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Item 7. Management’s Discussion and Analysis

2023-03-01 compared with 2022-03-01 · 264 added, 267 removed, 354 unchanged (60% of the section changed)

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

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

to refer to Certara, Inc.

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

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

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

uncertainties.

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

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Executive Overview

We accelerate medicines to patients using biosimulation software, technolog, and services to transform traditional drug discovery and development.

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

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

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

As a global leader in biosimulation based on 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.

As a global leader in biosimulation based on 2022 revenue, we provide an integrated, end-to-end platform used by more than 2,300 clients including biopharmaceutical companies, regulatory agencies and academic institutions across 70 countries, including 39 of the top 40 biopharmaceutical companies by research and development spend in 2021.

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.

Moreover, 20 global regulatory authorities license our biosimulation software to independently analyze, verify, and review regulatory submissions, including the FDA, Health Canada, Japan’s PMDA, and UK’s MHR.

Demand for our offerings continues to expand rapidly.

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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 differentiated regulatory services are powered by submissions management software and natural language processing for scalability and speed, allowing us to deliver more than 300 regulatory submissions over the past five 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.

A final hurdle to delivering medicines to patients is market access, defined as strategies, processes, and activities to ensure that therapies are available to patients at the right price.

We believe that biosimulation and market access will continue to be increasingly intertwined as health systems and countries move toward outcomes-based pricing.

We have recently expanded into technology-driven market access solutions, which help our customers understand the real-world impact of therapies and dosing regimens earlier in the process and effectively communicate this to payors and health authorities.

Our solutions are underpinned by technologies such as Bayesian statistical software and SaaS-based value communication tools.

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 Offerings

On December 15, 2020, we completed our IPO, pursuant to which we issued and sold 14,630,000 shares of our common stock and certain selling stockholders sold 18,783,250 shares of our common stock (representing the full exercise of the underwriters’ option to purchase additional shares), at a public offering price of $23.00 per share.

We received net proceeds of $316.3 million, after deducting underwriters’ discounts and commissions, but before offering costs.

We incurred offering costs of $4.4 million, net of the tax effect of $0.3 million, which we recognized as a charge to additional paid-in capital.

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

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

We did not offer any common stock in this transaction and did not receive any proceeds from the sale of the shares of common stock by the selling stockholders.

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

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

Public Offerings and Other Key Shareholders Transactions

On December 11, 2020, we completed our initial public offering (“IPO”), pursuant to which we issued and sold 14,630,000 shares of common stock and certain selling stockholders, including former controlling shareholder, EQT, sold 18,783,250 shares of our common stock (representing the full exercise of the underwriters’ option to purchase additional shares), at a public offering price of $23.00 per share.

We received net proceeds of $316,3 million, after deducting underwriters' discounts and commissions.

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

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

In addition, $4,4 million of legal, accounting and other offering costs, net of the tax effect of $0.3 million, incurred in connection with the sale of the Company's common stock in the IPO, were capitalized and offset against the proceeds received in the IPO.

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.

On August 11, 2022, the Company completed another secondary public offering in which certain selling stockholders, including EQT, sold 7,000,000 shares of the Company’s common stock.

The Company did not offer any common stock in this transaction and did not receive any proceeds from the sale of the shares of common stock by the selling stockholders.

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

On December 8, 2022, Arsenal acquired an aggregate of 29,954,521 shares of our common stock from EQT at a price of $15.00 per share.

In connection with this transaction, we entered into a letter agreement, effective December 8, 2022, with Arsenal providing that, subject to certain exceptions, Arsenal is prohibited from transferring the acquired shares until December 8, 2024.

Also, in connection with the transaction, we entered into a stockholders agreement with Arsenal, effective December 8, 2022, which, among other things, grants certain conditional rights to Arsenal to nominate up to two directors to our Board.

Key Factors Affecting Our Performance

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new bookings and renewal rates.

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.

Our new bookings represent the estimated annual contract value of 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.

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The table below summarizes our quarterly bookings and renewal rate trends:

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

Investments in Growth

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(iii) in research and development to support existing solutions and innovate new technology;

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

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

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

and (v) in complementary business.

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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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.

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 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.

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Some of our competitors and potential competitors have longer operating histories in certain segments of our industry than we do and could have greater financial, technical, marketing, R&D, and other resources.

