What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-08 compared with 2022-11-07 · 176 added, 274 removed, 219 unchanged (67% of the section changed)

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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.

Moreover, 20 global regulatory authorities license our biosimulation software to independently analyze, verify, and review regulatory submissions, including the FDA, Health Canada, Japan’s Pharmaceuticals and Medical Devices Agency, and UK’s Medicines and Healthcare Products Regulatory Agency.

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.

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

Our solutions are underpinned by SaaS-based value communication tools.

With continued innovation in and adoption of our biosimulation software, technology, and services, we believe more biopharmaceutical companies worldwide will leverage more of our end-to-end platform to reduce cost, accelerate speed to market, and ensure safety and efficacy of medicines for all patients.

Public Offering

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

We did not offer any common stock in 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 form the sale of the shares of common stock by the selling stockholders.

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 artificial intelligence (machine learning) and SaaS-based value communication tools.

Public Offerings and Other Key Shareholders Transactions

On August 11, 2022, the Company completed a 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 (i) 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;

(ii) 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;

and (iii) a Registration Rights Agreement, which contains provisions that entitle Arsenal to certain rights to have their securities registered by the Company under the Securities Act.

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

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

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

(ii) sales and marketing to promote our solutions to new and existing customers and in existing and expanded geographies;

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

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

and (v) complementary business.

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

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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.

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.

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 recommend against the use of, our products and services.

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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.

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.

Impact of COVID-19

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

As of September 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.

Macroeconomic challenges, including COVID-19

Uncertain macroeconomic conditions, including higher inflation, rising interest rates and instability in the financial system, geopolitical conflicts, and the residual effects of the COVID-19 pandemic, may pose challenges to our business.

As of March 31, 2023, we believe there have been and will be short-term impacts on our business;

for instance, 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., but given the evolution of COVID-19 since its onset, including the proliferation of variants, we cannot predict the impact of future virus surges on our business and will continue to closely monitor the impact of COVID-19 on our business and our industry generally.

Non-GAAP Measures

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

asset amortization, equity-based compensation expense, acquisition and integration expense, and other items not indicative of our ongoing operating performance.

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.

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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 condensed consolidated statements of operations that are necessary to run our business.

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

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

THREE MONTHS ENDED SEPTEMBER 30,

NINE MONTHS ENDED SEPTEMBER 30,

The following table reconciles net income to adjusted EBITDA :

THREE MONTHS ENDED MARCH 31,

(in thousands)

Net income (loss) (a)

Net income (a)

Interest expense (a)

Interest income (a)

(Benefit from) provision for income taxes(a)

Provision for income taxes (a)

Depreciation and amortization expense (a)

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Equity-based compensation expense (b)

Acquisition-related expenses (d)

Transaction-related expenses (e)

Severance expense (f)

Loss on disposal of fixed assets (g)

Executive recruiting expense (h)

First-year Sarbanes-Oxley implementation costs (i)

Change in fair value of contingent consideration (d)

Acquisition-related expenses (e)

Integration expense (f)

Transaction-related expenses (g)

Loss on disposal of fixed assets (h)

Executive recruiting expense (i)

First-year Sarbanes-Oxley implementation costs (j)

Adjusted EBITDA

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

THREE MONTHS ENDED SEPTEMBER 30,

NINE MONTHS ENDED SEPTEMBER 30,

The following table reconciles net income to adjusted net income:

THREE MONTHS ENDED MARCH 31,

(in thousands)

Net income (loss) (a)

Net income (a)

Currency (gain) loss (a)

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Amortization of acquisition-related intangible assets (c)

Acquisition-related expenses (d)

Transaction-related expenses (e)

Severance expense (f)

Loss on disposal of fixed assets (g)

Executive recruiting expense (h)

First-year Sarbanes-Oxley implementation costs (i)

Income tax expense impact of adjustments (j)

Change in fair value of contingent consideration (d)

Acquisition-related expenses (e)

Integration expense (f)

Transaction-related expenses (g)

Loss on disposal of fixed assets (h)

Executive recruiting expense (i)

First-year Sarbanes-Oxley implementation costs (j)

Income tax expense impact of adjustments (k)

Adjusted net income

The following table reconciles diluted earnings per share to adjusted diluted earnings per share:

THREE MONTHS ENDED SEPTEMBER 30,

NINE MONTHS ENDED SEPTEMBER 30,

(in thousands except share and per share data)

THREE MONTHS ENDED MARCH 31,

Diluted earnings per share (a)

Currency gain (a)

Currency (gain) loss (a)

Equity-based compensation expense (b)

Amortization of acquisition-related intangible assets (c)

Acquisition-related expenses (d)

Transaction-related expenses (e)

Severance expense (f)

Loss on disposal of fixed assets (g)

Executive recruiting expense (h)

First-year Sarbanes-Oxley implementation costs (i)

Income tax expense impact of adjustments (j)

Change in fair value of contingent consideration (d)

Acquisition-related expenses (e)

Integration expense (f)

Transaction-related expenses (g)

Loss on disposal of fixed assets (h)

Executive recruiting expense (i)

First-year Sarbanes-Oxley implementation costs (j)

Income tax expense impact of adjustments (k)

Adjusted Diluted Earnings Per Share

Diluted weighted average common shares outstanding

Effect of potentially dilutive shares outstanding (k)

Effect of potentially dilutive shares outstanding (l)

Diluted weighted average common shares outstanding

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

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

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

(i) 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.

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

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

(d) Represents expense associated with remeasuring fair value of contingent consideration of business acquisition.

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

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

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

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

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

(l) 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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● Software licenses :

We recognize revenue for software license fees up front, upon delivery of the software license.

We recognize revenue for software license fees upfront, upon delivery of the software license.

● Software subscription :

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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.

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

● Software maintenance :

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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.

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

Cost of Revenues

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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.

R&D 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, 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 .

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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 interest income and 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 we continue to grow net income.

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

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

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

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

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

Since our inception, and as of March 31, 2023, we have completed 17 acquisitions, of which 12 have included software or technology.

Details of acquisitions that have closed since the beginning of fiscal year 2022 are provided below.

We continually seek and assess a range of highly focused opportunities in our immediately addressable market and in related adjacent markets, whether through acquisitions, licenses, or partnerships.

Integrated Nonclinical Development Solutions, Inc.

On January 3, 2022, we completed the acquisition of INDS 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 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 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

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

Vyasa Analytics, LLC

On December 28, 2022, the Company completed the acquisition of 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 condensed consolidated financial statements.

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 were assigned to developed technology, customer relationships, trademarks, non-compete agreements and goodwill, respectively.

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

The contingent consideration was classified as a liability and included in other long-term liabilities on the Company’s condensed consolidated balance sheet, which is remeasured on a recurring basis at fair value for each reporting period.

Any changes in the fair value of these contingent liabilities are included in the earnings in the condensed consolidated statements of operations and comprehensive income (loss).

At March 31, 2023, the contingent consideration was remeasured to $21.1 million, resulting in $1.3 million adjustment to fair value.

For more information about our acquisitions, see Note 5.

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Results of Operations

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

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

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

THREE MONTHS ENDED SEPTEMBER 30,

( in thousands)

Total revenues

Revenues increased $10.8 million, or 15%, to $84.7 million for the three months ended September 30, 2022 as compared to the same period in 2021.

Excluding $7.7 million revenue from Pinnacle, which was acquired in late 2021, the revenues increased $3.0 million, or 4%.

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

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

Software revenues increased $9.1 million, or 47%, to $28.4 million for the three months ended September 30, 2022 as compared to the same period in 2021.

Excluding $7.3 million revenue from Pinnacle, the revenues from software increased $1.9 million, or 10%.

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 $1.6 million, or 3%, to $56.3 million for the three months ended September 30, 2022, as compared to the same period in 2021.

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

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

Cost of Revenues

THREE MONTHS ENDED SEPTEMBER 30,

(in thousands)

Cost of revenues

Cost of revenues increased by $4.0 million, or 14%, to $32.8 million for the three months ended September 30, 2022 as compared to the same period in 2021.

The increase was primarily due to a $1.6 million increase in intangible assets amortization, a $1.0 million increase in stock-based compensation costs, a $0.4 million increase in employee-related costs, a $0.4 million increase in equipment and travel expenses, and a $0.5 million increase related to cost of licenses.

Sales and Marketing Expenses

THREE MONTHS ENDED SEPTEMBER 30,

(in thousands)

Sales and marketing

% of total revenues

Sales and marketing expenses increased by $1.3 million, or 25%, to $6.4 million for the three months ended September 30, 2022 as compared to the same period in 2021.

Sales and marketing expenses increased primarily due to a $1.1 million increase in employee-related costs resulting from head count growth, and a $0.5 million increase in marketing, consulting and travel costs, partially offset by a $0.4 million decrease in stock-based compensation costs.

Research and Development Expenses

THREE MONTHS ENDED SEPTEMBER 30,

(in thousands)

Research and development

% of total revenues

Research and development expenses increased by $1.8 million, or 39%, to $6.3 million for the three months ended September 30, 2022, as compared to the same period in 2021.

The increase in research and development expenses was

primarily due to a $2.3 million increases in employee-related costs primarily resulting from head count growth and a $0.4 million increase in stock-based compensation cost, partially offset by a $0.9 million increase in capitalized cost in R&D.

General and Administrative Expenses

THREE MONTHS ENDED SEPTEMBER 30,

(in thousands)

General and administrative

% of total revenues

General and administrative expenses decreased by $8.9 million, or 34%, to $17.3 million for the three months ended September 30, 2022 as compared to the same period in 2021.

The decrease in general and administrative expenses was primarily due to a $7.5 million decrease in business acquisition costs, $2.4 million decrease in stock-based compensation costs, partially offset by a $0.5 million increase in employee-related costs, and a $0.4 million increase in transaction cost.

Intangible Asset Amortization

THREE MONTHS ENDED SEPTEMBER 30,

(in thousands)

Intangible asset amortization

% of total revenues

Intangible asset amortization expense increased by $1.0 million, or 10%, to $10.6 million for the three months ended September 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 SEPTEMBER 30,

(in thousands)

Depreciation and amortization

% of total revenues

Depreciation and amortization expense decreased by $0.1 million, or 22%, to $0.4 million for the three months ended September 30, 2022, as compared to the same period in 2021.

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

Interest Expense

THREE MONTHS ENDED SEPTEMBER 30,

(in thousands)

Interest expense

% of total revenues

Interest expense increased by $1.9 million, or 59%, to $5.2 million for the three months ended September 30, 2022 as compared to the same period in 2021.

The increase in interest expense was primarily due to increased interest on term loan debt due to market interest rates increase reflected on the debt interest.

THREE MONTHS ENDED SEPTEMBER 30,

(in thousands)

% of total revenues

Net other income increased by $2.2 million, to $2.9 million for the three months ended September 30, 2022 as compared to the same period in 2021.

The increase in other income was primarily due to a $2.0 million increase in remeasurement gains related to the fluctuation of foreign currency exchange rates and a $0.2 million increase in interest income.

Provision for Income Taxes

THREE MONTHS ENDED SEPTEMBER 30,

( in thousands)

Provision for income taxes

Effective income tax rate

Income tax expense was $4.6 million, resulting in an effective income tax rate of 54% for the three months ended September 30, 2022 as compared to income tax benefit of $1.6 million, or an effective income tax rate of 48%, for the same period in 2021.

Our income tax expense for the three months ended September 30, 2022 and 2021 was primarily due to the tax effects of U.S.

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

earnings, the relative mix of domestic and international earnings, and discrete tax items including $1.4 million corporate income taxes and interest assessed by the Portuguese Tax Authority (“PTA”) for 2012, 2014, and 2019.

Net Income (loss)

THREE MONTHS ENDED SEPTEMBER 30,

(in thousands)

Net income (loss)

Net income was $3.9 million, representing a $5.7 million increase in net income for the three months ended September 30, 2022 as compared to a net loss of $1.8 million in the same period of 2021.

The increase in net income was primarily due to a $10.8 million increase in total revenue, a $4.9 million decrease in operating expenses, and a $2.0 million currency gain, partially offset by a $4.0 million increase in cost of revenue, a $6.2 million increase in tax expense, and a $1.9 million increase in interest expense.

Nine Months Ended September 30, 2022 Versus Nine Months Ended September 30, 2021

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

NINE MONTHS ENDED SEPTEMBER 30,

We have included the results of operations of acquired companies in our consolidated results of operations from the date of their respective acquisitions, which impacts the comparability of our results of operations when comparing results for the three months ended March 31, 2023 to the three months ended March 31, 2022.

Three Months Ended March 31, 2023 Versus Three Months Ended March 31, 2022

The following table summarizes our unaudited statements of operations data for the three months ended March 31, 2023 and 2022:

THREE MONTHS ENDED MARCH 31,

( in thousands)

Total revenues

Revenues increased $38.3 million, or 18%, to $249.0 million for the nine months ended September 30, 2022 as compared to the same period in 2021.

Excluding $20.7 million revenue from Pinnacle, which was acquired in late 2021, the revenues increased $17.6 million, or 8%.

Revenues increased $8.8 million, or 11%, to $90.3 million for the three months ended March 31, 2023 as compared to the same period in 2022.

The overall increase in revenues was primarily due to growth in our technology-driven services and software product offerings from client expansion and new customer acquisitions.

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

Software revenues increased $25.0 million, or 41%, to $86.3 million for the nine months ended September 30, 2022 as compared to the same period in 2021.

Excluding $19.3 million in revenue from Pinnacle, the revenues from software increased $5.7 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.

Software revenues increased $3.8 million, or 13%, to $33.0 million for the three months ended March 31, 2023, as compared to the same period in 2022.

The overall growth is primarily attributable to client expansion and new customer acquisitions.

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

Services revenues increased $13.2 million, or 9%, to $162.7 million for the nine months ended September 30, 2022 as compared to the same period in 2021.

Services revenues increased $4.9 million, or 9%, to $57.3 million for the three months ended March 31, 2023, as compared to the same period in 2022.

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

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Cost of Revenues

NINE MONTHS ENDED SEPTEMBER 30,

THREE MONTHS ENDED MARCH 31,

(in thousands)

Cost of revenues

Cost of revenues increased by $18.5 million, or 22%, to $100.8 million for the nine months ended September 30, 2022 as compared to the same period in 2021.

The increase was primarily due to a $9.2 million increase in employee-related costs resulting from billable head count growth, a $5.0 million increase in intangible assets amortization, a $3.1 million increase in stock-based compensation cost, a $1.3 million increase related to cost of licenses, and a $1.4 million increase in travel, equipment and other miscellaneous operating expenses, partially offset by a $1.7 million decrease in consulting and professional services.

Cost of revenues increased by $2.1 million, or 6%, to $34.9 million for the three months ended March 31, 2023, as compared to the same period in 2022.

The increase was primarily due to a $1.3 million increase in employee-related costs resulting from billable head count growth, a $0.3 million increase in stock-based compensation costs, a $0.3 million increase in intangible assets amortization, and a $0.3 million increase in travel expenses.

Sales and Marketing Expenses

NINE MONTHS ENDED SEPTEMBER 30,

THREE MONTHS ENDED MARCH 31,

(in thousands)

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% of total revenues

Sales and marketing expenses increased by $6.2 million, or 46%, to $19.6 million for the nine months ended September 30, 2022 as compared to the same period in 2021.

Sales and marketing expenses increased primarily due to a $4.5 million increase in employee-related costs resulting from head count growth, a $1.6 million increase in travel, consulting and professional services, marketing, equipment, and other miscellaneous operating expenses.

Sales and marketing expenses increased by $1.9 million, or 31%, to $8.0 million for the three months ended March 31, 2023 as compared to the same period in 2022.

Sales and marketing expenses increased primarily due to a $1.5 million increase in employee-related costs resulting from head count growth, and a $0.6 million increase in marketing and travel costs, partially offset by a $0.3 million decrease in stock-based compensation costs.

Research and Development Expenses

NINE MONTHS ENDED SEPTEMBER 30,

THREE MONTHS ENDED MARCH 31,

(in thousands)

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% of total revenues

Research and development expenses increased by $7.7 million, or 56%, to $21.6 million for the nine months ended September 30, 2022 as compared to the same period in 2021.

The increase in research and development expenses was primarily due to a $7.6 million increase in employee-related costs primarily resulting from headcount growth and a $2.6 million increase in stock-based compensation cost, partially offset by a $2.7 million increase in capitalized cost in R&D.

Research and development expenses increased by $1.7 million, or 23%, to $9.3 million for the three months ended March 31, 2023, as compared to the same period in 2022.

The increase in research and development expenses was primarily due to a $1.5 million increase in employee-related costs primarily resulting from head count growth and a $0.3 million increase in stock-based compensation cost.

General and Administrative Expenses

NINE MONTHS ENDED SEPTEMBER 30,

THREE MONTHS ENDED MARCH 31,

(in thousands)

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% of total revenues

General and administrative expenses decreased by $7.4 million, or 12%, to $53.4 million for the nine months ended September 30, 2022, as compared to the same period in 2021.

The decrease in general and administrative expenses was primarily due to a $8.9 million decrease in acquisition-related costs, a $2.7 million decrease in stock-based compensation costs, and a $1.1 million decrease in transaction costs, partially offset by a $3.0 million increase in employee-related costs resulting from head count growth, and a $1.8 million increase in professional and consulting expenses.

General and administrative expenses increased by $1.4 million, or 8%, to $19.8 million for the three months ended March 31, 2023 as compared to the same period in 2022.

The increase in general and administrative expenses was primarily due to a $1.3 million increase related to change in fair value of contingent consideration, a $0.7 million increase in stock-based compensation cost, and a $0.4 million increase in professional and consulting expenses, partially offset by a $0.7 million decrease in first-year Sarbanes-Oxley implementation costs, and a $0.4 million decrease in insurance cost.

Intangible Asset Amortization

NINE MONTHS ENDED SEPTEMBER 30,

THREE MONTHS ENDED MARCH 31,

(in thousands)

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% of total revenues

Intangible asset amortization expense increased by $2.6 million, or 9%, to $31.1 million for the nine months ended September 30, 2022 as compared to the same period in 2021.

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

Intangible asset amortization expense increased by $0.4 million, or 4%, to $10.5 million for the three months ended March 31, 2023, as compared to the same period in 2022.

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

Depreciation and Amortization Expense

NINE MONTHS ENDED SEPTEMBER 30,

THREE MONTHS ENDED MARCH 31,

(in thousands)

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% of total revenues

Depreciation and amortization expense decreased by $0.4 million, or 22%, to $1.3 million for the nine months ended September 30, 2022 as compared to the same period in 2021.

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

Depreciation and amortization expense of $0.4 million was relatively flat for the three months ended March 31, 2023 as compared to the same period in 2022.

Interest Expense

NINE MONTHS ENDED SEPTEMBER 30,

THREE MONTHS ENDED MARCH 31,

(in thousands)

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% of total revenues

Interest expense decreased by $1.2 million, or 9%, to $12.3 million for the nine months ended September 30, 2022 as compared to the same period in 2021.

The decrease in interest expense was primarily due to $3.3 million of interest expense reclassed in from other comprehensive income due to hedge ineffectiveness in 2021, and partially offset by a $1.9 million interest increase on term loan debt.

NINE MONTHS ENDED SEPTEMBER 30,

Interest expense increased by $2.2 million, or 70%, to $5.5 million for the three months ended March 31, 2023 as compared to the same period in 2022.

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

The increase in interest expense was partially offset by $1.0 million interest income from interest swap hedge activities.

Net other income

THREE MONTHS ENDED MARCH 31,

(in thousands)

Net other income

% of total revenues

Net of other income increased by $6.0 million to $6.2 million for the nine months ended September 30, 2022 as compared to the same period in 2021.

The increase in other income was primarily due to a $5.3 million increase in remeasurement gains related to the fluctuation of foreign currency exchange rates, a $0.3 million increase in other foreign currency transactions, and a $0.2 million decrease in losses from fixed asset disposal.

Net other income decreased by $0.3 million to $0.5 million for the three months ended March 31, 2023, as compared to the same period in 2022.

The decrease in other income was primarily due to a $1.6 million decrease in remeasurement gains related to the fluctuation of foreign currency exchange rates, and partially offset by a $1.3 million increase in interest income primarily from cash investments.

Provision for Income Taxes

NINE MONTHS ENDED SEPTEMBER 30,

THREE MONTHS ENDED MARCH 31,

( in thousands)

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Effective income tax rate

Income tax expense was $9.5 million, resulting in an effective income tax rate of 63% for the nine months ended September 30, 2022 as compared to an income tax expense of $0.3 million, or an effective income tax rate of (11)%, for the same period in 2021.

Our income tax expense for the nine months ended September 30, 2022 and 2021 was primarily due to the tax effects of U.S.

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

and the relative mix of domestic and international earnings and discrete tax items including $1.4 million for corporate income taxes and interest assessed by the Portuguese Tax Authority (“PTA”) for 2012, 2014, and 2019.

Net Income (loss)

NINE MONTHS ENDED SEPTEMBER 30,

Our income tax expense was $1.1 million, resulting in an effective income tax rate of 45% for the three months ended March 31, 2023 as compared to income tax expense of $1.5 million, or an effective income tax rate of 41%, for the same period in 2022.

Our income tax expense for the three months ended March 31, 2023 and 2022 was primarily due to the tax effects of U.S.

pre-tax income, the relative mix of domestic and international earnings, the impact of non-deductible items, adjustments to the valuation allowances, the effects of tax elections made for U.K.

earnings, and discrete tax items.

THREE MONTHS ENDED MARCH 31,

(in thousands)

Net income (loss)

Net income increased by a $9.1 million, or 256%, to $5.6 million for the nine months ended September 30, 2022, as compared to a net loss of $3.6 million in the same period of 2021.

The $9.1 increase in net income was primarily due to a $38.3 million increase in total revenue, a $5.7 million foreign currency gains related to remeasurement and other currency gains, and a $1.2 million decrease in interest expense, partially offset by a $18.5 million increase in cost of revenue, an $8.8 million increase in operating expenses, and a $9.1 million increase in tax expense.

Net income was $1.4 million, decreased $0.9 million for the three months ended March 31, 2023, as compared to the same period in 2022.

The decrease was primarily due to a $5.4 million increase in operating expenses, a $2.2 million increase in interest expense, a $2.1 million increase in cost of revenues, and a $1.6 million currency remeasurement loss, partially offset by a $8.8 million increase in revenue and a $1.3 million increase in interest income and a $0.4 million decrease in tax expense.

Liquidity and Capital Resources

We have consistently generated positive cash flow from operations, providing $57.1 million and $39.6 million as a source of funds for the nine months ended September 30, 2022 and 2021, respectively.

We have consistently generated positive cash flow from operations, providing $10.0 million and $9.8 million as a source of funds for the three months ended March 31, 2023 and 2022, 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 lines of credit.

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

September 30, 2022

The following table provides a summary of the major sources of liquidity for the three and twelve months periods ended at March 31, 2023 and December 31, 2022 and as of March 31, 2023 and December 31, 2022.

March 31, 2023

December 31, 2022

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Cash and cash equivalents (2)

Net proceeds from issuing common stock

Term loan credit facilities

Revolving line of credit (3)

(1) Cash balance as of September 30 , 2022 inclu ded $46.0 million ca sh a nd cash equivalents held outside of the United States.

(1) Net cash for three months ended at March 31, 2023 and twelve months ended at December 31, 2022.

(2) Cash balance as of March 31, 2023 and December 31, 2022 included $62.1 million and $56.4 million cash and cash equivalents, respectively, held outside of the United States.

(3) Available borrowings under the revolving lines of credits as of March 31, 2023 and December 31, 2022 were reduced by $120 and $120 standby letters of credit issued to a landlord in lieu of a security deposit in addition to any outstanding borrowings.

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

We also have future cash obligations of $14.8 million for lease contracts, which have remaining terms of one to six years.

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

The principal amount of long-term debt outstanding as of March 31, 2023 matures in the following years:

Remainder of 2023

(In thousands)

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.

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.

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

NINE MONTHS ENDED SEPTEMBER 30,

THREE MONTHS ENDED MARCH 31,

(in thousands)

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

Net cash provided by operating activities in the first nine months of 2022 was $57.1 million, compared to $39.6 million in the same period of 2021.

The $17.5 million increase in cash from operating activities was primarily due to cash collected from higher revenues and less cash used for prepaid and other assets, partially offset by the increase in cash utilized for accounts payable and other liabilities.

Net cash provided by operating activities in the first three months of 2023 was $10.0 million, compared to $9.8 million in the same period of 2022.

The $0.2 million increase in cash from operating activities was primarily due to higher cash collected from accounts receivable and less cash utilized for other liabilities, partially offset by reduced cash inflow from deferred revenues and more cash used for paying down of accounts payable and expense accrued.

Investing Activities

Net cash used by investing activities in the first nine months of 2022 was $15.2 million, a decrease of $5.4 million, compared to $20.6 million in the same period of 2021.

The change in investing activities was primarily due to an $8.2 million decrease in cash payments in connection with business acquisitions, partially offset by a $2.9 million increase in cash utilized in capitalized development costs and capital expenditures to support our growth.

Net cash used by investing activities in the first three months of 2023 was $2.7 million, a decrease of $5.9 million, compared to $8.7 million in the same period of 2022.

The change in investing activities was primarily due to a $6.0 million decrease in cash payments in connection with business acquisitions.

Financing Activities

Net cash used by financing activities in the first nine months of 2022 was $6.4 million, compared to $127.0 million cash provided in the same period of 2021.

The $133.4 million change in cash flow in financing activities was primarily due to the $133.4 million cash proceeds received in the third quarter of 2021 from issuing common stock of the Company.

In addition, in comparing the first nine months of 2022 with the same period of 2021, cash payments increased $2.7 million in connection with share awards vested and withheld for payroll tax, and offset by a $2.9 million decrease related to debt issuance costs.

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 the 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.

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 they 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.

Net cash used by financing activities in the first three months of 2023 was $0.9 million, compared to $1.5 million cash used in the same period of 2022.

The $0.7 million change in cash flow for financing activities was primarily due to a decrease in cash payment on financing component of interest rate swap.

We have been a party to a Credit Agreement since August 2017 that provided for a senior secured term loan and commitments under a revolving credit facility.

The agreement was modified several times.

The Company and the lenders modified the credit Credit agreement Agreement again on June 17, 2021, 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 $80,000 in commitments available under the revolving line of credit (resulting in an

aggregate amount of commitments of $100,000).

The term loan under the modified Amendment amendment Credit Agreement has substantially the same terms as the existing term loans and revolving credit commitments.

The Credit Agreement is collateralized by substantially all U.S.

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

As of September 30, 2022, we had $298.2 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 September 30, 2022, we were in compliance with the covenants of the Credit Agreement.

As of March 31, 2023, we had $296.7 million of outstanding borrowings on the term loan, and $100.0 million of availability under the revolving credit facility under the Credit Agreement, and outstanding letters of credit of $0.1 million under the Credit Agreement.

As of March 31, 2023, we were in compliance with the covenants of the Credit Agreement.

Contractual Obligations and Commercial Commitments

There have been no material changes to our contractual obligations during the nine months ended September 30, 2022 from those disclosed in our 2021Annual Report, except for payments made in the ordinary course of business.

We recorded income tax expense of $9.5 million for the nine months ended September 30, 2022, and income tax expense of $0.3 million for the nine months ended September 30, 2021.

As of September 30, 2022, we had federal and state net operating losses(“NOLs”) of approximately $2.4 million and $2.6 million, respectively, which are available to reduce future taxable income and expire between 2024 and 2040 and 2029 and 2039, respectively.

There have been no material changes to our contractual obligations during the three months ended March 31, 2023 from those disclosed in our 2022 Annual Report, except for payments made in the ordinary course of business.

We recorded income tax expense of $1.1 million for the three months ended March 31, 2023 and income tax expense of $1.5 million for the three months ended March 31, 2022.

As of March 31, 2023, 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.

We had federal and state R&D tax credit carryforwards of approximately $0.4 million and $0.1 million, respectively, to offset future income taxes, which expire between 2025 and 2042.

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These carryforwards that may be utilized in a future period may be subject to limitations based upon changes in the ownership of our stock in a future period.

Additionally, we carried forward foreign NOLs of approximately $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.

Additionally, we carried forward foreign NOLs of approximately $65.8 million which will start to expire in 2022, foreign research and development credits of $0.3 million that expire in 2029, and Canadian investment tax credits of approximately $3.5 million which expire between 2030 and 2040.

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 September 30, 2022, the valuation allowance remained unchanged from December 31, 2021.

As required by 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.

At the foreign subsidiaries level, 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 $25.7 million is recorded at December 31, 2022.

As of March 31, 2023, the valuation allowance remained unchanged from December 31, 2022.

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.

During the periods presented, we did not have, and currently 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 2022 Annual Report.

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 the 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.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the 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 2021 Annual Report.

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

There were no significant changes to our critical accounting estimates during the three months ended March 31, 2023.

Recently Adopted and Issued Accounting Standards

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For information regarding our exposure to certain market risks, see “Quantitative and Qualitative Disclosures about Market Risk,” in Part II, Item 7A of the Company’s 2022 Annual Report.

There were no material changes to the Company’s market risk exposure during the nine months ended September 30, 2022.

There were no material changes to the Company’s market risk exposure during the three months ended March 31, 2023.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis