Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion summarizes the significant factors affecting the operating results, financial condition, liquidity, and cash flows of our Company as of and for the periods presented below. The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report and our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. The statements in this discussion regarding industry outlook, our expectations regarding our future performance, liquidity, and capital resources, and all other non-historical statements in this discussion are forward-looking statements and are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Quarterly Report, particularly in the sections entitled “Special Note Regarding Forward-Looking Statements” and “Risk Factors” of this Quarterly Report.
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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, 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 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 research and development 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.
We build our biosimulation technology on first principles of biology, chemistry, and pharmacology with proprietary mathematical algorithms that model how medicines and diseases behave in the body. For over two decades, we have honed and validated our biosimulation technology with an abundance of data from scientific literature, lab research, and preclinical and clinical studies. In turn, our customers use biosimulation to conduct virtual trials to answer critical questions, such as: What will be the human response to a drug based on preclinical data? How will other drugs interfere with this new drug? What is a safe and efficacious dose for children, the elderly, or patients with pre-existing conditions? Virtual trials may be used to optimize dosing on populations that are otherwise difficult to study for ethical or logistical reasons, such as infants, pregnant women, the elderly, and cancer patients.
Biosimulation results need to be incorporated into regulatory documents for compelling submissions. Accordingly, we provide regulatory science solutions and integrate them with biosimulation so that our customers can navigate the complex and evolving regulatory landscape and maximize their chances of approval. Our differentiated regulatory services are powered by submissions management software and natural language processing for scalability and speed, allowing us to deliver more than 250 regulatory submissions over the past four years. 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 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
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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 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.
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
We believe that the growth of and future success of our business depends on many factors. While each of these factors presents significant opportunities for our business, they also pose important challenges that we must successfully address to sustain our growth and improve results of operations.
Customer Retention and Expansion
Our future operating results depend, in part, on our ability to successfully enter new markets, increase our customer base, and retain and expand our relationships with existing customers. We monitor two key performance indicators to evaluate retention and expansion: new bookings and renewal rates.
● Bookings: Our new bookings represent a signed contract or purchase order where there is sufficient or reasonable certainty about the customer’s ability and intent to fund and commence the software and/or services. Bookings vary from period to period depending on numerous factors, including the overall health of the biopharmaceutical industry, regulatory developments, industry consolidation, and sales performance. Bookings have varied and will continue to vary significantly from quarter to quarter and from year to year.
● Renewal Rates: Our renewal rates measure the percentage of software customers who renew their licenses or subscriptions at the end of the license or subscription periods. The renewal rate is based on revenues and excludes the effect of price increases or expansions.
The table below summarizes our quarterly bookings and renewal rate trends:
2021
2022
Q1
Q2
Q1
Q2
Bookings (in millions)
81.9
75.1
108.5
100.3
Renewal Rate
92
%
90
%
92
%
92
%
Investments in Growth
We have invested and intend to continue to invest in expanding the breadth and depth of our solutions, including through
29
acquisitions and international expansion. We expect to continue to invest (i) in scientific talent to expand our ability to deliver solutions across the drug development spectrum; (ii) in sales and marketing to promote our solutions to new and existing customers and in existing and expanded geographies; (iii) in research and development to support existing solutions and innovate new technology; and (iv) in other operational and administrative functions to support our expected growth. We expect that our headcount will increase over time and also expect our total operating expenses will continue to increase over time.
Our Operating Environment
The acceptance of model-informed biopharmaceutical discovery and development by regulatory authorities affects the demand for our products and services. Support for the use of biosimulation in discovery and development from regulatory bodies, such as the FDA and EMA, has been critical to its rapid adoption by the biopharmaceutical industry. There has been a steady increase in the recognition by regulatory and academic institutions of the role that modeling and simulation can play in the biopharmaceutical development and approval process, as demonstrated by new regulations and guidance documents describing and encouraging the use of modeling and simulation in the biopharmaceutical discovery, development, testing, and approval process, which has directly led to an increase in the demand for our services. Changes in government or regulatory policy, or a reversal in the trend toward increasing the acceptance of and reliance upon in silico data in the drug approval process, could decrease the demand for our products and services or lead regulatory authorities to cease use of, or to recommend against the use of, our products and services.
Governmental agencies throughout the world, but particularly in the United States where the majority of our customers are based, strictly regulate the biopharmaceutical development process. Our business involves helping biopharmaceutical companies strategically and tactically navigate the regulatory approval process. New or amended regulations are expected to result in higher regulatory standards and often additional revenues for companies that service these industries. However, some changes in regulations, such as a relaxation in regulatory requirements or the introduction of streamlined or expedited approval procedures, or an increase in regulatory requirements that we have difficulty satisfying or that make our regulatory strategy services less competitive, could eliminate or substantially reduce the demand for our regulatory services.
Competition
The market for our biosimulation products and related services for the biopharmaceutical industry is competitive and highly fragmented. In biosimulation software, we compete with other scientific software providers, technology companies, in-house development by biopharmaceutical companies, and certain open source solutions. In the technology-driven services market, we compete with specialized companies, in-house teams at biopharmaceutical companies, and academic and government institutions. In some standard biosimulation services, and in regulatory and market access, we also compete with contract research organizations. Some of our competitors and potential competitors have longer operating histories in certain segments of our industry than we do and could have greater financial, technical, marketing, R&D, and other resources. Some of our competitors offer products and services directed at more specific markets than those we target, enabling these competitors to focus a greater proportion of their efforts and resources on those specific markets. Some competing products are developed and made available at lower cost by government organizations and academic institutions, and these entities may be able to devote substantial resources to product development. Some clinical research organizations or technology companies may decide to enter into or expand their offerings in the biosimulation area, whether through acquisition or internal development. We also face competition from open source software initiatives, in which developers provide software and intellectual property free of charge, such as R and PK-Sim software. In addition, some of our customers spend significant internal resources in order to develop their own solutions.
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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 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. 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. 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 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.
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The following table reconciles Net income (loss) to Adjusted EBITDA:
THREE MONTHS ENDED JUNE 30,
SIX MONTHS ENDED JUNE 30,
2022
2021
2022
2021
(in thousands)
Net income (loss) (a)
$
(589)
$
(2,857)
$
1,621
$
(1,805)
Interest expense (a)
3,879
6,332
7,107
10,260
Interest income (a)
(14)
(100)
(25)
(171)
Provision for income taxes (a)
3,380
1,453
4,916
1,980
Depreciation and amortization expense (a)
422
552
904
1,154
Intangible asset amortization (a)
12,711
10,125
25,161
20,227
Currency (gain) loss (a)
(2,558)
164
(3,263)
356
Equity-based compensation expense (b)
9,501
7,530
17,014
12,681
Acquisition-related expenses (d)
806
556
1,078
2,152
Transaction-related expenses (e)
111
937
128
1,622
Loss on disposal of fixed assets (f)
2
282
7
282
Executive recruiting expense (g)
—
327
—
327
First-year Sarbanes-Oxley implementation costs (h)
308
233
961
340
Adjusted EBITDA
$
27,959
$
25,534
$
55,609
$
49,405
The following table reconciles Net income (loss) to Adjusted Net Income:
THREE MONTHS ENDED JUNE 30,
SIX MONTHS ENDED JUNE 30,
2022
2021
2022
2021
(in thousands)
Net income (loss) (a)
$
(589)
$
(2,857)
$
1,621
$
(1,805)
Currency (gain) loss (a)
(2,558)
164
(3,263)
356
Equity-based compensation expense (b)
9,501
7,530
17,014
12,681
Amortization of acquisition-related intangible assets (c)
11,099
8,475
21,979
16,903
Acquisition-related expenses (d)
806
556
1,078
2,152
Transaction-related expenses (e)
111
937
128
1,622
Loss on disposal of fixed assets (f)
2
282
7
282
Executive recruiting expense (g)
—
327
—
327
First-year Sarbanes-Oxley implementation costs (h)
308
233
961
340
Income tax expense impact of adjustments (i)
(4,063)
(3,821)
(7,979)
(6,607)
Adjusted Net Income
$
14,617
$
11,826
$
31,546
$
26,251
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The following table reconciles Diluted Earnings Per Share to Adjusted Diluted Earnings Per Share:
THREE MONTHS ENDED JUNE 30,
SIX MONTHS ENDED JUNE 30,
2022
2021
2022
2021
(in thousands)
Diluted earnings per share (a)
$
—
$
(0.02)
$
0.01
$
(0.01)
Currency gain (a)
(0.02)
—
(0.02)
—
Equity-based compensation expense (b)
0.06
0.05
0.11
0.08
Amortization of acquisition-related intangible assets (c)
0.06
0.06
0.13
0.11
Acquisition-related expenses (d)
0.01
—
0.01
0.01
Transaction-related expenses (e)
—
0.01
—
0.02
Loss on disposal of fixed assets (f)
—
—
—
—
Executive recruiting expense (g)
—
—
—
—
First-year Sarbanes-Oxley implementation costs (h)
0.01
—
0.01
—
Income tax expense impact of adjustments (i)
(0.03)
(0.03)
(0.05)
(0.04)
Adjusted Diluted Earnings Per Share
$
0.09
$
0.07
$
0.20
$
0.17
Diluted weighted average common shares outstanding
156,478,724
147,485,566
156,209,335
147,323,724
Effect of potentially dilutive shares outstanding (j)
2,946,216
4,979,042
3,084,027
4,952,002
Diluted weighted average common shares outstanding
159,424,940
152,464,608
159,293,362
152,275,726
(a) Represents amounts as determined under GAAP.
(b) Represents expense related to equity-based compensation. Equity-based compensation has been, and will continue to be for the foreseeable future, a recurring expense in our business and an important part of our compensation strategy.
(c) Represents amortization costs associated with acquired intangible assets in connection with business acquisitions.
(d) Represents 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 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.
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Components of Results of Operations
Revenues
Our business generates revenue from the sales of software products and delivery of consulting services.
● Software . Our software business generates revenues from software licenses, software subscriptions and software maintenance as follows:
● Software licenses : We recognize revenue for software license fees up front, upon delivery of the software license.
● Software subscription : Subscription revenue consists of subscription fees to provide our customers access to and related support for our cloud-based solutions. We recognize subscription fees ratably over the term of the subscription, usually one to three years. Any subscription revenue paid upfront that is not recognized in the current period is included in deferred revenue in our consolidated balance sheet until earned.
● Software maintenance : Software maintenance revenue includes fees for providing updates and technical support for software offerings. Software maintenance revenue is recognized ratably over the contract term, usually one year.
● Services . Our services business generates revenues primarily from technology-driven services and professional services, which include software implementation services. Our service arrangements are time and materials, fixed fee, or prepaid. Revenues are recognized over the time services are performed for time and materials, and over time by estimating progress to completion for fixed fee and prepaid services.
Cost of Revenues
Cost of revenues consists primarily of employee related expenses, equity-based compensation, the costs of third-party subcontractors, travel costs, distributor fees, amortization of capitalized software and allocated overhead. We may add or expand computing infrastructure service providers, make additional investments in the availability and security of our solutions, or add resources to support our growth.
Operating Expenses
● Sales and Marketing . Sales and marketing expense consists primarily of employee-related expenses, equity-based compensation, sales commissions, brand development, advertising, travel-related expenses and industry conferences and events. We plan to continue to invest in sales and marketing to increase penetration of our existing client base and expand to new clients.
● Research and Development . Research and development expense accounts for a significant portion of our operating expenses. We recognize expenses as incurred. 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.
● General and Administrative . General and administrative expense consists of personnel-related expenses associated with our executive, legal, finance, human resources, information technology, and other administrative functions, including salaries, benefits, bonuses, and equity-based compensation. General and administrative
34
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, 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. 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 capitalized software development costs.
● Depreciation and Amortization Expense . Depreciation and amortization expense consists of depreciation of property and equipment and amortization of leasehold improvements.
Other Expenses
● Interest Expense . Interest expense consists primarily of interest expense associated with the Credit Agreement, including amortization of debt issuance costs and discounts. We expect interest expense to decline as a result of lower outstanding indebtedness going forward.
● Miscellaneous . Miscellaneous expense consists of miscellaneous non-operating expenses primarily comprised of foreign exchange transaction gains and losses.
● Provision for (Benefit from) Income Taxes . Provision for (benefit from) income taxes consists of U.S. federal and state income taxes and income taxes in certain foreign jurisdictions in which we conduct business. We expect income tax expense to increase over time as we continue to grow net income.
Acquisitions
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.
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 our restricted common stock. 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 $8.0 million, qualified as a business combination. The business combination was not significant to our condensed consolidated
35
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. “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 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:
Revenues
THREE MONTHS ENDED JUNE 30,
CHANGE
2022
2021
$
%
( in thousands)
Software
$
28,724
$
20,112
$
8,612
43
%
Services
54,036
49,984
4,052
8
%
Total revenues
$
82,760
$
70,096
$
12,664
18
%
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 acquisition. 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. 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.
36
Cost of Revenues
THREE MONTHS ENDED JUNE 30,
CHANGE
2022
2021
$
%
(in thousands)
Cost of revenues
$
35,194
$
27,542
$
7,652
28
%
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 JUNE 30,
CHANGE
2022
2021
$
%
(in thousands)
Sales and marketing
$
7,121
$
4,589
$
2,532
55
%
% of total revenues
9
%
7
%
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 JUNE 30,
CHANGE
2022
2021
$
%
(in thousands)
Research and development
$
7,741
$
4,626
$
3,115
67
%
% of total revenues
9
%
7
%
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 JUNE 30,
CHANGE
2022
2021
$
%
(in thousands)
General and administrative
$
17,778
$
18,034
$
(256)
(1)
%
% of total revenues
21
%
26
%
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,
37
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 JUNE 30,
CHANGE
2022
2021
$
%
(in thousands)
Intangible asset amortization
$
10,355
$
9,479
$
876
9
%
% of total revenues
13
%
14
%
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,
CHANGE
2022
2021
$
%
(in thousands)
Depreciation and amortization
$
422
$
552
$
(130)
(24)
%
% of total revenues
1
%
1
%
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,
CHANGE
2022
2021
$
%
(in thousands)
Interest expense
$
3,879
$
6,332
$
(2,453)
(39)
%
% of total revenues
5
%
9
%
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.
Other, net
THREE MONTHS ENDED JUNE 30,
CHANGE
2022
2021
$
%
(in thousands)
Other, net
$
(2,521)
$
346
$
(2,867)
nm
% of total revenues
(3)
%
0
%
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.
38
Provision for Income Taxes
THREE MONTHS ENDED JUNE 30,
CHANGE
2022
2021
$
%
( in thousands)
Provision for income taxes
$
3,380
$
1,453
$
1,927
133
%
Effective income tax rate
121
%
(103)
%
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.
Net loss
THREE MONTHS ENDED JUNE 30,
CHANGE
2022
2021
$
%
(in thousands)
Net loss
$
(589)
$
(2,857)
$
2,268
(79)
%
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:
Revenues
SIX MONTHS ENDED JUNE 30,
CHANGE
2022
2021
$
%
( in thousands)
Software
$
57,917
$
42,016
$
15,901
38
%
Services
106,394
94,798
11,596
12
%
Total revenues
$
164,311
$
136,814
$
27,497
20
%
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%. 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
39
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,
CHANGE
2022
2021
$
%
(in thousands)
Cost of revenues
$
67,983
$
53,558
$
14,425
27
%
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,
CHANGE
2022
2021
$
%
(in thousands)
Sales and marketing
$
13,232
$
8,341
$
4,891
59
%
% of total revenues
8
%
6
%
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,
CHANGE
2022
2021
$
%
(in thousands)
Research and development
$
15,289
$
9,332
$
5,957
64
%
% of total revenues
9
%
7
%
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
40
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,
CHANGE
2022
2021
$
%
(in thousands)
General and administrative
$
36,117
$
34,596
$
1,521
4
%
% of total revenues
22
%
25
%
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,
CHANGE
2022
2021
$
%
(in thousands)
Intangible asset amortization
$
20,504
$
18,935
$
1,569
8
%
% of total revenues
12
%
14
%
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
SIX MONTHS ENDED JUNE 30,
CHANGE
2022
2021
$
%
(in thousands)
Depreciation and amortization
$
904
$
1,154
$
(250)
(22)
%
% of total revenues
1
%
1
%
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.
41
Interest Expense
SIX MONTHS ENDED JUNE 30,
CHANGE
2022
2021
$
%
(in thousands)
Interest expense
$
7,107
$
10,260
$
(3,153)
(31)
%
% of total revenues
4
%
7
%
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.
Other, net
SIX MONTHS ENDED JUNE 30,
CHANGE
2022
2021
$
%
(in thousands)
Others, net
$
(3,362)
$
463
$
(3,825)
nm
% of total revenues
(2)
%
0
%
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
SIX MONTHS ENDED JUNE 30,
CHANGE
2022
2021
$
%
( in thousands)
Provision for income taxes
$
4,916
$
1,980
$
2,936
148
%
Effective income tax rate
75
%
1,131
%
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.
Net Income (loss)
SIX MONTHS ENDED JUNE 30,
CHANGE
2022
2021
$
%
(in thousands)
Net income (loss)
$
1,621
$
(1,805)
$
3,426
(190)
%
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
42
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 $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 June 30, 2022 and December 31, 2021.
June 30, 2022
December 31, 2021
(in thousands)
Net cash from operating activities
$
33,062
$
60,388
Cash and cash equivalents (1)
$
194,755
$
185,797
Net proceeds from issuing common stock
$
—
$
133,351
Term loan credit facilities
$
298,980
$
300,490
Revolving line of credit
$
100,000
$
100,000
(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
2023
2024
2025
2026
TOTAL
Maturities
$
1,510
$
3,020
$
3,020
$
3,020
$
288,410
$
298,980
We assess our liquidity in terms of our ability to generate adequate amounts of cash to meet current and future needs. We believe our existing sources of liquidity will be sufficient to meet our working capital, capital expenditures, and contractual obligations for the foreseeable future. Our expected primary uses on a short-term and long-term basis are for repayment of debt, interest payments, working capital, capital expenditures, geographic or service offering expansion, acquisitions, investments, and other general corporate purposes. We believe we will meet short and longer-term expected future cash requirements and obligations through a combination of cash flows from operating activities, available cash balances, and potential future equity or debt transactions.
Our future capital requirements, however, will depend on many factors, including funding for potential acquisitions, investments, and other growth and strategic opportunities, which could increase our cash requirements. While we believe we have, and will be able to generate, sufficient liquidity to fund our operations for the foreseeable future, our sources of liquidity could be affected by factors described under “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
43
Cash Flows
The following table presents a summary of our cash flows for the periods shown:
SIX MONTHS ENDED JUNE 30,
2022
2021
(in thousands)
Net cash provided by operating activities
$
33,062
$
19,556
Net cash used in investing activities
(11,914)
(17,999)
Net cash used in financing activities
(5,051)
(5,165)
Effect of foreign exchange rate changes on cash and cash equivalents, and restricted cash
(4,471)
(88)
Net (decrease) increase in cash and cash equivalents, and restricted cash
$
11,626
$
(3,696)
Cash paid for interest
$
7,468
$
7,114
Cash paid for income taxes
$
5,558
$
4,420
Operating Activities
Our cash flows from operating activities primarily include net income adjusted for (i) non-cash items included in net income, such as provisions for credit losses, depreciation and amortization, stock-based compensation, deferred taxes and other non-cash items and (ii) changes in the balances of operating assets and liabilities. Net cash provided by operating activities in the first 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 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 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.
Indebtedness
We are a party to a Credit Agreement that originally provided for a $250.0 million senior secured term loan and commitments under a revolving credit facility in an aggregate principal amount of $20.0 million, with a sub-commitment for issuance of letters of credit of $10.0 million. The 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.
44
In January 2018, we and the lenders amended the Credit Agreement to add incremental term loans in the amount of $25.0 million to be used for our general corporate purposes. Additionally, in April 2018, we and the lenders amended the Credit Agreement to (i) add incremental term loans in the amount of $40.0 million to be used for our general corporate purposes and (ii) provide a reduction of 50 basis points in the margin under the term loan. The terms of such incremental term loans were the same as the terms of our existing term loans, including in respect of maturity, and are considered an increase in the aggregate principal amount of the existing term loans outstanding under the Credit Agreement and are part of the existing term loan.
We entered into a third restated and amended loan agreement on June 17, 2021 (“Third Amendment”), which provides for, among other things, (i) the extension of the termination date applicable to the revolving credit commitments under the Credit Agreement to August 2025, (ii) the extension of the maturity date applicable to the term loans under the Credit Agreement to August 2026, and (iii) an increase of approximately $80.0 million in commitments available under the revolving line of credit (resulting in an aggregate amount of commitments of $100.0 million). The term loan under the Third Amendment has substantially the same terms as the existing term loans and revolving credit commitments. The Credit Agreement is collateralized by substantially all U.S. assets and stock pledges for the non-U.S. subsidiaries and contain various financial and nonfinancial covenants.
Borrowings under the Credit Agreement currently bear interest at a rate per annum equal to either (i) the Eurocurrency rate, with a floor of 0.00%, as adjusted for the reserve percentage required under regulations issued by the Federal Reserve Board for determining maximum reserve requirements with respect to Eurocurrency funding, plus an applicable margin rate of 3.50% for the term loan and between 4.00% and 3.50% for revolving credit loans, depending on the applicable first lien leverage ratio, (ii) an alternative base rate (“ABR”), with a floor of 1.00%, plus an applicable margin rate of 2.50% for the term loan or between 3.00% and 2.50% for revolving credit loans, depending on the applicable first lien leverage ratio (with the ABR determined as the greatest of (a) the prime rate, (b) the federal funds effective rate, plus 0.50%), and (iii) the Eurocurrency rate plus 1.00%.
Additionally, we are obligated to pay under the revolving credit facility (i) a commitment fee of between 0.50% and 0.25% per annum of the unused amount of the revolving credit facility, depending on the applicable first lien leverage ratio, (ii) customary letter of credit issuance and participation fees, and (iii) other customary fees and expenses of the letter of credit issuers.
All obligations under the Credit Agreement are unconditionally guaranteed by our wholly owned direct and indirect subsidiaries, subject to certain exceptions. All obligations under the Credit Agreement, and the guarantees of those obligations, are secured on a first lien basis, subject to certain exceptions, by substantially all of our assets and the assets of the other guarantors.
As of June 30, 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 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.
45
Income Taxes
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. We also had foreign tax credits of approximately $15.1 million, which will start to expire in 2025. These carryforwards that may be utilized in a future period may be subject to limitations based upon changes in the ownership of our stock in a future period. Additionally, we carried forward foreign NOLs of approximately $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.
As required by Accounting Standards Codification (‘‘ASC’’) Topic 740, Income Taxes, our management has evaluated the positive and negative evidence bearing upon the realizability of our deferred tax assets, which are composed principally of NOL carryforwards, R&D credit carryforwards, investment tax credit carryforward, and foreign tax credit carryforwards. Management has determined that it is more likely than not that we will not realize the benefits of foreign tax credit carryforwards. At the foreign subsidiaries, management has determined that it is more likely than not that we will not realize the benefits of certain NOL carryforwards. As a result, a valuation allowance of $18.2 million was recorded at December 31, 2021. As of June 30, 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 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 fiscal 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. We monitor estimates and assumptions on a continuous basis and update these estimates and assumptions as facts and circumstances change and new information is obtained. Actual results could differ materially from those estimates and assumptions. We discussed the accounting policies that we believe are most critical to the portrayal of our results of operations and financial condition and require management’s most difficult, subjective and complex judgments in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our 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
We have reviewed all recently issued standards and have determined that, other than as disclosed in Note 2 to our condensed consolidated financial statements appearing elsewhere in this Quarterly Report, such standards will not have a material impact on our condensed consolidated financial statements or do not otherwise apply to our operations.
46
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.