Certara, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion summarizes the significant factors affecting the operating results, financial condition, liquidity, and cash flows of our Company as of and for the periods presented below. The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report and our 2023 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. 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. We intend the discussion of our financial condition and results of operations that follows to provide information that will assist the reader in understanding our condensed consolidated financial statements, the changes in certain key items in those financial statements from period to period, and the primary factors that accounted for those changes, as well as how certain accounting principles, policies and estimates affect our condensed consolidated financial statements. Executive Overview We are a leading provider of biosimulation technology and solutions for using Model-Informed Drug Development ("MIDD") in the global biopharmaceutical industry. Biosimulation and MIDD can increase the probability of success in bringing a new drug to market and decrease the costs of drug development. In addition, MIDD strategies are increasingly utilized to help predict commercial success, a critical part of the drug development process as new products must be both approved by regulators and adopted by the market. Our goal is to enable the life science industry to use data, modeling, and analytics to make better decisions during drug development and commercialization to increase productivity rates and vastly reduce development costs. Drug development is necessarily a highly regulated process involving the collection of vast amounts of laboratory, clinical and evidence data, and there are many failures at every step along the way which add to total cost. The pharmaceutical industry spends more than $260 billion annually on R&D. Generally, companies spend an average of $6.2 billion per US Food and Drug Administration ("FDA") approved drug. Our software and scientists incorporate modern advances in scientific understanding, drug development experience, data analysis, and AI resulting in significant opportunities to decrease the cost and increase the odds of new drug approval and commercial success. Our proprietary biosimulation platforms are built on biology, chemistry, and pharmacology principles with proprietary mathematical algorithms that model how medicines and diseases behave in the body. For over two decades, our scientists have developed and validated our biosimulation technology using data from scientific literature, laboratory research, preclinical and clinical studies. To do this, we have developed solutions for the collection, standardization, validation, storage, and analysis of the preclinical and clinical data needed for MIDD. These data solutions are used internally and by global life sciences companies. The scientific principles underlying our work with customers in biosimulation and MIDD must be transparent and fully explainable during the regulatory process, so we have become experts at incorporating data and results into regulatory documents. Our software and regulatory services streamline the creation of regulatory filings and speed regulatory data flow to maximize the chances of successful commercialization. 30 Table of Contents AI and machine learning technologies are being incorporated across our software and services portfolios providing opportunities to expand the number of data sources utilized, better predict outcomes, and streamline reporting. For example, we are using machine learning to automate and speed the process of biosimulation, and we have created an AI application to aid creating regulatory documents from scientific analyses and clinical data. We believe that AI predictive models will continue to enhance the accuracy and usefulness of biosimulation models and be utilized broadly across drug development. We deliver software and technology-enabled services. Our strategy is to create and apply validated software applications that can be used broadly in the life science industry. We offer services, leveraging our technology, delivered by scientists with extensive drug development experience to aid our clients in applying biosimulation and MIDD to their specific projects. Since 2014, customers who leverage our solutions have received more than 90% of all new drug approvals by FDA. We have worked with nearly 2,400 life sciences companies and academic institutions and have collaborated on more than 8,000 customer projects in the last decade across a wide variety of therapeutic areas ranging from cancer and hematology to diabetes and hundreds of rare diseases. Our software products are licensed by more than 57,000 users and are also used by 23 global drug regulatory agencies, including the U.S. FDA, Japan’s Pharmaceuticals and Medical Devices Agency (“PMDA”), and China Food and Drug Administration ("cFDA"). With continued innovation in and adoption of our biosimulation software, technology, and services, we believe more life science companies worldwide will leverage more of our end-to-end platform to reduce cost, accelerate speed to market, and ensure safety and efficacy of medicines for all patients. Key Factors Affecting Our Performance We believe that the growth of and future success of our business depends on many factors. While each of these factors presents significant opportunities for our business, they also pose important challenges that we must successfully address to sustain our growth and improve results of operations. Customer Retention and Expansion Our future operating results depend, in part, on our ability to successfully enter new markets, increase our customer base, and retain and expand our relationships with existing customers. We monitor two key performance indicators to evaluate retention and expansion: new bookings and net retention rates. • Bookings: Our new bookings represent the estimated contract value of a signed contract or purchase order where there is sufficient or reasonable certainty about the customer’s ability and intent to fund and commence the software and/or services. Bookings vary from period to period depending on numerous factors, including the overall health of the biopharmaceutical industry, regulatory developments, industry consolidation, and sales performance. Bookings have varied and will continue to vary significantly from quarter to quarter and from year to year. • Net Retention Rates: Our net retention rates measure the percentage of recurring revenue that is retained from existing software customers over a specific time period of time, inclusive of price increases and expansion. 31 Table of Contents The table below summarizes our quarterly bookings and net retention rate trends: 2024 2023 Q1 Q1 (in millions except percentage) Bookings $ 105.8 $ 112.7 Net Retention Rates 114.1 % 110.5 % Investments in Growth We have invested and intend to continue to invest in expanding the breadth and depth of our solutions, including through acquisitions and international expansion. We expect to continue to invest (i) in scientific talent to expand our ability to deliver solutions across the drug development spectrum; (ii) in sales and marketing to promote our solutions to new and existing customers and in existing and expanded geographies; (iii) in research and development to support existing solutions and innovate new technology; (iv) in other operational and administrative functions to support our expected growth; and (v) in complementary businesses. We expect that our headcount and our total operating expenses will continue to increase over time. Our Operating Environment The acceptance of model-informed biopharmaceutical discovery and development by regulatory authorities affects the demand for our products and services. Support for the use of biosimulation in discovery and development from regulatory bodies, such as the FDA and European Medicines Agency, has been critical to its rapid adoption by the biopharmaceutical industry. There has been a steady increase in the recognition by regulatory and academic institutions of the role that modeling and simulation can play in the biopharmaceutical development and approval process, as demonstrated by new regulations and guidance documents describing and encouraging the use of modeling and simulation in the biopharmaceutical discovery, development, testing, and approval process, which has directly led to an increase in the demand for our products and services. Changes in government or regulatory policy, or a reversal in the trend toward increasing the acceptance of and reliance upon in silico data in the drug approval process, could decrease the demand for our products and services or lead regulatory authorities to cease use of, or recommend against the use of, our products and services. Governmental agencies throughout the world, but particularly in the United States where the majority of our customers are based, strictly regulate the biopharmaceutical development process. Our business involves helping biopharmaceutical companies strategically and tactically navigate the regulatory approval process. New or amended regulations are expected to result in higher regulatory standards and often additional revenues for companies that service these industries. However, some changes in regulations, such as a relaxation in regulatory requirements or the introduction of streamlined or expedited approval procedures, or an increase in regulatory requirements that we have difficulty satisfying or that make our regulatory strategy services less competitive, could eliminate or substantially reduce the demand for our regulatory services. Competition The market for our biosimulation products and related services for the biopharmaceutical industry is competitive and highly fragmented. In our view, the principal competitive factors in our market are the functionality and quality of models, the breadth of molecular types, therapeutic areas, and modalities supported, regulator acceptance of our solutions, ease of use and functionality of applications, depth of experience in drug 32 Table of Contents development, brand awareness and reputation, total cost, and the ability to securely integrate with other enterprise applications and the overall drug development process in the customer. 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. 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. 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, goodwill impairment expense, acquisition and integration expense, and other items not indicative of our ongoing operating performance. Further, management measures operating performance based on adjusted diluted earnings per share defined for a particular period as adjusted net income divided by the weighted-average diluted common shares outstanding. We believe adjusted EBITDA, adjusted net income, and adjusted diluted earnings per share are helpful to investors, analysts, and other interested parties because they can assist in providing a more consistent and comparable overview of our operations across our historical periods. In addition, these measures are frequently used by analysts, investors, and other interested parties to evaluate and assess performance. Adjusted EBITDA, adjusted net income, and adjusted diluted earnings per share are non-GAAP measures and are presented for supplemental purposes only and should not be considered as an alternative or substitute to financial information presented in accordance with GAAP. Adjusted EBITDA, adjusted net income and adjusted diluted earnings per share have certain limitations in that they do not include the impact of certain expenses that are reflected in our condensed consolidated statements of operations and comprehensive income (loss) that are necessary to run our business. Other companies, including other companies in our industry, may not use these measures and may calculate both differently than as presented, limiting the usefulness as a comparative measure. 33 Table of Contents The following table reconciles net income (loss) to adjusted EBITDA: THREE MONTHS ENDED MARCH 31, 2024 2023 (in thousands) Net income (loss)(a) $ (4,683) $ 1,358 Interest expense(a) 5,751 5,475 Interest income(a) (2,574) (1,354) (Benefit from) provision for income taxes(a) (751) 1,111 Depreciation and amortization expense(a) 432 411 Intangible asset amortization(a) 15,996 13,113 Currency (gain) loss(a) 876 894 Equity-based compensation expense(b) 9,073 8,543 Change in fair value of contingent consideration(d) 2,878 1,261 Acquisition-related expenses(e) 1,714 1,192 Integration expense(f) — 102 Reorganization expense(g) 51 — Loss on disposal of fixed assets(h) — 4 Executive recruiting expense(i) 380 196 Adjusted EBITDA $ 29,143 $ 32,306 The following table reconciles net income (loss) to adjusted net income: THREE MONTHS ENDED MARCH 31, 2024 2023 (in thousands) Net income (loss) (a) $ (4,683) $ 1,358 Currency (gain) loss(a) 876 894 Equity-based compensation expense(b) 9,073 8,543 Amortization of acquisition-related intangible assets(c) 13,348 11,256 Change in fair value of contingent consideration(d) 2,878 1,261 Acquisition-related expenses(e) 1,714 1,192 Integration expense(f) — 102 Reorganization expense(g) 51 — Loss on disposal of fixed assets(h) — 4 Executive recruiting expense(i) 380 196 Income tax expense impact of adjustments(j) (7,089) (5,495) Adjusted net income $ 16,548 $ 19,311 34 Table of Contents The following table reconciles diluted earnings per share to adjusted diluted earnings per share: THREE MONTHS ENDED MARCH 31, 2024 2023 Diluted earnings per share(a) $ (0.03) $ 0.01 Currency (gain) loss(a) 0.01 0.01 Equity-based compensation expense(b) 0.05 0.04 Amortization of acquisition-related intangible assets(c) 0.08 0.07 Change in fair value of contingent consideration(d) 0.02 0.01 Acquisition-related expenses(e) 0.01 0.01 Integration expense(f) — — Reorganization expense(g) — — Loss on disposal of fixed assets(h) — — Executive recruiting expense(i) — — Income tax expense impact of adjustments(j) (0.04) (0.03) Adjusted Diluted Earnings Per Share $ 0.10 $ 0.12 Basic weighted average common shares outstanding 159,524,270 158,177,025 Effect of potentially dilutive shares outstanding (k) 889,094 1,550,387 Adjusted diluted weighted average common shares outstanding 160,413,364 159,727,412 __________________________________ (a) Represents amounts as determined under GAAP. (b) Represents expense related to equity-based compensation. Equity-based compensation has been, and will continue to be for the foreseeable future, a recurring expense in our business and an important part of our compensation strategy. (c) Represents amortization costs associated with acquired intangible assets in connection with business acquisitions. (d) Represents 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 expense related to reorganization, including legal entity reorganization and lease abandonment cost associated with the evaluation of our office space footprint. (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 income tax effect of the non-GAAP adjustments calculated using the applicable statutory rate by jurisdiction. (k) Represents potentially dilutive shares that were included from our GAAP diluted weighted average common shares outstanding. 35 Table of Contents Components of Results of Operations Revenues Our business generates revenue from the sales of software products and delivery of consulting services. • Software . Our software business generates revenues from software licenses, software subscriptions and software maintenance as follows: • Software licenses : We recognize revenue for software license fees up front, upon delivery of the software license. • Software subscription : Subscription revenue consists of subscription fees to provide our customers access to and related support for our cloud-based solutions. We recognize subscription fees ratably over the term of the subscription, usually one to three years. Any subscription revenue paid upfront that is not recognized in the current period is included in deferred revenue in our condensed consolidated balance sheet until earned. • Software maintenance : Software maintenance revenue includes fees for providing updates and technical support for software offerings. Software maintenance revenue is recognized ratably over the contract term, usually one year. • Services . Our services business generates revenues primarily from technology-driven services and professional services, which include software implementation services. Our service arrangements are time and materials, fixed fee, or prepaid. Revenues are recognized over the time services are performed for time and materials, and over time by estimating progress to completion for fixed fee and prepaid services. Cost of Revenues Cost of revenues consists primarily of employee related expenses, equity-based compensation, the costs of third-party subcontractors, travel costs, distributor fees, amortization of capitalized software and allocated overhead. We may add or expand computing infrastructure service providers, make additional investments in the availability and security of our solutions, or add resources to support our growth. Operating Expenses • Sales and Marketing . Sales and marketing expense consists primarily of employee-related expenses, equity-based compensation, sales commissions, brand development, advertising, travel-related expenses and industry conferences and events. We plan to continue to invest in sales and marketing to increase penetration of our existing client base and expand to new clients. • Research and Development . Research and development expense (“R&D”) consist primarily of employee-related expenses, equity-based compensation, third-party consulting, allocated software costs and tax credits. We plan to continue to invest in our R&D efforts to enhance and scale our software product offerings by development of new features and increased functionality. • General and Administrative . General and administrative expense consists of personnel-related expenses associated with our executive, legal, finance, human resources, information technology, and other administrative functions, including salaries, benefits, bonuses, and equity-based compensation. General and administrative expense also includes professional fees for external legal, accounting and other consulting services, allocated overhead costs, and other general operating expenses. 36 Table of Contents • Intangible Asset Amortization . Intangible asset amortization consists primarily of amortization expense related to intangible assets recorded in connection with acquisitions and amortization of capitalized software development costs. • Depreciation and Amortization Expense . Depreciation and amortization expense consists of depreciation of property and equipment and amortization of leasehold improvements. Other Expenses • Interest Expense . Interest expense consists primarily of interest expense associated with our Credit Agreement, including amortization of debt issuance costs and discounts. • Net Other Income (Expense) . Net other income (expense) consists of miscellaneous non-operating expenses primarily comprised of interest income and foreign exchange transaction gains and losses. • Provision for (Benefit from) Income Taxes . Provision for (benefit from) income taxes consists of U.S. federal and state income taxes and income taxes in certain foreign jurisdictions in which we conduct business. We expect income tax expense to increase over time as the Company continues to grow more profitable. Business Combinations Since 2013 and as of March 31, 2024, we have completed 20 acquisitions, of which 13 have included software or technology. Details of acquisitions that have closed since the beginning of fiscal year 2023 are provided below. We continually seek and assess a range of highly focused opportunities in our immediately addressable market and in related adjacent markets, whether through acquisitions, licenses, or partnerships. Drug Interaction Solutions, University of Washington ("DIDB ") On June 20, 2023, we entered into an asset purchase agreement with the University of Washington and completed the acquisition of DIDB, including the Drug Interaction Database and related products, from The University of Washington for a total estimated consideration of $8.3 million. The business combination was not significant to the Company’s consolidated financial statements. Based on our purchase price allocation, approximately $0.3 million, $5.6 million, $0.4 million, and $2.3 million of the purchase price was assigned to trade names, database content/technology, customer relationships and goodwill, respectively. The total estimated consideration included a portion of contingent consideration that is payable over the next two years in cash, not to exceed $2.0 million. The fair value of the contingent consideration was estimated to be $0.8 million as of the acquisition date. At March 31, 2024, the contingent consideration was remeasured to $0.1 million, resulting in a fair value adjustment of $4 thousand and recorded in G&A on the accompanying condensed consolidated statement of operations and comprehensive income (loss). Formedix Limited ("Formedix") On October 10, 2023, we completed the acquisition of Formedix for a total estimated consideration of $41.4 million. The business combination was not material to our condensed consolidated financial statements. Based on our purchase price allocation, approximately $11.7 million, $3.1 million, and $25.1 million of the purchase price were assigned to developed technology, customer relationships and goodwill, respectively. 37 Table of Contents The total estimated consideration included a portion of contingent consideration that is payable over two years in cash, not to exceed $9.0 million. The fair value of the contingent consideration related to revenue threshold was estimated to be $4.4 million as of the acquisition date. Future payments of contingent consideration are based on achieving certain eligible revenue targets for each of the twelve-month periods ended December 31, 2023 and 2024, respectively. Additionally, another portion of the contingent consideration is based on the resolution of certain tax contingencies. In total, the fair value of the contingent consideration was estimated to be $5.2 million as of the acquisition date. At March 31, 2024 the contingent consideration related to revenues was remeasured to $3.2 million, resulting in a negative fair value remeasurement and adjustment of $0.5 million and recorded in G&A on the accompanying condensed consolidated statement of operations and comprehensive income (loss). Applied BioMath, LLC ("ABM") On December 12, 2023, we completed the acquisition of ABM, an industry-leader in providing model-informed drug discovery and development support to help accelerate and de-risk therapeutic research and development, for total estimated consideration of $36.6 million. The business combination was not material to our consolidated financial statements. Based on our preliminary purchase price allocation, approximately $4.6 million, $0.8 million, $13.7 million and $15.9 million of the purchase price was assigned to developed technology, non-compete agreements, customer relationships and goodwill, respectively. The total estimated consideration includes a portion of contingent consideration that is payable over two years in cash, not to exceed $17.6 million. Future payments of contingent consideration are based on achieving certain eligible revenue targets for each of the twelve-month periods ended December 31, 2023 and 2024, respectively. The fair value of the contingent consideration was estimated to be $5.4 million as of the acquisition date. At March 31, 2024, the contingent consideration was remeasured to $4.4 million, resulting in a negative fair value adjustment of $0.9 million and recorded in G&A on the accompanying condensed consolidated statement of operations and comprehensive income (loss). The contingent considerations for all acquisitions were classified as a liability and included in accrued expense and other long-term liabilities on our condensed consolidated balance sheet. The contingent consideration related with revenue threshold are 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). The current purchase price allocations for acquisitions of Formedix and ABM are preliminary. The primary areas of the preliminary purchase price allocations that are not yet finalized that relate to the fair value of certain tangible assets and liabilities assumed and residual goodwill. We continue to gather information supporting the acquired assets and liabilities, including but not limited to the estimation of the fair value of the identifiable intangible assets, measurement of deferred revenue and corresponding impact on goodwill, during the measurement period. 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. The results of operations of the acquired businesses and the fair value of the acquired assets and liabilities assumed are included in the Company’s consolidated financial statements with effect from the date of the acquisitions. For more information about our acquisitions, see Note 5. “Business Combinations” in the notes to the condensed consolidated financial statements. 38 Table of Contents 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 months ended March 31, 2024 to the three months ended at March 31, 2023. Three Months Ended March 31, 2024 Versus Three Months Ended March 31, 2023 The following table summarizes our unaudited statements of operations data for the three months ended at March 31, 2024 and 2023: Revenues THREE MONTHS ENDED MARCH 31, CHANGE 2024 2023 $ % (in thousands) Software $ 39,307 $ 33,005 $ 6,302 19 % Services 57,347 57,296 51 — % Total revenues $ 96,654 $ 90,301 $ 6,353 7 % Total revenues increased $6.4 million, or 7%, to $96.7 million for the three months ended March 31, 2024 as compared to the same period in 2023. The overall increase in revenues was primarily due to growth in our software product offerings from strong demand within existing customers, client expansions, and new customers. Software revenues increased $6.3 million, or 19%, to $39.3 million for the three months ended March 31, 2024 as compared to the same period in 2023, primarily driven by strong demand within existing customers and expanding relationships with customers. Services revenues of $57.3 million were relatively flat for the three months ended March 31, 2024, as compared to the same period in 2023. Cost of Revenues THREE MONTHS ENDED MARCH 31, CHANGE 2024 2023 $ % (in thousands) Cost of revenues $ 39,255 $ 34,856 $ 4,399 13 % Cost of revenues increased by $4.4 million, or 13%, to $39.3 million for the three months ended March 31, 2024 as compared to the same period in 2023. The increase was primarily due to a $1.9 million increase in employee-related costs resulting from billable head count growth, a $1.2 million increase in stock-based compensation costs, a $0.8 million increase in intangible assets amortization, a $0.5 million increase in equipment and software expenses. 39 Table of Contents Sales and Marketing Expenses THREE MONTHS ENDED MARCH 31, CHANGE 2024 2023 $ % (in thousands) Sales and marketing $ 10,687 $ 8,002 $ 2,685 34 % % of total revenues 11 % 9 % Sales and marketing expenses increased by $2.7 million, or 34%, to $10.7 million for the three months ended March 31, 2024 as compared to the same period in 2023. Sales and marketing expenses increased primarily due to a $1.7 million increase in employee-related costs primarily resulting from head count growth, a $0.2 million increase in stock-based compensation costs, a $0.2 million increase in travel expenses, a $0.2 million increase in marketing expenses, and a $0.2 million increase in professional and consulting expenses. Research and Development Expenses THREE MONTHS ENDED MARCH 31, CHANGE 2024 2023 $ % (in thousands) Research and development $ 11,995 $ 9,287 $ 2,708 29 % % of total revenues 12 % 10 % Research and development expenses increased by $2.7 million, or 29%, to $12.0 million for the three months ended March 31, 2024, as compared to the same period in 2023. The change in research and development expenses was primarily due to a $3.0 million increase in employee-related costs primarily resulting from head count growth, and a $0.2 million increase in the cost of licenses, partially offset by a $0.5 million increase in capitalized cost in R&D. General and Administrative Expenses THREE MONTHS ENDED MARCH 31, CHANGE 2024 2023 $ % (in thousands) General and administrative $ 22,979 $ 19,772 $ 3,207 16 % % of total revenues 24 % 22 % General and administrative expenses increased by $3.2 million, or 16%, to $23.0 million for the three months ended March 31, 2024 as compared to the same period in 2023. The increase in general and administrative expenses was primarily due to a $1.6 million increase related to change in the fair value of contingent consideration, a $1.1 million increase in employee-related costs primarily resulting from head count growth, a $0.5 million increase in merger and acquisition expenses, a $0.2 million increase in equipment and software expenses, a $0.2 million increase in executive recruiting expense, and a $0.2 million increase in credit allowance provision expense, partially offset by a $0.9 million decrease in stock-based compensation costs. 40 Table of Contents Intangible Asset Amortization THREE MONTHS ENDED MARCH 31, CHANGE 2024 2023 $ % (in thousands) Intangible asset amortization $ 12,593 $ 10,535 $ 2,058 20 % % of total revenues 13 % 12 % Intangible asset amortization expense increased by $2.1 million, or 20%, to $12.6 million for the three months ended March 31, 2024, as compared to the same period in 2023. The increase in intangible asset amortization expense was primarily due to $1.3 million increase in amortization in acquired intangible assets and $0.8 million increase in amortization in capitalized software. Depreciation and Amortization Expense THREE MONTHS ENDED MARCH 31, CHANGE 2024 2023 $ % (in thousands) Depreciation and amortization $ 432 $ 411 $ 21 5 % % of total revenues — % — % Depreciation and amortization expense of $0.4 million was relatively flat for the three months ended March 31, 2024, as compared to the same period in 2023. Interest Expense THREE MONTHS ENDED MARCH 31, CHANGE 2024 2023 $ % (in thousands) Interest expense $ 5,751 $ 5,475 $ 276 5 % % of total revenues 6 % 6 % Interest expense increased by $0.3 million, or 5%, to $5.8 million for the three months ended March 31, 2024 as compared to the same period in 2023. The increase in interest expense was primarily due to an $0.8 million increase in our floating rate term loan debt, driven by the uptick in market interest rates. The increase in interest expense was partially offset by a $0.5 million increase in gain from our interest swap hedge activities. Net Other (Income ) Expense THREE MONTHS ENDED MARCH 31, CHANGE 2024 2023 $ % (in thousands) Net other (income ) expense $ (1,604) $ (506) $ (1,098) 217 % % of total revenues (2) % (1) % Net other income increased by $1.1 million, to $1.6 million for the three months ended March 31, 2024 as compared to the same period in 2023. The increase in net other income was primarily due to a $1.2 million increase interest income primarily from cash investments. 41 Table of Contents Provision (Benefit) for Income Taxes THREE MONTHS ENDED MARCH 31, CHANGE 2024 2023 $ % (in thousands) Provision (benefit) for income taxes $ (751) $ 1,111 $ (1,862) (168) % Effective income tax rate 14 % 45 % Our income tax benefit was $0.8 million, resulting in an effective income tax rate of 14% for the three months ended March 31, 2024 as compared to an income tax expense of $1.1 million, or an effective income tax rate of 45%, for the same period in 2023. Our income tax expense for the three months ended March 31, 2024 and 2023 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. Net Income (Loss) THREE MONTHS ENDED MARCH 31, CHANGE 2024 2023 $ % (in thousands) Net income (loss) $ (4,683) $ 1,358 $ (6,041) 445 % Net loss was $4.7 million representing a $6.0 million change in net income for the three months ended March 31, 2024 as compared to a net income of $1.4 million for the same period of 2023. The decrease in net income was primarily due to a $10.7 million increase in operating expense, a $4.4 million increase in cost of revenue, partially offset by a $6.4 million increase in revenue, a $1.9 million decrease in tax expense, and a $0.8 million increase in total other income. Liquidity and Capital Resources We have consistently generated positive cash flow from operations, providing $4.3 million and $10.0 million as a source of funds for the three months ended March 31, 2024 and 2023, 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, 2024 and December 31, 2023 and as of March 31, 2024 and December 31, 2023. March 31, 2024 December 31, 2023 (in thousands) Net cash from operating activities (a) 4,296 82,755 Cash and cash equivalents (b) 224,776 234,951 Term loan credit facilities 293,695 294,450 Gross revolving line of credit 100,000 100,000 ___________________________________ (a) Net cash from operating activities for three months ended at March 31, 2024 and twelve months ended at December 31, 2023. (b) Cash balance as of March 31, 2024 and December 31, 2023 included $46.2 million and $47.3 million cash and cash equivalents, respectively, held outside of the United States. 42 Table of Contents Our material cash requirements from known contractual obligations are principal and interest payments of long-term debt. We also have future cash obligations of $18.7 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, 2024 matures in the following years: Remainder of 2024 2025 2026 TOTAL ( in thousands) Maturities $ 2,265 $ 3,020 $ 288,410 $ 293,695 We assess our liquidity in terms of our ability to generate adequate amounts of cash to meet current and future needs. We believe our existing sources of liquidity will be sufficient to meet our working capital, capital expenditures, and contractual obligations for the foreseeable future. Our expected primary uses on a short-term and long-term basis are for repayment of debt, interest payments, working capital, capital expenditures, geographic or service offering expansion, acquisitions, investments, and other general corporate purposes. We believe we will meet short and longer-term expected future cash requirements and obligations through a combination of cash flows from operating activities, available cash balances, and potential future equity or debt transactions. Our future capital requirements, however, will depend on many factors, including funding for potential acquisitions, investments, and other growth and strategic opportunities, which could increase our cash requirements. While we believe we have, and will be able to generate, sufficient liquidity to fund our operations for the foreseeable future, our sources of liquidity could be affected by factors described under “Risk Factors” in our 2023 Annual Report. Cash Flows The following table presents a summary of our cash flows for the periods shown: THREE MONTHS ENDED MARCH 31, 2024 2023 (in thousands) Net cash provided by operating activities $ 4,296 $ 9,957 Net cash used in investing activities (3,578) (2,731) Net cash used in financing activities (10,347) (850) Effect of foreign exchange rate changes on cash and cash equivalents, and restricted cash (546) 1,174 Net increase ( decrease) in cash and cash equivalents, and restricted cash $ (10,175) $ 7,550 Cash paid for interest $ 5,395 $ 5,196 Cash paid for income taxes $ 3,640 $ 517 Operating Activities Our cash flows from operating activities primarily include net income adjusted for (i) non-cash items included in net income, such as provisions (recoveries) 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 2024 was $4.3 million, compared to $10.0 million in the same period of 2023. The $5.7 million decrease in cash from operating activities was primarily driven by decrease in cash-adjusted net income, reduced cash inflows from deferred 43 Table of Contents revenues, more cash utilized for acquiring prepaid and other assets, and increased payments for accounts payable, accrued expenses, and other liabilities, partially offset by higher cash collected from accounts receivable. Investing activities Net cash used by investing activities in the first three months of 2024 was $3.6 million, an increase of $0.8 million, compared to $2.7 million in the same period of 2023. The change in investing activities was primarily due to a $0.6 million increase in cash utilized in capitalized development costs and a $0.3 million increase in cash utilized in capital expenditures to support our growth. Financing Activities Net cash used by financing activities in the first three months of 2024 was $10.3 million, compared to $0.9 million cash used in the same period of 2023. The $9.5 million decrease in cash flow in financing activities was primarily due to an $8.6 million increase in cash payments for contingent consideration related to business acquisition, and a $0.9 million increase in cash payments associated with share awards vested and withheld for payroll tax. Indebtedness 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. We and our lenders most recently modified the Credit Agreement on June 17, 2021. The maturity date of the term loans under the Credit Agreement is August 2026; the termination date of the revolving credit commitments is August 2025. Borrowings under the Credit Agreement bear interest at a rate per annum equal to either (i) the Eurocurrency rate, with a floor of 0.00%, as adjusted for the reserve percentage required under regulations issued by the Federal Reserve Board for determining maximum reserve requirements with respect to Eurocurrency funding, plus an applicable margin rate of 3.50% for the term loan and between 4.00% and 3.50% for revolving credit loans, depending on the applicable first lien leverage ratio, or (ii) an alternative base rate (“ABR”), with a floor of 1.00%, plus an applicable margin rate of 2.50% for the term loan or between 3.00% and 2.50% for revolving credit loans, depending on the applicable first lien leverage ratio (with the ABR determined as the greatest of (a) the prime rate, (b) the federal funds effective rate, plus 0.50%), and (c) the Eurocurrency rate plus 1.00%. Additionally, we are obligated to pay commitment fees and other customary fees under the revolving credit facility. In response to the discontinuation of LIBOR, we executed a LIBOR transition amendment in June 2023, formalizing the replacement of LIBOR with the Secured Overnight Funding Rate (“SOFR”). As part of this modification, a Credit Spread Adjustment (“CSA”) was introduced to aligning SOFR with LIBOR in terms of the overall interest rate earned by lenders under the Credit Agreement. The CSA varied depending on the selected interest period. All obligations under the Credit Agreement are unconditionally guaranteed by our wholly owned direct and indirect subsidiaries, subject to certain exceptions. All obligations under the Credit Agreement, and the guarantees of those obligations, are secured on a first lien basis, subject to certain exceptions, by substantially all of our assets and the assets of the other guarantors. As of March 31, 2024, we were in compliance with the covenants of the Credit Agreement. As of March 31, 2024, we had $293.7 million of outstanding borrowings on the term loan, and $100.0 million of availability under the revolving credit facility under the Credit Agreement. 44 Table of Contents Contractual Obligations and Commercial Commitments There have been no material changes to our contractual obligations during the three months ended March 31, 2024 from those disclosed in our 2023 Annual Report, except for payments made in the ordinary course of business. Income Taxes We recorded income tax benefit of $0.8 million for the three months ended March 31, 2024 and income tax expense of $1.1 million for the three months ended March 31, 2023. As of March 31, 2024, we had federal and state NOLs of approximately $1.6 million and $0.04 million, respectively, which are available to reduce future taxable income and expire between 2035 and 2036 and 2029 and 2040, respectively. We had federal and state R&D tax credit carryforwards of approximately $0.3 million and $0, respectively, to offset future income taxes, which expire between 2027 and 2028. We also had foreign tax credits of approximately $13.8 million, which will start to expire in 2027. 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 $81.6 million which will start to expire in 2024, foreign research and development credits of $0.3 million which expire in 2029, and Canadian investment tax credits of approximately $3.8 million which expire between 2031 and 2041. Our carryforwards are subject to review and possible adjustment by the appropriate taxing authorities. As required by Accounting Standards Codification (‘‘ASC’’) Topic 740, Income Taxes, our management has evaluated the positive and negative evidence bearing upon the realizability of our deferred tax assets, which are composed principally of NOL carryforwards, 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, 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 $31.5 million was recorded at December 31, 2023. As of March 31, 2024, the valuation allowance remained unchanged from December 31, 2023. Off-Balance Sheet Arrangements During the periods presented, we did not have, and currently do not have, any off-balance sheet arrangements, as defined under the rules and regulations of the SEC, that have, or are reasonably likely to have, a material effect on our current or future financial condition, results of operations, liquidity, capital expenditures or capital resources. Critical Accounting Estimates Our accounting policies are more fully described in Note 2, “Summary of Significant Accounting Policies,” in our audited consolidated financial statements included in our 2023 Annual Report. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We monitor estimates and assumptions on a continuous basis and update these estimates and assumptions as facts and circumstances change and new information is obtained. Actual results could differ materially from those estimates and assumptions. We discussed the accounting policies that we believe are most critical to the 45 Table of Contents 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 2023 Annual Report. There were no significant changes to our critical accounting estimates during the three months ended March 31, 2024. Recently Adopted and Issued Accounting Standards We have reviewed all recently issued standards and have determined that, other than as disclosed in Note 2 to our condensed consolidated financial statements appearing elsewhere in this Quarterly Report, such standards will not have a material impact on our condensed consolidated financial statements or do not otherwise apply to our operations. Item 3. Quantitative and Qualitative Disclosures About Market Risk 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 2023 Annual Report. There were no material changes to the Company’s market risk exposure during the three months ended March 31, 2024.