Some of our competitors offer products and services directed at more specific markets than those we

target, enabling these competitors to focus a greater proportion of their efforts and resources on those specific markets.

Some of our competitors offer products and services directed at more specific markets than those we target, enabling these competitors to focus a greater proportion of their efforts and resources on those specific markets.

Some competing products are developed and made available at lower cost by government organizations and academic institutions, and these entities may be able to devote substantial resources to product development.

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Impact of COVID-19

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

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

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

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

The continued spread of COVID-19 may adversely impact our business, financial condition or results of operations.

As of December 31, 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.

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, 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.

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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 consolidated statements of operations and comprehensive income (loss) 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 loss to Adjusted EBITDA :

The following table reconciles net income (loss) to adjusted EBITDA :

YEAR ENDED DECEMBER 31,

(in thousands)

Net income (loss)

Interest expense (a)

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Equity-based compensation expense (b)

Acquisition-related expense (c)

Integration expense (d)

Transaction related expenses (e)

Severance expense (f)

Reorganization expense (g)

Loss on disposal of fixed assets (h)

Executive recruiting expense (i)

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

Acquisition-related expense (d)

Integration expense (e)

Transaction related expenses (f)

Severance expense (g)

Reorganization expense (h)

Loss on disposal of fixed assets (i)

Executive recruiting expense (j)

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

Adjusted EBITDA

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

The following table reconciles net income (loss) to adjusted net income:

YEAR ENDED DECEMBER 31,

(in thousands)

Net income (loss)

Currency (gain) loss (a)

Equity-based compensation expense (b)

Acquisition-related expense (c)

Integration expense (d)

Transaction related expenses (e)

Severance expense (f)

Reorganization expense (g)

Loss on disposal of fixed assets (h)

Executive recruiting expense(i)

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

Income tax expense impact of adjustments (k)

Amortization of acquisition-related intangible assets (c)

Acquisition-related expense (d)

Integration expense (e)

Transaction related expenses (f)

Severance expense (g)

Reorganization expense (h)

Loss on disposal of fixed assets (i)

Executive recruiting expense (j)

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

Income tax expense impact of adjustments (l)

Adjusted net income

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YEAR ENDED DECEMBER 31,

Diluted earnings per share (a)

Currency (gain) loss (a)

Equity-based compensation expense (b)

Acquisition-related expense (c)

Integration expense (d)

Transaction related expenses (e)

Severance expense (f)

Reorganization expense (g)

Loss on disposal of fixed assets (h)

Executive recruiting expense (i)

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

Income tax expense impact of adjustments (k)

Adjusted Diluted Earnings Per Shares

Amortization of acquisition-related intangible assets (c)

Acquisition-related expense (d)

Integration expense (e)

Transaction related expenses (f)

Severance expense (g)

Reorganization expense (h)

Loss on disposal of fixed assets (i)

Executive recruiting expense (j)

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

Income tax expense impact of adjustments (l)

Adjusted diluted earnings per share

Basic weighted average common shares outstanding

Effect of potentially dilutive shares outstanding (l)

Effect of potentially dilutive shares outstanding (m)

Adjusted diluted weighted average common shares outstanding

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Equity-based compensation has been, and will continue to be for the foreseeable future, a recurring expense in our business and an important part of our compensation strategy.

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

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

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

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

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

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

(j) Represents the first-year Sarbanes-Oxley costs for accounting and consulting fees related to the Company's preparation to comply with Section 404 of the Sarbanes-Oxley Act in 2021, as well as implementing cost of ASC 842.

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

Represents potentially dilutive shares that were excluded from the Company's GAAP diluted weighted average common shares outstanding because the Company had a reported net loss and therefore including these shares would have been anti-dilutive.

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

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

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

(g) Represents charges for severance provided to former executives.

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

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

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

(k) 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, as well as implementation cost of adopting ASC 842.

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

(m) Represents dilutive shares or potentially dilutive shares that were excluded from the Company's GAAP diluted weighted average common shares outstanding because the Company had a reported net loss and therefore including these shares would have been anti-dilutive.

Components of Results of Operations

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● 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.

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

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

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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.

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 .

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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.

● Net Other Income (Expense) .

Net other income (expense) consists of miscellaneous non-operating expenses primarily comprised of foreign exchange transaction gains and losses.

