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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 
(Mark One)
 
      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022
or
         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                      to                      
 
Commission file number: 333-262106
 
ASPEN TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
Delaware 87-3100817
(State or other jurisdiction of incorporation or
organization)
 (I.R.S. Employer Identification No.)
20 Crosby Drive  
Bedford
Massachusetts 01730
(Address of principal executive offices) (Zip Code)
(781221-6400
(Registrant’s telephone number, including area code)
____________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading SymbolName of Each Exchange on Which Registered
Common stock, $0.0001 par value per shareAZPNNASDAQ Global Select Market
____________________________________________

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:   Yes ý No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



 Large accelerated filero Accelerated filer      
 Non-accelerated filer  ý Smaller reporting company
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act): Yes  No ý
There were 64,540,036 shares of common stock outstanding as of October 25, 2022.



TABLE OF CONTENTS
 
 
Aspen Technology, Inc. ("AspenTech") has many registered trademarks including aspenONE and Aspen Plus. All other trade names, trademarks and service marks appearing in this Form 10-Q are the property of their respective owners.
 
Our fiscal year ends on June 30th, and references to a specific fiscal year are to the twelve months ended June 30th of such year (for example, fiscal 2023 refers to the year ending June 30, 2023).


3

PART I - FINANCIAL INFORMATION
 
Item 1.    Financial Statements.
 
Consolidated and Combined Financial Statements (unaudited)
 
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
(Unaudited)
 
Three Months Ended
September 30,
 20222021
 (Dollars and Shares in Thousands)
Revenue:  
License and solutions$160,224 $44,215 
Maintenance78,366 24,535 
Services and other12,229 8,265 
Total revenue250,819 77,015 
Cost of revenue:  
License and solutions69,513 34,388 
Maintenance9,217 4,234 
Services and other12,400 4,898 
Total cost of revenue91,130 43,520 
Gross profit159,689 33,495 
Operating expenses:  
Selling and marketing118,274 25,000 
Research and development49,740 15,555 
General and administrative42,848 6,617 
Restructuring costs9 207 
Total operating expenses210,871 47,379 
(Loss) from operations(51,182)(13,884)
Other (expense), net(58,632)(1,359)
Interest income (expense), net5,023 (272)
(Loss) before provision for income taxes(104,791)(15,515)
(Benefit) for income taxes(93,547)(4,313)
Net (loss) $(11,244)$(11,202)
Net (loss) per common share:  
Basic$(0.17)$(0.31)
Diluted$(0.17)$(0.31)
Weighted average shares outstanding:  
Basic64,454 36,308 
Diluted64,454 36,308 
 
See accompanying notes to these unaudited consolidated and combined financial statements.
4

ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
Three Months Ended
September 30,
 20222021
 (Dollars in Thousands)
Net (loss)$(11,244)$(11,202)
Other comprehensive (loss) income:
Foreign currency translation adjustments(8,865)803 
Total other comprehensive (loss) income(8,865)803 
Comprehensive (loss)$(20,109)$(10,399)
 
See accompanying notes to these unaudited consolidated and combined financial statements.
5

ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED BALANCE SHEETS
(Unaudited)
September 30,
2022
June 30,
2022
 (Dollars in Thousands, Except
Share and Per Share Data)
ASSETS  
Current assets: 
Cash and cash equivalents$382,458 $449,725 
Accounts receivable, net97,340 111,027 
Current contract assets, net519,184 428,833 
Prepaid expenses and other current assets26,379 23,461 
Receivables from related parties14,573 16,941 
Prepaid income taxes55,057 17,503 
Total current assets1,094,991 1,047,490 
Property, equipment and leasehold improvements, net17,110 17,148 
Goodwill8,326,336 8,266,809 
Intangible assets, net5,021,909 5,112,781 
Non-current contract assets, net396,907 428,232 
Contract costs8,679 5,473 
Operating lease right-of-use assets74,201 78,286 
Deferred tax assets24,104 4,937 
Other non-current assets7,166 8,766 
Total assets$14,971,403 $14,969,922 
LIABILITIES AND STOCKHOLDERS’ EQUITY  
Current liabilities:  
Accounts payable11,732 21,416 
Accrued expenses and other current liabilities90,439 90,123 
Liability from foreign currency forward contract50,259  
Due to related parties16,520 4,111 
Current operating lease liabilities7,237 7,191 
Income taxes payable 6,768 
Current borrowings30,000 28,000 
Current contract liabilities131,346 143,327 
Total current liabilities337,533 300,936 
Non-current contract liabilities21,261 21,081 
Deferred income tax liabilities1,116,332 1,145,408 
Non-current operating lease liabilities67,662 71,933 
Non-current borrowings, net240,000 245,647 
Other non-current liabilities17,825 15,560 
Commitments and contingencies
Stockholders’ equity:  
Common stock, $0.0001 par value
Authorized—600,000,000 shares
Issued— 64,531,300 shares at September 30, 2022 and 64,425,378 shares at June 30, 2022
Outstanding— 64,531,300 shares at September 30, 2022 and 64,425,378 shares at June 30, 2022
6 6 
Additional paid-in capital13,129,112 13,107,570 
Retained earnings55,125 66,369 
Accumulated other comprehensive (loss)(13,453)(4,588)
Total stockholders’ equity13,170,790 13,169,357 
Total liabilities and stockholders’ equity$14,971,403 $14,969,922 
 
See accompanying notes to these unaudited consolidated and combined financial statements.
6

ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF EQUITY/
STOCKHOLDERS’ EQUITY
(Unaudited)
Accumulated Other Comprehensive Income (Loss)Common StockAdditional Paid-in CapitalRetained EarningsTotal Equity/Stockholders’ Equity
Number of SharesPar Value
(Dollars in Thousands, Except Share Data)
Balance June 30, 2022$(4,588)64,425,378 $6 $13,107,570 $66,369 $13,169,357 
Net Loss— — — — (11,244)(11,244)
Other comprehensive (loss)(8,865)— — — — (8,865)
Issuance of shares of common stock and net share settlement relating to withholding taxes— 71,547  8,489 — 8,489 
Issuance of restricted stock units— 34,375  (4,683)— (4,683)
Stock-based compensation— — — 17,736 — 17,736 
Balance September 30, 2022$(13,453)64,531,300 $6 $13,129,112 $55,125 $13,170,790 


Net Parent InvestmentAccumulated Other Comprehensive Income (Loss)Total Equity/Stockholders’ Equity
(Dollars in Thousands, Except Share Data)
Balance June 30, 2021$1,772,671 $(6,487)$1,766,184 
Net Loss(11,202)— (11,202)
Net transfer from Emerson15,561 — 15,561 
Other comprehensive income (loss)— 803 803 
Balance September 30, 2021$1,777,030 $(5,684)$1,771,346 

See accompanying notes to these unaudited consolidated and combined financial statements.

