CERTARA, INC. 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 Annual Report on Form 10-K for the fiscal year ended
Executive Overview
We accelerate medicines to patients using biosimulation software and technology to transform traditional drug discovery and development. Biosimulation is a powerful technology used to conduct virtual trials using virtual patients to predict how drugs behave in different individuals. Biopharmaceutical companies use our proprietary biosimulation software throughout drug discovery and development to inform critical decisions that not only save significant time and money but also advance drug safety and efficacy, improving millions of lives each year.
As a global leader in biosimulation based on 2020 revenue, we provide an
integrated, end-to-end platform used by more than 1,650 biopharmaceutical
companies and academic institutions across 61 countries, including all of the
top 35 biopharmaceutical companies by R&D spend in 2019. Since 2014, customers
who use our biosimulation software and technology-enabled services have received
over 90% of all new drug approvals by the
We build our biosimulation technology on first principles of biology, chemistry, and pharmacology with proprietary mathematical algorithms that model how medicines and diseases behave in the body. For over two decades, we have honed and validated our biosimulation technology with an abundance of data from scientific literature, lab research, and preclinical and clinical studies. In turn, our customers use biosimulation to conduct virtual trials to answer critical questions, such as: What will be the human response to a drug based on preclinical data? How will other drugs interfere with this new drug? What is a safe and efficacious dose for children, the elderly, or patients with pre-existing conditions? Virtual trials may be used to optimize dosing on populations that are otherwise difficult to study for ethical or logistical reasons, such as infants, pregnant women, the elderly, and cancer patients.
Biosimulation results need to be incorporated into regulatory documents for compelling submissions. Accordingly, we provide regulatory science solutions and integrate them with biosimulation so that our customers can navigate the complex and evolving regulatory landscape and maximize their chances of approval. Our differentiated regulatory services are powered by submissions management software and natural language processing for scalability and speed, allowing us to deliver more than 200 regulatory submissions over the past four years. Our team of more than 200 regulatory professionals has extensive experience applying industry guidelines and global regulatory requirements.
The final hurdle to delivering medicines to patients is market access, defined as strategies, processes, and activities to ensure that therapies are available to patients at the right price. We believe that biosimulation and market access will continue to be increasingly intertwined as health systems and countries move toward outcomes-based pricing. We have recently expanded into technology-enabled market access solutions, which help our customers understand the real-world impact of therapies and dosing regimens earlier in the process and effectively communicate this to payors and health authorities. Our solutions are underpinned by technologies such as Bayesian statistical software and SaaS-based value communication tools.
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With continued innovation in and adoption of our biosimulation software and technology-enabled services, we believe more biopharmaceutical companies worldwide will leverage more of our end-to-end platform to reduce cost, accelerate speed to market, and ensure safety and efficacy of medicines for all patients.
Initial Public Offering
On
Secondary Public Offering
On
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 renewal rates.
Bookings: Our new bookings represent a signed contract or purchase order where
there is sufficient or reasonable certainty about the customer's ability and
intent to fund and commence the software and/or services. 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.
Renewal Rates: Our renewal rates measure the percentage of software customers
? who renew their licenses or subscriptions at the end of the license or
subscription periods. The renewal rate is based on revenues and excludes the
effect of price increases or expansions.
The table below summarizes our quarterly bookings and renewal rate trends:
THREE MONTHS ENDED MARCH 31,
2020 2021
Bookings (in millions) $ 61.0 $ 81.9
Renewal Rate 92 % 92 %
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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; and (iv) in other operational and administrative functions to support our expected growth. We expect that our headcount will increase over time and also expect our total operating expenses will continue to increase over time, albeit, at a rate lower than revenue growth.
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 EMA, 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 services. Changes in government or regulatory policy, or a reversal in the trend toward increasing the acceptance of and reliance upon in silico data in the drug approval process, could decrease the demand for our products and services or lead regulatory authorities to cease use of, or to recommend against the use of, our products and services.