● Provision for (Benefit from) Income Taxes .

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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.

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

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.

Insight Medical Writing Limited

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.

Pinnacle 21, LLC

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 consolidated results of operations since the date of acquisition.

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

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

consideration of $7.1 million.

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

Integrated Nonclinical Development Solutions, Inc.

On January 3, 2022, we completed an acquisition for a total consideration of $8.0 million, which qualified as a business combination.

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

Based on the 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.

Vyasa Analytics, LLC

On December 28, 2022, we completed the acquisition of Vyasa Analytics, LLC (“Vyasa”), a company that provides an AI powered, scalable deep learning software and analytics platform for organizations within healthcare and life sciences, higher education and state and local governments for total estimated consideration of $29.3 million.

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

The total estimated consideration includes a portion of contingent consideration that is payable over the next three years in a combination of 70% cash and 30% Certara common stock.

Future payments of contingent consideration are based on achieving certain eligible revenue thresholds for each of the twelve-month periods ended December 31, 2023, 2024, and 2025, respectively.

Potential payments range from $0 to $60 million over the three years period.

The fair value of the contingent consideration was estimated to be $19.8 million as of the acquisition date.

Based on the Company’s purchase price allocation, approximately $11.4 million, $1.5 million, $0.1 million, $0.1 million and $16.6 million of the purchase price was assigned to developed technology, customer relationships, trademarks, non-compete agreements and goodwill, respectively.

For more information about our acquisitions, see Note 5.

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Interest expense

Miscellaneous, net

Net other income (expense)

Total other expenses

Loss before income taxes

Income (loss) before income taxes

Provision for (benefit from) income taxes

Net Income (loss)

Comparison of the Years Ended December 31, 2022 and 2021

YEAR ENDED DECEMBER 31,

(dollars in thousands)

(in thousands)

Total revenues

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

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

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

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

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

Revenue increased by $49.5 million, or 17%, to $335.6 million for the year ended December 31, 2022, as compared to the same period in 2021.

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

The increase was partially offset by the negative impact on our revenues from fluctuations in foreign currency exchange rates and a decline in regulatory and access revenue.

Software revenue increased by $28.6 million, or 33%, to $115.5 million for the year ended December 31, 2022, as compared to the same period in 2021.

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

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

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

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

Services revenue increased by $20.9 million, or 10%, to $220.2 million for the year ended December 31, 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 fluctuations in foreign currency exchange rates and a decline in regulatory and access revenue.

Cost of Revenues

YEAR ENDED DECEMBER 31,

(dollars in thousands)

(in thousands)

Cost of revenues

Cost of revenues increased by $21.0 million, or 19%, to $132.6 million for the year ended December 31, 2022, as compared to 2021.

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

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

The increase was primarily due to a $12.8 million increase in employee-related costs resulting from billable head count growth, a $5.0 million increase in intangible assets amortization, a $2.3 million increase in equity-based compensation cost, a $1.5 million increase related to cost of licenses, a $1.2 million increase in travel, equipment, and facility related expenses, partially offset by a $2.6 million decrease in consulting and professional services cost.

Sales and Marketing Expense

YEAR ENDED DECEMBER 31,

(dollars in thousands)

(in thousands)

Sales and marketing

% of total revenues

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

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

Sales and marketing expenses increased by $7.3 million, or 36%, to $27.4 million for the year ended December 31, 2022, as compared to 2021.

Sales and marketing expenses increased primarily due to a $5.2 million increase in employee-related costs resulting from head count growth, a $0.9 million increase in marketing costs, a $0.5 million increase in travel related expenses, and a $0.3 million increase in professional and consulting costs.

Research and Development Expense

YEAR ENDED DECEMBER 31,

(dollars in thousands)

(in thousands)

Research and development

1 unchanged sentence

Research and development expenses increased by $7.8 million, or 38%, to $28.2 million for the year ended December 31, 2022, as compared to 2021.

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

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

The increase in R&D expenses was primarily due to a $8.1 million increase in employee-related costs resulting from head count growth and a $3.0 million increase in equity-based compensation cost, partially offset by a $3.3 million increase in capitalized cost in R&D.

General and Administrative Expense

YEAR ENDED DECEMBER 31,

(dollars in thousands)

(in thousands)

General and administrative

1 unchanged sentence

General and administrative expenses decreased by $7.8 million, or 10 %, to $71.8 million for the year ended December 31, 2022, as compared to 2021.

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

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

The decrease in general and administrative expenses was primarily due to a $9.7 million decrease in acquisition-related costs, a $4.3 million decrease in equity-based compensation cost, a $1.6 million decrease in transaction costs related to public offerings, and a $1.0 million decrease in facility and lease related expenses, partially offset by a $5.1 million increase in employee-related costs resulting from head count growth, a $2.4 million increase in professional and consulting costs, and a $1.0 million increase in travel and equipment related expenses.

Intangible Asset Amortization Expense

YEAR ENDED DECEMBER 31,

(dollars in thousands)

(in thousands)

Intangible asset amortization

2 unchanged sentences

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

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

Depreciation and Amortization Expense

YEAR ENDED DECEMBER 31,

(dollars in thousands)

(in thousands)

Depreciation and amortization

1 unchanged sentence

Depreciation and amortization expense decreased by $0.4 million, or 19 %, to $1.7 million for the year ended December 31, 2022, as compared to 2021.

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

The decrease was primarily due to a decrease in depreciation from computer equipment and furniture for the year ended December 31, 2022 as compared to the same period in 2021.

Interest Expense

YEAR ENDED DECEMBER 31,

(dollars in thousands)

(in thousands)

Interest expense

% of total revenues

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

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

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

Miscellaneous, net

Interest expense increased by $0.9 million, or 6%, to $17.8 million for the year ended December 31, 2022, as compared to 2021.

The increase in interest expense was primarily due to market interest rates increase reflected on our term loan floating rate debt.

The increase in interest expense was partially offset by $3.3 million of interest expense reclassified from other comprehensive income due to hedge ineffectiveness in 2021 and the decrease of interest on interest swap.

Net other income (expense)

YEAR ENDED DECEMBER 31,

(dollars in thousands)

Miscellaneous, net

(in thousands)

Net other income (expense)

% of total revenues

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

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

(Benefit from) Provision for Income Taxes

Net other income (expense) increased by $4.1 million to $4.0 million for the year ended December 31, 2022, as compared to 2021.

The increase in net other income (expense) was primarily due to a $3.0 million increase in remeasurement gains related to the fluctuation of foreign currency exchange rates and a $1.0 million increase in interest income.

Provision for (Benefit from) Income Taxes

YEAR ENDED DECEMBER 31,

(dollars in thousands)

(in thousands)

Provision for (benefit from) income taxes

Effective tax rate

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

Our income tax expense was $4.0 million, resulting in an effective income tax rate of 21.5%, for the year ended December 31, 2022, as compared to an income tax expense of $9.9 million, or an effective income tax rate of (293.1)% in 2021.

Our income tax expense for the year ended December 31, 2022 was primarily due to the impact of rate changes in certain jurisdictions, the impact of non-deductible items, and the relative mix of domestic and international earnings.

Net income (Loss)

YEAR ENDED DECEMBER 31,

(dollars in thousands)

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

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

Comparison of the Year Ended December 31, 2020 and 2019

(dollars in thousands)

(in thousands)

Net Income (loss)

Net income increased by $28.0 million, or 211%, to $14.7 million for the year ended December 31, 2022, as compared to the same period in 2021.

The increase was primarily due to a $49.5 million increase in revenues, a $5.9 million decrease in tax expense, and a $4.1 million increase in net other income mainly related to increase in remeasurement gain and interest income, partially offset by a $21.0 million increase in cost of revenue, a $9.6 million increase in operating expense, and a $0.9 million increase in interest expense.

Comparison of the Years Ended December 31, 2021 and 2020

( in thousands)

Total revenues

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

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

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

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

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

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

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

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

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

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

Cost of Revenues

YEAR ENDED DECEMBER 31,

(dollars in thousands)

(in thousands)

Cost of revenues

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

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

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

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

Sales and Marketing Expense

YEAR ENDED DECEMBER 31,

(dollars in thousands)

(in thousands)

Sales and marketing

1 unchanged sentence

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

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

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

Research and Development Expense

YEAR ENDED DECEMBER 31,

(dollars in thousands)

(in thousands)

Research and development

1 unchanged sentence

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

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

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

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

General and Administrative Expense

YEAR ENDED DECEMBER 31,

(dollars in thousands)

