What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-09 compared with 2023-05-08 · 264 added, 115 removed, 280 unchanged (58% of the section changed)

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For over two decades, we have honed and validated our biosimulation technology with an abundance of data from scientific literature, lab research, and preclinical and clinical studies.

Many of our solutions are underpinned by artificial intelligence (machine learning) and SaaS-based value communication tools.

In turn, our customers use biosimulation to conduct virtual trials to answer critical questions, such as:

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Biosimulation results need to be incorporated into regulatory documents for compelling submissions.

Accordingly, we provide regulatory science solutions and integrate them with biosimulation so that our customers can navigate the complex and evolving regulatory landscape and maximize their chances of approval.

Accordingly, we provide regulatory science and market access 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 300 regulatory submissions over the past five years.

Our team of regulatory professionals has extensive experience applying industry guidelines and global regulatory requirements.

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 artificial intelligence (machine learning) and 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 the safety and efficacy of medicines for all patients.

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Public Offerings and Other Key Shareholders Transactions

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

Bookings (in millions)

(in millions)

Bookings 112.7 85.9 108.5 100.3

Renewal Rate 90 % 93 % 92 % 92 %

Investments in Growth

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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;

(ii) sales and marketing to promote our solutions to new and

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existing customers and in existing and expanded geographies;

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

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In the technology-driven services market, we compete with specialized companies, in-house teams at biopharmaceutical companies, and academic and government institutions.

In some standard biosimulation services, and in regulatory and market access, we also compete with contract research organizations.

In some standard biosimulation services, and in regulatory and market access, we also compete with contract research organizations, who may also offer more traditional methods of drug development and clinical trial design that are used in lieu of biosimulation.

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

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

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

Some clinical research

organizations or technology companies may decide to enter into or expand their offerings in the biosimulation area, whether through acquisition or internal development.

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

Some clinical research organizations or technology companies may decide to enter into or expand their offerings in the biosimulation area, whether through acquisition or internal development.

We also face competition from open source software initiatives, in which developers provide software and intellectual property free of charge, such as R and PK-Sim software.

In addition, some of our customers spend significant internal resources in order to develop their own solutions.

Macroeconomic challenges, including COVID-19

Macroeconomic challenges

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.

We believe that any impacts these conditions may have on our business would be transitory and that we are well-equipped to manage them 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.

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effectiveness of our business strategies, to make budgeting decisions, to make certain compensation decisions, and to compare our performance against that of other peer companies using similar measures.

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

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

The following table reconciles net income to adjusted EBITDA :

THREE MONTHS ENDED MARCH 31,

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

THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,

2023 2022 2023 2022

(in thousands)

Net income (a)

Net income (loss)(a) $ 4,706 $ (589) $ 6,064 $ 1,621

Interest expense(a) 5,668 3,879 11,143 7,107

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Adjusted EBITDA $ 32,373 $ 27,959 $ 64,679 $ 55,609

The following table reconciles net income to adjusted net income:

THREE MONTHS ENDED MARCH 31,

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

THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,

2023 2022 2023 2022

(in thousands)

Net income (a)

Net income (loss) (a) $ 4,706 $ (589) $ 6,064 $ 1,621

Currency (gain) loss(a) 1,120 (2,558) 2,014 (3,263)

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Adjusted net income $ 18,363 $ 14,617 $ 37,674 $ 31,546

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

THREE MONTHS ENDED MARCH 31,

THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,

2023 2022 2023 2022

(in thousands except share and per share data)

Diluted earnings per share(a) $ 0.03 $ — $ 0.04 $ 0.01

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Adjusted diluted earnings per share $ 0.12 $ 0.09 $ 0.24 $ 0.20

Diluted weighted average common shares outstanding

Basic weighted average common shares outstanding 158,955,822 156,478,724 158,568,575 156,209,335

Effect of potentially dilutive shares outstanding (l)

Diluted weighted average common shares outstanding

951,150 2,946,216 1,249,113 3,084,027

Adjusted diluted weighted average common shares outstanding 159,906,972 159,424,940 159,817,688 159,293,362

___________________________________

(a) Represents amounts as determined under GAAP.

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(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.

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

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

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(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.