Governmental agencies throughout the world, but particularly in
Competition
The market for our biosimulation products and related services for the biopharmaceutical industry is competitive and highly fragmented. In biosimulation software, we compete with other scientific software providers, technology companies, in-house development by biopharmaceutical companies, and certain open source solutions. In the technology-enabled services market, we compete with specialized companies, in-house teams at biopharmaceutical companies, and academic and government institutions. In some standard biosimulation services, and in regulatory and market access, we also compete with contract research organizations. Some of our competitors and potential competitors have longer operating histories in certain segments of our industry than we do and could have greater financial, technical, marketing, R&D, and other resources. Some of our competitors offer products and services directed at more specific markets than those we target, enabling these competitors to focus a greater proportion of their efforts and resources on those specific markets. Some competing products are developed and made available at lower cost by government organizations and academic institutions, and these entities may be able to devote substantial resources to product development. Some clinical research organizations or technology companies may decide to enter into or expand their offerings in the biosimulation area, whether through acquisition or internal development. We also face competition from open source software initiatives, in which developers provide software and intellectual property free of charge, such as R and PK-Sim software. In addition, some of our customers spend significant internal resources in order to develop their own solutions.
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Impact of COVID-19
The continued spread of COVID-19 may adversely impact our business, financial
condition or results of operations as a result of increased costs, negative
impacts to our healthy workforce or a sustained economic downturn. The extent to
which the COVID-19 pandemic may impact our business in the future is highly
uncertain and cannot be predicted. In addition, a recession or a prolonged
period of depressed economic activity related to COVID-19 and measures taken to
mitigate its spread could have a material adverse effect on our business,
financial condition and results of operations. As of
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, 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.
We believe Adjusted EBITDA is helpful to investors, analysts, and other interested parties because it can assist in providing a more consistent and comparable overview of our operations across our historical periods. In addition, this measure is frequently used by analysts, investors, and other interested parties to evaluate and assess performance.
Adjusted EBITDA is a non-GAAP measure and is 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 has certain limitations in that it does not include the impact of certain expenses that are reflected in our consolidated statement of operations that are necessary to run our business. Other companies, including other companies in our industry, may not use this measure and may calculate it differently than as presented on this prospectus, limiting the usefulness as a comparative measure.
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The following table reconciles Net income to Adjusted EBITDA :
THREE MONTHS ENDED MARCH 31,
2021 2020
(in thousands)
Net income(a) $ 1,052 $ 1,046
Interest expense(a) 3,928 6,858
Interest income(a) (70) (11)
Provision for income taxes(a) 527 621
Depreciation and amortization expense(a) 602 553
Intangible asset amortization(a) 10,102 9,930
Currency gain (loss)(a) 191 (282)
Equity-based compensation expense(b) 5,151 538
Acquisition-related expenses(c) 1,596 455
Transaction related expenses(d) 685 -
Severance expense(e) - 195
Reorganization expense(f) - 5
First-year Sarbanes-Oxley implementation costs(g) 107 -
Adjusted EBITDA $ 23,871 $ 19,908 The following table reconciles Net income to Adjusted Net Income:
THREE MONTHS ENDED MARCH 31,
2021 2020
(in thousands)
Net income(a) $ 1,052 $ 1,046
Currency gain (loss)(a) 191 (282)
Equity-based compensation expense(b) 5,151 538
Acquisition-related expenses(c) 1,596 455
Transaction related expenses(d) 685 -
Severance expense(e) - 195
Reorganization expense(f) - 5
First-year Sarbanes-Oxley implementation costs(g) 107 -
Income tax expense impact of adjustments(h) 665 103
Adjusted Net Income $ 9,447 $ 2,060
The following table reconciles Diluted Earnings Per Share to Adjusted Diluted
Earnings Per Share:
THREE MONTHS ENDED MARCH 31,
2021 2020
Diluted earnings per share(a) $ 0.01 $ 0.01
Currency gain (loss)(a) - -
Equity-based compensation expense(b) 0.03 0.01
Acquisition-related expense(c) 0.01 -
Transaction related expenses(d) 0.01 -
Severance expense(e) - -
Reorganization expense(f) - -
First-year Sarbanes-Oxley implementation costs(g) - -
Income tax expense impact of adjustments(h) - -
Adjusted Diluted Earnings Per Share $ 0.06 $ 0.02
Diluted weighted average common shares outstanding 152,084,745 132,407,786
(a) Represents amounts as determined under GAAP.
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Represents expense related to equity-based compensation. Equity-based (b) 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 costs associated with mergers and acquisitions and any retention
bonuses pursuant to the acquisitions.
(d) Represents costs associated with our secondary offering that are not
capitalized.
(e) Represents charges for severance provided to former executives and
non-executives.
(f) Represents expense related to reorganization, including legal entity
reorganization.
Represents the first year Sarbanes-Oxley costs for accounting and consulting (g) fees related to the Company's preparation to comply with Section 404 of the
Sarbanes-Oxley Act in 2021.
(h) Represents the income tax effect of the non-GAAP adjustments calculated using
the applicable statutory rate by jurisdiction.
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 upfront,
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 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-enabled 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, 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.
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Research and Development. Research and development expense accounts for a
significant portion of our operating expenses. We recognize expenses as
incurred. Research and development expenses consist primarily of
? employee-related expenses, 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.
We expect to increase the size of our general and administrative staff to support the anticipated growth of our business. As a public company, we expect to incur significant expenses on an ongoing basis that we did not incur as a private company. Those costs include additional director and officer liability insurance expense, as well as third-party and internal resources related to accounting, auditing, SOX compliance, legal, and investor and public relations expenses. As a result, we expect the dollar amount of our general and administrative expense to increase for the foreseeable future. Excluding public company expenses, we expect general and administrative expense to grow at a rate lower than revenues.
Intangible Asset Amortization. Intangible asset amortization consists
? primarily of amortization expense related to intangible assets recorded in
connection with acquisitions and amortization of capitalize 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 the Credit Facilities, including amortization of debt issuance
costs and discounts. We expect interest expense to decline as a result of lower
outstanding indebtedness going forward.
? Miscellaneous. Miscellaneous expense consists of miscellaneous non-operating
expenses primarily comprised of foreign exchange transaction gains and losses.
Provision for (Benefit from) Income Taxes. Provision for (benefit from) income
? taxes consists of
certain foreign jurisdictions in which we conduct business. We expect income
tax expense to increase over time as the Company continues to grow net income.
Acquisition
On
Results of Operations
We have included the results of operations of acquired companies in our
consolidated results of operations from the date of their respective
acquisitions, which impacts the comparability of our results of operations when
comparing results for the three months ended
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Three Months Ended
The following table summarizes our unaudited statements of operations data for
the three months ended
Revenues
THREE MONTHS ENDED MARCH 31, CHANGE
2021 2020 $ %
( in thousands)
Software $ 21,904 $ 20,261 $ 1,643 8 %
Services 44,814 37,188 7,626 21 %
Total revenues $ 66,718 $ 57,449 $ 9,269 16 %
Revenues increased
Software revenue increased by
Services revenue increased by$7.6 million , or 21%, to$44.8 million for the three months endedMarch 31, 2021 as compared to the same period in 2020, driven by growth in our technology-enabled services, primarily in biosimulation offerings. Cost of Revenues THREE MONTHS ENDED MARCH 31, CHANGE 2021 2020 $ % (in thousands) Cost of revenues$ 26,016 $ 22,183 $ 3,833 17 %
Cost of revenues increased by
Sales and Marketing Expenses
THREE MONTHS ENDED MARCH 31, CHANGE
2021 2020 $ %
(in thousands)
Sales and marketing $ 3,752 $ 2,938 $ 814 28 %
% of total revenues 6 % 5 %
Sales and marketing expenses increased by
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Research and Development Expenses
THREE MONTHS ENDED MARCH 31, CHANGE
2021 2020 $ %
(in thousands)
Research and development $ 4,706 $ 2,875 $ 1,831 64 %
% of total revenues 7 % 5 %
Research and development expenses increased by
General and Administrative Expenses
THREE MONTHS ENDED MARCH 31, CHANGE
2021 2020 $ %
(in thousands)
General and administrative $ 16,562 $ 11,541 $ 5,021 44 %
% of total revenues 25 % 20 %
General and administrative expenses increased by
Intangible Asset Amortization Expense
THREE MONTHS ENDED MARCH 31, CHANGE
2021 2020 $ %
(in thousands)
Intangible asset amortization $ 9,456 $ 9,359
14 % 16 %
Intangible asset amortization expense increased by
Depreciation and Amortization Expense
THREE MONTHS ENDED MARCH 31, CHANGE
2021 2020 $ %
(in thousands)
Depreciation and amortization $ 602 $ 553
1 % 1 %
Depreciation and amortization expense of
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Interest Expense
THREE MONTHS ENDED MARCH 31, CHANGE
2021 2020 $ %
(in thousands)
Interest expense $ 3,928 $ 6,858 $ (2,930) (43) %
% of total revenues 6 % 12 %
Interest expense decreased by
Miscellaneous, net
THREE MONTHS ENDED MARCH 31, CHANGE
2021 2020 $ %
(in thousands)
Miscellaneous, net $ (117) $ 525 $ (642) (122) %
% of total revenues (0) % 1 %
Miscellaneous income was $0.1 million for the three months ended March 31, 2021
as compared to miscellaneous expenses of $0.5 million for the same period in
2020. The change was primarily due to foreign currency exchange rate
fluctuations.