(in thousands)

General and administrative

% of total revenues

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

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

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

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

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

Intangible Asset Amortization Expense

YEAR ENDED DECEMBER 31,

(dollars in thousands)

(in thousands)

Intangibles asset amortization

1 unchanged sentence

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

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

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

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

Depreciation and Amortization Expense

YEAR ENDED DECEMBER 31,

(dollars in thousands)

(in thousands)

Depreciation and amortization

% of total revenues

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

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

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

Interest Expense

YEAR ENDED DECEMBER 31,

(dollars in thousands)

(in thousands)

Interest expense

1 unchanged sentence

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

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

Miscellaneous, net

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

The decrease in interest expense was partially offset by interest expense reclassified in 2021 as interest from other comprehensive income due to hedge ineffectiveness.

Net other income (expense)

YEAR ENDED DECEMBER 31,

(dollars in thousands)

Miscellaneous, net

(in thousands)

Net other income (expense)

% of total revenues

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

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

dollar, particularly with the pound sterling.

(Benefit from) Provision for Income Taxes

Net other income (expense) decreased by $0.3 million, or 75%, to $0.1 million for the year ended December 31, 2021 as compared to 2020.

The decrease in net other income (expenses) was primarily due to increase in currency gain, partially offset by increase in loss from fixed asset disposals.

Provision for (Benefit from) Income Taxes

YEAR ENDED DECEMBER 31,

(dollars in thousands)

(Benefit from) provision for income taxes

(in thousands)

Provision for (Benefit from) income taxes

Effective income tax rate

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

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

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

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

YEAR ENDED DECEMBER 31,

(dollars in thousands)

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

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

(in thousands)

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

Liquidity and Capital Resources

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

We have consistently generated positive cash flow from operations, providing $92.5 million, $60.4 million, and $44.8 million as a source of funds each year for the years ended December 31, 2022, 2021, and 2020, respectively.

Our additional liquidity comes from several sources:

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

accessing credit facilities and revolving line of credit.

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

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 periods ended at December 31, 2022, 2021, and 2020 and as of December 31, 2022, 2021, and 2020.

(in thousands)

Net cash from operating activities

Net cash provided by operating activities

Cash and cash equivalents (1)

2 unchanged sentences

Revolving line of credit

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

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

(1) Cash balance as of December 31, 2022, 2021, and 2020 included $56.4 million, $39.8 million, and $19.9 million cash and cash equivalents held outside of the United States.

Our material cash requirements from known contractual obligations as of December 31, 2022 are as follows:

(in thousands)

8 unchanged sentences

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

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

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

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

1 unchanged sentence

YEAR ENDED DECEMBER 31,

(in thousands)

Net cash provided by operating activities

6 unchanged sentences

Operating Activities

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

Our cash flows from operating activities primarily include net income (loss) adjusted for (i) non-cash items included in net income (loss), 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 for the year ended December 31, 2022, was $92.5 million, compared to $60.4 million for the year ended December 31, 2021.

The $32.2 million increase in cash from operating activities was primarily due to cash collected from higher revenues and more cash inflow from deferred revenues, partially offset by less cash used to pay for liabilities and increase in accounts receivables.

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

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

1 unchanged sentence

Changes in our operating assets and liabilities used cash and cash equivalents of approximately $6.7 million.

During the year ended December 31, 2019, operating activities provided approximately $38.0 million of cash and cash equivalents, primarily resulting from a net loss of $8.9 million, offset by $38.2 million of non-cash operating expenses inclusive of depreciation and amortization, amortization of debt issuance costs, equity-based compensation costs, and deferred income taxes.

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

Investing Activities

Net cash used in investing activities for the year ended December 31, 2022, was $27.8 million, a decrease of $242.1 million, compared to $269.9 million for the year ended December 31, 2021.

The change in investing activities was

primarily due to a $245.7 million decrease on cash used for business acquisitions, partially offset by cash utilized in capitalized development costs and capital expenditures to support our growth.

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

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

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

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

Financing Activities

During the year ended December 31, 2022, financing activities used cash of approximately $7.4 million, compared to $123.4 million cash provided by financing activities in the same period of 2021.

The $130.8 million decrease in cash provided from financing activities was primarily due to $133.4 million in proceeds received from stock offerings in 2021, partially offset by the increase on tax payment related to shares withheld for employee taxes in 2022.

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

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

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

The decrease was partially offset by $100.4 million decrease in payments on long-term debt in 2021.

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

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

Credit Facilities

9 unchanged sentences

subsidiaries and contain various financial and nonfinancial covenants.

Borrowings under the Credit Agreement currently bear interest at a rate per annum equal to either (i) the Eurocurrency rate, with a floor of 0.00%, as adjusted for the reserve percentage required under regulations issued by the Federal Reserve Board for determining maximum reserve requirements with respect to Eurocurrency funding, plus an applicable margin rate of 3.50% for the term loan and between 4.00% and 3.50% for revolving credit loans, depending on the applicable first lien leverage ratio, or (ii) an alternative base rate (“ABR”), with a floor of 1.00%, plus an applicable margin rate of 2.50% for the term loan or between 3.00% and 2.50% for revolving credit loans, depending on the applicable first lien leverage ratio (with the ABR determined as the greatest of (a) the prime rate, (b) the federal funds effective rate, plus 0.50%), and (c) the Eurocurrency rate plus 1.00%.

Board for determining maximum reserve requirements with respect to Eurocurrency funding, plus an applicable margin rate of 3.50% for the term loan and between 4.00% and 3.50% for revolving credit loans, depending on the applicable first lien leverage ratio, or (ii) an alternative base rate (“ABR”), with a floor of 1.00%, plus an applicable margin rate of 2.50% for the term loan or between 3.00% and 2.50% for revolving credit loans, depending on the applicable first lien leverage ratio (with the ABR determined as the greatest of (a) the prime rate, (b) the federal funds effective rate, plus 0.50%), and (c) the Eurocurrency rate plus 1.00%.

Additionally, we are obligated to pay under the revolving credit facility (i) a commitment fee of between 0.50% and 0.25% per annum of the unused amount of the revolving credit facility, depending on the applicable first lien leverage ratio, (ii) customary letter of credit issuance and participation fees, and (iii) other customary fees and expenses of the letter of credit issuers.

3 unchanged sentences

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

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

We recorded income tax expense of $4.0 million for the year ended December 31, 2022 and income tax expense of $9.9 million for the year ended December 31, 2021.

As of December 31, 2022, we had federal and state NOLs of approximately $1.8 million and $0.05 million, respectively, which are available to reduce future taxable income and expire between 2024 and 2036 and 2029 and 2040, respectively.

4 unchanged sentences

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.

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, Section 174 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.

10 unchanged sentences

The effects of material revisions in estimates, if any, are reflected in the consolidated financial statements prospectively from the date of change in estimates.

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

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

Revenue Recognition

5 unchanged sentences

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

Software Licenses and Support

License revenue includes perpetual license fees and term license fees, which provide customers with the same functionality and differ mainly in the duration over which the customer benefits from the use of software.

Both revenues from perpetual license and term license performance obligations are generally recognized up front at the point in time when the software license has been delivered.

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

We have determined that post-customer support and the right to unspecified enhancements and upgrades on a “when-and-if-available” basis included with term licenses is an immaterial component of the transaction price and, therefore, recognize these performance obligation components up front with the license when delivered.

Consulting Service Revenues

The Company’s primary professional services offering includes consulting services, which may be either strategic consulting services, reporting and analysis services, regulatory writing services, or any combination of the three.

The Company’s professional services contracts are either time-and-materials or fixed fee.

Services revenues are generally recognized over time as the services are performed.

Generally, these services are delivered to customers electronically.

Revenue from time-and-material contracts is recognized on an output basis as labor hours are delivered and/or direct expenses are incurred.

Revenues for fixed price services are generally recognized over time applying input methods to estimate progress to completion.

Accordingly, the number of resources being paid for and varying lengths of time they are being paid for, determine the measure of progress.

Software Licenses

Software license revenue consists primarily of sales of software licenses downloaded and installed by our customers on their own hardware.

The license period is generally one year or less and includes an insignificant amount of customer support to assist the customer with the software.

Software license performance obligations are generally recognized upfront at the point in time when the software license has been delivered.

Software as a Service (SaaS) Revenues

SaaS revenues consists of subscription fees for access to, and related support for, the Company’s cloud-based solutions.

The Company typically invoices subscription fees in advance in annual installments.

The invoice is initially deferred and revenue is recognized ratably over the life of the contract.

The Company’s software contracts do not typically include variable consideration, or options for future purchases that would not be similar to the original goods.

Software Services

For contracts that include multiple performance obligations, such as a software license plus software training, implementation, and/or maintenance/support, or in contracts where there are multiple software licenses, the transaction price is allocated to each of the performance obligations on a pro-rata basis based on the relative standalone selling price of each performance obligation.

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

Revenues allocated to maintenance services are recognized ratably over the contract term beginning on the delivery date of each offering.

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

Revenue allocated to maintenance services is recognized ratably over the contract term beginning on the delivery date of each offering.

Maintenance contracts generally have a term of one year.

Expenses related to maintenance and subscription are recognized as incurred.

While transfer of control of the software training and implementation performance obligations are performed over time, the services are typically started and completed within a few days.

Due to the quick nature of the performance obligation from start to finish and the immaterial amounts, we recognize any software training or implementation revenue at the completion of the service.

While transfer of control of the software training and implementation performance obligations are over time, the services are typically started and completed within a few days.

Due to the quick nature of the performance obligation from start to finish and the insignificant amounts, the Company recognizes any software training or implementation revenue at the completion of the service.

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

License revenue and post-contract services are combined and reported as software revenue on the consolidated statements of operations and comprehensive loss.

Subscription Revenues

Subscription revenue consists of subscription fees for access to, and related support for, our cloud-based solutions.

We typically invoice subscription fees in advance in annual installments and recognize subscription revenue ratably over the term of the applicable agreement, usually one to three years, which is initially deferred and recognized ratably over the life of the contract.

Unearned maintenance and subscription revenues are recorded as deferred revenue.

Our subscription services arrangements are generally non-cancelable and do not contain refund-type provisions.

In rare instances that subscription services arrangements are deemed cancelable, we will adjust the transaction price and period for revenue recognition accordingly to be reflective of the contract term.

Services and Other Revenues

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

Strategic consulting services consists of consulting,

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

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

Services revenues are generally recognized over time as the services are performed.

Revenues for fixed price services and prepaid are generally recognized over time applying input methods to estimate progress to completion.

Training revenues are recognized as the services are performed over time.

Consortium revenues consist of contractual agreements with customers where the customer receives multiple benefits as part of their contract with the Company, as follows:

access to the latest version simulator software, which has at least one new release per year, free access to a preset number of training workshops, a block of consulting hours to be used at the customer’s discretion, as well as voting rights at the annual consortium meeting where development priorities for the upcoming year are set.

The Company’s consortium contracts are generally for three years with an annual termination clause and annual upfront billings.

Consortium revenues are recognized over time as the benefits of the consortium arrangement are realized over the course of the contract.

Both the training and consulting services performance obligations will utilize an output method to measure the progress at the end of each reporting period.

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

Equity-Based Compensation

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

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

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

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

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

To do this we used the enterprise value of the Company as a proxy because the primary asset of EQT is its investment in the Company and therefore the total enterprise value was assumed to be the same.

The three valuation methodologies used to determine the enterprise value, each of which was given equal weighting, include the following:

● The Discounted Cash Flow Method (the “DCF Method”), a form of the Income Approach, was used to estimate the enterprise value by discounting the projected future free cash flows using an appropriate discount rate.

We performed the DCF Method using a “debt-free” analysis, which entails estimating the free cash flows available to both debt and equity investors.

The DCF Method incorporates several variables of observable and unobservable inputs, including, but not limited to, the Company’s prospective financial information and assumes outlays for capital expenditures, future terminal values, an effective tax rate assumption and a discount rate based on a number of factors including market interest rates, a weighted average cost of capital analysis based on an assumed capital structure, and includes adjustments for market risk and company specific risk.

● The Guideline Public Company Method (the “GPC Method”), a form of the Market Approach, was used to estimate the enterprise value by multiplying historical and anticipated financial metrics by a multiple that was derived from an analysis of comparable publicly traded companies.

The GPC Method estimates enterprise value based on a comparison of our company to comparable public companies in a similar line of business.

From the comparable companies, a representative market multiple is determined and subsequently applied to our historical and prospective financial results to estimate the enterprise value.

● The Merger and Acquisition Method, a form of the Market Approach, was used to estimate the enterprise value by multiplying historical financial metrics by a multiple that was derived from an analysis of companies that were the target of a merger or acquisition transaction.

Application of these approaches involves the use of estimates, judgments and assumptions that are highly complex and subjective, including those regarding our future expected revenue, expenses, cash flows, discount rates, market multiples, the selection of comparable public companies and the probability of future events.

We then subtracted the interest-bearing debt from the enterprise value to determine the operating equity value.

The operating equity value is then adjusted for cash and cash equivalents to determine the total equity value.

We then allocated the total equity value of EQT to the Class A Units and the various Class B Units, by utilizing the appropriate option pricing framework.

We concluded on the fair value of the Class A Units and the various Class B Units by taking into consideration the relative rights and privileges of the various security classes as well as the following assumptions of the option pricing framework:

Expected Exercise Term .

We estimate the expected life of equity awards based upon the timing of a potential liquidity event.

Expected Equity Volatility.

Prior to filing the IPO, we were a private entity and therefore, the selected equity volatility was based on the historical and implied volatility of comparable publicly traded companies over a similar expected term.

This is representative of the expected future equity volatility of the Company and of the equity volatility of EQT since its equity is similar.

Risk-Free Interest Rates.

We based the risk-free interest rate on the rate for a U.S.

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

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

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

Arrangements with Multiple Performance Obligations

For contracts with multiple performance obligations, such as a software license plus software training, implementation, and/or maintenance/support, or in contracts where there are multiple software licenses, the Company determines if the products or services are distinct and allocates the consideration to each distinct performance obligation on a relative standalone selling price basis (“SSP”).

The delivery of a particular type of software and each of the user licenses would be one performance obligation.

Additionally, any training, implementation, or support and maintenance promises as part of the software license agreement would be considered separate performance obligations, as those promises are distinct and separately identifiable from the software licenses.

The payment terms in these arrangements are less than one year such that there is no significant financing component to the transaction.

Goodwill and Other Intangible Assets

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

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

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

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

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

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

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

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

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non-compete agreements — two to five years;

tradenames — 20 years;

customer relationships — 11 to 16 years;

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

We are subject to the income tax laws and regulations of the many jurisdictions in which we operate.

These tax laws and regulations are complex and involve uncertainties in the application to our facts and circumstances that may be open to interpretation.

We account for uncertainty in income taxes using a two-step approach.

The first step requires the Company to conclude that a tax position, based solely on its technical merits, is more likely than not to be sustained upon examination by a tax authority.

The second step requires to measure the largest amount of benefit, determined on a cumulative probability basis, that is more likely than not to be realized upon ultimate settlement with tax authority.

We recognize benefits for these uncertain tax positions in the period during which, based on all available evidence, we believe it is more likely than not (a likelihood of more than 50%) that the position will be sustained upon examination.

This process is inherently subjective since it requires our assessment of the probability of future outcomes.

We evaluate these uncertain tax positions on a quarterly basis, including consideration of changes in facts and circumstances.

On a quarterly basis, we also assess the likelihood that we will be able to recover our deferred tax assets against future sources of taxable income and reduce the carrying amounts of deferred tax assets by recording a valuation allowance if, based on the available evidence, it is more likely than not (a likelihood of more than 50%) that all or a portion of such assets will not be realized.

Business Acquisitions

When we acquire businesses, we allocate the purchase price to tangible assets and liabilities and identifiable intangible assets acquired at their acquisition date fair values.

Any residual purchase price is recorded as goodwill.

We also estimate the fair value of any contingent consideration using Level 3 unobservable inputs.

Our estimates of fair value are based upon assumptions believed to be reasonable but which are uncertain and involve significant judgments by management.

We classified our contingent consideration as a liability in a recent acquisition and will remeasure the fair value of contingent liability quarterly until the contingency is resolved.

The changes in fair value will be recognized in earnings in our consolidated statements of operations and comprehensive income (loss).

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 consolidated financial statements appearing elsewhere in this filing, such standards will not have a material impact on our consolidated financial statements or do not otherwise apply to our operations.

We have reviewed all recently issued standards and have determined that, other than as disclosed in Note 2 to our consolidated financial statements appearing elsewhere in this annual report, such standards will not have a material impact on our consolidated financial statements or do not otherwise apply to our operations.

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-K

Item 7. Management’s Discussion and Analysis