What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-08 compared with 2023-08-09 · 181 added, 176 removed, 368 unchanged (49% of the section changed)

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The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report and our 2022 Annual Report.

The statements in this discussion regarding industry outlook, our expectations regarding our future performance, liquidity, and capital resources, and all other non-historical statements in this discussion are forward-looking statements and are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management.

The statements in this discussion regarding industry outlook, our expectations regarding our future performance, liquidity, and capital resources, and all other non-historical statements are forward-looking statements and are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management.

Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Quarterly Report, particularly in the sections “Special Note Regarding Forward-Looking Statements” and “Risk Factors” of this Quarterly Report.

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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:

Q1 Q2 Q3 Q1 Q2 Q3

(in millions)

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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

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existing customers and in existing and expanded geographies;

(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;

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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.

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

Our Operating Environment

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Non-GAAP 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.

Management uses various financial metrics, including total revenues, income from operations, net income, and certain metrics that are not required by, or presented in accordance with, GAAP, such as adjusted EBITDA, adjusted net income, and adjusted diluted earnings per share, to measure and assess the performance of our business, to evaluate the effectiveness of our business strategies, to make budgeting decisions, to make certain compensation decisions, and to compare our performance against that of other peer companies using similar measures.

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

Management measures operating performance based on adjusted EBITDA defined for a particular period as net income (loss) excluding interest expense, provision (benefit) for income taxes, depreciation and amortization expense, intangible asset amortization, equity-based compensation expense, acquisition and integration expense, and other items not indicative of our ongoing operating performance.

Management also measures operating performance based on adjusted net income defined for a particular period as net income (loss) excluding, equity-based compensation expense, amortization of acquisition-related intangible assets, acquisition and integration expense, and other items not indicative of our ongoing operating performance.

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, goodwill impairments, change in fair value of contingent consideration, 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, goodwill impairments, change in fair value of contingent consideration, acquisition and integration expense, and other items not indicative of our ongoing operating performance.

Further, management measures operating performance based on adjusted diluted earnings per share defined for a particular period as adjusted net income divided by the weighted-average diluted common shares outstanding.

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

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

THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,

2023 2022 2023 2022

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Interest income(a) (2,864) (322) (6,428) (347)

Provision for income taxes(a) 3,675 3,380 4,786 4,916

(Benefit from) Provision for income taxes(a) (4,644) 4,557 142 9,473

Depreciation and amortization expense(a) 367 417 1,139 1,321

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Change in fair value of contingent consideration(d) 8,757 — 11,316 —

Acquisition-related expenses(e) 692 806 1,884 1,078

Integration expense(f) 55 — 157 —

Transaction-related expenses(g) — 111 — 128

Loss on disposal of fixed assets(h) 25 2 29 7

Executive recruiting expense(i) 200 — 396 —

First-year Sarbanes-Oxley implementation costs(j) — 308 — 961

Goodwill impairment expense(e) 46,984 — 46,984 —

Acquisition-related expenses(f) 1,392 253 3,276 1,331

Integration expense(g) 33 — 190 —

Transaction-related expenses(h) — 596 — 724

Severance expenses(i) — 722 — 722

Reorganization expense(j) 1,602 — 1,602 —

Loss on disposal of fixed assets(k) — 49 29 56

Executive recruiting expense(l) — — 396 —

First-year Sarbanes-Oxley implementation costs(m) — — — 961

Adjusted EBITDA $ 28,844 $ 32,703 $ 93,523 $ 88,312

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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,

THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,

2023 2022 2023 2022

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Change in fair value of contingent consideration(d) 8,757 — 11,316 —

Acquisition-related expenses(e) 692 806 1,884 1,078

Integration expense(f) 55 — 157 —

Transaction-related expenses(g) — 111 — 128

Loss on disposal of fixed assets(h) 25 2 29 7

Executive recruiting expense(i) 200 — 396 —

First-year Sarbanes-Oxley implementation costs(j) — 308 — 961

Income tax expense impact of adjustments(k) (4,602) (4,063) (10,097) (7,979)

Goodwill impairment expense(e) 46,984 — 46,984 —

Acquisition-related expenses(f) 1,392 253 3,276 1,331

Integration expense(g) 33 — 190 —

Transaction-related expenses(h) — 596 — 724

Severance expenses(i) — 722 — 722

Reorganization expense(j) 1,602 — 1,602 —

Loss on disposal of fixed assets(k) — 49 29 56

Executive recruiting expense(l) — — 396 —

First-year Sarbanes-Oxley implementation costs(m) — — — 961

Income tax expense impact of adjustments(n) (10,572) (4,257) (20,669) (12,236)

Adjusted net income $ 17,074 $ 16,648 $ 54,748 $ 48,194

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

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

THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,

2023 2022 2023 2022

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Change in fair value of contingent consideration(d) 0.05 — 0.07 —

Acquisition-related expenses(e) 0.01 0.01 0.01 0.01

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) — 0.01 — 0.01

Income tax expense impact of adjustments(k) (0.03) (0.03) (0.06) (0.05)

Goodwill impairment expense(e) 0.30 — 0.30 —

Acquisition-related expenses(f) 0.01 — 0.02 0.01

Integration expense(g) — — — —

Transaction-related expenses(h) — — — —

Severance expenses(i) — — — —

Reorganization expense(j) 0.01 — 0.01 —

Loss on disposal of fixed assets(k) — — — —

Executive recruiting expense(l) — — — —

First-year Sarbanes-Oxley implementation costs(m) — — — 0.01

Income tax expense impact of adjustments(n) (0.07) (0.03) (0.13) (0.08)

Adjusted diluted earnings per share $ 0.11 $ 0.10 $ 0.34 $ 0.30

Basic weighted average common shares outstanding 159,165,206 157,140,166 158,769,638 156,523,022

Effect of potentially dilutive shares outstanding (l)

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

Effect of potentially dilutive shares outstanding (o) 742,488 2,447,479 1,078,382 2,869,512

Adjusted diluted weighted average common shares outstanding 159,907,694 159,587,645 159,848,020 159,392,534

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

(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.

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

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(e) Represents expense associated with goodwill impairment charge.

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

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

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

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

(j) Represents expense related to reorganization, including legal entity reorganization and lease abandonment cost associated with the evaluation of our office space footprint.

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

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

(m) 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.

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

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

Components of Results of Operations

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

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

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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.

• 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 June 30, 2023, we have completed 18 acquisitions, of which 13 have included software or technology.

Since our inception, and as of September 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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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.

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

At September 30, 2023, the contingent consideration was remeasured to $31.5 million, resulting in $11.7 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.

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

At September 30, 2023, the contingent consideration was remeasured to $0.4 million, resulting in a negative fair value adjustment of $0.4 million and recorded in general and administrative (“G&A”) on the accompanying condensed consolidated statement of operations and comprehensive income (loss).

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.

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For more information about our acquisitions, see Note 5.

“Business Combinations” in the notes to the condensed consolidated financial statements.

“Acquisitions” in the notes to the condensed consolidated financial statements.

Results of Operations

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

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 nine months ended September 30, 2023 to the three and nine months ended at September 30, 2022.

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

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

THREE MONTHS ENDED SEPTEMBER 30, CHANGE

2023 2022 $ %

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Total revenues $ 85,576 $ 84,700 $ 876 1 %

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.

Revenues increased $0.9 million, or 1%, to $85.6 million for the three months ended September 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, new product introductions, and client expansions.

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

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Software revenues increased $2.9 million, or 10%, to $31.3 million for the three months ended September 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 decreased $2.1 million, or 4% to $54.2 million for the three months ended September 30, 2023, as compared to the same period in 2022.

The decrease in overall services revenue is primarily attributable to a decline in regulatory revenue.

Cost of Revenues

THREE MONTHS ENDED JUNE 30, CHANGE

THREE MONTHS ENDED SEPTEMBER 30, CHANGE

2023 2022 $ %

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Cost of revenues $ 35,876 $ 32,812 $ 3,064 9 %

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.

Cost of revenues increased by $3.1 million, or 9%, to $35.9 million for the three months ended September 30, 2023 as compared to the same period in 2022.

The increase was primarily due to a $2.3 million increase in employee-related costs resulting from billable head count growth, a $0.7 million increase in stock-based compensation costs, a $0.4 million increase in intangible assets amortization, and a $0.1 million increase in travel and entertainment expense, partially offset by a $0.4 million decrease in miscellaneous operating expense and other items.

Sales and Marketing Expenses

THREE MONTHS ENDED JUNE 30, CHANGE

THREE MONTHS ENDED SEPTEMBER 30, CHANGE

2023 2022 $ %

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% of total revenues 8 % 8 %

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.