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

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Components of Results of Operations

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• Software licenses :

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

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

• Software subscription :

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

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.

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

Cost of Revenues

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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.

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• Intangible Asset Amortization .

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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.

Since our inception, and as of June 30, 2023, we have completed 18 acquisitions, of which 13 have included software or technology.

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

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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.

The contingent consideration was classified as a liability and included in accrued liabilities and 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.

At June 30, 2023, the contingent consideration was remeasured to $22.4 million, resulting in $2.6 million adjustment to fair value.

Drug Interaction Solutions, University of Washington ("DIDB")

On June 20, 2023, the Company entered into an asset purchase agreement with the University of Washington and completed the acquisition of Drug Interaction Solutions, including the Drug Interaction Database and related products,

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from the University of Washington for total estimated consideration of $8.3 million.

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

The total estimated consideration includes a portion of contingent consideration that is payable over the next two years in cash, not to exceed $2.0 million.

Future payments of contingent consideration are based on eligible revenue for the period from July 1, 2023 through June 30, 2025.

The fair value of the contingent consideration was estimated to be $0.8 million as of the acquisition date.

Based on the Company’s preliminary purchase price allocation, approximately $0.3 million, $5.6 million, $0.4 million, and $2.3 million of the purchase price were assigned to trademarks, database content/technology, customer relationships and goodwill, respectively.

The current purchase price allocation is preliminary.

Any adjustments to the preliminary purchase price allocation identified during the measurement period, which will not exceed one year from the acquisition date, will be accounted for prospectively.

For more information about our acquisitions, see Note 5.

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Results of Operations

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

We have included the results of operations of acquired companies in our condensed consolidated results of operations from the date of their respective acquisitions, which impacts the comparability of our results of operations when comparing results for the three and six months ended June 30, 2023 to the three and six months ended at June 30, 2022.

Three Months Ended June 30, 2023 Versus Three Months Ended June 30, 2022

The following table summarizes our unaudited statements of operations data for the three months ended June 30, 2023 and 2022:

THREE MONTHS ENDED JUNE 30, CHANGE

2023 2022 $ %

(in thousands)

Software $ 33,723 $ 28,724 $ 4,999 17 %

Services 56,727 54,036 2,691 5 %

Total revenues $ 90,450 $ 82,760 $ 7,690 9 %

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 $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 $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.

Revenues increased $7.7 million, or 9%, to $90.5 million for the three months ended June 30, 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 strong demand within existing customers, client expansions, and new customers.

The increase was partially offset by a decline in regulatory revenue.

Software revenues increased $5.0 million, or 17%, to $33.7 million for the three months ended June 30, 2023 as compared to the same period in 2022, primarily driven by strong demand within existing customers, new product introductions, and expanding relationships with customers.

Services revenues increased $2.7 million, or 5% to $56.7 million for the three months ended June 30, 2023, as compared to the same period in 2022.

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.

The increase was partially offset by a decline in Regulatory revenue.

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Cost of Revenues

THREE MONTHS ENDED MARCH 31,

THREE MONTHS ENDED JUNE 30, CHANGE

2023 2022 $ %

(in thousands)

Cost of revenues $ 36,224 $ 35,194 $ 1,030 3 %

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.

Cost of revenues increased by $1.0 million, or 3%, to $36.2 million for the three months ended June 30, 2023 as compared to the same period in 2022.

The increase was primarily due to a $0.6 million increase in employee-related costs resulting from billable head count growth, a $0.4 million increase in stock-based compensation costs, a $0.2 million increase in intangible assets amortization, a $0.1 million increase in equipment, and a $0.1 million increase in travel expenses,partially offset by a $0.5 million decrease in professional and consulting costs.

Sales and Marketing Expenses

THREE MONTHS ENDED MARCH 31,

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(in thousands)

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% of total revenues 9 % 9 %

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.

Sales and marketing expenses increased by $1.0 million, or 14%, to $8.1 million for the three months ended June 30, 2023 as compared to the same period in 2022.

Sales and marketing expenses increased primarily due to a $0.9 million increase in employee-related costs primarily resulting from head count growth, a $0.2 million increase in marketing, and a $0.1 million increase in travel costs, partially offset by a $0.3 million decrease in stock-based compensation costs.

Research and Development Expenses

THREE MONTHS ENDED MARCH 31,

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(in thousands)

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% of total revenues 9 % 9 %

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.

Research and development expenses increased by $0.1 million, or 2%, to $7.9 million for the three months ended June 30, 2023, as compared to the same period in 2022.

The change in research and development expenses was primarily due to a $1.5 million increase in employee-related costs primarily resulting from head count growth, partially offset by a $0.8 million increase in capitalized cost in R&D and a $0.6 million decrease in stock-based compensation cost.

General and Administrative Expenses

THREE MONTHS ENDED MARCH 31,

THREE MONTHS ENDED JUNE 30, CHANGE

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(in thousands)

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% of total revenues 16 % 21 %

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.

General and administrative expenses decreased by $3.5 million, or 20%, to $14.2 million for the three months ended June 30, 2023 as compared to the same period in 2022.

The decrease in general and administrative expenses was primarily due to a $5.5 million decrease in stock-based compensation costs, a $0.3 million decrease in first-year Sarbanes-Oxley implementation costs, and a $0.3 million decrease in insurance expense, partially offset by a $1.3 million increase related to change in the fair value of contingent consideration, a $0.4 increase in equipment expenses, a $0.4 million increase in employee-related costs, a $0.2 increase in travel expenses, and a $0.2 million increase in executive recruiting expense.

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Intangible Asset Amortization

THREE MONTHS ENDED MARCH 31,

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(in thousands)

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% of total revenues 12 % 13 %

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.

Intangible asset amortization expense increased by $0.2 million, or 2%, to $10.6 million for the three months ended June 30, 2023, as compared to the same period in 2022.

The increase in intangible asset amortization expense was primarily due to higher amortization expense from capitalized software.

Depreciation and Amortization Expense

THREE MONTHS ENDED MARCH 31,

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(in thousands)

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% of total revenues — % 1 %

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.

Depreciation and amortization expense of $0.4 million was relatively flat for the three months ended June 30, 2023, as compared to the same period in 2022.

Interest Expense

THREE MONTHS ENDED MARCH 31,

THREE MONTHS ENDED JUNE 30, CHANGE

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(in thousands)

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% of total revenues 6 % 5 %

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.

Interest expense increased by $1.8 million, or 46%, to $5.7 million for the three months ended June 30, 20232 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.

The increase in interest expense was partially offset by a $1.3 million gain from interest swap hedge activities.

Net other income

THREE MONTHS ENDED MARCH 31,

THREE MONTHS ENDED JUNE 30, CHANGE

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(in thousands)

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% of total revenues (1) % (3) %

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.

Net other income decreased by $1.5 million, to $1.0 million for the three months ended June 30, 2023 as compared to the same period in 2022.

The decrease in net other income was primarily due to a $3.7 million increase in remeasurement losses related to the fluctuation of foreign currency exchange rates.

The decrease in net other income was partially offset by a $2.2 million increase in interest income primarily from cash investments.

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Provision for Income Taxes

THREE MONTHS ENDED MARCH 31,

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2023 2022 $ %

(in thousands)

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Effective income tax rate 44 % 121 %

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.

Income tax expense was $3.7 million, resulting in an effective income tax rate of 44% for the three months ended June 30, 2023 as compared to an income tax expense of $3.4 million, or an effective income tax rate of 121%, for the same period in 2022.

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

Net Income (loss)

THREE MONTHS ENDED JUNE 30, CHANGE

2023 2022 $ %

(in thousands)

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.

Net income (loss) $ 4,706 $ (589) $ 5,295 899 %

Net income was $4.7 million representing a $5.3 million increase in net income for the three months ended June 30, 2023 as compared to a net loss of $0.6 million in the same period of 2022.

The increase in net income was primarily due to a $7.7 million increase in total revenue, a $2.2 million increase in interest income, and a $2.2 million decrease in operating expense, partially offset by a $3.7 million increase in remeasurement losses related to the fluctuation of foreign currency exchange rates, $1.8 million increase in interest expense, a $1.0 million increase in cost of revenue, and a $0.3 million increase in tax expense.

Six Months Ended June 30, 2023 Versus Six Months Ended June 30, 2022

The following table summarizes our unaudited statements of operations data for the six months ended June 30, 2023 and 2022:

SIX MONTHS ENDED JUNE 30, CHANGE

2023 2022 $ %

(in thousands)

Software $ 66,728 $ 57,917 $ 8,811 15 %

Services 114,023 106,394 7,629 7 %

Total revenues $ 180,751 $ 164,311 $ 16,440 10 %

Revenues increased $16.4 million, or 10%, to $180.8 million for the six months ended June 30, 2023 as compared to the same period in 2022.

The increase in revenues was primarily due to growth in our technology-driven services and software product offerings from strong demand within existing customers, client expansions, and new customers.

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

Software revenues increased $8.8 million, or 15%, to $66.7 million for the six months ended June 30, 2023 as compared to the same period in 2022.

The overall growth is primarily attributable to growth in strong demand within existing customers, new product introductions, and expanding relationships with customers.

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

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Services revenues increased $7.6 million, or 7%, to $114.0 million for the six months ended June 30, 2023 as compared to the same period in 2022.

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 the fluctuation of the foreign currency exchange rates and a decline in Regulatory revenue.

Cost of Revenues

SIX MONTHS ENDED JUNE 30, CHANGE

2023 2022 $ %

(in thousands)

Cost of revenues $ 71,080 $ 67,983 $ 3,097 5 %

Cost of revenues increased by $3.1 million, or 5%, to $71.1 million for the six months ended June 30, 2023 as compared to the same period in 2022.

The increase was primarily due to a $1.9 million increase in employee-related costs resulting from billable head count growth, a $0.7 million increase in stock-based compensation costs, a $0.5 million increase in intangible assets amortization, a $0.4 million increase in travel, and a $0.2 million increase in equipment, partially offset by a $0.6 million decrease in expenses of consulting and professional services and other miscellaneous operation expenses.

Sales and Marketing Expenses

SIX MONTHS ENDED JUNE 30, CHANGE

2023 2022 $ %

(in thousands)

Sales and marketing $ 16,113 $ 13,232 $ 2,881 22 %

% of total revenues 9 % 8 %

Sales and marketing expenses increased by $2.9 million, or 22%, to $16.1 million for the six months ended June 30, 2023 as compared to the same period in 2022.

Sales and marketing expenses increased primarily due to a $2.5 million increase in employee-related costs resulting from head count growth, a $0.5 million increase in travel, a $0.3 million increase in marketing, and a $0.1 million increase in consulting and professional services, partially offset by a $0.6 million decrease in stock-based compensation cost.

Research and Development Expenses

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2023 2022 $ %

(in thousands)

Research and development $ 17,175 $ 15,289 $ 1,886 12 %

% of total revenues 10 % 9 %

Research and development expenses increased by $1.9 million, or 12%, to $17.2 million for the six months ended June 30, 2023 as compared to the same period in 2022.

The increase in research and development expenses was primarily due to a $3.0 million increase in employee-related costs primarily resulting from headcount growth, partially offset by a $0.9 million increase in capitalized cost in R&D, and a $0.3 million decrease in stock-based compensation cost.

General and Administrative Expenses

SIX MONTHS ENDED JUNE 30, CHANGE

2023 2022 $ %

(in thousands)

General and administrative $ 34,017 $ 36,117 $ (2,100) (6) %

% of total revenues 19 % 22 %

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General and administrative expenses decreased by $2.1 million, or 6%, to $34.0 million for the six months ended June 30, 2023, as compared to the same period in 2022.

The decrease in general and administrative expenses was primarily due to a $4.7 million decrease in stock-based compensation costs, a $1.0 million decrease in first-year Sarbanes-Oxley implementation costs, a $0.6 million decrease in insurance expense, a $0.4 decrease in AR the allowance provision, and a $0.3 million decrease in facility and lease related expenses, partially offset by a $2.6 million increase related to the change in fair value of contingent consideration, a $0.6 million increase in employee-related costs resulting from head count growth, a $0.6 million increase in professional services expense, a $0.5 million increase in equipment expenses, a $0.4 million increase in executive recruiting expense, and a $0.3 million increase in travel expenses.

Intangible Asset Amortization

SIX MONTHS ENDED JUNE 30, CHANGE

2023 2022 $ %

(in thousands)

Intangible asset amortization $ 21,117 $ 20,504 $ 613 3 %

% of total revenues 12 % 12 %

Intangible asset amortization expense increased by $0.6 million, or 3%, to $21.1 million for the six months ended June 30, 2023 as compared to the same period in 2022.

The increase in intangible asset amortization expense is primarily due to increased amortization expenses from capitalized software.

Depreciation and Amortization Expense

SIX MONTHS ENDED JUNE 30, CHANGE

2023 2022 $ %

(in thousands)

Depreciation and amortization $ 772 $ 904 $ (132) (15) %

% of total revenues — % 1 %

Depreciation and amortization expense decreased by $0.1 million, or 15%, to $0.8 million for the six months ended June 30, 2023, as compared to the same period in 2022.

The decrease was primarily due to a decrease in depreciation and amortization from financing lease and furniture for the six months ended June 30, 2023 as compared to the same period in 2022.

Interest Expense

SIX MONTHS ENDED JUNE 30, CHANGE

2023 2022 $ %

(in thousands)

Interest expense $ 11,143 $ 7,107 $ 4,036 57 %

% of total revenues 6 % 4 %

Interest expense increased by $4.0 million, or 57%, to $11.1 million for the six months ended June 30, 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 a $2.3 million gain from interest swap hedge activities.

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Net other income

SIX MONTHS ENDED JUNE 30, CHANGE

2023 2022 $ %

(in thousands)

Net other income $ (1,516) $ (3,362) $ 1,846 (55) %

% of total revenues (1) % (2) %

Net other income decreased by $1.8 million to $1.5 million for the six months ended June 30, 2023 as compared to the same period in 2022.

The decrease in net other income was primarily due to a $5.3 million increase in remeasurement losses related to the fluctuation of foreign currency exchange rates.

The decrease in net other income was partially offset by a $3.5 million increase in interest income.

Provision for Income Taxes

SIX MONTHS ENDED JUNE 30, CHANGE

2023 2022 $ %

(in thousands)

Provision for income taxes $ 4,786 $ 4,916 $ (130) (3) %

Effective income tax rate 44 % 75 %

Income tax expense was $4.8 million, resulting in an effective income tax rate of 44% for the six months ended June 30, 2023 as compared to an income tax expense of $4.9 million, or an effective income tax rate of 75%, for the same period in 2022.

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

SIX MONTHS ENDED JUNE 30, CHANGE

2023 2022 $ %

(in thousands)

Net income $ 6,064 $ 1,621 $ 4,443 274 %

Net income increased by a $4.4 million, or 274%, to $6.1 million for the six months ended June 30, 2023, as compared to a net income of $1.6 million in the same period of 2022.

The $4.4 million increase in net income was primarily due to a $16.4 million increase in total revenue, a $3.5 million increase in interest income, partially offset by a $5.3 million increase in remeasurement losses related to the fluctuation of foreign currency exchange rates, a $4.0 million increase in interest expense, a $3.1 million increase in operating expenses, and a $3.1 million increase in cost of revenue,

Liquidity and Capital Resources

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.

We have consistently generated positive cash flow from operations, providing $28.0 million and $33.1 million as a source of funds for the six months ended June 30, 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 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

maintaining adequate balances of cash and cash equivalents, issuing common stock, and accessing credit facilities

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and revolving lines of credit.

The following table provides a summary of the major sources of liquidity for the six and twelve months periods ended at June 30, 2023 and December 31, 2022 and as of June 30, 2023 and December 31, 2022.

June 30, 2023 December 31, 2022

(in thousands)

Net cash from operating activities (1)

Cash and cash equivalents (2)

Net cash from operating activities (a)

28,015 92,543

Cash and cash equivalents (b)

245,190 236,586

Term loan credit facilities 295,960 297,470

Revolving line of credit (3)

(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.

Revolving line of credit (c)

100,000 100,000

___________________________________

(a) Net cash from operating activities for six months ended at June 30, 2023 and twelve months ended at December 31, 2022.

(b) Cash balance as of June 30, 2023 and December 31, 2022 included $66.3 million and $56.4 million cash and cash equivalents, respectively, held outside of the United States.

(c) Available borrowings under the revolving lines of credits as of June 30, 2023 and December 31, 2022 were reduced by $0.1 million and $0.1 million 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 $14.0 million for lease contracts, which have remaining terms of one to six years.

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

Remainder of 2023

(In thousands)

The principal amount of long-term debt outstanding as of June 30, 2023 matures in the following years:

Remainder of 2023 2024 2025 2026 TOTAL

Maturities $ 1,510 $ 3,020 $ 3,020 $ 288,410 $ 295,960

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

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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.

While we believe we have, and will be able to generate, sufficient liquidity to fund our operations for the foreseeable future, our sources of liquidity could be affected by factors described under “Risk Factors” in our 2022 Annual Report.

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

THREE MONTHS ENDED MARCH 31,

SIX MONTHS ENDED JUNE 30,

(in thousands)

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

Net cash provided by operating activities in the first three months of 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.

Net cash provided by operating activities in the first six months of 2023 was $28.0 million, compared to $33.1 million in the same period of 2022.

The $5.0 million decrease in cash from operating activities was primarily due to more cash being utilized to obtain prepaid and other assets, less cash received from deferred revenues, and lower cash based net income, partially offset by higher cash collected from accounts receivable.

Investing Activities

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.

Net cash used by investing activities in the first six months of 2023 was $14.5 million, an increase of $2.5 million, compared to $11.9 million in the same period of 2022.

The change in investing activities was primarily due to a $1.7 million increase in cash payments in connection with business acquisitions, and a $1.1 million increase in cash utilized in capitalized development costs, partially offset by a $0.3 million decrease in cash utilized in capital expenditures to support our growth.

Financing Activities

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.

Net cash used by financing activities in the first six months of 2023 was $7.3 million, compared to $5.1 million cash used in the same period of 2022.

The $2.2 million decrease in cash flow in financing activities was primarily due to a $3.4 million increase in cash payments in connection with share awards vested and withheld for payroll tax, partially offset by a $1.1 million decrease in cash payments on the financing component of the 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 agreement has been modified several times.

The Company and the lenders modified the Credit Agreement 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 Credit Agreement has substantially the same

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terms as the existing term loans and revolving credit commitments.

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

assets and stock pledges for the non-U.S.

subsidiaries and contain various financial and nonfinancial covenants.

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

subsidiaries and contains various financial and nonfinancial covenants.

Borrowings under the Credit Agreement were subject to a variable interest rate at LIBOR plus a margin.

The applicable margins were based on achieving certain levels of compliance with financial covenants.

We signed a LIBOR transition amendment in June 26, 2023, agreeing to adopt a new benchmark interest rate, SOFR, determined in accordance with the Credit Agreement, in order to replace LIBOR.

In order to make SOFR similar to LIBOR in terms of the overall interest rate being earned by the lenders under the Credit Agreement, a Credit Spread Adjustment (“CSA”) is added to the SOFR.

The CSA varied depending on the selected interest period.

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.

1 unchanged sentence

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

As of March 31, 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.

As of June 30, 2023, we had $296.0 million of outstanding borrowings on the term loan, and $100.0 million of availability under the revolving credit facility under the Credit Agreement, and outstanding letters of credit of $0.1 million under the Credit Agreement.

As of June 30, 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 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.

There have been no material changes to our contractual obligations during the six months ended June 30, 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 $4.8 million for the six months ended June 30, 2023 and income tax expense of $4.9 million for the six months ended June 30, 2022.

As of June 30, 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.

1 unchanged sentence

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

Additionally, we carried forward foreign NOLs of approximately $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.

Additionally, we carried forward foreign NOLs of approximately $65.8 million which will start to expire in 2023, foreign research and development credits of $0.3 million which 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 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.

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 $25.7 million is recorded at December 31, 2022.

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

As of June 30, 2023, the valuation allowance remained unchanged from December 31, 2022.

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Off-Balance Sheet Arrangements

6 unchanged sentences

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 2022 Annual Report.

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

There were no significant changes to our critical accounting estimates during the three months ended June 30, 2023 .

Recently Adopted and Issued Accounting Standards

2 unchanged sentences

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 three months ended March 31, 2023.

There were no material changes to the Company’s market risk exposure during the six months ended June 30, 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