.2 million increase in stock-

based compensation costs, a $0.9 million increase in professional and consulting expenses, partially offset by a $1.0 million decrease in acquisition related costs.

Intangible Asset Amortization

THREE MONTHS ENDED SEPTEMBER 30,

THREE MONTHS ENDED MARCH 31,

(in thousands)

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% of total revenues

Intangible asset amortization expense increased by $0.2 million, or 2%, to $9.6 million for the three months ended September 30, 2021 as compared to the same period in 2020.

Intangible asset amortization expense increased by $0.7 million, or 7%, to $10.1 million for the three months ended March 31, 2022 as compared to the same period in 2021.

The increase in intangible asset amortization expense is primarily due to increased amortization cost from the acquired intangible assets.

Depreciation and Amortization Expense

THREE MONTHS ENDED SEPTEMBER 30,

(in thousands)

Depreciation and amortization

% of total revenues

Depreciation and amortization expense of $0.5 million was relatively flat for the three months ended September 30, 2021 as compared to the same period in 2020.

Interest Expense

THREE MONTHS ENDED SEPTEMBER 30,

(in thousands)

Interest expense

% of total revenues

Interest expense decreased $2.6 million, or 45%, to $3.3 million for the three months ended September 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 third quarter of 2021 compared to the same period in 2020.

Miscellaneous, net

THREE MONTHS ENDED SEPTEMBER 30,

(in thousands)

Miscellaneous, net

% of total revenues

Miscellaneous income was $0.7 million for the three months ended September 30, 2021 as compared to miscellaneous expenses of $0.0 million for the same period in 2020.

The change was primarily due to $0.6 million currency translation gains.

Provision for Income Taxes

THREE MONTHS ENDED SEPTEMBER 30,

( in thousands)

Provision for income taxes

Effective income tax rate

Our income tax benefit was $1.6 million, resulting in an effective income tax rate of 48% for the three months ended September 30, 2021 as compared to income tax expense of $0.4 million, or an effective income tax rate of 22%, for the same period in 2020.

Our income tax expense for the three months ended September 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 and the overall increase in pre-tax book loss.

Our income tax expense for the three months ended September 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 SEPTEMBER 30,

(in thousands)

Net income (loss)

Net loss for the third quarter of 2021 was $1.8 million, compared to a net income of $1.2 million in the third quarter of 2020.

The loss was primarily due to a $7.0 million increase in stock-based compensation expense, a $7.5 million increase in acquisition cost, and other employee related costs.

The loss was partially offset by higher revenues and lower interest expense in the third quarter of 2021.

Nine Months Ended September 30, 2021 Versus Nine Months Ended September 30, 2020

The following table summarizes our unaudited statements of operations data for the nine months ended September 30, 2021 and 2020:

NINE MONTHS ENDED SEPTEMBER 30,

( in thousands)

Total revenues

Revenues increased $31.9 million, or 18%, to $210.8 million for the nine months ended September 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 strong renewal rates, client expansions and new customers in both our technology-enabled service product lines and software.

Software revenue increased by $5.4 million, or 10%, to $61.3 million for the nine months ended September 30, 2021 as compared to the same period in 2020, driven primarily by 10% or $5.2 million growth in revenue from subscriptions and license products offerings.

The revenue growth was driven by strong renewal rates and new customers from software products.

Services revenue increased by $26.5 million, or 22%, to $149.5 million for the nine months ended September 30, 2021 as compared to the same period in 2020, driven by growth in our technology-enabled biosimulation and regulatory services.

Cost of Revenues

NINE MONTHS ENDED SEPTEMBER 30,

(in thousands)

Cost of revenues

Cost of revenues increased by $16.5 million, or 25%, to $82.3 million for the nine months ended September 30, 2021 as compared to the same period in 2020.

The increase was primarily due to a $10.4 million increase in employee-related costs resulting from billable head count growth, a $3.6 million increase in stock-based compensation costs, and a $2.3 million increase in consulting costs.

Sales and Marketing Expenses

NINE MONTHS ENDED SEPTEMBER 30,

(in thousands)

Sales and marketing

% of total revenues

Sales and marketing expenses increased by $4.7 million, or 53%, to $13.4 million for the nine months ended September 30, 2021 as compared to the same period in 2020.

Sales and marketing expenses increased primarily due to a $2.9 million increase in employee-related costs resulting from head count growth and a $1.5 million increase in stock-based compensation costs.

Research and Development Expenses

NINE MONTHS ENDED SEPTEMBER 30,

(in thousands)

Research and development

% of total revenues

Research and development expenses increased by $4.7 million, or 52%, to $13.9 million for the nine months ended September 30, 2021 as compared to the same period in 2020.

The increase in R&D expenses was primarily due to a $2.9 million increases in employee-related costs resulting from head count growth and a $1.4 million increase in stock-based compensation costs.

The remaining increases were primarily due to an increase in consulting costs and an increase in cost due to lower software capitalization.

General and Administrative Expenses

NINE MONTHS ENDED SEPTEMBER 30,

(in thousands)

General and administrative

% of total revenues

General and administrative expenses increased by $24.7 million, or 68%, to $60.8 million for the nine months ended September 30, 2021 as compared to the same period in 2020.

The increase in general and administrative expenses was primarily due to a $12.0 million increase in stock-based compensation costs, $9.4 million increase in acquisition costs, and $2.1 million increase in insurance costs.

The remaining increases are due to increases in public company costs, stock

offering costs, first-year Sarbanes-Oxley implementation costs, and executive recruiting costs.

The increases were partially offset by decreases in consulting cost, travel and entertainment related costs, office supplies and facilities costs.

Intangible Asset Amortization Expense

NINE MONTHS ENDED SEPTEMBER 30,

(in thousands)

Intangible asset amortization

% of total revenues

Intangible asset amortization expense increased by $0.5 million, or 2%, to $28.5 million for the nine months ended September 30, 2021 as compared to the same period in 2020.

The increase in intangible asset amortization expense is due to $0.3 million in amortization cost in acquired intangibles and $0.2 million increase in amortization cost in capitalized software development.

Depreciation and Amortization Expense

NINE MONTHS ENDED SEPTEMBER 30,

THREE MONTHS ENDED MARCH 31,

(in thousands)

1 unchanged sentence

% of total revenues

Depreciation and amortization expense was $1.7 million for the nine months ended September 30, 2021, a decrease of $0.1 million, or 8% as compared to the same period in 2020.

The decrease was primarily due to decrease in depreciation in leasehold improvement and computer equipment.

Depreciation and amortization expense of $0.5 million was relatively flat for the three months ended March 31, 2022 as compared to the same period in 2021.

Interest Expense

NINE MONTHS ENDED SEPTEMBER 30,

THREE MONTHS ENDED MARCH 31,

(in thousands)

1 unchanged sentence

% of total revenues

Interest expense decreased by $6.3 million, or 32%, to $13.5 million for the nine months ended September 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 nine 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.

Interest expense decreased by $0.7 million, or 18%, to $3.2 million for the three months ended March 31, 2022 as compared to the same period in 2021.

The decrease in interest expense was primarily due to lower interest rate on the term loan on our credit facilities as well as the lower interest expense on the interest swap in the first quarter of 2022 compared to the same period in 2021.

Miscellaneous, net

NINE MONTHS ENDED SEPTEMBER 30,

THREE MONTHS ENDED MARCH 31,

(in thousands)

1 unchanged sentence

% of total revenues

Miscellaneous incomes decreased by $0.3 million for the nine months ended September 30, 2021 as compared for the same period in 2020.

The decrease was primarily due to $0.3 million loss recorded in the current period for disposal of fixed assets.

Miscellaneous income increased by $1.0 million, to $0.8 million for the three months ended March 31, 2022 as compared to the same period in 2021.

The increase in miscellaneous income was primarily due to $0.9 million increase on foreign currency gains.

Provision for Income Taxes

NINE MONTHS ENDED SEPTEMBER 30,

THREE MONTHS ENDED MARCH 31,

( in thousands)

1 unchanged sentence

Effective income tax rate

Our income tax expense was $0.3 million, resulting in an effective income tax rate of (11)% for the nine months ended September 30, 2021 as compared to income tax expense of $4.7 million, or an effective income tax rate of 48%, for the same period in 2020.

Our income tax expense for the nine months ended September 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 and the overall increase in pre-tax book loss.

Our income tax expense for the nine months ended September 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)

NINE MONTHS ENDED SEPTEMBER 30,

Our income tax expense was $1.5 million, resulting in an effective income tax rate of 41% for the three months ended March 31, 2022 as compared to income tax expense of $0.5 million, or an effective income tax rate of 33%, for the same period in 2021.

Our income tax expense for the three months ended March 31, 2022 and 2021 was primarily due to the tax effects of U.S.

pre-tax income, the impact of non-deductible items, and the effects of tax elections made for U.K.

earnings, and the relative mix of domestic and international earnings.

THREE MONTHS ENDED MARCH 31,

(in thousands)

Net income (loss)

Net loss was $3.6 million for the nine months ended September 30, 2021 as compared to net income of $5.1 million for the same period in 2020.

The loss was primarily due to $18.6 million increase in stock based compensation expense, $15.7 million increase in employee related costs, and $9.4 million increase in acquisition costs.

The loss was partially offset by increased revenue and lower interest expense in the first nine months of 2021.

Net income increased by $1.2 million, or 110%, to $2.2 million for the three months ended March 31, 2022 as compared to a net income of $1.1 million in the same period of 2021.

The $1.2 increase in net income was primarily due to a $14.8 million increase in total revenue and a $1.7 decrease in other expense, partially offset by a $6.8 million increase in cost of revenue, a $7.5 million increase in operating expenses, and $1.0 million increase in tax expense.

Liquidity and Capital Resources

We have consistently generated positive cash flow from operations, providing $9.8 million and $4.9 million as a source of funds for three month ended March 31, 2022 and 2021.

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 for period ended and as of March 31 2022 and December 31, 2021.

March 31, 2022

December 31, 2021

(in thousands)

Net cash from operating activities

Cash and cash equivalents (1)

Net proceeds from issuing common stock

Term loan credit facilities

Revolving line of credit

(1) Cash balance as of March 31, 2022 inclu ded $44.4 million cash a nd cash equivalents held outside of the United States.

Our material cash requirements from known contractual obligations are principal and interest paymemts of long-tem debt.

We also have future cash obligations $15.6 million for lease contracts, which have remaining terms from one to six years.

The principal amount of long-term debt outstanding as of March 31, 2022 matures in the following years:

Remainder of 2022

We assess our liquidity in terms of our ability to generate adequate amounts of cash to meet current and future needs.

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

Our expected primary uses on a short-term and long-term basis are for repayment of debt, interest payments, working capital, capital expenditures, geographic or service offering expansion, acquisitions, investments, and other general corporate purposes.

We 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 September 30, 2021, we had cash and cash equivalents $416.9 million, of which $35.6 million represents cash and cash equivalents held outside of the United States.

We believe we will meet short and longer-term expected future cash requirements and obligations through a combination of cash flows from operating activities, available cash balances, and potential future equity or debt transactions.

Our future capital requirements, however, will depend on many factors, including funding for potential acquisitions, investments, and other growth and strategic opportunities, which could increase our cash requirements.

While we believe we have, and will be able to generate, sufficient liquidity to fund our operations for the foreseeable future, our sources of liquidity could be affected by factors described under “Risk Factors” in the 2021 10K.

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

NINE MONTHS ENDED SEPTEMBER 30,

THREE MONTHS ENDED MARCH 31,

(in thousands)

1 unchanged sentence

Net cash used in investing activities

Net cash provided by (used in) financing activities

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

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

Net cash used in financing activities

Effect of foreign exchange rate changes on cash and cash equivalents, and restricted cash

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

Cash paid for interest

1 unchanged sentence

Operating Activities

Cash provided by operating activities in the first nine months of 2021 was $39.6 million, compared to $32.1 million in the same period of 2020.

The $7.4 million increase in cash from operating activities was primarily due to decreased interest payments for the current period and higher cash collected from revenue generated sales activities, partially offset by cash outflow from higher employee related expenses.

Our cash flows from operating activities primarily include net income adjusted for (i) non-cash items included in net income, such as provisions for credit losses, depreciation and amortization, stock-based compensation, deferred taxes and other non-cash items and (ii) changes in the balances of operating assets and liabilities.

Net cash provided by operating activities in the first three months of 2022 was $9.8 million, compared to $4.9 million in the same period of 2021.

The $4.9 million increase in cash from operating activities was primarily due to higher profitability as well as higher noncash depreciation, amortization expenses, and stock based compensation cost.