Sales and marketing expenses increased by $0.9 million, or 14%, to $7.2 million for the three months ended September 30, 2023 as compared to the same period in 2022.

Sales and marketing expenses increased primarily due to a $0.8 million increase in employee-related costs primarily resulting from head count growth, a $0.2 million increase in stock-based compensation costs, partially offset by a $0.2 million decrease in marketing expense.

Research and Development Expenses

THREE MONTHS ENDED JUNE 30, CHANGE

THREE MONTHS ENDED SEPTEMBER 30, CHANGE

2023 2022 $ %

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% of total revenues 10 % 7 %

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.

Research and development expenses increased by $2.7 million, or 42%, to $9.0 million for the three months ended September 30, 2023, as compared to the same period in 2022.

The change in research and development expenses was primarily due to a $2.2 million increase in employee-related costs primarily resulting from head count growth and a $1.0 million increase in stock-based compensation costs, partially offset by a $0.6 million increase in capitalized cost in R&D.

General and Administrative Expenses

THREE MONTHS ENDED JUNE 30, CHANGE

THREE MONTHS ENDED SEPTEMBER 30, CHANGE

2023 2022 $ %

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% of total revenues 32 % 20 %

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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General and administrative expenses increased by $10.4 million, or 60%, to $27.8 million for the three months ended September 30, 2023 as compared to the same period in 2022.

The increase in general and administrative expenses was primarily due to a $8.8 million increase related to change in the fair value of contingent considerations, a $1.6 million increase in lease abandonment expense, $0.8 million increase in merger and acquisition expenses, $0.6 million increase in equipment and software expense, partially offset by a $0.6 decrease in transaction cost, a $0.3 million decrease in employee-related costs, and a $0.3 million decrease in insurance expense.

Intangible Asset Amortization

THREE MONTHS ENDED JUNE 30, CHANGE

THREE MONTHS ENDED SEPTEMBER 30, CHANGE

2023 2022 $ %

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% of total revenues 13 % 13 %

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.

Intangible asset amortization expense increased by $0.6 million, or 5%, to $11.2 million for the three months ended September 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 JUNE 30, CHANGE

THREE MONTHS ENDED SEPTEMBER 30, CHANGE

2023 2022 $ %

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% of total revenues — % — %

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.

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

Goodwill Impairment Expense

THREE MONTHS ENDED SEPTEMBER 30, CHANGE

2023 2022 $ %

(in thousands)

Goodwill impairment expense $ 46,984 $ — $ 46,984 nm

Goodwill impairment expense was $47.0 million for the three months ended September 30, 2023 as compared to no goodwill impairment expense for the same period in 2022.

The increase in goodwill impairment expense was primarily due to record goodwill impairment for legacy Regulatory and Writing reporting unit as the carrying value exceeded its fair value.

Interest Expense

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THREE MONTHS ENDED SEPTEMBER 30, CHANGE

2023 2022 $ %

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% of total revenues 7 % 6 %

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.

Interest expense increased by $0.7 million, or 13%, to $5.9 million for the three months ended September 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.

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Net Other Income

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THREE MONTHS ENDED SEPTEMBER 30, CHANGE

2023 2022 $ %

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% of total revenues (6) % (3) %

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 JUNE 30, CHANGE

Net other income increased by $2.2 million, to $5.1 million for the three months ended September 30, 2023 as compared to the same period in 2022.

The increase in net other income was primarily due to a $2.5 million increase in interest income primarily from cash investments, and partially offset by a $0.3 million decrease in gains related to the fluctuation of foreign currency exchange rates.

Provision (benefit) for Income Taxes

THREE MONTHS ENDED SEPTEMBER 30, CHANGE

2023 2022 $ %

(in thousands)

Provision for income taxes $ 3,675 $ 3,380 $ 295 9 %

Provision (benefit) for income taxes

$ (4,644) $ 4,557 $ (9,201) (202) %

Effective income tax rate 9 % 54 %

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.

Income tax benefit was $4.6 million, resulting in an effective income tax rate of 9% for the three months ended September 30, 2023 as compared to an income tax expense of $4.6 million, or an effective income tax rate of 54%, for the same period in 2022.

Our income tax (benefit) expense for the three months ended September 30, 2023 and 2022 were primarily 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.

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Net Income (loss)

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THREE MONTHS ENDED SEPTEMBER 30, CHANGE

2023 2022 $ %

(in thousands)

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

Net income (loss) $ (48,965) $ 3,936 $ (52,901) nm

Net loss was $49.0 million representing a $52.9 million decrease in net income for the three months ended September 30, 2023 as compared to a net income of $3.9 million in the same period of 2022.

The decrease in net income was primarily due to a $47.0 million increase in goodwill impairment expense, a $8.8 million increase related to change in the fair value of contingent considerations, a $1.6 million increase in lease abandonment expense, a $4.1 million increase in other operating expenses, and a $3.1 million increase in cost of revenue, partially offset by a $9.2 million decrease in tax expense, and a $2.5 million increase in interest income.

Nine Months Ended September 30, 2023 Versus Nine Months Ended September 30, 2022

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

NINE MONTHS ENDED SEPTEMBER 30, CHANGE

2023 2022 $ %

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Total revenues $ 266,327 $ 249,011 $ 17,316 7 %

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.

Revenues increased $17.3 million, or 7%, to $266.3 million for the nine months ended September 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 increase was partially offset by the negative impact on our revenue from the fluctuation of foreign currency exchange rates.

Software revenues increased $11.7 million, or 14%, to $98.1 million for the nine months ended September 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.

Services revenues increased $5.6 million, or 3%, to $168.3 million for the nine months ended September 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.

The increase was partially offset by the decline in regulatory revenues.

Cost of Revenues

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Cost of revenues $ 106,956 $ 100,795 $ 6,161 6 %

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.

Cost of revenues increased by $6.2 million, or 6%, to $107.0 million for the nine months ended September 30, 2023 as compared to the same period in 2022.

The increase was primarily due to a $4.2 million increase in employee-related costs resulting from billable head count growth, a $1.5 million increase in stock-based compensation costs, a $0.9 million increase in intangible assets amortization, and a $0.5 million increase in travel, partially offset by a $0.4 million increase in capitalized software cost, a $0.3 million decrease in miscellaneous operation expenses, and a $0.2 million decrease in consulting and professional services.

Sales and Marketing Expenses

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% 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.

Sales and marketing expenses increased by $3.7 million, or 19%, to $23.4 million for the nine months ended September 30, 2023 as compared to the same period in 2022.

Sales and marketing expenses increased primarily due to a $3.2 million increase in employee-related costs resulting from head count growth, a $0.5 million increase in travel, a $0.2 million increase in marketing, and a $0.2 million increase in miscellaneous operating expense, partially offset by a $0.4 million decrease in stock-based compensation cost.

Research and Development Expenses

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% 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.

Research and development expenses increased by $4.5 million, or 21%, to $26.2 million for the nine months ended September 30, 2023 as compared to the same period in 2022.

The increase in research and development expenses was primarily due to a $5.3 million increase in employee-related costs primarily resulting from headcount growth, a $0.7 million increase in stock-based compensation cost, and a $0.3 million increase in travel, partially offset by a $1.5 million increase in capitalized cost in research & development, and a $0.3 million decrease in consulting and professional expense.

General and Administrative Expenses

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% of total revenues 23 % 21 %

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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.

General and administrative expenses increased by $8.3 million, or 16%, to $61.8 million for the nine months ended September 30, 2023, as compared to the same period in 2022.

The increase in general and administrative expenses was primarily due to a $11.3 million increase related to the change in fair value of contingent consideration, a $1.6 million increase in lease abandonment expense, a $1.1 million increase in equipment expenses, a $0.8 million increase in merger and acquisition cost, a $0.6 million increase in consulting and professional services expense, a $0.4 million increase in executive recruiting expense, and a 0.3 million increase in employee-related costs resulting from head count growth, partially offset by a $4.8 million decrease in stock-based compensation costs, a $1.0 million decrease in first-year Sarbanes-Oxley implementation costs, a $0.9 million decrease in insurance expense, a $0.7 million decrease in transaction expense, and a $0.3 million decrease in facility and lease related expense.

Intangible Asset Amortization

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% 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.

Intangible asset amortization expense increased by $1.2 million, or 4%, to $32.3 million for the nine months ended September 30, 2023 as compared to the same period in 2022.

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

Depreciation and Amortization Expense

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% 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.

Depreciation and amortization expense decreased by $0.2 million, or 14%, to $1.1 million for the nine months ended September 30, 2023, as compared to the same period in 2022.

