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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion of our financial condition and results of operations in conjunction with our audited consolidated financial statements and the related notes and other financial information included elsewhere in this Annual Report and our audited consolidated financial statements and notes thereto.

As discussed in the section titled “Special Note Regarding Forward Looking Statements,” the following discussion and analysis, in addition to historical financial information, contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the section titled “Risk Factors” under Part I, Item 1A above.

We operate on a fiscal year that ends on December 31.

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 2020. Since 2014, customers who use our biosimulation software and technology-enabled services have received over 90% of all new drug approvals by the FDA. Moreover, 17 global regulatory authorities license our biosimulation software to independently analyze, verify, and review regulatory submissions, including the FDA, Europe’s EMA, Health Canada, Japan’s PMDA, and China’s NMPA. Demand for our offerings continues to expand rapidly.

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.

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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.

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.

On December 15, 2020, we completed our IPO, pursuant to which we issued and sold 14,630,000 shares of our common stock and certain selling stockholders sold 18,783,250 shares of our common stock (representing the full exercise of the underwriters’ option to purchase additional shares), at a public offering price of $23.00 per share. We received net proceeds of $316.3 million, after deducting underwriters’ discounts and commissions, but before offering costs. We incurred offering costs of $4.4 million, net of the tax effect of $0.3 million, which we recognized as a charge to additional paid-in capital.

In connection with the closing of our IPO, we repaid in full the $80.0 million outstanding principal amount and $3.0 million accrued interest on our Loan Agreement.

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.

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

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

(1) Due to late renewals by several large biosimulation software customers.

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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 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 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 December 31, 2020, there have been no material adverse impacts on the Company’s financial condition, results of operations or cash flows.

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, 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 consolidated statements of operations that are necessary to run our business. Other companies, including other companies in our industry, may not use these measures and may calculate both differently than as presented, limiting the usefulness as a comparative measure.

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The following table reconciles Net loss to Adjusted EBITDA :

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ YEAR ENDED DECEMBER 31,

​ ​ (in thousands)

Interest income(a) ​ (44) ​ (9) ​ (9)

(Benefit from) provision for income taxes(a) ​ (784) ​ (225) ​ 697

Depreciation and amortization expense(a) ​ 2,443 ​ 2,596 ​ 2,416

Transaction related expenses(e) ​ 1,908 ​ — ​ —

Reorganization expense(g) ​ 525 ​ 222 ​ —

Loss on disposal of fixed assets(h) ​ 19 ​ 113 ​ 91

Executive recruiting expense(i) ​ 288 ​ 476 ​ —

​

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

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ YEAR ENDED DECEMBER 31,

​ ​ (in thousands)

Transaction related expenses(e) ​ 1,908 ​ — ​ —

Reorganization expense(g) ​ 525 ​ 222 ​ —

Loss on disposal of fixed assets(h) ​ 19 ​ 113 ​ 91

Executive recruiting expense(i) ​ 288 ​ 476 ​ —

Income tax expense impact of adjustments(j) ​ ​ 1,381 ​ ​ 1,758 ​ ​ 2,951

​

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The following table reconciles diluted earnings per share to Adjusted Diluted Earnings Per Share:

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ YEAR ENDED DECEMBER 31,

​ ​ (in thousands)

Diluted earnings per share(a) $ (0.37) $ (0.07) $ (0.25)

Currency loss(a) ​ ​ 0.01 ​ ​ — ​ ​ —

Equity-based compensation expense(b) ​ ​ 0.48 ​ ​ 0.01 ​ ​ 0.01

Acquisition-related expense(c) ​ 0.01 ​ 0.02 ​ 0.05

Integration expense(d) ​ — ​ 0.01 ​ 0.02

Transaction related expenses(e) ​ 0.01 ​ — ​ —

Reorganization expense(g) ​ 0.01 ​ — ​ —

Loss on disposal of fixed assets(h) ​ — ​ — ​ —

Executive recruiting expense(i) ​ — ​ 0.01 ​ —

Income tax expense impact of adjustments(j) ​ 0.01 ​ 0.01 ​ 0.02

Effect of using adjusted diluted shares(k) ​ ​ — ​ ​ — ​ ​ —

Adjusted Diluted Earnings Per Share ​ $ 0.17 ​ $ 0.01 ​ $ (0.14)

Effect of potentially dilutive shares outstanding (l) ​ ​ 229,383 ​ ​ — ​ ​ —

(a) Represents amounts as determined under GAAP.

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

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Components of Results of Operations

Revenues

Our business generates revenue from the sales of software products and delivery of consulting 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

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We expect to increase the size of our general and administrative staff to support the anticipated growth of our business. As a public company, we expect to incur significant expenses on an ongoing basis that we did not incur as a private company. Those costs include additional director and officer liability insurance expenses, as well as third-party and internal resources related to accounting, auditing, 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.

Other Expenses

Acquisitions

BaseCase Acquisition

On January 25, 2018, we acquired 100% of the equity of BaseCase, a SaaS company in the life sciences industry. The purchase price of $25.3 million was funded through proceeds of $25.0 million received from an additional tranche of term debt and cash on hand. See Note 5, "Business Combinations," of the consolidated financial statements.

Analytica Laser Acquisition

On April 3, 2018, we acquired 100% of the equity of Analytica Laser, a provider of real-world evidence and health economics outcomes research, value and access consultancy, cost and comparative effectiveness modeling, and collection and analysis of real-world data for use in market and payor communications. The purchase price of $40.0 million was funded through proceeds of $40.0 million received from an additional tranche of term debt and cash on hand. See Note 5, "Business Combinations," of the consolidated financial statements.

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Results of Operations

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ YEAR ENDED DECEMBER 31,

​ ​ (in thousands)

Statement of operations data: ​ ​ ​ ​ ​ ​ ​ ​ ​

Operating expenses: ​ ​ ​ ​ ​

Depreciation and amortization expense ​ 2,443 ​ 2,596 ​ 2,416

Other expenses: ​ ​ ​

Loss from operations before income taxes ​ (50,181) ​ (9,151) ​ (32,561)

(Benefit from) provision for income taxes ​ (784) ​ (225) ​ 697

​

Comparison of the Year Ended December 31, 2020 and 2019

Revenues

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ YEAR ENDED DECEMBER 31, CHANGE

​ ​ ( in thousands)

​

Revenues increased by $35.0 million, or 17%, to $243.5 million for the year ended December 31, 2020 as compared to the same period in 2019. The increase in revenues was a direct result of growth in our technology enabled services and software product offerings from strong renewal rates and client expansions.

Software revenue increased by $5.1 million, or 7%, to $73.5 million for the year ended December 31, 2020 as compared to the same period in 2019, driven primarily by growth in sales of our software licenses of 10%, or $3.3 million and subscriptions revenue of 8%, or $2.3 million, partially offset by a decline in software maintenance revenue or $0.5 million. The growth is attributable to maintaining high net revenue retention rates and renewal rates for our core software products.