Investing Activities

Cash used by investing activities in the first nine months of 2021 was $20.6 million, an increase of $13.4 million, compared to $7.2 million in the same period of 2020.

During the nine months ended September 30, 2021, investing activities used cash primarily for investing in business acquisitions, capitalized software development, and capital expenditures to support our growth.

Net cash used by investing activities in the first three months of 2022 was $8.7 million, an increase of $5.2 million, compared to $3.5 million in the same period of 2021.

The change in investing activities was primarily due to $4.3 million

increase in cash payments in connection with business acquisitions, $1.3 million increase in cash utilized in capitalized software development, and capital expenditures to support our growth.

Financing Activities

Cash provided by financing activities in the first nine months of 2021 was $127.0 million, compared to $24.1million cash used in the same period of 2020.

The $151.1 million increase in cash from financing activities was primarily due to cash received from stock offerings in September 2021 and the principal portion payment on a term loan debt during first nine months in 2020.

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 various factors, such as changes to the U.S.

economic condition, market interest rates, the Federal Reserve monetary policy, other government policies, etc.

Net cash used by financing activities in the first three months of 2022 was $1.5 million, compared to $0.9 million cash used in the same period of 2021.

The $0.7 million higher cash utilized for financing ac tivities was primarily due to payments on interest swaps liabilities and payments of taxes on shares withheld for employee taxes in the first quarter 2022.

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.

The term loan was originally scheduled to mature on August 14, 2024, and the commitments under the revolving credit facility was originally scheduled to mature on August 14, 2022.

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.

10 unchanged sentences

All obligations under the Credit Agreement, and the guarantees of those obligations, are secured on a first lien basis, subject to certain exceptions, by substantially all of our assets and the assets of the other guarantors.

As of September 30, 2021, we had $301.2 million of outstanding borrowings on the term loan, and $100.0 million of availability under the revolving credit facility under the Credit Agreement.

As of September 30, 2021, we were in compliance with the covenants of the Credit Agreement.

As of March 31, 2022, we had $299.7 million of outstanding borrowings on the term loan, and $100.0 million of availability under the revolving credit facility under the Credit Agreement, and outstanding letters of credit of $0.1 million under the Credit Agreement.

As of March 31, 2022, we were in compliance with the covenants of the Credit Agreement.

Contractual Obligations and Commercial Commitments

There have been no material changes to our contractual obligations during the nine months ended September 30, 2021 from those disclosed in our Annual Report on Form 10-K, except for payment made in the ordinary course of business.

We recorded income tax benefit of $1.6 million and income tax expense $0.3 million for the three and nine months ended September 30, 2021, respectively, and income tax expense of $0.4 million and $4.7 million for the three and nine months ended September 30, 2020, respectively.

As of September 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.

There have been no material changes to our contractual obligations during the three months ended March 31, 2022 from those disclosed in our Annual Report on Form 10-K, except for payment made in the ordinary course of business.

We recorded income tax expense of $1.5 million for the three months ended March 31, 2022 and income tax expense of $0.5 million for the three months ended March 31, 2021.

As of March 31, 2022, 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.

We had federal and state R&D tax credit carryforwards of approximately $1.5 million and $0.4 million, respectively, to offset future income taxes, which expire between 2038 and 2041.

1 unchanged sentence

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.

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.

3 unchanged sentences

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

As of September 30, 2021, the valuation allowance remained unchanged from December 31, 2020.

As of March 31, 2022, the valuation allowance remained unchanged from December 31, 2021.

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

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, that have, or are reasonably likely to have, a material effect on our current or future financial condition, results of operations, liquidity, capital expenditures or capital resources.

Critical Accounting Estimates

Our accounting policies are more fully described in Note 2, “Summary of Significant Accounting Policies,” in our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021.

2 unchanged sentences

Actual results could differ materially from those estimates and assumptions.

We discussed the accounting policies that we believe are most critical to the portrayal of our results of operations and financial condition and require management’s most difficult, subjective and complex judgments in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our 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 nine months ended September 30, 2021.

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 2021 Form 10-K for the year ended December 31, 2021.

There were no significant changes to our critical accounting estimates during the three months ended March 31, 2022.

Recently Adopted and Issued Accounting Standards

1 unchanged sentence

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis