What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-09 compared with 2022-05-05 · 208 added, 113 removed, 276 unchanged (54% of the section changed)

9 unchanged sentences

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 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.

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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 did not offer any common stock in that 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.

21 unchanged sentences

Investments in Growth

We have invested and intend to continue to invest in expanding the breadth and depth of our solutions, including through acquisitions and international expansion.

We have invested and intend to continue to invest in expanding the breadth and depth of our solutions, including through

acquisitions and international expansion.

We expect to continue to invest (i) in scientific talent to expand our ability to deliver solutions across the drug development spectrum;

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and (iv) in other operational and administrative functions to support our expected growth.

We expect that our headcount will increase over time and also expect our total operating expenses will continue to increase over time, albeit, at a rate lower than revenue growth.

We expect that our headcount will increase over time and also expect our total operating expenses will continue to increase over time.

Our Operating Environment

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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 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.

The continued spread of COVID-19 may adversely impact our business, financial condition or results of operations As of June 30, 2022, we believe there have been and will be short-term impacts on our business due to new variants of COVID-19.

The presence of these new variants has caused a slowdown in closing out clinical trials and delays in regulatory services projects.

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, 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.

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.

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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.

Adjusted EBITDA, adjusted net income and adjusted diluted earnings per share have certain limitations in that they do not include the impact of certain expenses that are reflected in our condensed consolidated statements of operations 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,

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

THREE MONTHS ENDED JUNE 30,

SIX MONTHS ENDED JUNE 30,

(in thousands)

Net income (a)

Net income (loss) (a)

Interest expense (a)

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Loss on disposal of fixed assets (f)

First-year Sarbanes-Oxley implementation costs (g)

Executive recruiting expense (g)

First-year Sarbanes-Oxley implementation costs (h)

Adjusted EBITDA

The following table reconciles Net income to Adjusted Net Income:

THREE MONTHS ENDED MARCH 31,

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

THREE MONTHS ENDED JUNE 30,

SIX MONTHS ENDED JUNE 30,

(in thousands)

Net income (a)

Net income (loss) (a)

Currency (gain) loss (a)

4 unchanged sentences

Loss on disposal of fixed assets (f)

First-year Sarbanes-Oxley implementation costs (g)

Income tax expense impact of adjustments (h)

Executive recruiting expense (g)

First-year Sarbanes-Oxley implementation costs (h)

Income tax expense impact of adjustments (i)

Adjusted Net Income

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

THREE MONTHS ENDED MARCH 31,

Net income (a)

Currency (gain) loss (a)

THREE MONTHS ENDED JUNE 30,

SIX MONTHS ENDED JUNE 30,

(in thousands)

Diluted earnings per share (a)

Currency gain (a)

Equity-based compensation expense (b)

3 unchanged sentences

Loss on disposal of fixed assets (f)

First-year Sarbanes-Oxley implementation costs (g)

Income tax expense impact of adjustments (h)

Executive recruiting expense (g)

First-year Sarbanes-Oxley implementation costs (h)

Income tax expense impact of adjustments (i)

Adjusted Diluted Earnings Per Share

Diluted weighted average common shares outstanding

Effect of potentially dilutive shares outstanding (i)

Effect of potentially dilutive shares outstanding (j)

Diluted weighted average common shares outstanding

6 unchanged sentences

(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.

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

(h) 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.

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

(j) Represents potentially dilutive shares that were included from our GAAP diluted weighted average common shares outstanding.

Components of Results of Operations

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General and administrative expense consists of personnel-related expenses associated with our executive, legal, finance, human resources, information technology, and other administrative functions, including salaries, benefits, bonuses, and equity-based compensation.

General and administrative expense also includes professional fees for external legal, accounting and other consulting services, allocated overhead costs, and other general operating expenses.

General and administrative

expense also includes professional fees for external legal, accounting and other consulting services, allocated overhead costs, and other general operating expenses.

We expect to increase the size of our general and administrative staff to support the anticipated growth of our business.

As a public company, we expect to incur significant expenses on an ongoing basis that we did not incur as a private company.

Those costs include additional director and officer liability insurance expenses, as well as third-party and internal resources related to accounting, auditing, SOX compliance, legal, and investor and public relations expenses.

Those costs include additional director and officer liability insurance expenses, as well as third-party and internal resources related to accounting, auditing, Sarbanes-Oxley 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.

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federal and state income taxes and income taxes in certain foreign jurisdictions in which we conduct business.

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

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.

We expect income tax expense to increase over time as we continue to grow net income.

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

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

Based on our 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 that qualified as a business combination for a total consideration of $15.2 million.

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

Based on our purchase price allocation, approximately $7.4 million and $4.7 million of the purchase price was assigned to customer relationships and goodwill, respectively.

Based on our purchase price allocation, approximately $15.8 million, $103.0 million, $24.6 million and $180.9 million of the purchase price was assigned to trademark, acquired software, customer relationships, and goodwill, respectively.

Pinnacle has been included in our condensed 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.

This acquisition, for a total consideration of $8.0 million, qualified as a business combination.

The business combination was not significant to our condensed consolidated

financial statements.

Based on the our purchase price allocation, approximately $2.4 million, $1.0 million, $0.1 million, and $2.9 million of the purchase price was assigned to customer relationships, developed technology, non-compete agreements, and goodwill, respectively

For more information about our acquisitions, see Note 5.

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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 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,

We have included the results of operations of acquired companies in our consolidated results of operations from the date of their respective acquisitions, which impacts the comparability of our results of operations when comparing results for the three and six months ended June 30, 2022 to the three and six months ended June 30, 2021.

Three Months Ended June 30, 2022 Versus Three Months Ended June 30, 2021

The following table summarizes our unaudited statements of operations data for the three months ended June 30, 2022 and 2021:

THREE MONTHS ENDED JUNE 30,

( in thousands)

Total revenues

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.

Revenues increased $12.7 million, or 18%, to $82.8 million for the three months ended June 30, 2022 as compared to the same period in 2021.

Excluding $7.0 million revenue from Pinnacle, which was acquired in late 2021, the revenues increased $5.7 million, or 8%.

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.

The increase was partially offset by the negative impact on our revenue from fluctuation of the foreign currency exchange rates.

Software revenues increased $8.6 million, or 43%, to $28.7 million for the three months ended June 30, 2022 as compared to the same period in 2021.

Excluding $6.5 million revenue from Pinnacle, the revenues from software increased $2.1 million, or 11%.

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.

The increase was partially offset by the negative impact on our revenue from fluctuation of the foreign currency exchange rates.

Services revenues increased $4.1 million, or 8%, to $54.0 million for the three months ended June 30, 2022 as compared to the same period in 2021.

The growth in overall services revenue is primarily attributable to continued growth in biosimulation.

The increase was partially offset by the negative impact on our revenue from fluctuation of the foreign currency exchange rates.

Cost of Revenues

THREE MONTHS ENDED MARCH 31,

THREE MONTHS ENDED JUNE 30,

(in thousands)

Cost of revenues

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.

Cost of revenues increased by $7.7 million, or 28%, to $35.2 million for the three months ended June 30, 2022 as compared to the same period in 2021.

The increase was primarily due to a $4.2 million increase in employee-related costs resulting from billable headcount growth, a $1.7 million increase in intangible assets amortization, a $1.2 million increase in stock-based compensation cost, and a $0.5 million increase related to cost of licenses.

Sales and Marketing Expenses

THREE MONTHS ENDED MARCH 31,

THREE MONTHS ENDED JUNE 30,

(in thousands)

1 unchanged sentence

% of total revenues

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.

Sales and marketing expenses increased by $2.5 million, or 55%, to $7.1 million for the three months ended June 30, 2022 as compared to the same period in 2021.

Sales and marketing expenses increased primarily due to a $1.6 million increase in employee-related costs resulting from head count growth, a $0.2 million increase in stock based compensation cost, and a $0.5 million increase in marketing and travel costs.

Research and Development Expenses

THREE MONTHS ENDED MARCH 31,

THREE MONTHS ENDED JUNE 30,

(in thousands)

1 unchanged sentence

% of total revenues

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.

Research and development expenses increased by $3.1 million, or 67%, to $7.7 million for the three months ended June 30, 2022 as compared to the same period in 2021.

The increase in research and development expenses was primarily due to a $2.6 million increases in employee-related costs primarily resulting from head count growth and a $1.2 million increase in stock-based compensation cost, partially offset by a $0.8 million increase in capitalized cost in research and development.

General and Administrative Expenses

THREE MONTHS ENDED MARCH 31,

THREE MONTHS ENDED JUNE 30,

(in thousands)

1 unchanged sentence

% of total revenues

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.

General and administrative expenses decreased by $0.3 million, or 1%, to $17.8 million for the three months ended June 30, 2022 as compared to the same period in 2021.

The decrease in general and administrative expenses was primarily due to a $0.7 million decrease in transaction cost related to public offerings, 0.6 million decrease in stock-based compensation costs, a $0.4 million decrease in acquisition related costs, and $0.3 million decrease in executive recruiting expense,

partially offset by a $1.0 million increase in employee-related costs resulting from head count growth, a $0.6 million increase in professional and consulting expenses.

Intangible Asset Amortization

THREE MONTHS ENDED MARCH 31,

THREE MONTHS ENDED JUNE 30,

(in thousands)

1 unchanged sentence

% of total revenues

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.

Intangible asset amortization expense increased by $0.9 million, or 9%, to $10.4 million for the three months ended June 30, 2022 as compared to the same period in 2021.

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

Depreciation and Amortization Expense

THREE MONTHS ENDED JUNE 30,

(in thousands)

Depreciation and amortization

% of total revenues

Depreciation and amortization expense decreased by $0.1 million, or 24%, to $0.4 million for the three months ended June 30, 2022 as compared to the same period in 2021.

The decrease was primarily due to decrease in depreciation from computer equipment and furniture for the three months ended June 30, 2022 as compared to the same period in 2021.

Interest Expense

THREE MONTHS ENDED JUNE 30,

(in thousands)

Interest expense

% of total revenues

Interest expense decreased by $2.5 million, or 39%, to $3.9 million for the three months ended June 30, 2022 as compared to the same period in 2021.

The decrease in interest expense was primarily due to interest expense reclassed in from other comprehensive income due to hedge ineffectiveness in second quarter 2021, partially offset by an increase in interest expense on the Company’s term loan in the second quarter 2022 as compared to the same period in 2021.

THREE MONTHS ENDED JUNE 30,

(in thousands)

% of total revenues

Net of other income increased by $2.9 million, to $2.5 million for the three months ended June 30, 2022 as compared to the same period in 2021.

The increase in other income was primarily due to $2.7 million increase in remeasurement gains related to the fluctuation of foreign currency exchange rates.

Provision for Income Taxes

THREE MONTHS ENDED JUNE 30,

( in thousands)

Provision for income taxes

Effective income tax rate

Our income tax expense was $3.4 million, resulting in an effective income tax rate of 121% for the three months ended June 30, 2022 as compared to income tax expense of $1.5 million, or an effective income tax rate of (103)%, for the same period in 2021.

Our income tax expense for the three months ended June 30, 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 JUNE 30,

(in thousands)

Net income grew 79%, representing a $2.3 million increase in net income, to a net loss $0.6 million for the three months ended June 30, 2022 as compared to a net loss of $2.9 million in the same period of 2021.

The $2.3 million decrease in net loss was primarily due to a $12.7 million increase in total revenue, $2.7 million currency gain, and $2.5 million decrease in interest expense, partially offset by a $7.7 million increase in cost of revenue, a $6.1 million increase in operating expenses, and $1.9 million increase in tax expense.

Six Months Ended June 30, 2022 Versus Six Months Ended June 30, 2021

The following table summarizes our unaudited statements of operations data for the six months ended June 30, 2022 and 2021:

SIX MONTHS ENDED JUNE 30,

( in thousands)

Total revenues

Revenues increased $27.5 million, or 20%, to $164.3 million for the six months ended June 30, 2022 as compared to the same period in 2021.

Excluding $13.0 million revenue from Pinnacle, which was acquired in late 2021, the revenues increased $14.5 million, or 11%.

acquisitions.

The increase was partially offset by the negative impact on our revenue from fluctuation of the foreign currency exchange rates.

Software revenues increased $15.9 million, or 38%, to $57.9 million for the six months ended June 30, 2022 as compared to the same period in 2021.

Excluding $12.1 million revenue from Pinnacle, the revenues from software increased $3.8 million, or 9%.

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.

The increase was partially offset by the negative impact on our revenue from fluctuation of the foreign currency exchange rates.

Services revenues increased $11.6 million, or 12%, to $106.4 million for the six months s ended June 30, 2022 as compared to the same period in 2021.

The growth in overall services revenue is primarily attributable to continued growth in biosimulation.

The increase was partially offset by the negative impact on our revenue from fluctuation of the foreign currency exchange rates.

Cost of Revenues

SIX MONTHS ENDED JUNE 30,

(in thousands)

Cost of revenues

Cost of revenues increased by $14.4 million, or 27%, to $68.0 million for the six months ended June 30, 2022 as compared to the same period in 2021.

The increase was primarily due to a $8.8 million increase in employee-related costs resulting from billable head count growth, a $3.4 million increase in intangible assets amortization, a $2.1 million increase in stock-based compensation cost, a $0.8 million increase related to cost of licenses and other operating expenses, and $0.8 million increase in travel, equipment and other miscellaneous expenses, partially offset by a $1.6 million decrease in consulting and professional services.

Sales and Marketing Expenses

SIX MONTHS ENDED JUNE 30,

(in thousands)

Sales and marketing

% of total revenues

Sales and marketing expenses increased by $4.9 million, or 59%, to $13.2 million for the six months ended June 30, 2022 as compared to the same period in 2021.

Sales and marketing expenses increased primarily due to a $3.4 million increase in employee-related costs resulting from head count growth, a $0.5 million increase in stock based compensation cost, and a $0.7 million increase in marketing and travel costs.

Research and Development Expenses

SIX MONTHS ENDED JUNE 30,

(in thousands)

Research and development

% of total revenues

Research and development expenses increased by $6.0 million, or 64%, to $15.3 million for the six months ended June 30, 2022 as compared to the same period in 2021.

The increase in research and development expenses was primarily due

to a $5.3 million increases in employee-related costs primarily resulting from headcount growth and a $2.1 million increase in stock-based compensation cost, partially offset by a $1.8 million increase in capitalized cost in research and development.

General and Administrative Expenses

SIX MONTHS ENDED JUNE 30,

(in thousands)

General and administrative

% of total revenues

General and administrative expenses increased by $1.5 million, or 4%, to $36.1 million for the six months ended June 30, 2022 as compared to the same period in 2021.

The increase in general and administrative expenses was primarily due to a $2.5 million increase in employee-related costs resulting from head count growth, a $1.4 million increase in professional and consulting expenses, and a $0.7 million increase in equipment and software as well as travel expenses, partially offset by a $1.4 million decrease in acquisition related costs, a $1.5 million decrease in transaction cost related to public offerings, and a $0.4 million decrease in stock-based compensation costs.

Intangible Asset Amortization

SIX MONTHS ENDED JUNE 30,

(in thousands)

Intangible asset amortization

% of total revenues

Intangible asset amortization expense increased by $1.6 million, or 8%, to $20.5 million for the six months ended June 30, 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 MARCH 31,

SIX MONTHS ENDED JUNE 30,

(in thousands)

1 unchanged sentence

% of total revenues

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.

Depreciation and amortization expense decreased by $0.3 million, or 22%, to $0.9 million for the six months ended June 30, 2022 as compared to the same period in 2021.

The decrease was primarily due to decrease in depreciation from computer equipment and furniture for the six months ended June 30, 2022 as compared to the same period in 2021.

Interest Expense

THREE MONTHS ENDED MARCH 31,

SIX MONTHS ENDED JUNE 30,

(in thousands)

1 unchanged sentence

% of total revenues

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

THREE MONTHS ENDED MARCH 31,

Interest expense decreased by $3.2 million, or 31%, to $7.1 million for the six months ended June 30, 2022 as compared to the same period in 2021.

The decrease in interest expense was primarily due to interest expense reclassed in from other comprehensive income due to hedge ineffectiveness in second quarter 2021.

SIX MONTHS ENDED JUNE 30,

(in thousands)

Miscellaneous, net

% of total revenues

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.

Net of other income increased by $3.8 million to $3.4 million for the six months ended June 30, 2022 as compared to the same period in 2021.

The increase in other income was primarily due to $3.6 million increase in remeasurement gains related to the fluctuation of foreign currency exchange rates.

Provision for Income Taxes

THREE MONTHS ENDED MARCH 31,

SIX MONTHS ENDED JUNE 30,

( in thousands)

1 unchanged sentence

Effective income tax rate

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.

Our income tax expense was $4.9 million, resulting in an effective income tax rate of 75% for the six months ended June 30, 2022 as compared to income tax expense of $2.0 million, or an effective income tax rate of 1,131%, for the same period in 2021.

Our income tax expense for the six months ended June 30, 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,

Net Income (loss)

SIX MONTHS ENDED JUNE 30,

(in thousands)

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.

Net income (loss)

Net income increased by $3.4 million, or 190%, to $1.6 million for the six months ended June 30, 2022 as compared to a net loss of $1.8 million in the same period of 2021.

The $3.4 increase in net income was primarily due to a $27.5 million increase in total revenue, a $3.6 million foreign currency gain, and $3.2 million decrease in interest expense, partially

offset by a $14.4 million increase in cost of revenue, a $13.7 million increase in operating expenses, and $2.9 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.

We have consistently generated positive cash flow from operations, providing $33.1 million and $19.6 million as a source of funds for the six month ended June 30, 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

The following table provides a summary of the major sources of liquidity for period ended and as of June 30, 2022 and December 31, 2021.

June 30, 2022

December 31, 2021

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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:

(1) Cash balance as of June 30 , 2022 inclu ded $43.9 million cash a nd cash equivalents held outside of the United States.

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

We also have future cash obligations of $13.8 million for lease contracts, which have remaining terms from one to six years.

The principal amount of long-term debt outstanding as of June 30, 2022 matures in the following years:

Remainder of 2022

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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:

THREE MONTHS ENDED MARCH 31,

SIX MONTHS ENDED JUNE 30,

(in thousands)

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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.

Net cash provided by operating activities in the first six months of 2022 was $33.1 million, compared to $19.6 million in the same period of 2021.

The $13.5 million increase in cash from operating activities was primarily due to higher revenue, higher inflows of cash from higher deferred revenues, less cash used on prepaid assets, accounts payable, and other liabilities, partially offset by the increase in accounts receivable.

Investing Activities

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.

Net cash used by investing activities in the first six months of 2022 was $11.9 million, a decrease of $6.1 million, compared to $18.0 million in the same period of 2021.

The change in investing activities was primarily due to $8.2 million decrease in cash payments in connection with business acquisitions, $1.8 million increase in cash utilized in capitalized software development to support our growth.

Financing Activities

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.

Net cash used by financing activities in the first six months of 2022 was $5.1 million, compared to $5.2 million cash used in the same period of 2021.

The cash used was relatively flat for the six months ended June 30, 2022, as compared to the same period in 2021.

For the first six months of 2022, we paid $2.3 million on our employees’ behalf in connection with share awards vested and withheld for payroll tax, and paid $1.1 million on derivative contracts.

Compared to the same period of 2021, the prepayment on long term debt and payment on finance lease obligation decreased $0.7 million.

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 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.

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

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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 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.

As of June 30, 2022, we had $299.0 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 June 30, 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 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.

There have been no material changes to our contractual obligations during the six months ended June 30, 2022 from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 21, 2021, except for payment made in the ordinary course of business.

We recorded income tax expense of $4.9 million for the six months ended June 30, 2022 and income tax expense of $2.0 million for the six months ended June 30, 2021.

As of June 30, 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.

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

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

As of June 30, 2022, the valuation allowance remained unchanged from December 31, 2021.

Off-Balance Sheet Arrangements

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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.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

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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 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.

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

There were no significant changes to our critical accounting estimates during the six months ended June 30, 2022.

Recently Adopted and Issued Accounting Standards

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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