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

Goodwill Impairment Expense

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(in thousands)

Goodwill Impairment Expense $ 46,984 $ — $ 46,984 nm

Goodwill impairment expense was $47.0 million for the nine months ended September 30, 2023 as compared to no goodwill impairment expense for the same period in 2022.

The increase in goodwill impairment expense was primarily due to record goodwill impairment for legacy Regulatory and Writing reporting unit as the carrying value exceeded its fair value.

Interest Expense

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% of total revenues 6 % 5 %

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.

Interest expense increased by $4.7 million, or 38%, to $17.0 million for the nine months ended September 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 $3.8 million gain from interest swap hedge activities.

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Net other income

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% of total revenues (2) % (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.

Net other income increased by $0.4 million to $6.6 million for the nine months ended September 30, 2023 as compared to the same period in 2022.

The increase in net other income was primarily due to a $6.1 million increase in interest income, partially offset by a $5.7 million remeasurement losses related to the fluctuation of foreign currency exchange rates.

Provision for Income Taxes

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Effective income tax rate (0.3) % 63 %

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.

Income tax expense was $0.1 million, resulting in an effective income tax rate of (0.3)% for the nine months ended September 30, 2023 as compared to an income tax expense of $9.5 million, or an effective income tax rate of 63%, for the same period in 2022.

Our income tax expense for the nine months ended September 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.

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Net (Loss) income

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(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,

Net (loss) income $ (42,901) $ 5,557 $ (48,458) (872) %

Net loss was $42.9 million, representing a $48.5 million decrease in net income for the nine months ended September 30, 2023, as compared to a net income of $5.6 million in the same period of 2022.

The decrease in net income was primarily due to a $47.0 million increase in goodwill impairment charge, a $11.3 million increase in expense related to change in the fair value of contingent considerations, a $6.2 million increase in cost of revenue, a $5.7 million remeasurement losses related to the fluctuation of foreign currency exchange rates, a $4.7 million increase in other operating expense items, a $4.7 million increase in interest expense, and a $1.6 million increase in lease abandonment expense, partially offset by a $17.3 million increase in total revenue, a $9.3 million decrease in tax expense, a $6.1 million increase in interest income.

Liquidity and Capital Resources

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.

We have consistently generated positive cash flow from operations, providing $59.4 million and $57.1 million as a source of funds for the nine months ended September 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

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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

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 nine and twelve months periods ended at September 30, 2023 and December 31, 2022 and as of September 30, 2023 and December 31, 2022.

September 30, 2023 December 31, 2022

(in thousands)

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___________________________________

(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.

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

(b) Cash balance as of September 30, 2023 and December 31, 2022 included $70.0 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 September 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 $12.7 million for lease contracts, which have remaining terms of one to six years.

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

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

Remainder of 2023 2024 2025 2026 TOTAL

(in thousands)

Maturities $ 755 $ 3,020 $ 3,020 $ 288,410 $ 295,205

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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:

SIX MONTHS ENDED JUNE 30,

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(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 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.

Net cash provided by operating activities in the first nine months of 2023 was $59.4 million, compared to $57.1 million in the same period of 2022.

The $2.4 million increase in cash from operating activities was primarily due to higher cash collections from accounts receivable, reduced cash payments for accounts payable and accrued expenses, and partially offset by increased cash utilization for obtaining prepaid and other assets, as well as higher payments for taxes and interest.

Investing Activities

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.

Net cash used in investing activities in the first nine months of 2023 was $18.5 million, an increase of $3.3 million, compared to $15.2 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 $1.9 million increase in cash utilized in capitalized development costs, partially offset by a $0.4 million decrease in cash utilized in capital expenditures to support our growth.

Financing Activities

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.

Net cash used in financing activities in the first nine months of 2023 was $8.2 million, compared to $6.4 million cash used in the same period of 2022.

The $1.8 million decrease in cash flow in financing activities was primarily due to a $3.1 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 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 term loan under the modified 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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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.

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

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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 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.

As of September 30, 2023, we had $295.2 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, 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 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.

There have been no material changes to our contractual obligations during the nine months ended September 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 $0.1 million for the nine months ended September 30, 2023 and income tax expense of $9.5 million for the nine months ended September 30, 2022.

As of September 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.

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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.

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.

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As a result, a valuation allowance of $25.7 million is recorded at December 31, 2022.

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

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

Off-Balance Sheet Arrangements

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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 June 30, 2023 .

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

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