7

ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
September 30,
 20222021
 (Dollars in Thousands)
Cash flows from operating activities:  
Net (loss) $(11,244)$(11,202)
Adjustments to reconcile net (loss) to net cash provided by (used in) operating activities:  
Depreciation and amortization122,546 30,420 
Reduction in the carrying amount of right-of-use assets3,291 1,712 
Net foreign currency losses8,332 1,538 
Stock-based compensation17,736 368 
Deferred income taxes(70,438)(5,692)
Provision for receivables3,609 59 
Other non-cash operating activities3,225 61 
Changes in assets and liabilities:  
Accounts receivable8,009 (15,690)
Contract assets(68,357)(4,776)
Contract costs(3,451) 
Lease liabilities(1,659)(421)
Prepaid expenses, prepaid income taxes, and other assets(47,004)1,811 
Liability from foreign currency forward contract50,259  
Accounts payable, accrued expenses, income taxes payable and other liabilities(13,476)(2,234)
Contract liabilities3,699 (5,140)
Net cash provided by (used in) operating activities5,077 (9,186)
Cash flows from investing activities:  
Purchases of property, equipment and leasehold improvements(1,321)(2,607)
Payments for business acquisitions, net of cash acquired(74,947)(1,065)
Payments for capitalized computer software development costs(99) 
Purchases of other assets (285)
Net cash used in investing activities(76,367)(3,957)
Cash flows from financing activities:  
Issuance of shares of common stock8,470  
Payment of tax withholding obligations related to restricted stock(3,422) 
Deferred business acquisition payments(1,363) 
Repayments of amounts borrowed under term loan(6,000) 
Net transfers from Parent Company12,446 15,195 
Payments of debt issuance costs(2,375) 
Net cash provided by financing activities7,756 15,195 
Effect of exchange rate changes on cash and cash equivalents(3,733)2 
(Decrease) increase in cash and cash equivalents(67,267)2,054 
Cash and cash equivalents, beginning of period449,725 23,659 
Cash and cash equivalents, end of period$382,458 $25,713 
Supplemental disclosure of cash flow information:  
Income taxes paid, net$6,950 $3,632 
Interest paid3,815 355 
Supplemental disclosure of non-cash activities:
Change in purchases of property, equipment and leasehold improvements included in accounts payable and accrued expenses$(702)$483 
Lease liabilities arising from obtaining right-of-use assets68  


See accompanying notes to these unaudited consolidated and combined financial statements.
8

ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
 
1.  Organization and Basis of Presentation

Aspen Technology, Inc., together with its subsidiaries (“AspenTech" or “Company”), is a leading industrial software company that develops solutions to address complex industrial environments where it is critical to optimize the asset design, operations and maintenance lifecycle. Through the Company's unique combination of product capabilities and deep domain expertise and award-winning innovation, customers across diverse end markets in capital-intensive industries can improve their operational excellence while achieving sustainability goals.

On October 10, 2021, Emerson Electric Co. (“Emerson”) entered into a definitive agreement (the “Transaction Agreement”) with Aspen Technology Corporation. (“Heritage AspenTech”) to contribute the Emerson Industrial Software Business (the "Industrial Software Business"), along with $6.014 billion in cash, to create AspenTech (the “Transaction”). The Industrial Software Business included Open Systems International, Inc. (“OSI Inc.”) and Geological Simulation Software (“GSS”), which we have renamed as Subsurface Science & Engineering (“SSE”). The Transaction closed on May 16, 2022 (“Closing Date”). Emerson owns 55% of AspenTech on a fully diluted basis as of September 30, 2022.

On July 27, 2022, the Company entered into a definitive agreement to acquire Mining Software Holdings Pty Ltd ("Micromine") for AU $900 million in cash (approximately $623.0 million based on exchange rates when the acquisition was initially announced). Micromine is a global leader in design and operational management solutions for the metals and mining industry. The Company currently intends to finance the transaction through a combination of cash on hand and additional debt financing. The acquisition is expected to close in the fiscal second quarter of 2023, subject to receipt of regulatory approvals.

The Company operates globally in 80 countries as of September 30, 2022.

Basis of Presentation

The accompanying consolidated and combined financial statements include the accounts of Aspen Technology, Inc. and our wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

The Transaction was accounted for as a business combination in accordance with U.S. GAAP, with the Industrial Software Business treated as the “acquirer” and Heritage AspenTech treated as the “acquired” company for financial reporting purposes. Accordingly, for the three-month interim period ended September 30, 2021, the consolidated and combined financial statements comprise the results of the Industrial Software Business only and do not include the results of Heritage AspenTech.

We have prepared the accompanying consolidated and combined financial statements as of September 30, 2022, and for the first quarter of fiscal 2023 and 2022, without audit, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC) and in accordance with generally accepted accounting principles in the United States (GAAP). These consolidated and combined financial statements should be read in conjunction with the consolidated and combined financial statements and the notes thereto included in our Transition Reports on Form 10-KT for the fiscal year ended June 30, 2022.

The preparation of financial statements and related disclosures in conformity with GAAP requires us to make judgments, assumptions, and estimates that affect the amounts reported in the consolidated and combined financial statements and accompanying notes. The actual results that we experience may differ materially from our estimates.

Certain reclassifications have been made to the amounts in prior periods in order to conform to the current period’s presentation. We have evaluated subsequent events through the date that the financial statements were issued.

Russia and Ukraine

While the Company has no operations in Ukraine, the ongoing conflict there could negatively impact its financial position, results of operations and cash flows. The United States and other governments have imposed sanctions and taken other regulatory actions that adversely affect doing business in Russia and with Russian companies. The Company maintains operations in Russia, licenses software and provides related services to customers in Russia and areas of Ukraine that are not under sanction. The Company had net sales of approximately $10.0 million for the three-month period ended September 30, 2022, and total assets of approximately $24.5 million as of September 30, 2022, related to operations in Russia. While the conflict has not had a material impact on the Company's financial results thus far, the Company continues to evaluate the impact of the various sanctions, export control measures and business restrictions imposed by the United States and other governments on its ability to do business in Russia and areas of Ukraine that are not under sanction, maintain contracts with vendors and pay employees in Russia, as well as receive payment from customers in Russia and areas of Ukraine that are not
9

under sanction. The outcome of these assessments will depend on how the conflict evolves and on further actions that may be taken by the United States, Russia, and other governments around the world. As a software company, no material impact to supply chain operations is expected due to the conflict in Ukraine.

If the sanctions and other retaliatory measures and restrictions imposed by the global community change, the Company may be required to cease or suspend operations in the region or, should the conflict or the effects of these sanctions, measures and restrictions worsen, the Company may voluntarily elect to do so. Any disruption to, or suspension of, the Company’s business and operations in Russia would result in the loss of revenues from the business in Russia. In addition, as a result of the risk of collectability of receivables from customers in Russia, the Company may be required to adjust accounting practices relating to revenue recognition in this region, with the result that the Company may not be able to recognize revenue until risk of revenue reversal is not probable.

2.  Significant Accounting Policies
 
Our significant accounting policies are described in Note 2 to the consolidated and combined financial statements included in our Transition Reports on Form 10-KT for the fiscal year ended June 30, 2022. There were no material changes to our significant accounting policies during the three months ended September 30, 2022, other than those noted below.

(a) Derivatives and Hedging

We use derivative instruments to manage exposures to foreign currency exchange rate risks. Our primary objective is holding derivatives to reduce the volatility of cash flows associated with changes in foreign currency exchange rates. Our derivatives expose us to credit risk to the extent that the counterparties may be unable to meet the terms of the agreement. We do seek to mitigate such risks by limiting our counterparties to major financial institutions. In addition, the potential risk of loss with any one counterparty resulting from this type of credit risk is monitored. Management does not expect material losses as a result of defaults by counterparties.

The Company accounts for derivative transactions in accordance with ASC Topic 815, “Derivatives and Hedging,” and recognizes derivatives instruments as either assets or liabilities in the consolidated and combined balance sheet and measures those instruments at fair value. The Company’s foreign currency forward contracts as described in Note 11 do not qualify for hedge accounting. Accordingly, the changes in fair value of the derivative transactions are presented currently in earnings.

(b) Recently Issued Accounting Pronouncements

Recently issued accounting pronouncement that will be applicable to the Company are not expected to have a material impact on the Company’s consolidated and combined financial statements.
10

3.   Revenue from Contracts with Customers

Contract Assets and Contract Liabilities

The contract assets are subject to credit risk and reviewed in accordance with ASC 326. The Company monitors the credit quality of customer contract asset balances on an individual basis, at each reporting date, through credit characteristics, geographic location, and the industry in which they operate. The Company recognizes an impairment on contract assets if, subsequent to contract inception, it becomes probable payment is not collectible. An allowance for expected credit loss reflects losses expected over the remaining term of the contract asset and is determined based upon historical losses, customer-specific factors, and current economic conditions. The Company's contract assets and contract liabilities were as follows as of September 30, 2022 and June 30, 2022:
September 30,
2022
June 30,
2022
(Dollars in Thousands)
Contract assets$916,091 $857,065 
Contract liabilities(152,607)(164,408)
$763,484 $692,657 

Contract assets and contract liabilities are presented net at the contract level for each reporting period.

The majority of the Company’s contract balances are related to arrangements where revenue is recognized at a point in time and payments are made according to a contractual billing schedule. The change in net contract liabilities during the three months ended September 30, 2022 was primarily due to an increase in new billings in advance of revenue recognition, partially offset by $55.2 million of revenue recognized that was included in net contract liabilities as of June 30, 2022.

The Company did not have any customer that accounted for 10 percent or more of the Company’s revenues for the three months ended September 30, 2022 and 2021, respectively.

Transaction Price Allocated to Remaining Performance Obligations

The following table includes the aggregate amount of the transaction price allocated as of September 30, 2022 to the performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period:
Year Ending June 30,
20232024202520262027Thereafter
(Dollars in Thousands)
License and solutions$123,298 $84,137 $24,293 $10,453 $803 $ 
Maintenance64,654 29,123 10,731 5,187 7,375 4,966 
Services and other10,847 5,010 1,979 1,672 853 2,954 
The table below reflects disaggregated revenues by business for the three months ended September 30, 2022 and 2021, respectively.
Three Months Ended September 30,
20222021
Heritage AspenTech$176,406 $ 
SSE32,988 29,097 
OSI, Inc.41,425 47,918 
Total$250,819 $77,015 

4. Acquisitions 

Inmation Software GmbH

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On August 29, 2022, the Company completed the acquisition of Inmation Software GmbH (“Inmation”) for a total cash consideration of $87.4 million. The purchase price consisted of $78.9 million of cash paid at closing and an additional $8.5 million to be held back until August 2023 as security for certain representations, warranties, and obligations of the sellers. The holdback is recorded in accrued expenses and other current liabilities in our consolidated and combined balance sheets. The total cash acquired from Inmation was approximately $4.0 million resulting in a net cash payment of $74.9 million during the three months ending September 30, 2022. The Company recognized goodwill of $63.6 million (none of which is expected to be tax deductible) and identifiable intangible assets of $31.5 million, primarily developed technology and customer relationships, with a useful life of approximately 5 years for developed technology and 7 years for customer relationships. The fair value of assets acquired and liabilities assumed represent the preliminary fair value estimates as of September 30, 2022, and are subject to subsequent adjustments as the Company obtains additional information during the measurement period and finalizes its fair value estimates.

Inmation’s revenue and net loss included in the Company’s consolidated and combined income statement from the acquisition date to the first reporting period ending on September 30, 2022 were $0.3 million and $(0.2) million, respectively. Results included amortization of developed technology and customer relationships of $0.5 million. The Company has not furnished pro forma financial information relating to Inmation because such information is not material to the Company’s financial results.

Prior to the closing date, Inmation was considered a related party to AspenTech as Emerson, through one of its subsidiaries, held an equity-method investment in Inmation. At the time of close, $17.6 million was paid to Emerson in exchange for all its shares in Inmation, with another $2.0 million to be paid 12 months after the close.

Heritage AspenTech

On October 10, 2021, Emerson entered into the Transaction with Heritage AspenTech to contribute the Industrial Software Business comprised of OSI and SSE, along with $6.014 billion in cash, to create the Company. On the Closing Date, Emerson owned 55% of the outstanding common shares of AspenTech on a fully diluted basis, while the stockholders of Heritage AspenTech owned the remaining 45%. The acquisition-date fair value of the purchase consideration totaled $11.19 billion.

During the first quarter of fiscal 2023, the Company recorded purchase price allocation adjustments that increased goodwill by $1.9 million. The following table sets forth the purchase price allocation of the Heritage AspenTech acquisition:

Amount
(Dollars in Thousands)
Cash and cash equivalents
$273,728 
Accounts receivable
43,163 
Current and non-current contract assets
730,548 
Intangible assets
4,390,667 
Other net assets acquired
64,342 
Total asset acquired (excluding Goodwill)
5,502,448 
Accounts payable, accrued expenses, and other current liabilities
53,841 
Current and non-current deferred revenue
62,319 
Current and non-current borrowings under credit agreement282,000 
Deferred income taxes1,078,463 
Other net liabilities assumed62,279 
Total liabilities assumed1,538,902 
Net identifiable assets acquired3,963,546 
Goodwill7,224,730 
Net assets acquired
$11,188,276 

The following pro forma consolidated and combined financial results of operations are presented as if the Heritage AspenTech acquisition occurred on October 1, 2020. The pro forma information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved had the acquisition occurred as of that time.

Three Months Ended
September 30,
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2022
2021
(Dollars in Thousands)
Total revenue$250,819 $213,035 
Net (loss)
(6,233)(45,604)


5. Intangible Assets 

Intangible assets consisted of the following as of September 30, 2022 and June 30, 2022:
Developed TechnologyTrademarksCustomer Relationships and BacklogCapitalized Software and OtherTotal
(Dollars in Thousands)
September 30, 2022:
Gross carrying amount$1,902,575 $464,400 $3,081,579 $10,149 $5,458,703 
Less: Accumulated amortization(201,017)(10,489)(216,733)(8,555)(436,794)
Net carrying amount$1,701,558 $453,911 $2,864,846 $1,594 $5,021,909 
June 30, 2022:
Gross carrying amount$1,882,037 $464,400 $3,072,738 $10,149 $5,429,324 
Less: Accumulated amortization(153,758)(9,379)(144,888)(8,518)(316,543)
Net carrying amount$1,728,279 $455,021 $2,927,850 $1,631 $5,112,781 

The increase in intangible assets from June 30, 2022 was primarily due to the Inmation acquisition. See Note 4, Acquisitions. Total intangible asset amortization expense was $121.2 million, of which $97.9 million related to the Heritage AspenTech acquisition, and $28.8 million during the three months ended September 30, 2022 and 2021, respectively.

6. Goodwill

The changes in the carrying amount of goodwill during the three months ended September 30, 2022 were as follows:

Carrying Value
(Dollars in Thousands)
Balance, June 30, 2022
$8,266,809 
Goodwill from Inmation acquisition
63,577 
Purchase accounting adjustment from Heritage AspenTech acquisition1,931 
Foreign currency translation
(5,981)
Balance, September 30, 2022
$8,326,336 

7.   Fair Value
 
The Company determines fair value by utilizing a fair value hierarchy that ranks the quality and reliability of the information used in its determination. Fair values determined using “Level 1 inputs” utilize unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Fair values determined using “Level 2 inputs” utilize data points that are observable, such as quoted prices, interest rates and yield curves for similar assets and liabilities. 

Cash equivalents are reported at fair value utilizing quoted market prices in identical markets, or “Level 1 Inputs.” The Company's cash equivalents consist of short-term money market instruments.

Equity method investments are reported at fair value calculated in accordance with the market approach, utilizing market consensus pricing models with quoted prices that are directly or indirectly observable, or “Level 2 Inputs.”

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Our derivative instruments are primarily classified as Level 2, as they are not actively traded and are valued using pricing models that use observable market inputs.

The following table summarizes financial assets and liabilities measured and recorded at fair value on a recurring basis in the accompanying consolidated and combined balance sheets as of September 30, 2022 and June 30, 2022, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

Fair Value Measurements at Reporting Date Using
 
Quoted Prices in Active Markets for Identical Assets
(Level 1 Inputs)
Significant Other Observable Inputs
(Level 2 Inputs)
 (Dollars in Thousands)
September 30, 2022:
Cash equivalents$1,026 $ 
Equity method investments 2,032 
   Derivative liabilities (50,259)
June 30, 2022:
Cash equivalents2,998  
Equity method investments$ $1,761 

Financial instruments not measured or recorded at fair value in the accompanying consolidated and combined financial statements consist of accounts receivable, accounts payable and accrued liabilities. The estimated fair value of these financial instruments approximates their carrying value. The estimated fair value of the borrowings under the Amended and Restated Credit Agreement (described below in Note 8, “Credit Agreement”) approximates its carrying value due to the floating interest rate.

8.  Debt

Bridge Facility
 
On July 27, 2022, the Company entered into a $475.0 million senior unsecured bridge facility (the “Bridge Facility”) with JPMorgan Chase Bank, N.A. (“JPMorgan”), as Administrative Agent, to finance the Micromine acquisition. The Bridge Facility was entered into under the existing Amended and Restated Credit Agreement dated as of December 23, 2019, with JPMorgan ("Credit Agreement"). The Company may elect that each incremental borrowing under the Bridge Facility bear interest at a rate per annum equal to (a) the Alternate Base Rate (“ABR”), plus the applicable margin or (b) the Adjusted Term Secured Overnight Financing Rate (“SOFR”), plus the applicable margin. The outstanding balance under the Bridge Facility as of September 30, 2022 was $0 million and is payable 364 days after the closing date of July 27, 2022.

As consideration for JPMorgan’s agreement to act as administrative agent for the Bridge Facility, the Company is required to pay a fee of $50,000 per annum, payable on the closing date of the loan and every anniversary thereof during the term of the loan.

In addition, the Company incurred issuance costs associated with the Bridge Facility. For the three months ended September 30, 2022, the Company has paid in total $2.375 million fees to JPMorgan to secure the Bridge Facility, which was recorded as other current assets and is being amortized to interest expense over the estimated term of the loan.

Credit Agreement

The Company also has a Credit Agreement with JP Morgan that provides for a $200.0 million secured revolving credit facility and a $320.0 million secured term loan facility.

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As of September 30, 2022, the Company's current and non-current borrowings, under the term loan facility, were $30.0 million and $240.0 million, respectively. As of June 30, 2022, the Company's current and non-current borrowings, under the term loan facility, were $28.0 million and $245.6 million, respectively. The interest rate on the term loan facility as of September 30, 2022 was 2.74%. There were no amounts outstanding under the revolving credit facility at either September 30, 2022 or June 30, 2022. Any outstanding balances of the indebtedness under the revolving credit facility mature on December 23, 2024.

The following table summarizes the maturities of the term loan facility:

Year Ending June 30,Amount
 (Dollars in Thousands)
2023$22,000 
202436,000 
2025212,000 
Total$270,000 

The Credit Agreement contains customary affirmative and negative covenants, which are also applicable to the Bridge Facility, including restrictions on incurrence of additional debt, liens, fundamental changes, asset sales, restricted payments (including dividends) and transactions with affiliates. There are also financial covenants measured at the end of each fiscal quarter including a maximum leverage ratio of 3.50 to 1.00 and a minimum interest coverage ratio of 2.50 to 1.00. As of September 30, 2022, the Company was in compliance with all the loan covenants.
 
9.  Stock-Based Compensation 

The stock-based compensation expense under all equity plans and its classification in the unaudited consolidated and combined statements of operations for the three months ended September 30, 2022 and 2021 are as follows:
Three Months Ended
September 30,
 20222021
 (Dollars in Thousands)
Recorded as expenses:  
Cost of license and solutions$742 $ 
Cost of maintenance561  
Cost of services and other408  
Selling and marketing3,347  
Research and development3,611  
General and administrative9,067 368 
Total stock-based compensation$17,736 $368 

During the three month period ended September 30, 2022, the Company granted 162,383 stock options and 164,098 restricted stock units (“RSUs”). The stock options granted had a weighted average exercise price of $211.87 per option and a weighted average fair value of $77.29 per option. The RSUs granted had a weighted average fair value of $207.02 per RSU.
 
10.  Net Income Per Share
 
Basic income per share is determined by dividing net income by the weighted average common shares outstanding during the period. Diluted income per share is determined by dividing net income by diluted weighted average shares outstanding during the period. Diluted weighted average shares reflect the dilutive effect, if any, of potential common shares. To the extent their effect is dilutive, employee equity awards and other commitments to be settled in common stock are included in the calculation of diluted net income per share based on the treasury stock method.
 
Prior to the Transaction, the Industrial Software Business did not have any shares of common stock outstanding. Accordingly, net loss per share for the three months ended September 30, 2021 has been calculated using weighted average shares outstanding (basic and diluted) based on the number of shares of common stock issued to Emerson on the Closing Date of the Transaction.
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The calculations of basic and diluted net income per share and basic and dilutive weighted average shares outstanding for the three months ended September 30, 2022 and 2021 are as follows:
Three Months Ended
September 30,
 (Dollars and Shares in Thousands, Except per Share Data)20222021
 
Net (loss)$(11,244)$(11,202)
Basic weighted average shares outstanding64,454 36,308 
Dilutive weighted average shares outstanding64,454 36,308 
(Loss) per share  
Basic$(0.17)$(0.31)
Dilutive$(0.17)$(0.31)
 
For the three months ended September 30, 2022, and 2021 certain employee equity awards were anti-dilutive based on the treasury stock method. The following employee equity awards were excluded from the calculation of dilutive weighted average shares outstanding because their effect would be anti-dilutive as of September 30, 2022 and 2021:
Three Months Ended
September 30,
 20222021
 (Shares in Thousands)
Employee equity awards286  

Included in the table above are options to purchase 49,079 shares of our common stock during the three months ended September 30, 2022, which were not included in the computation of dilutive weighted average shares outstanding, because their exercise prices ranged from $208.57 per share to $225.63 per share and were greater than the average market price of our common stock during the period then ended. These options were outstanding as of September 30, 2022 and expire at various dates through September 13, 2032.

11.   Derivatives

In connection with the agreement to purchase Micromine, the Company also entered into foreign currency forward contracts on August 2, 2022 for a six-month period ending on February 6, 2023 to mitigate the impact of foreign currency exchange associated with the forecasted payment of purchase price. The acquisition is expected to close in the second quarter of fiscal 2023.

The notional amounts of our outstanding derivatives are in total AU $900 million. As of September 30, 2022, the fair values of our derivative instruments were $50.3 million and were recorded to the liability from foreign currency forward contract caption on the consolidated and combined balance sheets. For the three months ended September 30, 2022, the Company recognized losses of $50.3 million and recorded as part of the other income (expense), net on the consolidated and combined statements of operations.

12.   Benefit for Income Taxes
 
Benefit for income taxes was $93.5 million and $4.3 million for the three months ended September 30, 2022 and 2021, respectively, resulting in effective tax rates of 89.3% and 27.8%, respectively. Income tax benefit increased due to the higher Foreign-Derived Intangible Income (“FDII”) deduction recorded in the current period as a result of non-deductible amortization of intangibles, capitalized R&D costs, and a change in the accounting methodology related to historical revenue recognition for tax purposes on multi-year software license agreements. The change resulted in the recognition of taxable income over a 4 tax year period with fiscal year 2024 as the last year of the adjustment.

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13. Related-Party Transactions

The Company utilizes Emerson's centralized treasury function which manages the working capital and financing needs of its business operations. This function oversees a cash pooling arrangement which sweeps certain Company cash accounts into pooled Emerson cash accounts on a daily basis. Pooled cash and nontrade balances attributable to Emerson have been presented as receivables from related parties or due to related parties in the consolidated and combined financial statements of the Company.

Before the Closing Date, the Industrial Software Business was charged for costs directly attributable to the SSE and OSI and was allocated a portion of Emerson’s costs, including general corporate costs, information technology costs, insurance and other benefit costs, and shared service and other costs. All of these costs are reflected in the Company’s consolidated and combined financial statements. Management believes the methodologies and assumptions used to allocate these costs are reasonable.

At the Closing Date, Emerson and the Company entered into the transition service agreement (“TSA”) for the provision of certain transitionary services from Emerson to AspenTech. Pursuant to the TSA, Emerson will provide AspenTech and its subsidiaries with certain services, including information technology, human resources and other specified services, as well as access to certain of Emerson’s existing facilities. TSA related activities have been recorded as cost of goods sold or operating expenses from related parties and resulting balances have been presented as receivable from or due to related parties in the consolidated and combined financial statements presented.

Receivables from related parties and due to related parties reported in the consolidated and combined balance sheets as of September 30, 2022 and June 30, 2022 include the following:
September 30,June 30,
20222022
Interest bearing receivables from related parties
$14,518 $16,122 
Trade receivables from related parties
55 819 
Interest bearing payables to related parties14,460 2,028 
Trade payables to related parties2,059 2,083 

Allocations and charges from Emerson are as follows:

Three Months Ended
September 30, 2022
20222021
Corporate costs$— $601 
Information technology811 1,048 
Insurance and other benefits— 229 
Shared services and other2,697 4,316 

Corporate costs, human resources, and insurance and other benefits are recorded in general and administrative expenses and information technology, facility charges, and shared services and other are allocated to cost of goods sold and operating expenses based on systemic methods.

Before the Closing Date, OSI and SSE engaged in various transactions to sell software and purchase goods in the ordinary course of business with affiliates of Emerson. At the Closing Date, the Company and Emerson entered into a commercial agreement to allow Emerson to distribute software and services from AspenTech. (the “Commercial Agreement”). Pursuant to the Commercial Agreement, AspenTech will grant Emerson the right to distribute, on a non-exclusive basis, certain (i) existing Heritage AspenTech products, (ii) existing Emerson products being transferred to AspenTech pursuant to the Transaction Agreement and (iii) future AspenTech products as mutually agreed upon, in each case, to end-users through Emerson acting as an agent, reseller or original equipment manufacturer. Commercial Agreement related activities have been recorded as revenues and expenses from related parties and resulting trade balances have been presented as trade receivables from related parties in the consolidated and combined financial statements presented. Revenue from Emerson are as follows:
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Three Months Ended
September 30, 2022
20222021
Revenue from Emerson affiliates$4 $ 
Purchases from Emerson affiliates139 840 

Emerson Share Maintenance Rights

Immediately following the Closing Date, Emerson beneficially owned 55% of the fully diluted shares of AspenTech common stock. Under the Shareholders Agreement, Emerson has the right to acquire additional equity securities of AspenTech pursuant to pre-agreed procedures and rights in order to maintain its 55% ownership. No additional shares of common stock, or any other equity securities of AspenTech, were issued to Emerson subsequent to the Closing Date through September 30, 2022.

Business combination with related party

The Inmation acquisition completed on August 29, 2022 was considered a related party transaction. Refer to Note 4, “Acquisitions”, to our consolidated and combined financial statements for further discussion.

14.  Segment Information
 
Operating segments are defined as components of an enterprise that engage in business activities for which discrete financial information is available and regularly reviewed by the chief operating decision maker in deciding how to allocate resources and to assess performance.

Prior to the Transactions, the Industrial Software Business had two operating and reportable segments: OSI Inc. and GSS (subsequently renamed Subsurface Science & Engineering Solutions, or “SSE”, after the Closing Date). The Transactions resulted in the creation of a third operating and reportable segment: Heritage AspenTech. During the three months ended September 30, 2022, the Company completed certain integration activities and changes to its organizational structure that triggered a change in the composition of its operating and reportable segments. As a result, as of September 30, 2022, the Company is now comprised of a single operating and reportable segment. Accordingly, the Company has restated its operating and reportable segment information for the three months ended September 30, 2021. The Company's chief operating decision maker is its President and Chief Executive Officer.

Geographic Information

Summarized below is information about the Company's geographic operations:

Revenue by Destination

Three Months Ended September 30,
20222021
Americas$130,858 $51,897 
Asia, Middle East and Africa53,671 10,563 
Europe66,290 14,555 
Total$250,819 $77,015 

Americas included revenue in the U.S. of $112.2 million and $49.0 million for the three months ended September 30, 2022 and 2021.

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Property, Equipment, and
Leasehold Improvements, Net
September 30, 2022June 30, 2022
Americas$14,645 $14,591 
Asia, Middle East and Africa1,597 1,154 
Europe868 1,403 
Total$17,110 $17,148 

Property, equipment, and leasehold improvements located in the U.S. were $25.2 million and $13.0 million as of September 30, 2022 and June 30, 2022.

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Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
Caution Concerning Forward-Looking Statements

This Quarterly Report contains forward-looking statements that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this Quarterly Report, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, prospective products, size of market, plans, objectives of management, expected market growth and the anticipated effects of the coronavirus (COVID-19) pandemic (and any COVID-19 variants, the “COVID-19 pandemic”) on our business, operating results and financial condition are forward-looking statements.

Forward-looking statements concern future circumstances and results and other statements that are not historical facts and are sometimes identified by the words “may,” “will,” “should,” “potential,” “intend,” “expect,” “endeavor,” “seek,” “anticipate,” “estimate,” “overestimate,” “underestimate,” “believe,” “plan,” “could,” “would,” “project,” “predict,” “continue,” “target” or other similar words or expressions or negatives of these words, but not all forward-looking statements include such identifying words. Forward-looking statements are based upon current plans, estimates and expectations that are subject to risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those indicated or anticipated by such forward-looking statements. We can give no assurance that such plans, estimates or expectations will be achieved and therefore, actual results may differ materially from any plans, estimates or expectations in such forward-looking statements.

Any forward-looking statements speak only as of the date of this Quarterly Report. We undertake no obligation to update any forward-looking statements, whether as a result of new information or development, future events or otherwise, except as required by law. You should read the following discussion in conjunction with our unaudited consolidated and combined financial statements and related notes thereto contained in this report.  You should also read “Item 1A. Risk Factors” of Part II for a discussion of important factors that could cause our actual results to differ materially from our expectations.
 
Our fiscal year ends on June 30, and references in this Quarterly Report to a specific fiscal year are the twelve months ended June 30 of such year with the exception of fiscal 2022 being the nine months ended June 30 (for example, “fiscal 2023” refers to the year ending June 30, 2023).


Business Overview 

We are a global leader in asset optimization software that enables industrial manufacturers to design, operate, and maintain their operations for maximum performance. We combine decades of modeling, simulation, and optimization capabilities with industrial operations expertise and apply advanced analytics to improve the profitability and sustainability of production assets. Our purpose-built software is proven to drive value creation levers for our customers; improving operational efficiency and maximizing productivity, reducing unplanned downtime and safety risks, and minimizing energy consumption and emissions. Our technology is at the center of their sustainability and decarbonization programs, enabling circularity through improved industrial technologies and more degradable and recyclable plastics, and supporting the broader energy transition with advanced solutions for power transmission and distribution, carbon capture, storage and utilization, batteries and energy storage. Cybersecurity is foundational in the design of our software.

On May 16, 2022, Heritage AspenTech and Emerson Electric Co. (“Emerson”) and certain of its subsidiaries, entered into a definitive agreement pursuant to, among other matters Emerson and its subsidiaries contributed to Heritage AspenTech Shareholders $6,014,000,000 in cash and its Open Systems International, Inc. business (the “OSI business" or "OSI Inc.") and Geological Simulation Software business, which we have renamed as Subsurface Science & Engineering (the “SSE business” or "SSE") in exchange for 55% of our outstanding common stock (on a fully diluted basis).

By combining the software capabilities, deep domain expertise and leadership of Heritage AspenTech with the OSI and SSE businesses, we have created a company that we believe will deliver superior value to customers across diverse end markets including energy, chemicals, power transmission and distribution, engineering, procurement, and construction, pharmaceuticals, and metals and mining, among others.

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For the quarter ended September 30, 2022, the consolidated and combined financial statements comprised the results of OSI Inc., SSE and Heritage AspenTech, while for the same period in the prior fiscal year, these financial statements comprised the results of only OSI Inc. and SSE. Certain financial information for the periods ended September 30, 2021 have been reclassed to conform to the consolidated and combined financial statements for the three-month period ended September 30, 2022.

Recent Events

On July 27, 2022, we announced that we entered into a definitive agreement to acquire Micromine, a global leader in design and operational management solutions for the metals and mining industry, from private equity firm Potentia Capital and other sellers for AU $900 million in cash (approximately $623 million USD based on foreign currency exchange rate at the time of announcement). We currently intend to finance the transaction through a combination of cash on hand and additional debt financing. The acquisition currently is expected to close in the fiscal second quarter of 2023, subject to receipt of regulatory approvals. In connection with the agreement to purchase Micromine, we also entered into foreign currency forward contracts on August 2, 2022 for a six-month period ending on February 6, 2023 to mitigate the impact of foreign currency exchange associated with the forecasted payment of purchase price.

Key Business Metrics

Background

We utilize key business metrics to track and assess the performance of our business. We have identified the following set of appropriate business metrics in the context of our evolving business:

Annual Contract Value

Total Contract Value

Bookings

We also use the following non-GAAP business metrics in addition to GAAP measures to track our business performance:

Free cash flow

Non-GAAP operating income

We make these measures available to investors and none of these metrics should be considered as an alternative to any measure of financial performance calculated in accordance with GAAP.

Annual Contract Value

Annual contract value (ACV) is an estimate of the annual value of our portfolio of term license and software maintenance and support (SMS) contracts, the annual value of SMS agreements purchased with perpetual licenses, and the annual value of standalone SMS agreements purchased with certain legacy term license agreements, which have become an immaterial part of our business.

Comparing ACV for different dates can provide insight into the growth and retention rates of our recurring software business because ACV represents the estimated annual billings associated with our recurring license and maintenance agreements at any point in time. Management uses the ACV business metric to evaluate the growth and performance of our business as well as for planning and forecasting purposes. We believe that ACV is a useful business metric to investors as it provides insight into the growth component of our software business.

ACV generally increases as a result of new term license and SMS agreements with new or existing customers, renewals or modifications of existing term license agreements that result in higher license fees due to contractually-agreed price escalation or an increase in the number of tokens (units of software usage) or products licensed, or an increase in the value of licenses delivered.

ACV is adversely affected by term license and SMS agreements that are renewed at a lower entitlement level or not renewed, a decrease in the value of licenses delivered, and, to a lesser extent, by customer agreements that become inactive
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during the agreement’s term because, in our determination, amounts due (or which will become due) under the agreement are not collectible. As ACV is an estimate of annual billings, it will generally not include contracts with a term of less than one year. Because ACV represents all other active term software and SMS agreements, it may include amounts under agreements with customers that are delinquent in paying invoices, that are in bankruptcy proceedings, are subject to termination by the customer or where payment is otherwise in doubt.

As of September 30, 2022, customer agreements representing approximately 84% of our ACV (by value) were denominated in U.S. dollars. For agreements denominated in other currencies, we use a fixed historical exchange rate to calculate ACV in dollars rather than using current exchange rates, so that our calculation of growth in ACV is not affected by fluctuations in foreign currencies. We have not applied this methodology retroactively for OSI software amounts delivered prior to October 2020, but do not believe this to have a material impact on our reported ACV metric due to the high USD-denominated concentration of the OSI business. As of September 30, 2022, approximately 94% of OSI ACV was denominated in USD.

For term license agreements that contain professional services or other products and services, we have included in ACV the portion of the invoice allocable to the term license under Topic 606 rather than the portion of the invoice attributed to the license in the agreement. We believe that methodology more accurately allocates any discounts or premiums to the different elements of the agreement.

We estimate that the pro forma ACV of AspenTech grew by approximately 7.7%, from $751.9 million as of September 30, 2021 to $809.6 million as of September 30, 2022. This includes approximately $2.7 million from Inmation.

Total Contract Value

Total Contract Value (“TCV”) is the aggregate value of all payments received or to be received under all active term license and perpetual SMS agreements, including maintenance and escalation. TCV of Heritage AspenTech, the OSI business and the SSE business was $3.3 billion and $3.1 billion as of September 30, 2022 and 2021, respectively.

Bookings

Bookings is the total value of customer term license and perpetual SMS contracts signed in the current period, less the value of such contracts signed in the current period where the initial licenses and SMS agreements are not yet deemed delivered, plus term license contracts and SMS agreements signed in a previous period for which the initial licenses are deemed delivered in the current period.

The bookings of Heritage AspenTech, the OSI business and the SSE business was $224.0 million during the three months ended September 30, 2022, compared to $156.2 million during the three months ended September 30, 2021. The change in bookings is related to the timing of renewals.
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Non-GAAP Business Metrics

The following table provides a reconciliation of GAAP net cash provided by (used in) operating activities to free cash flow for the indicated periods (in thousands):

 Three Months Ended
September 30,
 20222021
Net cash provided by (used in) operating activities (GAAP)$5,077 $(9,186)
Purchase of property, equipment, and leasehold improvements(1,321)(2,607)
Payments for capitalized computer software development costs(99)— 
Acquisition related payments7,059 54 
Free cash flow$10,716 $(11,739)

The following table presents our (loss) from operations, as adjusted for stock-based compensation expense, amortization of intangible assets, and other items, such as the impact of acquisition and integration planning related fees, for the indicated periods:

Three Months Ended
September 30,
20222021
GAAP (loss) from operations$(51,182)$(13,884)
Plus:
Stock-based compensation17,736 368 
Amortization of intangibles121,160 28,809 
Acquisition and integration planning related fees4,858 54 
Non-GAAP income from operations$92,572 $15,347 
 
Critical Accounting Estimates and Judgments
 
Note 2, “Significant Accounting Policies,” to the audited consolidated and combined financial statements in our Transition Reports on Form 10-KT for the fiscal year ended June 30, 2022 describes the significant accounting policies and methods used in the preparation of the consolidated and combined financial statements appearing in this report. The accounting policies that reflect our critical estimates, judgments and assumptions in the preparation of our consolidated and combined financial statements are described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of our Transition Reports on Form 10-KT for the fiscal year ended June 30, 2022, and include the subsection captioned “Revenue Recognition.”