Services revenue increased by $29.9 million, or 21%, to $170.1 million for the year ended December 31, 2020 as compared to the same period in 2019, primarily driven by organic growth in our technology-enabled services product lines of 23%, or $30.6 million, partially offset by a $0.7 million decrease in professional services offerings. The growth is primarily attributable to strong growth in biosimulation and regulatory services from client expansions and new customer acquisition.

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Cost of Revenues

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ YEAR ENDED DECEMBER 31, CHANGE

​ ​ (in thousands)

​

Cost of revenues increased by $21.0 million, or 26%, to $100.8 million for the year ended December 31, 2020 as compared to 2019. The increase was primarily due to a $8.6 million increase in stock-based compensation driven by the exchange of performance vesting Class B Units in connection with the December 2020 offering and an increase to employee-related costs of $8.6 million related to increased headcount. The remaining increase is due to consulting costs and bonus expense, partially offset by decreases in travel related costs, retention, and software expenses.

Sales and Marketing Expense

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ YEAR ENDED DECEMBER 31, ​ CHANGE

​ ​ (in thousands)

% of total revenues ​ 8 % 5 % ​ ​

​

Sales and marketing increased by $8.5 million, or 79%, to $19.2 million for the year ended December 31, 2020 as compared to 2019. The increase was primarily due to a $7.3 million increase in stock-based compensation driven by the exchange of performance vesting Class B Units in connection with the December 2020 offering. The remainder of the increase is due to sales commissions, employee-related costs, and other marketing costs, offset by decreases in advertising and tradeshow, travel and entertainment, bonus, and consulting expenses.

Research and Development Expense

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ YEAR ENDED DECEMBER 31, CHANGE

​ ​ (in thousands)

% of total revenues ​ 8 % 6 % ​ ​

​

Research and development expenses increased by $8.0 million, or 69%, to $19.6 million for the year ended December 31, 2020 as compared to 2019. The increase was primarily due to a $7.0 million increase in stock-based compensation driven by the exchange of performance vesting Class B Units in connection with the December 2020 offering. The remaining increase was due to employee-related costs, consulting expenses, and bonus expense, partially offset by lower capitalization of software development costs, tax credits, and travel and entertainment spend.

General and Administrative Expense

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ YEAR ENDED DECEMBER 31, CHANGE

​ ​ (in thousands)

% of total revenues ​ 36 % 23 % ​ ​

​

General and administrative expenses increased by $40.6 million, or 85%, to $88.5 million for the year ended December 31, 2020 as compared to 2019. The increase was primarily due to a $39.8 million increase in stock-based compensation driven by the exchange of performance vesting Class B Units in connection with the December 2020 offering. The remaining increase is due to increases in professional fees, IPO transaction costs, employee-related costs, bonus expense, IT-related costs, and D&O insurance coverage, partially offset by decreases in travel and entertainment spend, severance expenses, restructuring costs, acquisitions and integration costs, and office supply expense.

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Intangible Asset Amortization Expense

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ YEAR ENDED DECEMBER 31, CHANGE

​ ​ (in thousands)

% of total revenues ​ 15 % 17 % ​ ​

​

Intangible asset amortization expense increased by $1.2 million, or 3%, to $37.4 million for the year ended December 31, 2020 as compared to 2019. The increase in intangible asset amortization was a direct result of increases in capitalized software development costs and increases in acquired intangible assets.

Depreciation and Amortization Expense

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ YEAR ENDED DECEMBER 31, CHANGE

​ ​ (in thousands)

Depreciation and amortization ​ $ 2,443 ​ $ 2,596 ​ $ (153) ​ (6) %

% of total revenues ​ 1 % 1 % ​ ​

​

Depreciation and amortization expense of $2.4 million was relatively flat for the year ended December 31, 2020 as compared to 2019.

Interest Expense

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ YEAR ENDED DECEMBER 31, CHANGE

​ ​ (in thousands)

% of total revenues ​ 10 % 13 % ​ ​

​

Interest expense decreased by $2.7 million, or 10%, to $25.3 million for the year ended December 31, 2020 as compared to 2019. The decrease in interest expense was primarily due to lower outstanding debt resulting from payoff of our higher interest term loans and lower interest rates on the outstanding debt.

Miscellaneous, net

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ YEAR ENDED DECEMBER 31, CHANGE

​ ​ (in thousands)

% of total revenues ​ 0 % 0 % ​ ​

​

Miscellaneous expenses decreased by $0.3 million, or 39%, to $0.5 million for the year ended December 31, 2020 as compared to 2019. The decrease in miscellaneous expenses was primarily due to a $0.2 million decrease in asset disposals and sublease losses and a $0.2 million Australian stimulus income provided by the Australian government, partially offset by a $0.3 million unfavorable foreign currency exchange rate fluctuations compared to the U.S. dollar, particularly with the pound sterling.

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(Benefit from) Provision for Income Taxes

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ YEAR ENDED DECEMBER 31, ​ CHANGE

​ ​ ( in thousands)

(Benefit from) income taxes ​ $ (784) $ (225) ​ $ 559 ​ 248 %

Effective income tax rate ​ 1.6 % ​ 2.5 % ​ ​

​

Our income tax benefit was $0.8 million, resulting in an effective income tax rate of 1.6%, for the year ended December 31, 2020, as compared to an income tax benefit of $0.2 million, or an effective income tax rate of 2.5%, in 2019. Our income tax benefit for the year ended December 31, 2020 was primarily due to the tax effects of the U.S. pre-tax loss and the impact of tax rate changes in certain jurisdictions.

Net Loss

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ YEAR ENDED DECEMBER 31, CHANGE

​ ​ (in thousands)

​

Net loss increased by $40.5 million, or 453%, to $49.4 million for the year ended December 31, 2020 as compared to the same period in 2019. The increase was primarily due to an increase in operating expenses, namely general and administrative expenses, sales and marketing, and research and development expenses.

Comparison of the Year Ended December 31, 2019 and 2018

Revenues

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ YEAR ENDED DECEMBER 31, ​ CHANGE ​

​ ​ (in thousands)

​

Revenues increased by $44.8 million, or 27%, to $208.5 million for the year ended December 31, 2019 as compared to the same period in 2018. The increase in revenues was a direct result of growth in our services and software product offerings, strong renewal rates and client expansions in software, as well as growth in our technology-enabled services, primarily in biosimulation, market access, and regulatory writing offerings.

Software revenue increased by $21.5 million, or 46%, to $68.3 million for the year ended December 31, 2019 as compared to the same period in 2018, driven primarily by an increase in sales of our software licenses of 16%, or $4.6 million, as well as an increase in subscriptions revenue of 8%, or $2.3 million, and software maintenance revenue of 8%, or $0.3 million. In addition to organic growth, we incurred a reduction in 2018 software licenses and software subscriptions of $8.3 million and $6.1 million respectively, as compared to $0 and $0.3 million in 2019, relating to purchase accounting fair value adjustments of deferred revenue.

Services revenue increased by $23.3 million, or 20%, to $140.2 million for the year ended December 31, 2019 as compared to the same period in 2018, primarily driven by both organic and acquisition growth in our technology-enabled services product lines of 20%, or $22.7 million and professional service offerings of $0.5 million.

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Cost of Revenues

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ YEAR ENDED DECEMBER 31, ​ CHANGE ​

​ ​ (in thousands)

​

Cost of revenues increased by $8.7 million, or 12%, to $79.8 million for the year ended December 31, 2019 as compared to 2018. The increase in cost of revenues was primarily due to increases in employee-related costs, including bonus expense, of $6.0 million. The remaining increase is due to consulting costs, distributor fees, and software expenses, partially offset by a decrease in amortization of software development costs and integration costs.

Sales and Marketing Expense

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ YEAR ENDED DECEMBER 31, ​ CHANGE ​

​ ​ (in thousands)

% of total revenues ​ 5 % 6 % ​ ​

​

Sales and marketing increased by $1.3 million, or 14%, to $10.7 million for the year ended December 31, 2019 as compared to 2018. Sales and marketing increased primarily due to increases in employee-related costs, including bonus expense, of $0.7 million. The remaining increase is due to sales commissions, consulting expenses, and travel and entertainment costs, partially offset by a decrease in other marketing costs.

Research and Development Expense

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ YEAR ENDED DECEMBER 31, ​ CHANGE ​

​ ​ (in thousands)

% of total revenues ​ 6 % 6 % ​ ​

​

Research and development expenses increased by $1.2 million, or 11%, to $11.6 million for the year ended December 31, 2019 as compared to 2018. The increase in R&D expenses was primarily due to increases in employee-related costs, including bonus expense, of $2.2 million. This was partially offset by higher capitalization of software development costs, tax credits, and a decrease in startup costs.

General and Administrative Expense

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ YEAR ENDED DECEMBER 31, ​ CHANGE ​

​ ​ (in thousands)

% of total revenues ​ 23 % 27 % ​ ​

​

General and administrative expenses increased by $4.5 million, or 10%, to $47.9 million for the year ended December 31, 2019 as compared to 2018. The increase in general and administrative expenses was primarily due to increases in employee-related costs, including bonus expense, of $3.7 million. The remaining increase is due to facilities costs, software expenses, accounting fees, and severance, integration, restructuring, and reorganization costs, partially offset by decreases in travel and entertainment costs and acquisition-related synergies.

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Intangible Asset Amortization Expense

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ YEAR ENDED DECEMBER 31, ​ CHANGE ​

​ ​ (in thousands)

% of total revenues ​ 17 % 19 % ​ ​

​

Intangible asset amortization expense increased by $4.6 million, or 15%, to $36.2 million for the year ended December 31, 2019 as compared to 2018. The increase in intangible asset amortization was a direct result of increases in capitalized software development costs and increases in acquired intangible assets.

Depreciation and Amortization Expense

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ YEAR ENDED DECEMBER 31, ​ CHANGE ​

​ ​ (in thousands)

Depreciation and amortization ​ $ 2,596 ​ $ 2,416 ​ $ 180 ​ 7 %

% of total revenues ​ 1 % 1 % ​ ​

Depreciation and amortization expense of $2.6 million was relatively flat for the year ended December 31, 2019 as compared to 2018.

Interest Expense

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ YEAR ENDED DECEMBER 31, ​ CHANGE ​

​ ​ (in thousands)

% of total revenues ​ 13 % 17 % ​ ​

​

Interest expense increased by $0.2 million, or 1%, to $28.0 million for the year ended December 31, 2019 as compared to 2018. The increase in interest expense was primarily due to the full year effect of interest on acquisition-related borrowings.

Miscellaneous, net

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ YEAR ENDED DECEMBER 31, ​ CHANGE ​

​ ​ (in thousands)

% of total revenues ​ 0 % 0 % ​ ​

​

Miscellaneous expenses increased by $0.7 million, or 610%, to $0.8 million for the year ended December 31, 2019 as compared to 2018. The increase in miscellaneous expenses was primarily due to unfavorable foreign exchange rates compared to the U.S. dollar, particularly with the pound sterling.

(Benefit from) Provision for Income Taxes

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ YEAR ENDED DECEMBER 31, ​ CHANGE ​

​ ​ (in thousands)

(Benefit from) provision for income taxes ​ $ (225) $ 697 ​ $ 922 ​ nm ​

Effective income tax rate ​ 2.5 % ​ (2.1) % ​ ​ ​

​

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Our income tax benefit was $0.2 million, resulting in an effective income tax rate of 2.5%, for the year ended December 31, 2019, as compared to an income tax expense of $0.7 million, or an effective income tax rate of (2.1%), in 2018. Our income tax benefit for the year ended December 31, 2019 was primarily due to the tax effects of the U.S. pre-tax loss and the impact of tax rate changes in certain jurisdictions.

Net Loss

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ YEAR ENDED DECEMBER 31, ​ CHANGE ​

​ ​ (in thousands)

​

Net loss decreased by $24.3 million, or 73%, to $8.9 million for the year ended December 31, 2019 as compared to the same period in 2018. The decrease was primarily due to an increase in operating income and positive change in taxes, partially offset by increase in other expenses, each as described above.

Liquidity and Capital Resources

As of December 31, 2020, we had cash and cash equivalents of $271.4 million, of which $19.9 million represents cash and cash equivalents held outside of the United States.

Cash Flows

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

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ YEAR ENDED DECEMBER 31,

​ ​ (in thousands)

Net cash used in investing activities ​ (8,612) ​ (9,517) ​ ​ (73,905)

​

Operating Activities

During the year ended December 31, 2020, operating activities provided approximately $44.8 million of cash and cash equivalents, primarily resulting from a net loss of $49.4 million, offset by $100.9 million of non-cash operating expenses inclusive of depreciation and amortization, amortization of debt issuance costs, equity-based compensation costs, and deferred income taxes. Changes in our operating assets and liabilities used cash and cash equivalents of approximately $6.7 million.

During the year ended December 31, 2019, operating activities provided approximately $38.0 million of cash and cash equivalents, primarily resulting from a net loss of $8.9 million, offset by $38.2 million of non-cash operating expenses inclusive of depreciation and amortization, amortization of debt issuance costs, equity-based compensation costs, and deferred income taxes. Changes in our operating assets and liabilities provided cash and cash equivalents of approximately $8.7 million.

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During the year ended December 31, 2018, operating activities provided approximately $11.6 million of cash and cash equivalents, primarily resulting from a net loss of $33.3 million, offset by $36.4 million of non-cash operating expenses inclusive of depreciation and amortization, amortization of debt issuance cost, equity-based compensation costs, deferred income taxes, and a $0.1 million non-cash loss on retirement of assets. Changes in our operating assets and liabilities provided cash and cash equivalents of approximately $8.3 million.

Investing Activities

During the year ended December 31, 2020, investing activities used approximately $8.6 million of cash, primarily for investing in capital expenditures and capitalized software development to support our growth.

During the year ended December 31, 2019, investing activities used approximately $9.5 million of cash, primarily for investing in capital expenditures and capitalized software development to support our growth.

During the year ended December 31, 2018, investing activities used approximately $73.9 million of cash, primarily for business acquisitions of $62.4 million, and investing in capital expenditures and capitalized software development to support our growth.

Financing Activities

During the year ended December 31, 2020, financing activities provided approximately $208.2 million of cash, primarily attributable to proceeds from issuance of common stock in connection with our IPO, partially offset by payments on long-term debt.

During the year ended December 31, 2019, financing activities used approximately $8.5 million of cash, primarily attributable to payments on long-term debt, capital lease obligations, and our revolving credit facility, and unit repurchases, partially offset by proceeds from capital contributions.

During the year ended December 31, 2018, financing activities provided approximately $57.3 million of cash, consisting of proceeds from borrowings on long-term debt and our revolving credit facility, and capital contributions, partially offset by payments on contingent consideration obligations, long-term debt, capital lease obligations, and our revolving credit facility, units repurchases, and debt issuance costs.

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 filing.

Indebtedness

Credit Facilities

Loan Agreement

During the year ended December 31, 2020, we were party to a loan agreement, dated July 6, 2017, (the “Loan Agreement”) providing for a $100.0 million senior unsecured term loan. The Loan Agreement was set to mature on August 14, 2025. Borrowings under the Loan Agreement bore interest at a rate per annum equal to 8.25% payable semi-annually on January 15th and July 15th and on the final maturity date. During the year ended December 31, 2020, we

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repaid the $100.0 million aggregate principal amount owed, plus $7.1 million in interest owed, under the Loan Agreement. As we could voluntarily repay outstanding loans without premium or penalty, we did not incur any early termination penalties or write offs of any deferred financing costs as a result of the repayment of the indebtedness. Our obligations under the Loan Agreement were discharged on December 28, 2020, the date of the final prepayment and the agreement was terminated.

Credit Agreement

Certain of our wholly owned indirect subsidiaries, Certara Holdco, Inc. and Certara USA, Inc. (collectively, the “Borrowers”), are party to a Credit Agreement that provides for a $250.0 million senior secured term loan and commitments under a revolving credit facility in an aggregate principal amount of $20.0 million, with a sub-commitment for issuance of letters of credit of $10.0 million. The Credit Agreement matures on August 14, 2024, with respect to the term loan thereunder, and August 14, 2022, with respect to the revolving credit facility thereunder.

In January 2018, the Borrowers amended the Credit Agreement to borrow incremental term loans in the amount of $25.0 million to be used for general corporate purposes. Additionally, in April 2018, the Borrowers amended the Credit Agreement to (i) borrow incremental term loans in the amount of $40.0 million to be used for general corporate purposes and (ii) provide a reduction of 50 basis points in the margin under the term loan. The terms of such incremental term loans were the same as the terms of the Borrowers’ existing term loans, including in respect of maturity, and are considered an increase in the aggregate principal amount of the existing term loans outstanding under the Credit Agreement and are part of the existing term loan.

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

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.

The Credit Agreement provides that the Borrowers may request increased commitments and additional term loans or additional term or revolving facilities under the Credit Agreement, in each case, subject to certain conditions and in an aggregate principal amount not to exceed the sum of (a) the greater of (i) $50.0 million and (ii) 100% of Consolidated Adjusted EBITDA (as defined in the Credit Agreement) for the most recently completed four fiscal quarter period for which internal financial statements have been delivered (or are required to be delivered) prior to the date of any such incurrence, plus (b) an additional amount, subject to compliance on a pro forma basis with (i) a consolidated first lien leverage ratio of no greater than 5.00 to 1.00 for incremental first lien debt or (ii) if incurred in connection with a permitted acquisition, the first lien leverage ratio immediately prior to such acquisition, plus (c) certain other amounts as specified in the Credit Agreement. The Credit Agreement also provides for the incurrence of junior secured and unsecured debt, subject to certain conditions and ratios specified in the Credit Agreement.

The term loan under the Credit Agreement amortizes at a rate of approximately 1.00% per annum, paid in quarterly installments approximately equal to the product of (a) 0.25% times (b) the aggregate principal amount of the initial term loan outstanding immediately after the borrowing of the initial term loan on the closing date and each incremental term loan outstanding immediately after the borrowing thereof on the applicable closing date (with respect to each term loan repayment date prior to the term loan maturity date, as such product may be reduced by, and after giving pro forma effect to, any voluntary and mandatory prepayments as described in the Credit Agreement).

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The Credit Agreement requires the Borrowers to prepay, subject to certain exceptions, outstanding term loans thereunder with:

There is no scheduled amortization under the revolving credit facility. The Borrowers may voluntarily reduce the unutilized portion of the commitment amount and repay outstanding loans under the Credit Agreement at any time without premium or penalty.

All obligations under the Credit Agreement are unconditionally guaranteed by our wholly owned indirect subsidiary and the parent of the Borrowers, Certara Intermediate, Inc. (“Holdings”), the Borrowers and certain of the Borrowers’ existing and future direct and indirect wholly owned domestic 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 Holdings’ and the Borrowers’ assets and the assets of the other guarantors.

The Credit Agreement contains covenants that, among other things, limit the ability of the Borrowers to incur additional debt; create liens against their assets; make acquisitions; pay dividends on their capital stock or redeem, repurchase, or retire their capital stock; make investments, acquisitions, loans, and advances; create negative pledges; merge or consolidate with another entity; transfer or sell assets; and enter into certain transactions with their affiliates.

In addition, the revolving credit facility under the Credit Agreement is subject to a first lien leverage ratio test of 7.50 to 1.00, tested quarterly if, and only if, on the last day of any fiscal quarter, the revolving credit facility and letters of credit (to the extent not cash collateralized or backstopped or, in the aggregate, not in excess of $5.0 million) are outstanding and/or issued, as applicable, in an aggregate principal amount exceeding 35% of the total amount of the revolving credit facility commitments thereunder.

The Credit Agreement also contains certain customary representations and warranties, affirmative covenants and reporting obligations. In addition, the lenders under the Credit Agreement will be permitted to accelerate the loans and terminate commitments thereunder or exercise other specified remedies available to secured creditors upon the occurrence of certain events of default, subject to certain grace periods and exceptions, which include, among others, payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to certain material indebtedness, certain events of bankruptcy and insolvency, certain pension plan related events, material judgments, and any change of control.