Provision for Income Taxes
THREE MONTHS ENDED MARCH 31, CHANGE
2021 2020 $ %
( in thousands)
Provision for income taxes $ 527 $ 621 $ (94) (15) %
Effective income tax rate 33 % 37 %
Our income tax expense was
Net Income
THREE MONTHS ENDED MARCH 31, CHANGE
2021 2020 $ %
(in thousands)
Net income $ 1,052 $ 1,046 $ 6 1 %
Net income was
Liquidity and Capital Resources
We assess our liquidity in terms of our ability to generate adequate amounts of cash to meet current and future needs. 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 have historically funded our operations primarily through cash generated from operations. We
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have historically used long-term debt and cash on hand to fund acquisitions. We
hold our cash balances in
As of
Cash Flows
The following table presents a summary of our cash flows for the periods shown:
THREE MONTHS ENDED MARCH 31,
2021 2020
(in thousands)
Net cash provided by operating activities $ 4,934 $ 8,823
Net cash used in investing activities (3,458) (3,009)
Net cash provided by (used in) financing activities (855) 19,031
Effect due to foreign exchange rate changes on cash, cash equivalents, and restricted cash
(191) (251)
Net increase in cash, cash equivalents, and restricted
cash $ 430 $ 24,594
Cash paid for interest $ 3,552 $ 8,987
Cash paid for income taxes $ 1,663 $ 1,763
Operating Activities
During the three months ended
During the three months ended
Investing Activities
During the three months ended
During the three months ended
Financing Activities
During the three months ended
During the three months ended
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Funding Requirements
We believe that our existing cash and cash equivalents will be sufficient to fund our operations and capital expenditure requirements for the foreseeable future. Our future capital requirements will depend on many factors, including funding for potential acquisitions, investments, and other growth and strategic opportunities that might require use of existing cash, borrowings under our revolving credit facility, or additional long-term financing. We may also use existing cash and cash flows from operations to pay down long-term debt from time to time.
While we believe we have sufficient liquidity to fund our operations for the foreseeable future, our sources of liquidity could be affected by factors described under "Risk Factors" elsewhere in this Quarterly Report.
Indebtedness
Credit Facilities
Credit Agreement
Certain of our wholly owned indirect subsidiaries,
In
Borrowings under the Credit Agreement currently bear interest at a rate per
annum equal to either (i) the Eurocurrency rate, with a floor of 0.00%, as
adjusted for the reserve percentage required under regulations issued by the
Additionally, we are obligated to pay under the revolving credit facility (i) a commitment fee of between 0.50% and 0.25% per annum of the unused amount of the revolving credit facility, depending on the applicable first lien leverage ratio, (ii) customary letter of credit issuance and participation fees, and (iii) other customary fees and expenses of the letter of credit issuers.
All obligations under the Credit Agreement are unconditionally guaranteed by our
wholly owned indirect subsidiary and the parent of the Borrowers,
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As of
As of
Contractual Obligations and Commercial Commitments
There have been no material changes to our contractual obligations during the
three months ended
Income Taxes
We recorded income tax expense of
As of
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, R&D credit
carryforwards, investment tax credit carryforward, and foreign tax credit
carryforwards. Management has determined that it is more likely than not that we
will not realize the benefits of foreign tax credit carryforwards. At the
foreign subsidiaries, management has determined that it is more likely than not
that we will not realize the benefits of certain NOL carryforwards. As a result,
a valuation allowance of
Off-Balance Sheet Arrangements
During the periods presented, we did not have, and currently we do not have, any
off-balance sheet arrangements, as defined under the rules and regulations of
the
Critical Accounting Policies and 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 Annual Report on Form Form 10-K for the year ended
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There were no significant changes to our critical accounting policies and
estimates during the three months ended
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.
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