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Results of Operations
 
Comparison of the Three Months Ended September 30, 2022 and 2021
 
The following table sets forth the results of operations and the period-over-period percentage change in certain financial data for the three months ended September 30, 2022 and 2021:
Three Months Ended
September 30,
Increase / (Decrease)
Change
 20222021$%
 (Dollars in Thousands)
Revenue:   
License and solutions$160,224 $44,215 $116,009 262.4 %
Maintenance78,366 24,535 53,831 219.4 %
Services and other12,229 8,265 3,964 48.0 %
Total revenue250,819 77,015 173,804 225.7 %
Cost of revenue:   
License and solutions69,513 34,388 35,125 102.1 %
Maintenance9,217 4,234 4,983 117.7 %
Services and other12,400 4,898 7,502 153.2 %
Total cost of revenue91,130 43,520 47,610 109.4 %
Gross profit159,689 33,495 126,194 376.8 %
Operating expenses:   
Selling and marketing118,274 25,000 93,274 373.1 %
Research and development49,740 15,555 34,185 219.8 %
General and administrative42,848 6,617 36,231 547.5 %
Restructuring 207 (198)(95.7)%
Total operating expenses210,871 47,379 163,492 345.1 %
(Loss) from Operations(51,182)(13,884)(37,298)268.6 %
Other (expense), net(58,632)(1,359)(57,273)4,214.3 %
Interest income (expense), net5,023 (272)5,295 (1,946.7)%
(Loss) before provision for income taxes(104,791)(15,515)(89,276)575.4 %
(Benefit) for income taxes(93,547)(4,313)(89,234)2,069.0 %
Net (loss)$(11,244)$(11,202)$(42)0.4 %


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The following table sets forth the results of operations as a percentage of total revenue for certain financial data for the three months ended September 30, 2022 and 2021:
Three Months Ended
September 30,
 20222021
(% of Revenue)
Revenue:  
License and solutions63.9 %57.4 %
Maintenance31.2 31.9 
Services and other4.9 10.7 
Total revenue100.0 100.0 
Cost of revenue:  
License and solutions27.7 44.7 
Maintenance3.7 5.5 
Services and other4.9 6.4 
Total cost of revenue36.3 56.5 
Gross profit63.7 43.5 
Operating expenses:  
Selling and marketing47.2 32.5 
Research and development19.8 20.2 
General and administrative17.1 8.6 
Restructuring costs— 0.3 
Total operating expenses84.1 61.5 
(Loss) from operations(20.4)(18.0)
Other (expense), net(23.4)(1.8)
Interest income (expense), net2.0 (0.4)
(Loss) before provision for income taxes(41.8)(20.1)
(Benefit) for income taxes(37.3)(5.6)
Net (loss)(4.5)%(14.5)%
 
Revenue
 
Total revenue increased by $173.8 million during the three months ended September 30, 2022 as compared to the same period in prior fiscal year. Overall revenue growth is primarily due to $176.4 million in revenue from Heritage AspenTech as a result of the Transaction, an increase of $3.9 million in new and renewal contracts from SSE, offset by a decrease in revenue of $6.5 million from OSI due to the mix of open customer projects and the stage of completion compared to the prior period.
 
License and solutions revenue increased by $116.0 million during the three months ended September 30, 2022, as compared to the same period in prior fiscal year. This increase was driven primarily by $116.4 million from Heritage AspenTech as a result of the Transaction.

Maintenance revenue increased by $53.8 million during the three months ended September 30, 2022 as compared to the same period in prior fiscal year. This increase was primarily due to $53.0 million from Heritage AspenTech as a result of the Transaction.

Services and other revenue increased by $4.0 million during the three months ended September 30, 2022, as compared to the same period in prior fiscal year primarily due to $7.1 million from Heritage AspenTech as a result of the Transaction, offset by a decrease of $3.1 million in services and other revenue from OSI and SSE professional services arrangements.
 
Cost of Revenue
 
Cost of revenue increased by $47.6 million during the three months ended September 30, 2022, as compared to the same period in prior fiscal year. The increase in cost of revenue is primarily due to $49.4 million from Heritage AspenTech as a result of the Transaction, offset by a decrease in cost of revenue of $1.8 million due to the timing of SSE customer contract renewals.
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Cost of license and solutions revenue increased $35.1 million during the three months ended September 30, 2022, as compared to the same period in prior fiscal year. This increase was driven by $35.2 million from Heritage AspenTech as a result of the Transaction, $32.9 million of which is associated with additional amortization of intangible assets.
 
Cost of maintenance revenue increased by $5.0 million during the three months ended September 30, 2022, as compared to the same period in prior fiscal year. This increase was primarily due to $6.0 million from Heritage AspenTech as a result of the Transaction.

Cost of services and other revenue increased by $7.5 million for the three months ended September 30, 2022, as compared to the same period in prior fiscal year primarily due to $8.2 million from Heritage AspenTech as a result of the Transaction. Gross profit margin on services and other revenue was (1.4)% and 40.7% for the three months ended September 30, 2022 and 2021, respectively.

Overall gross profit increased by $126.2 million for the three months ended September 30, 2022, as compared to the same period in prior fiscal year primarily due to $127.0 million from the Transaction. Gross profit margin increased significantly to 63.7% for the three months ended September 30, 2022 from 43.5% for the same period in prior fiscal year. The increase was mainly driven by larger gross profit on license revenue from Heritage AspenTech in the current period.

Operating Expenses
 
Selling and marketing expense increased by $93.3 million during the three months ended September 30, 2022, as compared to the same period in prior fiscal year primarily due to $100.9 million from Heritage AspenTech as a result of the Transaction, of which $64.2 million was additional amortization of intangible assets, offset by a decrease of $7.6 million in management fees, severance and restructuring.
 
Research and development expense increased by $34.2 million during the three months ended September 30, 2022, as compared to the same period in prior fiscal year primarily due to $32.8 million from Heritage AspenTech as a result of the Transaction, and $1.5 million from SSE compensation related costs.
 
General and administrative expense increased by $36.2 million during the three months ended September 30, 2022, as compared to the same period in prior fiscal year primarily due to $37.2 million from Heritage AspenTech as a result of the Transaction, and increased stock-based compensation expense of $2.0 million from SSE and OSI.

Non-Operating Income (Expense)
 
Interest income (expense) increased by $5.3 million for the three months ended September 30, 2022 as compared to the same period in prior fiscal year. The increase was largely attributable to the Transaction, which contributed $9.2 million resulting from interest income earned on Heritage AspenTech's long-term revenue contracts, partially offset by a $3.7 million increase in interest expense due to a higher interest rate on our term loan and amortization of debt issuance costs associated with the Bridge Facility.

Other (expense), net is comprised primarily of unrealized losses on foreign currency forward contracts and unrealized and realized foreign currency exchange gains and losses generated from the settlement and remeasurement of transactions denominated in currencies other than the functional currency of our entities.

Other expense increased by $57.3 million during the three months ended September 30, 2022, as compared to the same period in prior fiscal year primarily due to $50.3 million associated with unrealized losses on foreign currency forward contracts, while the remaining amount was related to unrealized and realized foreign currency exchange gains and losses.
  
Benefit for Income Taxes
 
 Three Months Ended
September 30,
Increase / (Decrease)
Change
 20222021$%
 (Dollars in Thousands)
(Benefit) for income taxes$(93,547)$(4,313)$(89,234)2,069.0 %
Effective tax rate89.3 %27.8 %  
 
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Benefit for income taxes was $93.5 million and $4.3 million for the three months ended September 30, 2022 and 2021, respectively, resulting in effective tax rates of 89.3% and 27.8%, respectively. Income tax benefit increased due to the higher Foreign-Derived Intangible Income (“FDII”) deduction recorded in the current period as a result of non-deductible amortization of intangibles, capitalized R&D costs, and a change in the accounting methodology related to historical revenue recognition for tax purposes on multi-year software license agreements. The change resulted in the recognition of taxable income over a 4 tax year period with fiscal year 2024 as the last year of the adjustment.