As of December 31, 2020, we had $304.1 million of outstanding borrowings on the term loan, and $19.9 million of availability under the revolving credit facility, and outstanding letters of credit of $0.1 million under the Credit Agreement.

As of December 31, 2020, we and the Borrowers were in compliance with the covenants of each of the Credit Agreement.

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Contractual Obligations and Commercial Commitments

We enter into long-term contractual obligations and commitments in the normal course of business, including operating leases.

The following table summarizes our contractual obligations as of December 31, 2020:

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ MORE THAN

​ TOTAL 1 YEAR 2 TO 3 YEARS 4 TO 5 YEARS 5 YEARS

​ ​ (in thousands)

Lease obligations:(1) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

(2) Inclusive of interest expense.

As of December 31, 2020, contractual obligations for lease obligations decreased by $4.3 million from December 31, 2019, due to payments. As of December 31, 2020, contractual obligations for principal payments of long-term debt and interest on debt decreased by $104.1 million and $82.8 million, respectively, from December 31, 2019. The decrease in principal payments of long-term debt is due to scheduled payments on our Credit Agreement plus a $100 million prepayment on the Loan Agreement. The decrease in interest on debt is due to lower outstanding debt balances and lower interest rates.

Income Taxes

We recorded income tax benefit of $0.8 million for the year ended December 31, 2020 and income tax benefit of $0.2 million for the year ended December 31, 2019.

As of December 31, 2020, we had federal and state NOLs of approximately $3.3 million and $3.0 million, respectively, which are available to reduce future taxable income and expire between 2024 and 2036 and 2029 and 2038, respectively. We had federal and state R&D tax credit carryforwards of approximately $2.3 million and $0.6 million, respectively, to offset future income taxes, which expire between 2024 and 2040. We also had foreign tax credits of approximately $12.5 million, which will start to expire in 2025. 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 $16.1 million which will start to expire in 2022, foreign research and development credits of $2.5 million which expire between 2029 and 2030, and Canadian investment tax credits of approximately $2.7 million which expire between 2030 and 2039. Our carryforwards are subject to review and possible adjustment by the appropriate taxing authorities.

As required by Accounting Standards Codification (‘‘ASC’’) Topic 740, Income Taxes, our management has evaluated the positive and negative evidence bearing upon the realizability of our deferred tax assets, which are composed principally of NOL carryforwards, R&D credit carryforwards, investment tax credit carryforward, and foreign tax credit carryforwards. Management has determined that it is more likely than not that we will not realize the benefits of foreign tax credit carryforwards. At the foreign subsidiaries, management has determined that it is more likely than not that we will not realize the benefits of certain NOL carryforwards. As a result, a valuation allowance of $16.7 million was recorded at December 31, 2020. Additionally, the Company released the valuation allowance against certain U.S.

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carryforwards and foreign investment tax credits, as management deemed such attributes more likely than not to be realized.

Off-Balance Sheet Arrangements

During the periods presented, we did not have, and currently we do not have, any off-balance sheet arrangements, as defined under the rules and regulations of the SEC.

Critical Accounting Policies and Estimates

Our management’s discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make judgments and estimates that affect the reported amounts of assets, liabilities, revenues, and expenses and the disclosure of contingent assets and liabilities in our consolidated financial statements. We base our estimates on historical experience, known trends and events, and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. On an ongoing basis, we evaluate our judgments and estimates in light of changes in circumstances, facts, and experience. The effects of material revisions in estimates, if any, are reflected in the consolidated financial statements prospectively from the date of change in estimates.

While our significant accounting policies are described in more detail in the notes to our consolidated financial statements appearing elsewhere in this filing, we believe the following accounting policies used in the preparation of our consolidated financial statements require the most significant judgments and estimates.

Revenues

Our revenue is primarily derived from the sale of software products and delivery of consulting services.

On January 1, 2019, we adopted ASC 606, Revenue from Contracts with Customers, on a modified retrospective basis. Prior to January 1, 2019 size we applied ASC 605, Revenues Recognition,and Recognized Revenue, when the following criteria have been met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the price is fixed and determinable; and (4) collectability is reasonably assured.

Under ASC 606, we recognize revenue when control of the promised good or service is transferred to the customer in an amount that reflects the consideration for which we are expected to be entitled in exchange for those services.

Software Licenses and Support

License revenue includes perpetual license fees and term license fees, which provide customers with the same functionality and differ mainly in the duration over which the customer benefits from the use of software. Both revenues from perpetual license and term license performance obligations are generally recognized up front at the point in time when the software license has been delivered. A source of software license revenue is from term and bundled licenses that are time-based arrangements for one or multiple software products sold together with maintenance and support for the term of the license arrangement. We have determined that post-customer support and the right to unspecified enhancements and upgrades on a “when-and-if-available” basis included with term licenses is an immaterial component of the transaction price and, therefore, recognize these performance obligation components up front with the license when delivered.

Software Services

For contracts that include multiple performance obligations, such as a software license plus software training, implementation, and/or maintenance/support, or in contracts where there are multiple software licenses, the transaction price is allocated to each of the performance obligations on a pro-rata basis based on the relative standalone selling price

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of each performance obligation. Maintenance services agreements consist of fees for providing software updates and for providing technical support for software products for a specified term. Revenues allocated to maintenance services are recognized ratably over the contract term beginning on the delivery date of each offering. Maintenance contracts generally have a term of one year. Expenses related to maintenance and subscription are recognized as incurred. While transfer of control of the software training and implementation performance obligations are performed over time, the services are typically started and completed within a few days. Due to the quick nature of the performance obligation from start to finish and the immaterial amounts, we recognize any software training or implementation revenue at the completion of the service. Any unrecognized portion of amounts paid in advance for licenses and services is recorded as deferred revenue.

License revenue and post-contract services are combined and reported as software revenue on the consolidated statements of operations and comprehensive loss.

Subscription Revenues

Subscription revenue consists of subscription fees for access to, and related support for, our cloud-based solutions. We typically invoice subscription fees in advance in annual installments and recognize subscription revenue ratably over the term of the applicable agreement, usually one to three years, which is initially deferred and recognized ratably over the life of the contract. Unearned maintenance and subscription revenues are recorded as deferred revenue. Our subscription services arrangements are generally non-cancelable and do not contain refund-type provisions. In rare instances that subscription services arrangements are deemed cancelable, we will adjust the transaction price and period for revenue recognition accordingly to be reflective of the contract term.

Services and Other Revenues

Services primarily represent advisory services, which may be either strategic consulting services, reporting and analysis services, regulatory writing services, or any combination of the three. Strategic consulting services consists of consulting, training, and process redesign that enables customers to identify which uncertainties are greatest and matter most and then to design development programs, trial sequences, and individual trials in such a way that those trials systematically reduce the identified uncertainties, in the most rapid and cost-effective manner possible. Our professional services contracts are time and materials, fixed fee, or prepaid. Services revenues are generally recognized over time as the services are performed. Revenues for fixed price services and prepaid are generally recognized over time applying input methods to estimate progress to completion. Training revenues are recognized as the services are performed over time.

Consortium revenues consist of contractual agreements with customers where the customer receives multiple benefits as part of their contract with the Company, as follows: access to the latest version simulator software, which has at least one new release per year, free access to a preset number of training workshops, a block of consulting hours to be used at the customer’s discretion, as well as voting rights at the annual consortium meeting where development priorities for the upcoming year are set. The Company’s consortium contracts are generally for three years with an annual termination clause and annual upfront billings. Consortium revenues are recognized over time as the benefits of the consortium arrangement are realized over the course of the contract. Both the training and consulting services performance obligations will utilize an output method to measure the progress at the end of each reporting period. As the simulation license was determined to be a functional license with the right to access, the license revenue is recognized evenly over the contract period.

Revenue Recognition under ASC 605

The adoption of ASC 606 changed the way we recognize revenue related to term and bundled license agreements. Prior to ASC 606, the Company recognized software licenses and support revenue in accordance with ASC 985, Software. Revenues from software license agreements are recognized when all of the following criteria are met as set forth in ASC 985: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured.

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A source of software license revenue is from term and bundled licenses that are time-based arrangements for one or multiple software products that are sold together with maintenance and support for the term of the license arrangement. The Company does not have vendor specific objective evidence (“VSOE”) to determine fair value of the maintenance and support in term arrangements and, therefore, recognizes revenues from these bundled time-based licenses ratably over the license term, which typically ranges from one to three years.

We allocate revenues from perpetual software arrangements involving multiple elements to each element based on the relative fair values as determined by the VSOE for each element. We limit our assessment of VSOE for each element to the price charged when the same element is sold separately. We analyzed all of the elements included in multiple-element arrangements and determined that the Company has sufficient VSOE to allocate revenues to maintenance and support, deployment, and training. We sell training separately and have established VSOE on this basis. VSOE for maintenance and support is determined based upon the renewal rates in contracts themselves, which is based on a fixed percentage of the current perpetual license list price. Deployment services are charged based on standard hourly rates. Accordingly, assuming all other revenue recognition criteria are met, revenues from perpetual licenses are recognized upon delivery of the software using the residual method in accordance with ASC 985.

Software maintenance agreements provide for technical support and the right to unspecified enhancements and upgrades on a “when-and-if-available” basis. Post-contract support revenues on perpetual agreements are recognized ratably over the term of the support period (generally one year). Deployment, training, and other service revenues are recognized as the related services are provided. Any unrecognized portion of amounts paid in advance for licenses and services is recorded as deferred revenue.

Equity-Based Compensation

Upon consummation of the IPO, vested Class B Units were exchanged by EQT for shares of common stock of the Company held by EQT, and unvested Class B Units were exchanged for shares of restricted common stock issued by the Company. While the Class B Units are no longer outstanding, the grant date fair value of the time-based vesting Class B Units will continue to be recognized over the remaining service period of the restricted common stock, and therefore our methods for estimating fair value of our Class B Units remains relevant.

We estimated the fair value of the Class B Units granted by EQT to certain Company employees using the Monte Carlo option pricing model in 2019 and the Black-Scholes option-pricing model in 2018. In order to derive an estimate of each security class of EQT, we first determined the enterprise value of EQT. To do this we used the enterprise value of the Company as a proxy because the primary asset of EQT is its investment in the Company and therefore the total enterprise value was assumed to be the same.

The three valuation methodologies used to determine the enterprise value, each of which was given equal weighting, include the following:

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Application of these approaches involves the use of estimates, judgments and assumptions that are highly complex and subjective, including those regarding our future expected revenue, expenses, cash flows, discount rates, market multiples, the selection of comparable public companies and the probability of future events.

We then subtracted the interest-bearing debt from the enterprise value to determine the operating equity value. The operating equity value is then adjusted for cash and cash equivalents to determine the total equity value.

We then allocated the total equity value of EQT to the Class A Units and the various Class B Units, by utilizing the appropriate option pricing framework. We concluded on the fair value of the Class A Units and the various Class B Units by taking into consideration the relative rights and privileges of the various security classes as well as the following assumptions of the option pricing framework:

Expected Exercise Term. We estimate the expected life of equity awards based upon the timing of a potential liquidity event.

Expected Equity Volatility. Prior to filing the IPO, we were a private entity and therefore, the selected equity volatility was based on the historical and implied volatility of comparable publicly traded companies over a similar expected term. This is representative of the expected future equity volatility of the Company and of the equity volatility of EQT since its equity is similar.

Risk-Free Interest Rates. We based the risk-free interest rate on the rate for a U.S. Treasury zero-coupon issue with a term that closely approximates the expected life of the option grant at the date nearest the option grant date.

The concluded fair value of the Class A Units was taken into consideration as the strike price of some of the newly issued Class B Units through an iterative process, in order to determine the fair value of those newly issued Class B Units, since management’s intent was to issue those units as at-the-money equity awards.

The assumptions underlying these valuations represent management’s best estimates, which involve inherent uncertainties and the application of management’s judgment. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our equity-based compensation expense could be materially different.

Following the completion of the IPO, the fair value of our common stock is determined based on the quoted market price.

Goodwill and Other Intangible Assets

Goodwill is tested for impairment at the reporting unit level, which is one level below or the same as an operating segment. When testing goodwill for impairment, the Company first performs a qualitative assessment to determine whether it is necessary to perform step one of a two-step annual goodwill impairment test for each reporting unit. The Company is required to perform step one only if it concludes that it is more likely than not that a reporting unit’s fair value is less than its carrying value. Should this be the case, the first step of the two-step process is to identify whether a potential impairment exists by comparing the estimated fair values of the Company’s reporting units with their respective book values, including goodwill. If the estimated fair value of the reporting unit exceeds book value, goodwill is considered not to be impaired, and no additional steps are necessary. If, however, the fair value of the reporting unit is less than book value, then the second step is performed to determine if goodwill is impaired and to measure the amount of impairment loss, if any. The amount of the impairment loss is the excess of the carrying amount of the goodwill over its implied fair value. The estimate of implied fair value of goodwill is primarily based on an estimate of the discounted cash flows expected to result from that reporting unit but may require valuations of certain internally generated and unrecognized intangible assets such as the Company’s software, technology, patents, and trademarks. If the carrying

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amount of goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess.

Other identifiable intangible assets with finite lives, such as software products acquired in acquisitions, non-compete agreements, tradenames, and customer relationship assets, are amortized over their estimated lives using either a straight-line method or a method based on pattern of expected economic benefit of the asset as follows: acquired software — three to ten years; non-compete agreements — two to five years; tradenames — 20 years; customer relationships — 11 to 16 years; and trademarks — 10 to 17 years. The Company evaluates finite intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset might not be recoverable. An impairment loss is recognized when estimated undiscounted future cash flows expected to result from the use of the asset are less than its carrying amount.