Liquidity and Capital Resources
 
Resources
 
As of September 30, 2022 and June 30, 2022, our principal sources of liquidity consisted of $382.5 million and $449.7 million, respectively, in cash and cash equivalents.

We believe our existing cash on hand and cash flows generated by operations are sufficient for at least the next 12 months to meet our operating requirements, including those related to salaries and wages, working capital, capital expenditures, and other liquidity requirements associated with operations. We may need to raise additional funds if we decide to make one or more acquisitions of businesses, technologies or products. If additional funding for such purposes is required beyond existing resources and our Amended and Restated Credit Agreement described below, we may not be able to effect a receivable, equity or debt financing on terms acceptable to us or at all.

Bridge Facility
 
On July 27, 2022, the Company entered into a $475.0 million senior unsecured bridge facility (the “Bridge Facility”) with JPMorgan Chase Bank, N.A. (“JPMorgan”), as Administrative Agent, to finance the acquisition of all of the equity interests of Mining Software Holdings Pty Ltd (“Micromine acquisition”). The Bridge Facility was entered into under the existing Amended and Restated Credit Agreement dated as of December 23, 2019, with JPMorgan ("Credit Agreement"). The Company may elect that each incremental borrowing under the Bridge Facility bear interest at a rate per annum equal to (a) the Alternate Base Rate (“ABR”), plus the applicable margin or (b) the Adjusted Term Secured Overnight Financing Rate (“SOFR”), plus the applicable margin. There are no amounts outstanding under the Bridge Facility as of September 30, 2022. Future borrowings under the Bridge Facility are payable 364 days after the closing date of July 27, 2022.

Credit Agreement

The Credit Agreement provides for a $200.0 million secured revolving credit facility and a $320.0 million secured term loan facility.

The interest rate as of September 30, 2022 was 2.74% on $270.0 million in outstanding borrowings on its term loan facility.

As of September 30, 2022, the Company's current and non-current borrowings, under the term loan facility, were $30.0 million and $240.0 million, respectively. As of June 30, 2022, the Company's current and non-current borrowings, under the term loan facility, were $28.0 million and $245.6 million, respectively.

For a more detailed description of the Credit Agreement, see Note 8, “Credit Agreement”, to our Unaudited Consolidated and Combined Financial Statements in Part 1, Item 1 of this Form 10-Q.
 
Cash Balance Sheet and Cash Flows
 
Our cash and cash equivalents were $382.5 million and $25.7 million as of September 30, 2021 and 2022, respectively. The following table summarizes our free cash flow (in thousands):

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 Three Months Ended
September 30,
 20222021
Net cash provided by (used in) operating activities (GAAP)$5,077 $(9,186)
Purchase of property, equipment, and leasehold improvements(1,321)(2,607)
Payments for capitalized computer software development costs(99)— 
Acquisition related payments7,059 54 
Free cash flow (non-GAAP)$10,716 $(11,739)
 
Total free cash flow increased $22.5 million during the three-month period ended September 30, 2022 as compared to the same period in prior fiscal year, primarily due to the contribution from Heritage AspenTech as a result of the Transaction and was mainly driven by the cash flows provided by operating activities.

Contractual Obligations
 
Standby letters of credit for $3.6 million secured our performance on professional services contracts, certain facility leases and potential liabilities as of September 30, 2022. The letters of credit expire at various dates through fiscal 2025. There were no standby letters of credit as of the September 30, 2021.
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Item 3.    Quantitative and Qualitative Disclosures About Market Risk.
 
In the ordinary course of conducting business, we are exposed to certain risks associated with potential changes in market conditions. These market risks include changes in currency exchange rates and interest rates which could affect operating results, financial position and cash flows. We manage our exposure to these market risks through our regular operating and financing activities and, if considered appropriate, we may enter into derivative financial instruments such as forward currency exchange contracts.
 
Foreign Currency Exchange Risk
 
Our foreign exchange forward contracts outstanding as of the respective period-ends are summarized as follows (in thousands):

September 30, 2022June 30, 2022
Notional AmountFair ValueNotional AmountFair Value
Forward contracts:
PurchasedAU $900,000$(50,259)— $— 

During the three months ended September 30, 2022 and 2021, 11.7% and 6.7% of our total revenue was denominated in a currency other than the U.S. dollar, respectively. In addition, certain of our operating costs incurred outside the United States are denominated in currencies other than the U.S. dollar. We conduct business on a worldwide basis and as a result, a portion of our revenue, earnings, net assets, and net investments in foreign affiliates is exposed to changes in foreign currency exchange rates. We measure our net exposure for cash balance positions and for cash inflows and outflows in order to evaluate the need to mitigate our foreign exchange risk. We may enter into foreign currency forward contracts to minimize the impact related to unfavorable exchange rate movements related to our cash positions and cash flows, although we have not done so during the three months ended September 30, 2022 and 2021. Currently, our largest exposures to foreign exchange rates exist primarily with the Euro, Pound Sterling, Canadian Dollar, Japanese Yen, Norwegian Krone, and Russian Ruble.
 
During the three months ended September 30, 2022 and 2021, we recorded net foreign currency exchange losses of $8.3 million and $1.5 million, respectively, related to the settlement and remeasurement of transactions denominated in currencies other than the functional currency of our operating units. Our analysis of operating results transacted in various foreign currencies indicated that a hypothetical 10% change in the foreign currency exchange rates could have increased or decreased the consolidated and combined results of operations by approximately $2.4 million and $1.1 million for the three months ended September 30, 2022 and 2021, respectively.

We may also enter into foreign exchange forward to reduce the short-term effects of foreign currency fluctuations on receivables and payables that are denominated in currencies other than the functional currencies of the entities, although we have not done so during the three months ended September 30, 2022 and 2021. The market risks associated with these foreign currency receivables and payables relate primarily to variances from our forecasted foreign currency transactions and balances. We do not enter into foreign exchange forward contracts for speculative purposes.

Interest Rate Risk
 
We place our investments in money market instruments. Our analysis of our investment portfolio and interest rates at September 30, 2022 indicated that a hypothetical 100 basis point increase or decrease in interest rates would not have a material impact on the fair value of our investment portfolio determined in accordance with an income-based approach utilizing portfolio future cash flows discounted at the appropriate rates.
 
As of September 30, 2022, our current and non-current borrowings of $30.0 million and $240.0 million, respectively, consist of the term loan facility under the Amended and Restated Credit Agreement. A hypothetical 10% increase or decrease in interest rates paid on outstanding borrowings under the Amended and Restated Credit Agreement would not have a material impact on our financial position, results of operations or cash flows.

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Investment Risk

The Company owns an interest in a limited partnership investment fund. The primary objective of this partnership is investing in equity and equity-related securities (including convertible debt) of venture growth- stage businesses. We account for the investment in accordance with Topic 323, Investments - Equity Method and Joint Ventures. Our total commitment under this partnership is $5.0 million CAD ($4.0 million). Under the conditions of the equity method investment, unfavorable future changes in market conditions could lead to a potential loss up to the full value of our 5.0 million CAD ($4.0 million) commitment. As of September 30, 2022, the fair value of this investment is $2.7 million CAD ($2.0 million), representing our payment towards the total commitment, and is recorded in non-current assets in our consolidated balance sheet.
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Item 4.   Controls and Procedures.
 
a)