Software Development Costs

Software development costs are accounted for in accordance with ASC Subtopic 985-20 if the software is to be sold, leased or otherwise marketed, or by ASC Subtopic 350-40 if the software is for internal use. After the technological feasibility of the software has been established (for software to be marketed), or at the beginning of application development (for internal-use software), software development costs, which include primarily salaries and related payroll costs and costs of independent contractors incurred during development, are capitalized. Research and development costs incurred prior to the establishment of technological feasibility (for software to be marketed), or prior to application development (for internal-use software), are expensed as incurred. Software development costs are amortized on a product-by-product basis commencing on the date of general release of the products (for software to be marketed) or the date placed in service (for internal-use software).

JOBS Act Election

We qualify as an “emerging growth company” as defined in the JOBS Act. An emerging growth company may take advantage of reduced reporting requirements that are not otherwise applicable to public companies. These provisions include, but are not limited to:

We may use these provisions until the last day of our fiscal year in which the fifth anniversary of the completion of our IPO occurs.

However, if certain events occur prior to the end of such five-year period, including if we become a “large accelerated filer,” our annual gross revenues exceed $1.07 billion, or we issue more than $1.0 billion of non-convertible debt in any three-year period, we will cease to be an emerging growth company prior to the end of such five-year period.

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The JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards until those standards apply to private companies. We have elected to take advantage of the benefits of this extended transition period and, therefore, we will not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards. Until the date that we are no longer an emerging growth company or affirmatively and irrevocably opt out of the exemption provided by Section 7(a)(2)(B) of the Securities Act of 1933, as amended, upon issuance of a new or revised accounting standard that applies to our financial statements and that has a different effective date for public and private companies, we will disclose the date on which we will adopt the recently issued accounting standard.

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 consolidated financial statements appearing elsewhere in this filing, such standards will not have a material impact on our consolidated financial statements or do not otherwise apply to our operations.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Market risk is broadly defined as potential economic losses due to adverse changes in the fair value of a financial instrument. In the normal course of business, we are exposed to market risks, including foreign currency exchange rate risk and interest rate risk.

Foreign Currency Exchange Rate Risk

We are exposed to foreign currency exchange rate risk by virtue of our international operations. This risk arises because we use different currencies to recognize revenue and pay operating expenses. We derived 26% of our revenue for the year ended December 31, 2020 from operations outside of the United States. Our strategy for managing foreign currency risk relies on efforts to negotiate customer contracts to receive payment in the same currency used to pay expenses. As of December 31, 2020, we had no outstanding foreign currency forward contracts. Foreign currency exchange rate risk is evidenced in our consolidated financial statements through translation risk and transaction and re-measurement risk.

Translation Risk

We are exposed to movements in foreign currencies, predominately in U.S. dollars, pounds sterling, euros, or Japanese yen, with the majority in U.S. dollars. The vast majority of our contracts are entered into by our U.S. and U.K., E.U., and Japanese subsidiaries. Contracts entered into by our U.S. subsidiaries are almost always denominated in U.S. dollars. Contracts entered into by our other subsidiaries are generally denominated in U.S. dollars, pounds sterling, euros, or Japanese yen, with the majority in U.S. dollars. If the U.S. dollar had weakened 10% relative to the pound sterling, the euro, and the Japanese yen in the year ended December 31, 2020, income from operations would have been lower by approximately $1.7 million, based on revenues and costs related to our foreign operations.

Changes in exchange rates between the applicable foreign currency and the U.S. dollar will affect the translation of foreign subsidiaries’ financial results into U.S. dollars for purposes of reporting our consolidated financial results. The process by which we translate each foreign subsidiary’s financial results to U.S. dollars is as follows:

● we translate equity accounts at historical exchange rates.

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Translation of the balance sheet in this manner affects stockholders’ equity through the foreign currency translation adjustment account. This account exists only in the foreign subsidiary’s U.S. dollar balance sheet and is necessary to keep the foreign balance sheet, stated in U.S. dollars, in balance.

We report translation adjustments within accumulated other comprehensive loss as a separate component of stockholders’ deficit on our consolidated balance sheets. Gains or losses from translating amounts in foreign currencies are recorded in other comprehensive income or other comprehensive loss on our consolidated statements of operations and comprehensive loss.

Transaction and Re-measurement Risk

We have currency risk resulting from the passage of time between the recognition of revenue, invoicing of customers under contracts, and the collection of payment. If a contract is denominated in a currency other than the subsidiary’s functional currency, we recognize an unbilled services asset at the time of revenue recognition and a receivable at the time of invoicing for the local currency equivalent of the foreign currency invoice amount. Changes in exchange rates from the time we recognize revenue until the time the customer pays will result in our receiving either more or less in local currency than the amount that was originally invoiced. We recognize this difference as a foreign currency transaction gain or loss, as applicable.

We also have currency risk as a result of intercompany loans or other intercompany borrowings throughout our organization when such intercompany debt is denominated in a currency other than the subsidiary’s functional currency. Changes in exchange rates from the time a subsidiary records the intercompany debt until the time the subsidiary pays the intercompany debt will result in a foreign currency transaction gain or loss. We record all foreign currency transaction and re-measurement gains and losses as other income (expense), net on the consolidated statement of operations and comprehensive loss. We do not have significant operations in countries considered highly inflationary.

Interest Rate Risk

We have borrowings under our Credit Agreement that bear interest at a rate per annum equal to either (a) the Eurocurrency rate, with a floor of 0.0%, 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 3.5% for the term loan and between 4.0% and 3.5% for revolving credit loans, depending on the applicable first lien leverage ratio or (b) an ABR, with a floor of 1.00%, plus an applicable margin rate of 2.5% for the term loan or between 3.0% and 2.5% for revolving credit loans, depending on the applicable first lien leverage ratio.

The ABR is determined as the greatest of (a) the prime rate, (b) the federal funds effective rate, plus 0.5% or (c) the Eurocurrency rate plus 1.0%. As of December 31, 2020, we had $304.1 million of outstanding borrowings on the term loan, no outstanding borrowings under the revolving credit facility and an outstanding letter of credit of $0.1 million under the Credit Agreement.

Each quarter-point increase in the Eurocurrency rate would increase interest expense on our current variable rate debt by approximately $0.2 million for the year ended December 31, 2020. Our exposure to interest rate risk is minimized by our interest rate swaps. As of December 31, 2020, we recorded the fair value of our interest rate swaps in the amount of $3.7 million as a derivative liability.

Other Risk

Although we perform services for customers located in a number of jurisdictions, we have not experienced any material difficulties in receiving funds remitted from foreign countries. However, new or modified exchange control restrictions could have an adverse effect on our ability to repatriate cash to fund our operations and make principal and interest payments, when necessary.

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Item 8. Financial Statements and Supplementary Data.

​

Certara, Inc.

Index to Consolidated Financial Statements

​

​ PAGE

​ ​

Report of Independent Registered Public Accounting Firm 79

Consolidated Balance Sheets 80

Consolidated Statements of Operations and Comprehensive Loss 81

Consolidated Statements of Stockholders’ Equity 82

Consolidated Statements of Cash Flows 83

Notes to the Consolidated Financial Statements 84

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​

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders of

Certara, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Certara, Inc. and Subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Certara, Inc. and Subsidiaries as of December 31, 2020 and 2019, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Adoption of New Accounting Standard

As discussed in Note 2 to the consolidated financial statements, Certara, Inc. and Subsidiaries adopted Accounting Standard Codification ASU 2014-09, Revenue from Contracts with Customers (“Topic 606”), beginning January 1, 2019, using the modified retrospective method.

/s/CohnReznick LLP

Tysons, Virginia

March 15, 2021

We have served as Certara, Inc. and Subsidiaries’ auditor since October 2019.

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CERTARA, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

​

​ ​ ​ ​ ​ ​ ​

​ ​ DECEMBER 31,

(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA) ​ 2020 2019

Assets ​ ​ ​

Current assets: ​ ​ ​

Prepaid expenses and other current assets ​ 19,202 ​ 8,119

Other assets: ​ ​

Property and equipment, net ​ 3,872 ​ 4,623

Liabilities and stockholders’ equity ​ ​

Current liabilities: ​ ​

Current portion of deferred revenue ​ 30,662 ​ 26,240

Current portion of interest rate swap liability ​ 2,605 ​ 551

Current portion of long-term debt ​ 4,680 ​ 4,210

Current portion of capital lease obligations ​ 275 ​ 48

Long-term liabilities: ​ ​

Capital lease obligations, net of current portion ​ 318 ​ —

Deferred revenue, net of current portion ​ 545 ​ 1,137

Long-term portion of interest rate swap liability ​ 1,066 ​ 1,601

Long-term debt, net of current portion and debt discount ​ 294,100 ​ 397,121

Commitments and contingencies ​ ​

Stockholders' equity ​ ​

Accumulated other comprehensive loss ​ (1,587) ​ (5,497)

​

​

The accompanying notes are an integral part of the consolidated financial statements

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CERTARA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ YEAR ENDED DECEMBER 31,

(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA) 2020 2019 2018

Operating expenses: ​ ​ ​ ​ ​ ​ ​

Depreciation and amortization expense ​ 2,443 ​ 2,596 ​ ​ 2,416

Other income (expenses): ​ ​ ​ ​ ​ ​ ​

(Benefit from) provision for income taxes ​ (784) ​ (225) ​ ​ 697

Other comprehensive income (loss) ​ ​ ​ ​ ​ ​ ​

Total other comprehensive income (loss) ​ 3,910 ​ (3,850) ​ ​ (15,642)

Net loss per common share – basic and diluted ​ $ (0.37) ​ $ (0.07) ​ $ (0.25)

​

The accompanying notes are an integral part of the consolidated financial statements

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CERTARA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ RETAINED ​ ACCUMULATED ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ EARNINGS ​ OTHER ​ TOTAL

​ ​ COMMON STOCK ​ ADDITIONAL ​ (ACCUMULATED ​ COMPREHENSIVE ​ STOCKHOLDER’S

Equity compensation ​ — ​ ​ — ​ ​ 1,711 ​ ​ — ​ ​ — ​ ​ 1,711

Capital contributions ​ — ​ ​ — ​ ​ 1,110 ​ ​ — ​ ​ — ​ ​ 1,110

Repurchase of Parent Class B Units ​ — ​ ​ — ​ ​ (1,100) ​ ​ — ​ ​ — ​ ​ (1,100)

Net loss ​ — ​ ​ — ​ ​ — ​ ​ (33,258) ​ ​ — ​ ​ (33,258)

Equity compensation — ​ — ​ 1,691 ​ — ​ — ​ 1,691

Repurchases of Parent Class B Units — ​ — ​ (703) ​ — ​ — ​ (703)

Capital contributions — ​ — ​ 650 ​ — ​ — ​ 650

Net loss — ​ — ​ — ​ (8,926) ​ — ​ (8,926)

Foreign currency translation adjustment — ​ — ​ — ​ — ​ 433 ​ 433

Equity compensation — ​ — ​ 64,507 ​ — ​ — ​ 64,507

Repurchases of Parent Class B Units — ​ — ​ (1,079) ​ — ​ — ​ (1,079)

Capital contributions — ​ — ​ 250 ​ — ​ — ​ 250

Issuance of restricted stock 5,941,693 ​ 59 ​ (59) ​ — ​ — ​ —

Net loss ​ — ​ ​ — ​ ​ — ​ ​ (49,397) ​ ​ — ​ ​ (49,397)

​

The accompanying notes are an integral part of the consolidated financial statements

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CERTARA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ YEAR ENDED DECEMBER 31,

Cash flows from operating activities: ​ ​ ​ ​ ​

Amortization of debt issuance costs ​ 1,520 ​ 1,536 ​ ​ 1,517

(Recovery of) provision for doubtful accounts ​ (53) ​ 10 ​ ​ (250)

Loss on retirement of assets ​ 19 ​ 113 ​ ​ 91

Changes in assets and liabilities, net of acquisitions: ​ ​ ​ ​ ​ ​ ​

Prepaid expenses and other assets ​ (8,257) ​ (1,831) ​ ​ (2,614)

Accounts payable and accrued expenses ​ 2,381 ​ 10,031 ​ ​ (6,357)

Cash flows from investing activities: ​ ​ ​ ​ ​

Capitalized development costs ​ (7,074) ​ (7,410) ​ ​ (6,727)

Business acquisitions, net of cash acquired ​ (675) ​ — ​ ​ (62,420)

Net cash used in investing activities ​ (8,612) ​ (9,517) ​ ​ (73,905)

Cash flows from financing activities: ​ ​ ​ ​ ​

Proceeds from borrowings on long-term debt ​ — ​ — ​ ​ 65,000

Proceeds from line of credit ​ 19,880 ​ — ​ ​ 10,000

Payments of deferred offering costs ​ ​ (2,900) ​ ​ — ​ ​ —

Payment of debt issuance costs ​ ​ — ​ ​ — ​ ​ (1,063)

Payment of contingent consideration obligations ​ ​ — ​ ​ — ​ ​ (7,670)

Supplemental disclosures of cash flow information ​ ​ ​ ​ ​

Property and equipment controlled through new capital leases ​ $ 831 ​ $ — ​ $ —

Deferred offering costs, accrued but not paid ​ $ 1,767 ​ $ — ​ $ —

​

The accompanying notes are an integral part of the consolidated financial statements

​

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CERTARA, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(IN THOUSANDS, EXCEPT PER SHARE PERCENTAGES AND SHARE AND UNIT DATA)

1. Description of Business